1994 (2) TMI 90 - AT - Income Tax

Summary

Issues:
1. Interpretation of Section 145(1) of the Income Tax Act, 1961 regarding the method of accounting adopted by the assessee.
2. Validity of the hybrid accounting system followed by the assessee.
3. Assessing Officer's discretion in determining the correct profits and gains from the accounts maintained by the assessee.
4. Whether the assessee can choose the method of accounting for computing income.

Analysis:

1. The primary issue in this case revolves around the interpretation of Section 145(1) of the Income Tax Act, 1961, concerning the method of accounting adopted by the assessee. The Income Tax Officer (ITO) invoked this provision as the assessee followed a system where receipts were accounted for on a cash basis while payments on a mercantile basis. The ITO adopted the income and expenditure on a mercantile basis for all the years under appeal.

2. The second issue pertains to the validity of the hybrid accounting system followed by the assessee. The Commissioner of Income Tax (Appeals) held that there was nothing wrong with the method of accounting adopted by the assessee, which involved a hybrid system of accounting. The CIT(A) directed the ITO to recompute the income as per the method adopted by the assessee for all the years under appeal.

3. The third issue involves the Assessing Officer's discretion in determining the correct profits and gains from the accounts maintained by the assessee. The Departmental Representative argued that the method of accounting adopted by the assessee did not allow for the proper deduction of income. However, the counsel for the assessee contended that the choice of the accounting method lies with the assessee, citing various legal precedents to support this argument.

4. The final issue addresses whether the assessee can choose the method of accounting for computing income. The Tribunal observed that the assessee's hybrid method of accounting, using cash basis for receipts and mercantile basis for payments, was untenable as it did not enable the correct computation of income. The Tribunal referred to a judgment by the Madras High Court to support its decision. Ultimately, the Tribunal directed the ITO to compute the income of the assessee for all the years under appeal using the cash method of accounting, as per the choice of the assessee.

In conclusion, the Tribunal allowed the appeals for statistical purposes and emphasized that the choice of the accounting method should be left to the assessee, directing the ITO to compute the income based on the cash method chosen by the assessee.