1997 (9) TMI 639 - HC - Income Tax

Assessee bound by accounting method agreement; interest income inclusion upheld.

The High Court held that the assessee cannot unilaterally switch accounting systems without mutual consent. The Court ruled in favor of the Revenue, ... Mercantile system of accounting - cash system of accounting - consistent application of an accounting method - change of accounting system requires mutual consentMercantile system of accounting - cash system of accounting - change of accounting system requires mutual consent - Whether the assessee, having previously followed the mercantile system for the interest on a loan, could in the accounting period relevant to asst. yr. 1973-74 unilaterally adopt the cash system to exclude accrued interest from income. - HELD THAT: - The Tribunal found that the assessee had, in earlier assessment years, treated the interest on the loan on the basis of the mercantile system and did not pursue a contrary stance by way of appeal for those years. The Court applied the principle in Shiv Prasad Ram Sahai v. ITR that where an assessee has once adopted and regularly employed the mercantile system for a transaction, he cannot thereafter unilaterally change to the cash system in subsequent accounting years; any variation requires mutual consent of the assessing officer. The assessee did not demonstrate that such mutual consent existed for the change of system in the year relevant to 1973-74. On these grounds the Tribunal's conclusion that the mercantile system governed the treatment of the interest income for the period in question was upheld. [Paras 3, 4]Assessee cannot unilaterally switch from mercantile to cash system for the interest in the assessment year 1973-74; the Tribunal's holding in favour of the Revenue is affirmed.Final Conclusion: The reference is answered against the assessee and in favour of the Revenue: having regularly followed the mercantile system earlier, the assessee was not entitled to adopt the cash system for the assessment year 1973-74 absent mutual consent. The High Court held that the assessee cannot unilaterally switch from mercantile to cash accounting system without mutual consent. The Tribunal justified the inclusion of interest income based on the mercantile system. The Court ruled in favor of the Revenue.