9911796707
TMI Blog1998 (11) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... over due instalments of loan repayable by the borrowers, but for which no credit in the profit and loss account has been given by the assessee. The method of accounting followed by the assessee, on its own showing, for all the earlier assessment years was the mercantile system of accounting. For these two years, it was the claim of the assessee that the penal interest had not been collected and had not been taken into account in the profit and loss account statement. The amount of the penal interest was however set out in a note in the annual report of the company. The note so made in the balance-sheet relevant for the assessment year 1979-80 reads as under : "Penal interest on the instalments due but not collected before March 31, 1979, in respect of loan granted and hire purchase instalments has not been taken into account. Such penal interest amounts to Rs. 27,87,113 (previous year Rs. 14,92,749)". The assessee's appeal to the Commissioner having been, unsuccessful, the assessee filed a further appeal before the Income-tax Appellate Tribunal. It was contended by it before the Tribunal that the assessee was following the mercantile system of accounting up to the assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est must be held to have accrued to the assessee in the previous year relevant to the assessment years, as the assessee was following the mercantile system of accounting. The argument similar to the one advanced before the Tribunal on behalf of the assessee for those two years, had been advanced before the Tribunal in the appeal for the assessment year 1978-79 also and such argument had been rejected by the Tribunal. As mentioned earlier, the reference arising from that order was answered in favour of the Revenue by this court in T. C. No. 1115 of 1985, decided on February 27, 1998. The Tribunal despite the fact that for all these assessment years, it had itself found that the penal interest had accrued having regard to the mercantile system of accounting that was being followed by the assessee, it has held that the penal interest did not accrue to the assessee in the previous year relevant to these two assessment years, as the system of accounting followed in respect of penal interest was the cash system. While so holding, it had relied upon the notes to the balance-sheet for the year relevant to the assessment years. The Tribunal's finding rested on the fact that the amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect authority, but on the first principles it is clear that once the assessee had adopted the mercantile system of accounting, there is no alternative for the Income-tax Officer but to compute the assessee's income on that system, i.e., on the accrual and not the receipt basis. It was also held that though the choice is entirely that of the assessee, the assessee having chosen one method, the assessee cannot unilaterally refuse to follow that system in respect of a particular transaction. Learned counsel for the assessee, on the other, submitted that it was open to the assessee to treat the penal interest in a manner different from its other income and the fact that it had adopted the mercantile system of accounting did not have the effect of preventing the assessee from adopting a different system for certain transactions and a hybrid system of accounting is permissible in law. Counsel relied on the decision of the Bombay High Court in the case of CIT v. Citi bank N. A. [1994] 208 ITR 930 wherein it was held that the fact that the assessee in that case for its convenience kept a separate note of those parties in whose case the mercantile system of accounting had not been followe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is case, there can be no doubt about the fact that the system of accounting adopted by the assessee is the mercantile system for all the assessment years till 1978-79. The claim made for the subsequent assessment years 1979-80 and 1980-81 that the assessee had in respect of penal interest alone adopted the cash system of accounting, in the circumstances, cannot be accepted as even according to the assessee the cash system of accounting had been adopted by it from the year 1974-75. For the assessment years 1974-75 to 1977-78, it has been held by this court in the earlier references that the method of accounting adopted by the assessee was the mercantile system and that penal interest has accrued in those years. There was no change in the system of accounting followed by the assessee during the years relevant to the assessment years 1979-80 and 1980-81. The manner in which the penal interest was treated in the assessment years 1974-75 to 1977-78 is also the manner in which it is required to be treated for the assessment years 1979-80 and 1980-81. The system of accounting must disclose the true extent of the income. The systems of accounting are many. The cash system and the merca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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