1982 (4) TMI 104 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee-company can change the method of accounting for interest income from a mercantile to a cash basis.
2. Whether the change in accounting method was justified and not malafide.
3. Whether the Commissioner was correct in directing the inclusion of interest income and charging interest under section 217 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Change in Method of Accounting:
The primary issue was whether the assessee-company could change its method of accounting for interest income from a mercantile basis to a cash basis. The assessee-company, a private limited company holding controlling shares in two other companies, had been advancing funds to one of its subsidiaries, Magnotape Co. (P.) Ltd. Historically, the company charged interest on these advances, which was taxed. However, due to the subsidiary's financial difficulties and non-commencement of production, the assessee's board resolved to account for interest on a cash basis from the accounting year ending 30-6-1975. The Income Tax Officer (ITO) completed the assessment without adding the interest due from the subsidiary company.

2. Justification and Bona Fides of the Change:
The Commissioner, using powers under section 263 of the Income-tax Act, deemed the ITO's order erroneous and prejudicial to the revenue, directing the inclusion of Rs. 1,30,947 as interest income. The Commissioner argued that the change in accounting method was not justified, as the assessee continued to follow the mercantile system for other transactions and doubted the bona fides of the resolution. The assessee's counsel contended that an assessee is entitled to change the method of accounting from one accepted method to another, provided it is not malafide. The counsel cited the subsidiary's financial struggles as justification for the change, emphasizing that the funds were locked without reasonable prospects of realizing interest or principal.

3. Commissioner's Directions and Legal Precedents:
The Tribunal considered various legal precedents, including the Calcutta High Court's decision in CIT v. Eastern Bengal Jute Trading Co. Ltd., which allowed a change in accounting method unless malafide motives were found. The Madras High Court's decision in CIT v. Motor Credit Co. (P.) Ltd. was also referenced, indicating that no income accrues if it has not materialized, regardless of the accounting method. The Tribunal found that the change in method was not casual and was applied to the entire interest income, not just the subsidiary's advances. The Tribunal concluded that the assessee could have different methods for different income sources and that the change was not malafide.

Conclusion:
The Tribunal held that the assessee's change in the method of accounting for interest income was justified and not malafide. The Commissioner's objections were addressed, noting that the change did not need specific events to warrant it, and the subsidiary's continued deduction claims were not relevant to the assessee's method change. The Tribunal allowed the appeals, ruling no interference in the ITO's order, and consequently, no interest under section 217 was to be levied. The appeals were allowed.