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TMI Blog1996 (6) TMI 101X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, Industrial Development Bank of India and also generates funds from its own resources. In that process, the Corporation charges interest on the advances of loans made to the entrepreneurs and other agencies. Up to the assessment year 1987-88, the assessee-company was following mercantile system of accounting except in respect of commitment charges, sitting fees and dividend income which were being accounted for on receipt basis. However, with effect from the year relevant to assessment year 1988-89, the assessee-company switched over from mercantile to hybrid system of accounting in respect of interest income from the loans granted by it. The company felt that in certain cases, it was not realising the interest in time but was unnecessarily paying taxes on the interest income on accrual basis. The company accordingly asked M/s S.B. Billimoria & Co., Chartered Accountants, New Delhi to submit a report as to how to streamline the procedure and how to minimise the tax effect by showing a correct picture of the profits earned. The Chartered Accountants submitted a report in April 1985 and particularly recommended a switch-over in the assessee's system of accounting from mercantile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s taxable income of the assessee. It was submitted that the assessee was paying interest to IDBI, etc., still on the basis of mercantile system of accounting and it was only in respect of certain loans where the parties receiving loans had defaulted for a period of two years or more that an exception was made and the interest receivable on those accounts was offered for assessment on receipt basis and not on accrual basis. It was submitted that the purpose of obtaining the report from the Chartered Accountants by the assessee was to minimise its tax liability and hence the change was colourable and was not in good faith. Relying on the Allahabad High Court decision in the case of Balraj Virmani v. CIT [1974] 97 ITR 69, the learned D.R. submitted that where the assessee followed the mercantile system of accounting, interest on loans accrued became assessable even if it had not been received. Reliance was also placed on the Allahabad High Court decision in the case of Shiv Prasad Ram Sahai v. CIT [1966] 61 ITR 124 for the proposition that if the assessee had once chosen the mercantile system for a transaction and had regularly employed that system, it was not open to him unilaterally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... untants was requisitioned with a view to streamlining the procedure. It was submitted that it was against this background that on the recommendation of the Chartered Accountants, the assessee switched-over to a hybrid system of accounting, inasmuch as, interest on memoranda accounts where the parties had defaulted in the payment of principal amount/interest, the changed method envisaged the offering of interest income not on accrual basis but on receipt basis. It was submitted that the assessee-company passed the resolution for implementing the recommendations of the Chartered Accountants on 11-11-1985 and applied the same w.e.f. the assessment year 1988-89 for which the accounting period started on 1-7-1986. It was submitted that the assessee-company had made a classification which was based on intelligible criteria. The changed system was to apply only in respect of the ' memoranda cases ' where there had been default in the matter of payment of principal amount/interest for two years or more. It was submitted that there was a rationale behind what the assessee did and there was nothing wrong or mala fide about the changed system of accounting. 7. Relying on the Calcutta High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n tax because when that interest was received on cash basis, the same had been offered for assessment. Reliance was placed on another decision of the Calcutta High Court in the case of CIT v. Bikaner Trading Co. [1989] 180 ITR 286/45 Taxman 201 for the proposition that a bona fide change in the method of accounting was permissible in law. For a similar proposition, reliance was placed on the Bombay High Court decision in the case of CIT v. West Coast Paper Mills Ltd. [1992] 193 ITR 349. As regards the decisions relied on by the learned D.R., Shri Garg submitted that these were either irrelevant or they supported the assessee's case. It was for instance pointed out that the decision of the Allahabad High Court in the case of Balraj Virmani did not involve the question of change of accounting method but laid down the broad proposition that where the assessee was following mercantile system of accounting, interest on accrual basis had to be assessed to tax. It was submitted that there was no quarrel with the proposition of law laid down by the High Court but that decision was not applicable to the facts of the instant case where change in the accounting system was involved. It was poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crual basis even from the defaulters and such huge remissions were being claimed thereafter, the assessee, in a bona fide manner, changed over to a method which reflected a true state of affairs and a correct picture of the profits earned. We, therefore, hold that the change was bona fide and no mala fide motive can be attributed to the assessee which is a Government Corporation and serving the laudable objective of maximising the industrial growth of the State of Punjab. The changed method has been followed consistently by the assessee in the subsequent years and no evidence has been placed on record by the Revenue that there has been any departure from the changed method in the subsequent years. For assessment years 1989-90 and 1990-91, the department itself has accepted the changed method of accounting, inasmuch as, no such additions have been made as has been done in the year relevant to assessment year 1988-89. The case law cited by the learned D.R. either supports the assessee's case or is distinguishable on facts or is irrelevant as rightly pointed out by the learned Counsel for the assessee. In the case of Munjal Sales Corpn., this Bench of the Tribunal has taken a view tha ..... 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