Bona fide change in accounting method for doubtful customer class accepted, but relief was partly denied on facts.

A taxpayer may adopt a different accounting basis for a distinct class of customers where the change is bona fide, regularly followed, and made before year-end, if it still reflects true profits. The tribunal accepted cash basis treatment for sales to sick textile mills because recovery prospects had become doubtful and the method was confined to that class. It also held that failure to separately allocate common overheads was not fatal where such expenses were not precisely allocable and were insignificant. However, the claim for exclusion of amounts relating to the two mills taken over by the industrial corporation was not justified on the facts, and that addition was upheld.

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Issues: Whether the assessee was entitled to adopt cash basis only for sales made to sick textile mills and the two mills taken over by the Industrial Reconstruction Corporation of India Ltd., and thereby exclude the corresponding outstanding amounts from taxable income.

Analysis: The accounting change was confined to a distinct class of customers whose recovery prospects had become doubtful after takeover. The entry reflecting the change was made before the close of the accounting year, and the method was said to have been followed regularly. The tribunal accepted that different methods may be adopted for different classes of customers or different parts of the same business, provided the method is bona fide, consistently applied, and results in proper computation of true profits. The tribunal also accepted that the absence of separate debit of common overheads was not fatal where such expenses could not be precisely allocated and were insignificant in relation to the overall business. As to the mills taken over by the industrial corporation, the tribunal found no basis to disturb the commissioner's view that the assessee's claim for exclusion was not justified on the facts.

Conclusion: The assessee's change to cash basis for the sick mills was held to be genuine and permissible, but the addition relating to the two mills taken over by the industrial corporation was upheld. Overall, the departmental appeal and the cross-objection failed.

Final Conclusion: A taxpayer may, where commercially justified and bona fide, adopt a different accounting basis for a distinct class of customers, but the facts here did not justify relief for the entire disputed amount, and the additions survived in part.

Ratio Decidendi: A bona fide and regularly followed change in the method of accounting may be adopted for a distinct class of customers or transactions if it properly reflects true profits, even where the business continues in other respects on the original basis.

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