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TMI Blog1982 (4) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting year ended 30-6-1975. The accounts of Magnotape show advances received from the holding company totalling Rs. 18,55,001 as on the last day of the accounting year. We may say that the accounting year followed by both the companies, is the same. 3. Up to and including the accounting year ended 30-6-1974, the assessee-holding-company was charging interest on such loans. The subsidiary company was also crediting interest to the assessee-company's accounts. This was being taxed in those years. 4. On 30-6-1975, the board of directors of the assessee-company passed a resolution. In that resolution the assessee-company noted, that although the subsidiary-company had come into existence in 1965, it had not yet started production and was in financial difficulties. Therefore, it would be difficult to recover any interest from such advances which had been lent from time to time. It was, therefore, resolved that interest receivable from the subsidiary companies on those advances would be accounted for on cash basis, but a suitable note would be put in the accounts forming part of the balance sheet for the year ended 30-6-1975. As a consequence of this resolution, the accounts for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alled upon to justify a change, in this case, there is justification for a change. He pointed out that the subsidiary company which had been in existence from 1965, had not been able to start production even after a lapse of 10 years. The subsidiary companies had a lot of hurdles and the assessee-company's funds are locked up therein, without any reasonable prospect of realization of interest or principal. Under these circumstances, it should be a prudent step for the assessee to change the method so that it conforms to realities. He then relied on certain authorities for the proposition submitted by him for consideration. 8. Shri Makhija, for the department, pointed out that there was no justification for change in the method of accounting. He submitted that the circumstances of the subsidiary companies were not so gloomy as to hold that recovery of interest was not possible. The continued losses sustained by the subsidiary companies had not deterred the assessee-company from going on advancing further funds. He pointed out that during the accounting year itself, a further sum of Rs. 7 lakhs had been advanced. The balance as on the first day was about Rs. 11 lakhs and the closin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round that the assessee has been following the mercantile system of accounting. Even if an entry is made in the books, if no income had materialized, there cannot be a liability to tax on a hypothetical income. It is not the hypothetical accrual of income based on mercantile system of accounting that has to be taken into account, but what should be considered is, whether the income has really materialized or resulted to the assessee. On facts in that case, the Madras High Court found that no income had materialized. This case is an authority to hold that unless income materializes a method of accounting followed by the assessee is not relevant. This case did not deal with a change in the method of accounting. In order to apply this ratio, we will have to give a finding that no income accrued, although there was a contract for payment of interest. We can come to such a finding if the balance sheet of the debtor-company revealed a financial position which would show that it had no capacity to repay the principal or interest. We do not find such a position on going through the balance sheet of the subsidiary company. So, we cannot say that what is attempted to be brought into the acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's contention that he is entitled to such a change. 13. Even in respect of a particular type of income, the Madras High Court has gone further, and in the case of CIT v. E. A. E. T. Sundararaj [1975] 99 ITR 226, they have held that an assessee may employ one method of accounting for one part of his business or one class of customers and a different method for another part of his business or another class of customers ; that he may also keep accounts in respect of different parts of the same business on different basis. All that will have to be seen is, whether the classification of the business or the customers, as the case may be, is made on a rational basis. It is, of course, necessary to see that by such method no income ultimately escapes tax. If these conditions are satisfied, the department cannot refuse to notice the change in the method of accounting. 14. Shri Makhija relied on the decision of the Bombay High Court in Confinance Ltd.'s case. This was not a case of change of accounting. In this case, the assessee, who is a money-lender, did not bring into account interest, due from some of his customers. He relied on some of the circumstances of the debtor, to show that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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