2007 (11) TMI 270 - HC - Income Tax

Court upholds cash basis accounting for interest income, rejects revenue's challenge to switch method.

The High Court dismissed all appeals against the Income Tax Appellate Tribunal's order, affirming the assessee's use of cash basis accounting for interest ... Revenue pleaded that ITAT is not right in holding that the assessee was justified in declaring its income from interest on FDRs on a cash basis when the evidence clearly show that it has been accounted on a mercantile basis - Once it has been held that the assessee has been regularly following the cash system of accounting for the interest income earned from the bank, there is no room left for HC to entitle revenue to compel the assessee to follow the mercantile system of accounting Issues:Appeal against consolidated order dated 31.1.2007 passed by the Income Tax Appellate Tribunal regarding the method of accounting for interest income earned from the bank - Substantial question of law raised by the revenue challenging the cash basis accounting followed by the assessee.Analysis:1. Method of Accounting for Interest Income:The High Court dealt with the issue of the method of accounting for interest income earned from the bank. The revenue contended that the assessee should have accounted for the interest income on a mercantile basis rather than a cash basis. However, the Tribunal found that the assessee consistently followed the cash system of accounting for interest income. The Court referred to Section 145(1) of the Income Tax Act, which requires income to be computed based on the method of accounting regularly employed by the assessee. Since the assessee had consistently used the cash system, the Court held that the revenue could not compel them to switch to the mercantile system. Consequently, the Court found no legal question to be determined in this regard.2. Substantial Question of Law:The revenue raised a substantial question of law challenging the correctness of the assessee's cash basis accounting for interest income. However, the High Court, relying on the Tribunal's findings, concluded that since the assessee had been consistently following the cash system of accounting, there was no basis for the revenue to enforce a change to the mercantile system. As a result, the Court dismissed the appeals, stating that no question of law, let alone a substantial one, arose from the revenue's contentions.3. Disposal of Appeals:Based on the above analysis, the High Court dismissed all the appeals (ITA Nos. 363, 364, 365, 366, and 369 of 2007) against the consolidated order of the Income Tax Appellate Tribunal. The Court affirmed the Tribunal's decision that the assessee's use of the cash system of accounting for interest income was in compliance with the law, and there was no legal basis for the revenue's challenge to this method. Consequently, the appeals were deemed to have failed, and the Court upheld the Tribunal's decision.In conclusion, the High Court, through its detailed analysis, clarified the legal position regarding the method of accounting for interest income and upheld the Tribunal's decision in favor of the assessee's consistent use of the cash system. The judgment emphasized the importance of adhering to the method of accounting regularly employed by the assessee as mandated by the Income Tax Act.