1978 (1) TMI 62 - HC - Income Tax

Company's Accounting Method Change Upheld on Appeal

The company changed its accounting method from mercantile to cash basis. The Tribunal found the change was realistic and not in bad faith, allowing the ... Change of method of accounting - bona fide change of accounting method - mercantile system versus cash system of accounting - taxation on accrual basis versus receipt basis - tribunal's finding not to be disturbed unless perverseChange of method of accounting - bona fide change of accounting method - tribunal's finding not to be disturbed unless perverse - Tribunal's finding that the assessee's change from mercantile to cash system of accounting was bona fide and legally sustainable - HELD THAT: - The Tribunal found, on examination of the assessee's books and payments history, that the change to the cash basis realistically reflected the assessee's true position and was not tainted by mala fides. That factual finding of bona fides was not shown to be perverse or displaced by contrary evidence; accordingly the Court declined to reopen the question of bona fides. Authorities cited by the revenue were inapposite on the facts: one decision concerned a unilateral departure for a single item without a general accounting change, and another emphasised bona fides as a requirement but did not warrant upsetting the Tribunal's accepted finding here. The Court therefore accepted the Tribunal's conclusion that the change of method was bona fide and properly adopted.Tribunal's finding of a bona fide change of accounting method is affirmed and upheld in favour of the assessee.Taxation on accrual basis versus receipt basis - mercantile system versus cash system of accounting - Whether interest receivable/received from specified debtors was includible in the relevant assessment years - HELD THAT: - The Court observed that the Tribunal did not find that any amount actually received from Messrs. Surajmal Nagarmal was not includible; therefore no determination was required on that part. As to interest receivable from Surajmal Nagarmal and B. L. Bagla for the assessment year 1971-72, the Tribunal's acceptance of the cash basis meant amounts not actually received were not to be taxed for that year. The revenue's contention that sectional or accrual provisions should nonetheless apply was not pressed earlier and relevant authorities cited did not persuade the Court to override the Tribunal's factual and legal conclusion that receipt, not accrual, governed taxability under the accepted change of method.No addition is sustained in respect of amounts not actually received; the Tribunal's conclusion that receivables for 1971-72 were not includible is affirmed in favour of the assessee, and the part relating to received interest required no answer.Final Conclusion: The High Court affirms the Tribunal's factual and legal conclusion that the assessee's change from mercantile to cash accounting was bona fide and that, on that basis, interest not actually received in the relevant years (including the receivables for 1971-72) is not includible; the revenue's appeal is dismissed. Issues involved: Income-tax assessment of a company changing its method of accounting from mercantile basis to cash basis to reflect interest income received accurately.Summary:Issue 1: Change in method of accountingThe company changed its method of accounting from mercantile basis to cash basis, starting from the accounting year 1966-67. The Income-tax Officer added all interest receivable by the company in the assessment years, suspecting tax avoidance. The Appellate Assistant Commissioner initially upheld this decision but later accepted the change to cash basis for the assessment year 1971-72. The Tribunal found the change to cash basis as more realistic and not done in bad faith, allowing the company's appeal and dismissing the revenue's appeal.Issue 2: Treatment of interest incomeThe Tribunal determined that the change in accounting method was done in good faith and should be based on the company's own accounts, not its debtors' accounts. The revenue contended that the change was to avoid proper tax payment. The Tribunal found no evidence of mala fides and allowed the company's appeals while dismissing the revenue's appeal. The Commissioner of Income-tax raised questions regarding the change in accounting method and the treatment of interest income received from specific parties. The High Court affirmed the Tribunal's decision, stating that the change in accounting method was bona fide and the interest income should be taxed based on what was actually received.Separate Judgment by Banerji J.:Justice Banerji concurred with the decision of Justice Dipak Kumar Sen, agreeing that the change in accounting method was done in good faith and the interest income should be taxed based on actual receipts.