1981 (11) TMI 27 - HC - Income Tax

High Court allows change in accounting method for interest income, interest not received not taxable

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

The High Court held in favor of the assessee, allowing the company to change its accounting method from the mercantile system to the cash system for ... Interest Issues Involved:1. Whether the assessee-company was entitled to change its method of accounting from the mercantile system to the cash system for interest income.2. Whether the interest accrued during the relevant years but not received was liable to be included in the assessment.Summary:Issue 1: Change of Accounting MethodThe primary issue was whether the assessee-company was entitled to change its method of accounting from the mercantile system to the cash system for interest income. The Tribunal had previously upheld the Revenue's decision rejecting the change, citing a lack of evidence that the change was intended to be regular. The Tribunal's decision was challenged, and the High Court had upheld the Tribunal's order on the ground that there was no material to show that the change was intended to be regular.Issue 2: Inclusion of Accrued InterestThe second issue was whether the interest accrued during the relevant years but not received was liable to be included in the assessment. The Tribunal had upheld the inclusion of accrued interest in the assessee's income, following its earlier decision for the assessment year 1969-70. The High Court noted that the Tribunal had not found any new facts or issues in the present appeals and had followed its earlier order.Legal Arguments and Precedents:The assessee argued that it was entitled to change its method of accounting for one part of its business, provided it substituted one regular system with another. The assessee cited several precedents, 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), to support its contention that the change in the method of accounting was bona fide and regularly employed.Revenue's Contention:The Revenue argued that the change in the method of accounting was not bona fide and was intended only for one debtor. The Revenue cited decisions such as *Ramkumar Kedarnath v. CIT* [1937] 5 ITR 261 (Bom) and *Forest Industries Travancore Ltd. v. CIT* [1964] 51 ITR 329 (Ker) to support its contention that the change was not bona fide and should not be accepted.Court's Analysis:The High Court observed that there was no material to show that the interest received from any debtor was accounted for on the mercantile basis in the relevant years. The Court also noted that the assessee had maintained the change in its method of accounting for two years since the assessment year 1969-70, which was not considered by the Tribunal. The Court held that the principles of res judicata were not applicable in revenue matters and that the findings of fact in an earlier year were not binding in subsequent years.Conclusion:The High Court concluded that the assessee had regularly employed the changed method of accounting and that the question of bona fides was not relevant once the change was regularly followed. The Court answered the questions referred to it in the negative and in favor of the assessee, holding that the assessee was entitled to change its method of accounting and that the interest accrued but not received was not liable to be included in the assessment. The judgment was delivered by both judges without separate opinions.