1984 (1) TMI 98 - AT - Income Tax

Summary

Issues:
1. Change of method of accounting from cash to mercantile system for bonus payments.
2. Change of method of accounting from mercantile to cash system for interest receivable.
3. Disallowance of bonus accrued during the year for services rendered in the previous year.
4. Dispute regarding interest receivable from sister-concerns and other parties.

Analysis:

Issue 1: Change of method of accounting for bonus payments
The appeal was filed by the Department against the CIT(A)'s order allowing the assessee to change the method of accounting from cash to mercantile system for bonus payments. The assessee argued that bonus had become a statutory liability and should be accounted for on an accrual basis. The CIT(A) found the change to be bona fide and consistent in subsequent years, allowing the claim but reducing the amount to Rs. 1,17,366. The ITAT upheld the CIT(A)'s decision, stating that the change was justified as it reflected the true profits of the business over time.

Issue 2: Change of method of accounting for interest receivable
The assessee changed the method of accounting from mercantile to cash system for interest receivable due to uncertainties in recovering principal amounts from sister-concerns. The ITO disallowed the claim, arguing that the change was selective and not justified. However, the CIT(A) allowed the claim, emphasizing the bona fide nature of the change and consistent application in subsequent years. The ITAT upheld the CIT(A)'s decision, stating that the change was valid and reflected the true income of the assessee.

Issue 3: Disallowance of bonus accrued during the year
The ITO disallowed the claim of bonus accrued during the year for services rendered in the previous year. The CIT(A) reduced the amount allowed but the assessee did not appeal against this reduction. The dispute in this appeal was focused on the amount allowed by the CIT(A) and the change in accounting method for bonus payments.

Issue 4: Dispute regarding interest receivable from sister-concerns
The assessee had lent funds to sister-concerns, and the interest receivable was being accounted for on a mercantile basis. The change to a cash basis was made due to doubts about recovery. The ITO disallowed the claim, but the CIT(A) allowed it, considering the uncertainties in recovery. The ITAT upheld the CIT(A)'s decision, stating that the interest income could not be taxed if the principal amount itself was doubtful of recovery.

In conclusion, the ITAT dismissed the Department's appeal, upholding the CIT(A)'s decision to allow the changes in the method of accounting for bonus payments and interest receivable, based on their bona fide nature and consistent application in subsequent years. The decision was supported by legal precedents and the principle of reflecting true profits in the business.