1991 (9) TMI 121 - AT - Income Tax

Summary

Issues:
1. Rejection of change in method of accounting from accrual basis to cash basis for income from operating fee and interest.
2. Addition of specific amounts in respect of operating fee and interest on accrual basis.

Detailed Analysis:
Issue 1: The appeal concerns the rejection of the assessee's change in the method of accounting from accrual basis to cash basis for income from operating fee and interest. The assessee, engaged in providing operational services and consultancy in hotel management, shifted to a hybrid system of accounting from the previous mercantile system. The Assessing Officer disallowed the change, citing reasons such as past accounting practices, lack of approval for the change, and business necessity. The Commissioner(A) upheld the rejection, emphasizing the lack of bona fide reasons for the change, as evidenced by the expectation of increased revenue and absence of difficulty in recovering amounts from hotels. The Tribunal, however, found merit in the assessee's arguments, highlighting the necessity of the change for financial statements and tax liability calculation due to business disputes. The Tribunal emphasized the right of the assessee to change accounting methods for genuine business reasons and directed the Assessing Officer to revise the assessment, accepting the change.

Issue 2: The second aspect of the appeal pertains to the addition of specific amounts in respect of operating fee and interest on an accrual basis. The assessee contended that the change in accounting method was justified, supported by detailed explanations regarding financial settlements with hotels and ongoing disputes affecting income realization. The Tribunal considered the discrepancies between mercantile and cash systems in income recognition and expenditure payment, noting the genuine efforts of the assessee to comply with accounting standards. Citing legal precedents and the assessee's consistent approach to accounting changes, the Tribunal allowed the appeal, directing the Assessing Officer to accept the change and provide a fair opportunity for correct income computation.

In conclusion, the Tribunal allowed the appeal, emphasizing the assessee's right to change accounting methods for legitimate business reasons and directing the Assessing Officer to revise the assessment in line with the accepted change in the method of accounting from accrual basis to cash basis for income from operating fee and interest.