1993 (11) TMI 93 - AT - Income Tax

Summary

Issues Involved:
1. Change in the method of accounting from mercantile to cash basis for commission income from Majestic Auto Ltd.
2. Justification for selective change in accounting method.
3. Legitimacy and implications of the change in accounting method on tax liabilities.

Issue-wise Detailed Analysis:

1. Change in the method of accounting from mercantile to cash basis for commission income from Majestic Auto Ltd.:
The assessee, a registered firm, switched its accounting method from mercantile to cash basis for commission income received from Majestic Auto Ltd. under a new agreement dated 1-10-1983, which changed the nature of services to a sole selling agency. The assessee continued using the mercantile system for commission income from three other concerns. The Assessing Officer did not accept this change and made an addition based on the accrual of income.

2. Justification for selective change in accounting method:
The assessee argued that it had the right to adopt any particular method of accounting for specific income or class of income. The counsel contended that the new agreement with Majestic Auto Ltd. constituted a new source of income, justifying the change to the cash system. The Department Representative (D.R.) countered that the change was unjustified as it applied selectively to one principal out of four, and the nature of services rendered remained similar before and after the new agreement.

3. Legitimacy and implications of the change in accounting method on tax liabilities:
The assessee cited several judicial decisions to support its right to change the accounting method, including cases from the Allahabad High Court and Madras High Court, which recognized the right to employ different accounting methods for different parts of business or classes of customers. However, the D.R. argued that these decisions did not support the assessee's case because the change was not applied to an entire class but selectively to one principal. The D.R. also suggested that the change was a device to avoid tax on accrued income.

Conclusion:
The Tribunal found that the assessee did not justify the selective change in the accounting method. The source of income remained the same across all concerns, and the change was only applied to income from Majestic Auto Ltd. The Tribunal concluded that there was no reasonable cause for the change, and it appeared to be a device to avoid tax. The addition made by the Assessing Officer was upheld, and the first ground of the assessee's appeal was rejected.

Note:
Paragraphs 15 to 22, which involve minor issues, were not reproduced in the summary.