1985 (4) TMI 88 - AT - Income Tax

Summary

Issues:
1. Change in accounting method from mercantile to mixed system.
2. Disallowance of freight charges by the ITO.
3. Appeal before Commissioner (Appeals) regarding accounting method.
4. Contention by the departmental representative on accounting system.
5. Hybrid system of accounting adopted by the assessee.
6. Interpretation of section 145(1) of the Income-tax Act, 1961.
7. Analysis of the method of accounting in determining true profits.
8. Examination of the regularity and uniformity of the accounting method.

Analysis:

1. The appeal involved a dispute regarding the change in the accounting method by the assessee from the mercantile system to a mixed system. The ITO disallowed freight charges due to this change, leading to an appeal by the assessee before the Commissioner (Appeals).

2. The Commissioner (Appeals) observed that the change in the accounting method was genuine and bona fide, aimed at avoiding disputes and was not in violation of any law. He concluded that the assessee had valid reasons for the change and deleted the addition made by the ITO.

3. The departmental representative argued that the assessee cannot adopt an accounting method that is neither cash nor mercantile. Reference was made to legal commentaries and court decisions to support the contention that the method of accounting should reflect true profits.

4. The counsel for the assessee defended the hybrid system of accounting adopted, citing legal texts and court precedents. It was argued that the change in the accounting method was justified and should be upheld.

5. The Tribunal noted that the hybrid system of accounting, combining elements of cash and mercantile systems, was acceptable. It was emphasized that the true profits of the assessee need to be ascertained, considering the method of accounting regularly followed.

6. The Tribunal analyzed the provisions of section 145(1) of the Income-tax Act, highlighting the need for adjustments in the trading account to align with the chosen accounting system. It was emphasized that the entire system of accounting followed by the assessee should not be disregarded.

7. The judgment delved into the theoretical aspects of accounting systems, emphasizing the importance of determining true profits. The Tribunal concluded that changes in the accounting method for genuine reasons are permissible if consistently followed.

8. Upon examining the regularity and uniformity of the accounting method, the Tribunal found that the change from accrual to cash and carry basis was justified. The reasons for the change were considered valid, and the appeal by the revenue was dismissed.

This detailed analysis of the judgment highlights the key issues, arguments presented, and the Tribunal's reasoning in resolving the dispute over the change in the accounting method by the assessee.