2002 (2) TMI 78 - HC - Income Tax

Tribunal upholds change in accounting system for interest income assessment.

The Tribunal's decision to allow the change in the accounting system from mercantile to hybrid for assessing interest income was upheld. The court found ... Change of accounting method - hybrid system of accounting - mercantile system of accounting - regularly employed method of accounting - application of section 145 regarding method of accounting - bona fide changeChange of accounting method - hybrid system of accounting - mercantile system of accounting - regularly employed method of accounting - application of section 145 regarding method of accounting - bona fide change - The Tribunal was right in allowing the assessee to change the method of accounting for interest income from mercantile to a hybrid system for the assessment years 1988-89 and 1991-92. - HELD THAT: - The assessee had followed mercantile accounting for interest liabilities and a cash system for interest receipts until 1987-88, and with effect from 1988-89 adopted a hybrid system (interest income shown on receipt basis and interest payments on accrual basis) after obtaining professional advice to streamline its procedure. The Tribunal found the change to be a legitimate and bona fide accounting need and recorded absence of mala fide. Section 145 requires income to be computed in accordance with the method of accounting 'regularly' employed by the assessee during the relevant period, but 'regular' does not import permanence or forbid a warranted change of accounting method. Nothing in the statute or the record shows that a change, when genuinely necessitated and properly adopted, is impermissible. The Tribunal's conclusion that the procedure adopted by the Government company did not violate section 145 is a possible view and was rightly upheld by the High Court.Question answered against the Revenue; the change of accounting method was permissible and the Tribunal's view sustained.Final Conclusion: The High Court upheld the Tribunal's allowance of the assessee's switch to a hybrid system of accounting for interest income for the assessment years 1988-89 and 1991-92, holding that section 145 does not bar a bona fide and warranted change of accounting method; order for Revenue dismissed without costs. Issues Involved:The judgment addresses the issue of whether the Income-tax Appellate Tribunal was correct in allowing a change in the system of accounting of interest income from mercantile to hybrid system for the assessment years 1988-89 and 1991-92.Analysis:The State Industrial Development Corporation, the assessee, had been following the mercantile system of accounting until 1987-88, after which it switched to a hybrid system for interest income. The Assessing Officer disallowed this change, resulting in additions to the assessee's income for the relevant years. The Commissioner accepted the assessee's appeal, and the Tribunal upheld this decision.Legal Interpretation:Section 145 of the Income Tax Act allows income computation based on the method of accounting regularly employed by the assessee. In this case, the assessee had valid reasons for the change in accounting method, as it faced challenges in realizing interest income in a timely manner from loan recipients. The Tribunal found the change to be legitimate and bona fide, with no evidence of malafide intentions.Conclusion:The Tribunal's decision to permit the change in the accounting system from mercantile to hybrid was deemed valid and in accordance with the law. The judgment emphasized that the term 'regularly' in section 145 does not imply permanency, and a change in accounting method can be warranted by circumstances. As the assessee, a Government company, had carefully considered and implemented the new accounting procedure, the court ruled in favor of the assessee, rejecting the Revenue's appeal.