2000 (9) TMI 44 - HC - Income Tax

High Court overturns Tribunal's decision on interest disallowance in money-lending case, stresses accounting consistency and AO discretion.

The High Court set aside the Tribunal's order in a case involving the disallowance of interest on borrowings by a partnership firm engaged in ... Accounting, Rejection Of Accounts Issues:1. Disallowance of interest on borrowings2. Accounting system followed by the assesseeAnalysis:Issue 1: Disallowance of interest on borrowingsThe case involved the disallowance of Rs. 6,72,000 out of the claim of interest on borrowings by the Assessing Officer for a partnership firm engaged in money-lending business. The firm claimed that it followed the cash system for interest on funds given to partners, while the Assessing Officer asserted the firm was using the mercantile system. The Tribunal, however, allowed the appeal, stating that interest was accounted for on cash basis for previous assessment years. The High Court noted the conflicting views on the accounting method and referred to relevant case laws like CIT v. A. Krishnaswami Mudaliar to emphasize the Assessing Officer's power to determine income based on accounting method if deemed improper. The Court directed the Tribunal to reconsider the matter considering these aspects.Issue 2: Accounting system followed by the assesseeThe dispute also revolved around whether the firm consistently followed the same accounting system for all transactions. The Department argued that following the cash system for only one item of expenditure was impermissible, citing G. Padmanabha Chettiar and Sons v. CIT. The Revenue's counsel contended that the firm maintained a uniform accounting system for all transactions. The High Court found the matter unclear from the Tribunal's order and highlighted the need for clarity on the accounting system to address the issues effectively. The Court emphasized the Assessing Officer's authority to intervene if the accounting method was deemed inappropriate, as established in various judicial precedents.In conclusion, the High Court set aside the Tribunal's order and instructed a reassessment based on the directions provided, emphasizing the importance of consistent accounting practices and the Assessing Officer's discretion in determining income based on the accounting method's propriety.