1981 (11) TMI 26 - HC - Income Tax

High Court Upholds Tribunal Decision on Accounting Method Change for Interest Income

Snow White Food Products Co. Limited Versus Commissioner Of Income-Tax, West Bengal II

Snow White Food Products Co. Limited Versus Commissioner Of Income-Tax, West Bengal II - [1983] 141 ITR 847 Issues Involved:1. Entitlement to change the method of accounting from mercantile to cash basis.2. Regularity and bona fides of the changed method of accounting.3. Requirement of board resolution or shareholder approval for changing the method of accounting.4. Reflection of true profit and loss by the changed method of accounting.5. Applicability of Section 145 of the Income Tax Act, 1961.6. Relevance of prior judgments and precedents.Issue-wise Detailed Analysis:1. Entitlement to Change the Method of Accounting:The assessee sought to change its method of accounting from mercantile to cash basis for interest income in the assessment year 1968-69. The Tribunal held that the assessee was not entitled to unilaterally change its method of accounting for a particular transaction within the same accounting year. This conclusion was based on the precedent set by Shiv Prasad Ram Sahai v. CIT [1966] 61 ITR 124, which stated that once a system is adopted, it cannot be changed unilaterally for specific transactions.2. Regularity and Bona Fides of the Changed Method:The Tribunal found no evidence that the change in the method of accounting was intended to be followed regularly in future years. The statement in the annual report that 'interest receivable amounting to Rs. 1,58,886 has not been accounted for in the accounts' was not sufficient to establish a regular change. The Tribunal noted that the change appeared to be suggested only for the year in question, which did not meet the requirement for a bona fide change in the method of accounting.3. Requirement of Board Resolution or Shareholder Approval:The Tribunal noted that there was no resolution by the board of directors or shareholders supporting the change in the method of accounting. Mr. Poddar, representing the assessee, argued that under Sections 291 and 292 of the Companies Act, 1956, directors are empowered to change the method of accounting without a formal resolution. However, the Tribunal held that such a significant policy change should be formally recorded to ensure transparency and accountability.4. Reflection of True Profit and Loss:The AAC and the Tribunal both held that the change in the method of accounting did not reflect the true profit and loss of the assessee. The AAC's finding that the departure from the regular method did not provide a true picture of the assessee's financial position was not challenged before the Tribunal, and thus, was accepted.5. Applicability of Section 145 of the Income Tax Act, 1961:Section 145(1) mandates that income should be computed in accordance with the method of accounting regularly employed by the assessee. Section 145(2) allows the ITO to make an assessment if the accounts are not complete or the method is not regularly employed. The Tribunal concluded that the assessee did not establish a regular change in the method of accounting, thus the ITO was justified in assessing the income on an accrual basis.6. Relevance of Prior Judgments and Precedents:Several precedents were cited, including Sarupchand v. CIT [1936] 4 ITR 420 (Bom), Sundaram & Co. Ltd. v. CIT [1959] 36 ITR 162 (Mad), and Indo-Commercial Bank Ltd. v. CIT [1962] 44 ITR 22 (Mad). These cases generally supported the principle that an assessee could change their method of accounting, provided it was done bona fide and regularly. However, the Tribunal found that the assessee failed to meet these criteria in the present case.Conclusion:The High Court affirmed the Tribunal's decision, holding that the assessee was not entitled to change its method of accounting from mercantile to cash basis for interest income in the relevant assessment year. The court emphasized the need for regularity and bona fides in such changes and noted the absence of formal resolutions or sufficient evidence to support the change. The question referred was answered in the affirmative and in favor of the Revenue.