1999 (11) TMI 28 - HC - Income Tax

Tribunal Upholds Cash Incentive Inclusion in Income; Emphasizes Genuine Accounting Method Change

The Tribunal upheld the decision of the Assessing Officer and the Commissioner of Income-tax (Appeals) regarding the inclusion of the cash incentive ... Accounting, Method Of Accounting Issues:1. Change in method of accounting from mercantile to cash system.2. Inclusion of cash assistance in total income for assessment year.3. Bona fide change in method of accounting.4. Entitlement to adjust tax burden by changing accounting method.5. Regular employment of changed method of accounting.6. Frequency of changing method of accounting.7. Acceptance of changed method of accounting by taxing authority.Analysis:Issue 1: Change in method of accounting from mercantile to cash systemThe Tribunal raised questions regarding the correctness of the change in accounting method by the assessee from mercantile to cash system. The Assessing Officer found the change to be not bona fide as the assessee had not included a cash incentive amount in the return of income for the assessment year 1988-89. The Revenue contended that the change was made to claim deductions in a subsequent year, indicating a lack of bona fide intention. The Tribunal observed that the change was not justifiable, as there was no uncertainty in receiving the cash incentive. The Tribunal upheld the decision of the Assessing Officer and the Commissioner of Income-tax (Appeals) regarding the inclusion of the amount in the total income for the relevant assessment year.Issue 2: Inclusion of cash assistance in total income for assessment yearThe Tribunal deliberated on whether the cash assistance amount of Rs. 7,19,598, due to the assessee, should be included in the total income for the assessment year 1988-89. The assessee argued that the amount accrued in the subsequent year and should be considered for assessment in 1989-90. However, the Tribunal found that the amount accrued during the relevant assessment year and should have been included in the total income for that year. The Tribunal rejected the assessee's claim to defer the inclusion of the amount to avail benefits under section 80HHC in a subsequent year.Issue 3: Bona fide change in method of accountingThe Tribunal examined whether the change in the method of accounting by the assessee was bona fide. It was noted that the assessee had switched from cash basis to due basis on the mercantile system for accounting for cash incentives. The Tribunal found the change to be not bona fide, as the purpose appeared to be to reduce tax liability by claiming deductions in a subsequent year. The Tribunal emphasized the importance of a genuine intention behind changing the accounting method.Issue 4: Entitlement to adjust tax burden by changing accounting methodThe Tribunal considered whether the assessee was entitled to adjust its tax burden by changing the method of accounting. It was clarified that while an assessee can change the method of accounting, it must be a genuine change intended to be regularly employed. The Tribunal highlighted that the regularity of the changed method is crucial, and the taxing authority can revert to the earlier method if the changed method is not consistently followed.Issue 5: Regular employment of changed method of accountingThe Tribunal analyzed whether the assessee had regularly employed the changed method of accounting. It was emphasized that for a changed method to be considered regular, the assessee must abandon the previous method and consistently follow the new method. The Tribunal found that the assessee's switching between methods for the same income source in different years indicated a lack of regularity in following the accounting method.Issue 6: Frequency of changing method of accountingThe Tribunal addressed the frequency of changing the method of accounting by the assessee. It was noted that while the assessee had changed the method only once before, the frequent switching between methods for the same income source raised concerns about the regularity and bona fide nature of the changes. The Tribunal concluded that the intermediary changes in accounting method did not align with the concept of regularly followed accounting methods.Issue 7: Acceptance of changed method of accounting by taxing authorityThe Tribunal examined whether the taxing authority was justified in rejecting the changed method of accounting. It was emphasized that the taxing authority can base its computation on the changed method if it is regularly followed by the assessee. However, in this case, the Tribunal found that the changed method was not consistently employed, leading to the refusal of the assessee's stand by the authorities.In conclusion, the Tribunal answered the questions in favor of the Revenue and against the assessee, highlighting the importance of a bona fide, regular, and justifiable change in the method of accounting to avoid tax implications.