1989 (1) TMI 156 - AT - Income Tax

Accounting Year, Assessment Year, Cash Basis, Cash System, Investment Company, Mercantile System, Tax Deducted At Source

Summary

Issues Involved:
1. Whether the change of the method of accounting from mercantile system to cash system in respect of realization of interest alone is allowable.
2. Whether the difference between the interest received and the interest receivable by the appellant-company should be added to its income.
3. Whether the bona fide of the appellant-company plays any important role in giving findings on the said question.

Issue-wise Detailed Analysis:

1. Change of Method of Accounting:
The appellant-company followed the mercantile system of accounting but changed its method to the cash system for the realization of interest. The ITO disallowed this change, suspecting it was done to reduce tax liability. The CIT(A) upheld the ITO's decision. The Tribunal considered whether this change was allowable. The appellant-company argued that the change was due to difficulties in realizing interest and claiming credit for taxes deducted at source. The Tribunal found that the change was consistently followed and reflected the true state of affairs, thus it was allowable. The Tribunal relied on precedents like Snow White Food Products Co. Ltd. v. CIT, CIT v. Standard Triumph Motor Co. Ltd., and CIT v. Rajasthan Investment Co. (P.) Ltd., which supported the legitimacy of changing the method of accounting if it reflects the correct state of affairs.

2. Addition of Interest Difference to Income:
The ITO added the difference between the interest receivable and the interest received to the appellant-company's income, arguing that the debtors had provided for interest on a mercantile basis. The Tribunal examined whether the accrued interest, which was not realized, should be taxed. The Tribunal concluded that tax should not be paid on unrealized interest due to the change in the method of accounting. The Tribunal emphasized that the income should be computed in accordance with the cash system of accounting, as supported by the judgments in Reform Floor Mills (P.) Ltd. v. CIT and Carborandum Universal Ltd.

3. Bona Fide of the Appellant-Company:
The ITO questioned the bona fide of the appellant-company, suggesting the change was to avoid tax. The Tribunal, however, found no evidence of mala fide intent. The Tribunal noted that the change was bona fide and reflected the true affairs of the appellant-company. The Tribunal referred to the commentary on Income-tax Law by Chaturvedi and Pithisaria, which supported that a recognized method of accounting followed regularly results in a proper computation of real income. The Tribunal concluded that the bona fide of the appellant-company cannot be doubted and that the change of the method of accounting was proper and realistic.

Conclusion:
The Tribunal allowed the appeals, concluding that the change of the method of accounting from mercantile to cash system for interest realization was bona fide and allowable. The difference between the interest receivable and received should not be added to the appellant-company's income. The consistent follow-up of the changed method year after year reflected the true state of affairs, supporting the appellant-company's position.