Assessing Officer's Decision Upheld on Accounting Systems, Income Computation

The Tribunal upheld the Assessing Officer's decision, ruling that the assessee could not maintain two different accounting systems for different purposes. It held that the income must be computed on the mercantile system as regularly employed by the assessee, despite the previous use of cash basis accounting. The appeal was dismissed, emphasizing the comprehensive adoption of the mercantile system for practical purposes following the Companies Act amendment.

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Issues Involved:
1. Whether the assessee could maintain accounts on cash basis for income-tax purposes while maintaining them on accrual basis under the Companies Act.
2. Whether the assessee could follow two different systems of accounting for different purposes.
3. Whether the change in accounting method due to the amendment in the Companies Act affects the assessee's right to be taxed on the cash basis.

Summary:

Issue 1: Maintaining Accounts on Cash Basis for Income-Tax Purposes
The assessee, a limited company engaged in financing and investment, had been following the cash system of accounting since inception. However, due to the amendment of section 209 of the Companies Act by the Companies (Amendment) Act, 1988, effective from 15-6-1988, it became mandatory for all companies to maintain accounts on an accrual basis. Consequently, the assessee started maintaining accounts on a mercantile system from 1-4-1988. Despite this, for income-tax purposes, the assessee continued to prepare its return on a cash basis. The Assessing Officer added Rs. 2,68,870 to the income, representing interest accrued but not received, arguing that u/s 145(1), income must be computed according to the method of accounting regularly employed by the assessee, which was now mercantile. The Commissioner (Appeals) upheld this addition.

Issue 2: Following Two Different Systems of Accounting
The assessee's counsel argued that maintaining two sets of accounts was permissible, citing a CBTD Circular and various judicial precedents. However, the Tribunal found that for all practical purposes, including compliance with the Companies Act and filing returns, the assessee had adopted the mercantile system, except for income-tax purposes. The Tribunal referenced judicial principles from cases like Sarangpur Cotton Mfg. Co. Ltd. and Smt. Singari Bai, which held that an assessee could not adopt one method for business purposes and another for income-tax purposes. The Tribunal concluded that the change to the mercantile system for all practical purposes indicated the assessee's intention to adopt this method comprehensively.

Issue 3: Impact of Companies Act Amendment on Taxation Basis
The Tribunal rejected the argument that the assessee could continue on a cash basis for income-tax purposes despite the Companies Act amendment. It noted that the amendment aimed to ensure a true and fair view of a company's affairs by mandating the accrual system. The Tribunal also dismissed the argument that the change was merely to comply with the Companies Act, emphasizing that the assessee had indeed changed its accounting method for all practical purposes. The Tribunal found no evidence of interest on sticky or doubtful loans being accrued, and noted that guidelines and circulars from the Institute of Chartered Accountants and the Central Board of Direct Taxes provided sufficient safeguards against such issues.

Conclusion:
The Tribunal upheld the Assessing Officer's decision, stating that the assessee could not maintain two different systems of accounting for different purposes. The appeal was dismissed, affirming that the income must be computed on the mercantile system as regularly employed by the assessee.

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