Court Upholds Accounting Method Decision, Emphasizes Bona Fides and Consistency

The court upheld the Tribunal's decision to not allow the changeover in the accounting system from mercantile to cash. The judgment emphasized the importance of bona fides in changing the accounting method and the consistent application of the chosen method. The court found the assessee's inconsistent application of the accounting method and lack of evidence regarding the debtor's financial status indicated a lack of bona fides. The reference was answered in favor of the revenue, with no order as to costs, and both judges concurred with the judgment.

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Issues Involved:
1. Whether the Tribunal was justified in not allowing the changeover in the system of accounting from mercantile to cash.

Issue-wise Detailed Analysis:

1. Justification of Tribunal's Decision on Changeover in Accounting System:

Facts and Background:
- The assessee-HUF had advanced Rs. 3,50,000 to Dupent Trading & Investment Co. Ltd., earning interest at 12.5% per annum.
- Initially, the assessee accounted for the interest on an accrual basis but switched to a cash basis from the accounting year ending on 20-4-1983.
- The Assessing Officer (AO) rejected this change and taxed the interest on an accrual basis for the assessment years 1983-84 to 1985-86.

Appeals and Tribunal's Findings:
- The assessee appealed to the Commissioner (Appeals), arguing the change was bona fide due to irregular interest payments by the debtor-company. The Commissioner upheld the AO's decision.
- On further appeal, the Tribunal acknowledged the assessee's right to change the accounting method but held that the change was not bona fide.

Arguments Presented:
- The assessee's counsel argued that the question of bona fides is irrelevant under section 145 of the Income-tax Act, 1961, and cited several decisions supporting this view.
- The revenue supported the Tribunal's order, emphasizing the necessity of bona fides in changing the accounting method.

Relevant Case Law:
- Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 847: The court held that while an assessee can change their accounting method, the change must be intended to be followed regularly, and the absence of such intent can lead to rejection of the change.
- Hada Textile Industries Ltd. v. CIT [1991] 187 ITR 371 (Cal.): The court emphasized the importance of bona fides in changing the accounting method, particularly when the change is not intended for regular continuation.

Court's Analysis:
- The court noted that while section 145 does not explicitly mention bona fides, the intention behind the change is crucial to prevent distortion of income.
- The Tribunal's finding that the change was not bona fide was based on the assessee's inconsistent application of the accounting method and lack of evidence supporting the debtor's inability to pay interest.
- The court upheld the Tribunal's decision, emphasizing that the assessee's fluctuating method of accounting and the lack of honest representation regarding the debtor's financial status indicated a lack of bona fides.

Conclusion:
- The court answered the question in the affirmative, supporting the Tribunal's decision to not allow the changeover in the accounting system from mercantile to cash.
- The judgment reaffirmed the necessity of bona fides in changing the accounting method and the importance of consistent application of the chosen method.

Order:
- The reference was answered in favor of the revenue, with no order as to costs.
- Both judges concurred with the judgment.

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