9911796707
TMI Blog2025 (2) TMI 864X X X X Extracts X X X X X X X X Extracts X X X X ..... our considered view, change of method of accounting from mercantile to cash by the assessee in the year under consideration is a legitimate exercise. Assessee has explained that it is a genuine and bonafide exercise arising out of compelling reasons of financial distress at the end of borrowers.
Subjecting assessee to tax on interest income which he has not received, we have held the change in method of accounting from mercantile to cash system justifiable and legitimate. Having held so, non-receipt of interest income during the year from both the parties, namely, in the case of SPCPL where assessee has waived the interest which has not even been accrued by it in its books of account to claim it as an expense and Roxanna having accrued the interest expense in its books of account has not paid the same to the assessee, cannot be added in the hands of the assessee on accrual basis as done by the ld. AO
No infirmity in the findings arrived at by ld. CIT(A) in deleting the addition made by AO towards interest income on loans given to the two companies. In the result, grounds raised by the Revenue are dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... own case was required to offer the interest income in the same manner they had offered in the previous year they have changed their method of accounting stating that they have followed the cash system of accounting?" 6 "Whether on the facts and in the Circumstances of the case and in law, the Ld CIT(A) has erred in ignoring the word (regularly) stated in sub section (3) of sec. 145 which does not permit such free will to change accounting method?" 3. Assessee belongs to the promoter family of Shapoorji Pallonji and Co. Pvt. Ltd. (SPCPL) and Roxanna Consultancy Services Pvt. Ltd. (Roxanna). Assessee as an individual, filed his return of income, reporting total income at Rs. 1,45,71,240/- with source of income from salary and from other sources. In the course of assessment proceedings, ld. Assessing Officer on perusal of Form 26AS of the assessee for the year under consideration noted an entry towards interest income of Rs. 8,81,35,246/- from Roxanna with a corresponding TDS of Rs. 88,38,525/-. He observed that this income has not been offered to tax so also TDS has not been claimed by the assessee. Necessary details and explanations were called for from the assessee. Details o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Ld. CIT(A), thus concluded in para 6.5.6 that assessee being a non-corporate assessee is legally allowed to change method of accounting from mercantile to cash. Since no income is received by the assessee during the year under consideration by following cash system of accounting, no interest income from SPCPL and Roxanna could be brought to tax in the year under consideration. 4. We have heard both the parties and perused the material on record. Considering the submissions made before us and upon going through the orders of the authorities below as well as synopsis filed by the ld. Counsel of the assessee, we give our observations and findings hereunder. 4.1. It is an undisputed fact that assessee belongs to promoter family of SPCPL and Roxanna. In order to bail out the group which was under financial stress, assessee had extended loans to both the companies. Assessee extended the loans out of funds received from his father as gift. This fact is stated in impugned assessment order at para 12(a) forming part of the submissions made by the assessee in compliance to notice u/s.142(1) dated 17.08.2022. In this respect, assessee furnished copy of bank account statement and income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders of the company as well as the lenders of the respective group entities, timing of cashflows from monetization of assets and infusion of funds by the promoters to bridge any further shortfall with regards to its obligations and other matters as described in the said Notes. Our opinion is not modified in respect of this matter." 4.4. Accordingly, SPCPL did not accrue interest expense in its books of account as interest payable and correspondingly there was no deduction of tax at source done by it. Since there was no interest accrued at the end of SPCL and no TDS thereon, this transaction did not reflect in Form 26AS of the assessee for the year under consideration. 4.5. On these facts, ld. Assessing Officer observed in para 16 of his order that SPCPL did not furnish any documentary evidence in support of request for waiver of interest made by it to the assessee and its acceptance in the Board meeting. He also noted that audited financials of SPCPL does not mention any such event of waiver of interest from the assessee during the year under consideration. He thus, concluded that it is nothing but an afterthought, done to avoid immediate financial burden of depositing required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: "145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time [income computation and disclosure standards] to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) "[has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under" 4.9. Sub-section 1 inter alia requires that in respect of income from other sources, the method of accounting could be either cash or mercantile system regularly employed by the assessee subject to income computation and disclosure standards notified by Central Government which are to be followed by any class of assessee or in respect of any class of income. Sub-section 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the period under consideration. However, the provision cannot be interpreted to mean that once a system of accounting is adopted, it can never be changed." 4.11. In the present case, assessee has changed the method of accounting from mercantile system to cash system in the year under consideration. In this respect justifiable reasons and corroborative actions taken have been explained by the assessee. Assessee is a non- corporate assessee who is permitted to follow either of the cash or mercantile system of accounting for recognizing his income. In the case of companies, they are mandatorily required to follow accrual basis of accounting. In respect of loans given to SPCPL, assessee had waived interest which was accepted by the company by way of resolution in its Board of Director's meeting with appropriate disclosure in its audited financial statements. Company did not claim any interest expense in its profit and loss account nor provided for TDS in that respect. Thus, there was no occasion for the company to accrue interest expense and for the assessee to include the same in his return of income. In the given set of facts, whether assessee followed accrual or cash system, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to change in method of accounting from mercantile to cash basis by the assessee, as observed by us in above paragraphs, 'regular' cannot in the present context mean 'permanent'. Change in method of accounting is not prohibited when warranted by situations which has been justifiably explained by the assessee. Assessee had demonstrated that once changed, he has regularly followed the method in the subsequent years. Assessee has affirmed to offer the income as and when he receives it. Keeping all the above discussions in juxtaposition, in our considered view, change of method of accounting from mercantile to cash by the assessee in the year under consideration is a legitimate exercise. Assessee has explained that it is a genuine and bonafide exercise arising out of compelling reasons of financial distress at the end of borrowers. 5.2. On the second aspect of subjecting assessee to tax on interest income which he has not received, we have held the change in method of accounting from mercantile to cash system justifiable and legitimate. Having held so, non-receipt of interest income during the year from both the parties, namely, in the case of SPCPL where assessee has waived the i ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
