Bona fide change in accounting method upheld where it better reflected true profits and was not barred by law.

A bona fide change from mercantile to cash basis for export cash assistance was accepted where it was made to avoid genuine accounting difficulties and to reflect true profits, and the Act did not bar such a change for a single receipt item. The note also records that, on similar facts, a deed of hypothecation trust as modified by a supplementary deed was treated as creating a valid charge or mortgage. It further notes that no disallowance survived under section 40A(8) in respect of part of the interest on fixed deposits from the public, with all issues resolved in favour of the assessee.

---

---

Issues: (i) Whether the assessee could validly change the method of accounting in respect of export cash assistance from mercantile to cash basis. (ii) Whether a valid charge or mortgage was created by the deed of hypothecation trust as modified by the supplementary deed. (iii) Whether part of the interest on fixed deposits from the public was liable to be disallowed under section 40A(8) of the Income-tax Act, 1961.

Issue (i): Whether the assessee could validly change the method of accounting in respect of export cash assistance from mercantile to cash basis.

Analysis: The change was found to have been made bona fide to avoid genuine accounting problems and to better reflect the true profits. There was nothing in the Act preventing such a change being made in respect of one item of receipt when it was intended to show the true state of accounts.

Conclusion: The change in the method of accounting was valid and the issue was answered in favour of the assessee.

Issue (ii): Whether a valid charge or mortgage was created by the deed of hypothecation trust as modified by the supplementary deed.

Analysis: The question was covered by an earlier of the Court on similar facts, and the same reasoning was applied.

Conclusion: A valid charge or mortgage was treated as having been created, and the issue was answered in favour of the assessee.

Issue (iii): Whether part of the interest on fixed deposits from the public was liable to be disallowed under section 40A(8) of the Income-tax Act, 1961.

Analysis: The issue was held to be covered by the Court's earlier decision in similar matters, and the same conclusion was adopted.

Conclusion: No disallowance survived under section 40A(8), and the issue was answered in favour of the assessee.

Final Conclusion: The reference was decided entirely for the assessee, and the additions sustained by the revenue did not survive.

Ratio Decidendi: A bona fide change in the method of accounting, when made to reflect true profits and not prohibited by the Act, cannot be rejected merely because it is applied to a particular item of receipt.

---