1986 (5) TMI 56 - AT - Income Tax

Summary

Issues:
1. Challenge to the deletion of addition on account of interest by the Department.
2. Assessment of interest income on cash basis vs. accrual basis.
3. Validity of the AAC's decision in deleting the interest added by the ITO.

Analysis:
1. The Department challenged the deletion of addition on account of interest by the AAC. The assessee, an individual, had advanced loans to two firms and showed interest income in the assessment. The ITO included the entire interest amount in the assessment, stating that interest is receivable on a due basis. The assessee argued that their accounting system was cash-based, and the interest income should be assessed only on receipt basis. The AAC reviewed the assessment records for previous years and found that interest income was assessed based on receipt, not accrual. Consequently, the AAC deleted the interest amount added by the ITO.

2. The departmental representative contended that the cash method of accounting did not apply as the assessee did not maintain proper accounts. However, the authorised representative for the assessee argued that the interest income was consistently disclosed on a receipt basis, supported by previous assessment orders. The Tribunal examined the materials and legal precedents cited, concluding that the assessee was entitled to adopt the cash system for certain income. The Tribunal found that the AAC's decision to delete the interest added by the ITO on an accrual basis was justified, as the assessee had been taxed on a receipt basis in previous years.

3. After careful consideration of the submissions and evidence, the Tribunal upheld the AAC's decision and dismissed the Department's appeal. The Tribunal found that the assessee's consistent application of the cash system for interest income, as evidenced by past assessments, justified the deletion of the interest added by the ITO on an accrual basis. The Tribunal emphasized that the ITO could not disregard the receipt basis previously applied to the assessee and switch to a mercantile basis for taxing interest income. Therefore, the Tribunal concluded that the AAC's decision was valid and did not require any interference, resulting in the dismissal of the appeal.