Court upholds interest inclusion in assessment, disallows unilateral accounting change

The High Court affirmed the Tribunal's decision, holding that interest on the loan to M/s. Associated Industries (Assam) Ltd. must be included in the assessment for the relevant years. The Court ruled that the unilateral change in accounting method by the assessee was impermissible, emphasizing the need to consistently follow the mercantile system. The decision favored the revenue, concluding that maintaining a hybrid accounting system or selectively applying cash accounting to specific transactions was not allowed.

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Issues Involved:
1. Inclusion of interest receivable from M/s. Associated Industries (Assam) Ltd. on an accrual basis.
2. Change of accounting method from mercantile to cash system by the assessee.
3. Permissibility of maintaining a hybrid system of accounting.

Detailed Analysis:

1. Inclusion of Interest Receivable on Accrual Basis:
The Income Tax Officer (ITO) included Rs. 1,36,170 as interest receivable from M/s. Associated Industries (Assam) Ltd. on an accrual basis for the assessment years 1968-69 and 1969-70. The assessee-company had been following the mercantile system of accounting, which necessitated the inclusion of interest on an accrual basis. The Appellate Assistant Commissioner (AAC) and the Tribunal upheld this inclusion, rejecting the assessee's contention that the interest should be excluded due to a change in the accounting method to a cash system and the improbability of receiving the interest or principal amount.

2. Change of Accounting Method:
The assessee argued before the AAC that the interest should be excluded because it had changed its accounting method from mercantile to cash system. This change was purportedly made to reflect the real income, as the interest had not been received for several years, and there was no chance of receiving it. The AAC rejected this argument, stating that the assessee could not selectively apply the cash system to interest receivable from a particular debtor while maintaining the mercantile system for other transactions. The Tribunal also held that the unilateral change in the accounting method by the assessee was not permissible, citing the decision in Shiv Prasad Ram Sahai v. CIT, which stated that once the mercantile system of accounting is adopted, it must be consistently followed.

3. Permissibility of Hybrid System of Accounting:
The Tribunal and the High Court examined whether the assessee could maintain a hybrid system of accounting, where different methods are used for different transactions. The Tribunal concluded that the assessee's unilateral action to change the accounting method for interest receivable from a specific debtor was not permissible. The High Court referred to several decisions, including T. O. Foster v. CIT and S. R. V. G. Press Co. v. CEPT, which supported the view that an assessee could not change the method of accounting unilaterally. The High Court also noted that the assessee's own case was that this was not a change in the accounting method but a reflection of the improbability of realizing the interest. The High Court agreed with the Tribunal's decision, emphasizing that the treatment of a particular transaction differently from the method followed by the assessee was not permissible.

Conclusion:
The High Court affirmed the Tribunal's decision, holding that the interest on the loan to M/s. Associated Industries (Assam) Ltd. was liable to be included in the assessment for the relevant assessment years. The High Court concluded that the unilateral change in the accounting method by the assessee was not permissible and that the assessee was required to consistently follow the mercantile system of accounting. The question referred to the High Court was answered in the affirmative and in favor of the revenue.

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