Court allows cash deductions during transition to mercantile system under statutory compulsion

The High Court upheld the Tribunal's decision to allow deductions for cash-based expenditure during the transition period when the assessee switched from the cash to the mercantile system of accounting due to statutory compulsion. The court emphasized the necessity to consider cash payments in the assessment year to enable deductions for cash-based expenses, rejecting the Revenue's appeal and affirming the Tribunal's order without costs.

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Issues:
1. Whether the Appellate Tribunal was correct in deleting interest additions for the assessment years 1989-90 and 1990-91Rs.
2. Whether the deletion of interest expenditure by the Appellate Tribunal for the assessment year 1989-90, despite the assessee following the mercantile system, is validRs.

Analysis:
1. The case involved the transition of the assessee from the cash system of accounting to the mercantile system due to statutory compulsion. The Assessing Officer disallowed expenditure under the hybrid system, leading to an appeal before the Commissioner of Income Tax. The Commissioner allowed the appeals considering the peculiar situation of the transition period, following a decision of the Bombay High Court. The Tribunal upheld the Commissioner's view, leading to the Revenue's appeal. The High Court noted the statutory compulsion for the switch and the necessity for cash payments to be considered in the assessment year 1989-90 to allow deductions for cash-based expenditure.

2. The High Court referenced previous decisions to support its stance that the change in accounting method, though initially detrimental to the Revenue, should not be a basis for denying deductions. The court cited cases where the switch from cash to mercantile system due to statutory compulsion resulted in a mixed system during the transition period. The Revenue did not dispute the necessity for the assessee to follow the mercantile system, acknowledging the hybrid system during the transition. Relying on previous court decisions, the High Court rejected the Revenue's contention and affirmed the Tribunal's order, dismissing the tax case appeal without costs.

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