1997 (3) TMI 156 - AT - Income Tax

Assessment Year Assessment Year Cash Basis Cash Basis Expenditure Incurred Expenditure Incurred Interest Payable Interest Payable Mercantile System Mercantile System Money Lending Business Money Lending Business

Issues:
1. Whether the assessee can change the system of accounting from mercantile basis to cash basis only for receipts and not for payments.
2. Whether the Assessing Officer correctly disallowed the interest payable amount.
3. Whether the income can be properly deduced from the method of accounting employed by the assessee.
4. Whether the real income of the assessee can be properly deduced from the changed method of accounting.
5. Whether the decision in G. Padmanabha Chettiar & Sons v. CIT applies to the present case.
6. Whether the decision in United Credit Ltd. v. Asstt. CIT is applicable to the present case.

Analysis:
1. The main issue in this case is whether the assessee can change the system of accounting from mercantile basis to cash basis only for receipts and not for payments. The Revenue argued that the method of accounting should enable the correct and real income to be deduced. The CIT(A) allowed the change, but the Revenue contended that the method should be consistent for both receipts and payments. The Tribunal held that the real income should be computed on a mercantile basis, considering both receipts and liabilities on an accrual basis. The decision in G. Padmanabha Chettiar & Sons v. CIT supported this approach.

2. The second issue pertains to the disallowance of the interest payable amount by the Assessing Officer. The CIT(A) accepted the assessee's claim and deleted the addition of Rs. 3,28,824. The Tribunal directed the Assessing Officer to compute the income on a mercantile basis, including interest income on accrual basis as well as the liability for expenditure on accrual basis.

3. The third issue concerns whether the income can be properly deduced from the method of accounting employed by the assessee. The Tribunal emphasized that the correct and real income should be deduced for each assessment year, following the provisions of section 145(1) of the IT Act.

4. The fourth issue addresses whether the real income of the assessee can be properly deduced from the changed method of accounting. The Tribunal held that the changed method, where interest income was accounted for on a cash basis while expenditure was on a mercantile basis, would present a distorted picture of the profits and gains. Therefore, the income should be computed on a mercantile basis to reveal the real income of the assessee.

5. The fifth issue involves the applicability of the decision in G. Padmanabha Chettiar & Sons v. CIT to the present case. The Tribunal followed this decision and directed the Assessing Officer to determine the correct and real income of the assessee on the basis of the mercantile system of accounting.

6. The final issue relates to whether the decision in United Credit Ltd. v. Asstt. CIT is applicable to the present case. The Tribunal distinguished this case from the present one, emphasizing that the reasons for changing the system of accounting only for interest receipts were not provided, unlike in the United Credit Ltd. case. The Tribunal held that the decision in United Credit Ltd. was not applicable to the present case.

In conclusion, the Revenue's appeal was allowed, and the cross-objections filed by the assessee were dismissed. The Tribunal directed the Assessing Officer to compute the assessee's income on a mercantile basis, considering both receipts and liabilities on an accrual basis to determine the real income for the assessment year in question and subsequent years.

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