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TMI Blog1997 (3) TMI 156X X X X Extracts X X X X X X X X Extracts X X X X ..... of AOP and the main income is from money-lending business and also from a Kalyana Mandapam and some house properties. The assessee was following mercantile system of accounting for all the sources of income. But from 1-1-1984 it changed the system of accounting over to cash basis in respect of interest received in money-lending business. The Assessing Officer came to the conclusion that the assessee is free to change the system of accounting for a particular source of income, but not for one side of the account. Since the assessee changed its system of accounting only in respect of receipt and not in respect of expenditure, the Assessing Officer considered the provisions of section 145(1) of the IT Act, 1961 and observed that the assessee c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision in CIT v. McMillan & Co. [1958] 33 ITR 182 (SC) and Bhagwandas Jagdish Prasad & Co. v. CIT [1983] 144 ITR 845/[1982] 11 Taxman 68 (MP). 4. On the other hand, the learned counsel for the assessee argued that the assessee by changing the system of accounting in respect of interest receipt on cash basis has adopted hybrid system of accounting and the assessee cannot be deprived of its right to have the method adopted and given effect in the assessment as long as the genuineness of the change is not questioned. The learned counsel relied on the decision of the Calcutta Bench ' D ' of the Tribunal in the case of United Credit Ltd. v. Asstt. CIT [1997] 60 ITD 367 in support of his contention. 5. We have considered the rival submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and gains, each year is a separate self-contained accounting period of time, and income, profits and gains made in each accounting year have to be considered -- ITO v. Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC). Income-tax is exigible on income earned in reality. It is only the real income as is commercially understood earned by an assessee, which has to be taxed. -- Poona Electric Supply Co. Ltd v. CIT [1965] 57 ITR 521 (SC). In determining the real income, the question is not of any physical receipt of income but of the concept of receipt in law. In examining the transaction and situation relating to the income, the Court should have more regard to the reality and speciality of the situation rather than purely theoretical or doctrinai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich enable the Assessing Officer to deduce the correct and real income for charging tax for each assessment year if a method of accounting does not enable the Assessing Officer to deduce the correct and real income, then such a method has to be rejected in view of the provisions of section 145(1). 8. In the case of G. Padmanabha Chettiar & Sons v. CIT [1990] 182 ITR 1 (Mad.), the facts are identical and similar to the facts of the assessee before us. Their Lordships of the Madras High Court at page 5 of 182 ITR held as under : " Insofar as the first part of the question referred is concerned, we are of the view that the same basis has to be adopted for receipt and payment of interest and having regard to the mercantile system of accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not show interest on accrual basis if it is claiming deduction for interest expenditure on accrual basis. The change in the system of accounting, viz., receipt of interest on cash basis cannot be allowed because it would present a distorted picture of the profits and gains of the business and the real income of the assessee cannot be properly deduced from the changed method of accounting followed by it. We are, therefore, of the opinion that the assessee's income should be computed on mercantile basis i.e., after taking into consideration the accrual of income as well as liability for making payment of interest which would reveal the real income of the assessee for the assessment year under appeal. The Assessing Officer was also not corre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be said to be a recognised and regular system of accounting. On appeal, the Tribunal accepted the assessee's contention and allowed the appeal. It was claimed before the Tribunal that mercantile system followed in respect of interest income created undue hardship to the assessee in the sense that it has to pay tax on the unrealised interest. The Tribunal took into consideration the fact that interest liability cannot be wished away or refused to be taken into consideration by the assessee in ascertaining the true profits. The Tribunal came to the conclusion that it is not possible to adopt cash system of accounting even in respect of the interest liability. That would show an unrealistic picture of the financial position of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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