Mercantile accounting for loan interest cannot be shifted unilaterally to cash basis without mutual consent.

An assessee that has consistently accounted for interest on a loan under the mercantile system cannot unilaterally switch to the cash system for the same transaction in a later year. A change in accounting treatment for a settled item requires mutual consent, and where no such consent is shown, the earlier method continues to govern. The High Court therefore answered the question against the assessee and in favour of the Revenue.

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Issues: Whether the assessee, having followed the mercantile system for interest income on a loan in earlier years, could unilaterally shift to the cash system for the assessment year in question.

Analysis: The assessee had consistently been assessed on the mercantile basis in respect of interest on the loan advanced to the firm in earlier assessment years, and the earlier rejection of the cash-system contention had not been pursued further. A change from mercantile to cash system for a particular transaction could not be made unilaterally in a subsequent year; such variation required mutual consent, which was not shown.

Conclusion: The question was answered in the affirmative, against the assessee and in favour of the Revenue.

Ratio Decidendi: Once an assessee has regularly employed the mercantile system for a transaction, it cannot unilaterally change to the cash system in a later year without mutual consent.

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