1980 (6) TMI 47 - AT - Income Tax

Summary

Issues:
1. Change in method of accounting from mercantile system to cash basis for dealings with sick mills.
2. Dispute over treatment of outstanding amounts from sick mills and mills taken over by Industrial Reconstruction Corporation of India Ltd.
3. Validity of change in method of accounting and its impact on tax assessment.
4. Application of legal precedents to support or challenge the decision of the Commissioner.

Detailed Analysis:
1. The appeal involved a dispute regarding the change in the method of accounting by the assessee from the mercantile system to the cash basis for dealings with sick mills and mills taken over by the Industrial Reconstruction Corporation of India Ltd. The assessee claimed that the change was genuine and bona fide due to the financial conditions and the slim chances of recovery from the mills taken over by the government. The Income Tax Officer (ITO) added back a sum of Rs. 42,15,544, contending that the change in accounting method was not valid. The Commissioner (Appeals) upheld the assessee's plea for Rs. 34,72,540 related to sick mills but rejected the claim for Rs. 7,43,004 related to other mills.

2. The Department and the assessee both appealed the decision before the Appellate Tribunal. The Department argued that the change in accounting method was not bona fide and should not have been permitted by the Commissioner. They cited legal precedents to support their argument. The assessee, on the other hand, defended the change, emphasizing that the entry was made in the account books before the end of the accounting year. The Tribunal upheld the Commissioner's decision regarding both amounts, stating that the change in accounting method was justified based on the business prudence and financial conditions. The Tribunal also noted that the assessee's failure to debit expenses separately for the sick mills did not invalidate the change in accounting method.

3. The Tribunal further analyzed the legal principles governing the change in accounting methods, emphasizing that an assessee can employ different methods for different parts of the business as long as it is done regularly and consistently. The Tribunal found that the change in method was genuine and necessary considering the circumstances, such as the low chances of recovery from the sick mills. The Tribunal also distinguished the legal precedents cited by the Department, stating that they were not applicable to the facts of the case. Ultimately, the Tribunal dismissed both the Departmental Appeal and the Cross Objection, affirming the Commissioner's decision regarding the treatment of outstanding amounts from the sick mills and mills taken over by the Industrial Reconstruction Corporation of India Ltd.