Assessee must consistently use cash or mercantile accounting under Section 145(1); accrual basis applies to assigned receipts

HC held for revenue: an assessee cannot selectively apply mercantile accounting for some projects and cash accounting for another; Section 145(1) requires use of either cash or mercantile system regularly, so income must be computed on accrual (mercantile) not actual receipts. The Tribunal was correct to disallow the departure. The court found the assessee had validly assigned rights and never disputed entitlement to consideration, so receipts accrued despite earlier statutory restraints; matter decided against the assessee.

---

---

Issues:
1. Whether the ITAT erred in holding that the assessee could not follow cash system of accounting for the Hadapsar projectRs.
2. Whether the amount of Rs. 10 crore accrued in AY 2007-08Rs.
3. Whether the assessee was bound to follow the mercantile system of accountingRs.
4. Whether the assignment under which the accrual arose was invalidRs.

Analysis:

Issue 1: The ITAT's decision on the cash system of accounting for the Hadapsar project was challenged by the assessee. The appellant contended that the method of accounting followed was permissible in law. The Tribunal found that the assessee had consistently followed the mercantile system for all projects except the Hadapsar project. Section 145 of the Income Tax Act allows the choice between cash or mercantile system, but the assessee cannot switch methods for different projects. The High Court upheld the Tribunal's decision, stating that the assessee was required to follow the mercantile system for the Hadapsar project.

Issue 2: The question of whether the Rs. 10 crore accrued in AY 2007-08 was raised. The assessee argued that the amount did not accrue in that year due to the repeal of the Urban Land Ceiling Act and the subsequent completion of transactions. The High Court examined the validity of the assignment agreement and the rights transferred. It was found that the assessee had acquiesced rights in the property and never questioned the validity of the assignment. The Court concluded that the accrual of income crystallized before the Urban Land Ceiling Act was repealed, and the sale deed was executed. Therefore, the High Court dismissed the appeal on this issue.

Issue 3: The assessee contended that it was entitled to follow the cash system of accounting for the Hadapsar project. However, the High Court held that the assessee was bound to follow the mercantile system of accounting and offer income to tax on an accrual basis, not on actual receipts. The Court emphasized that the choice of accounting system must be consistent across projects, and the assessee could not selectively switch methods.

Issue 4: The validity of the assignment agreement under which the income accrued was questioned. The Court found that the rights in the property were transferred as per the agreement, and the assessee never disputed the validity of the arrangement. The Court rejected the argument that the accrual of income was invalid due to the timing of the Urban Land Ceiling Act's repeal. The Court concluded that the assessee's right to receive consideration was not in jeopardy, and the assignment agreement was finalized after the Act's repeal. Consequently, the Tax Appeal was dismissed.

---