1996 (6) TMI 101 - AT - Income Tax

Assessing Officer, Assessment Year, Bona Fide, Hybrid System, Interest Income, Mercantile System, Tax Liability

Summary

Issues Involved:
1. Deletion of addition of Rs. 1,72,04,280 for the assessment year 1988-89.
2. Deletion of addition of Rs. 6,39,727 for the assessment year 1991-92.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 1,72,04,280 for the Assessment Year 1988-89:

The core issue for the assessment year 1988-89 revolves around the deletion of an addition amounting to Rs. 1,72,04,280. The assessee, a State Government Industrial Development Corporation, switched from a mercantile to a hybrid system of accounting for interest income from loans. This change was based on a report by M/s S.B. Billimoria & Co., Chartered Accountants, which recommended treating accounts with consecutive defaults of two years or more as 'memoranda cases' and accounting for interest on these accounts on a receipt basis rather than an accrual basis.

The Assessing Officer (AO) deemed the change to be non-bona fide and added Rs. 1,72,04,280, representing accrued interest on loans, back to the taxable income. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition. The Revenue argued that the hybrid method was not recognized and that the change was intended to minimize tax liability, citing various High Court decisions to support their stance.

Conversely, the assessee argued that the change was made to present a more accurate picture of its profits, as previously shown interest on an accrual basis was often not realized. The assessee also highlighted that the change was applied consistently and was not aimed at tax evasion.

The Tribunal concluded that the change in accounting method was bona fide, aimed at depicting true profits, and was consistently followed in subsequent years. It was noted that the Revenue did not demonstrate any tax evasion due to this change. The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal.

2. Deletion of Addition of Rs. 6,39,727 for the Assessment Year 1991-92:

For the assessment year 1991-92, the issue concerned the deletion of an addition of Rs. 6,39,727 made on account of accrued interest. The AO relied on the Supreme Court decision in McDowell & Co. Ltd v. CTO and added Rs. 6,39,727 to the taxable income. However, the CIT(A) deleted this addition, following her order for the assessment year 1988-89.

The Tribunal, having upheld the CIT(A)'s order for the assessment year 1988-89, applied the same reasoning and upheld the deletion of the addition of Rs. 6,39,727 for the assessment year 1991-92 as well.

Conclusion:

In conclusion, the Tribunal dismissed both appeals by the Revenue, upholding the CIT(A)'s decisions to delete the additions of Rs. 1,72,04,280 for the assessment year 1988-89 and Rs. 6,39,727 for the assessment year 1991-92. The Tribunal found the change in the accounting method by the assessee to be bona fide and consistently applied, aimed at presenting a true picture of profits without any intention of tax evasion.