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2008 (1) TMI 491 - AT - Income TaxAccrual of income - The books are maintained on accrual basis, except in the case of income from interest on seed money loans (including penal interest) which is accounted for on cash basis - Permitted to Government companies engaged in the promotion and development of industries, Method of Accounting ''Mercantile or Cash''? - Best judgement assessment u/s 144 - HELD THAT:- we are of the considered view even when an assessee is following mercantile method of accounting, it is indeed possible, and at times even necessary, that depending upon the probability or improbability of being able to recover the amounts, revenues which legally accrue to an assessee may not be taken into account for the purpose of income recognition. To that extent, it is still possible for an assessee to recognize certain revenues, due to their peculiar nature. on receipts basis. The only change that has been brought about by amendment in s. 145 is that while prior to the amendment, there was no need to justify such an accounting treatment on merits and it was possible for the assessee to argue that as long as a method has been consistently followed, no objection can be taken to the same, the situation post amendment is that any non recognition of revenue has to be justified by the assessee on merits. Post amendment, it is also necessary for the assessee to demonstrate that even under the mercantile method of accounting, there are good reasons for not recognizing the revenues in question on accrual basis and that facts and circumstances of the case warrant that such revenues are recognized only when the same are received. That will essentially depend on facts of each case. The facts of the case before us do indeed justify that even under mercantile method of accounting, revenues in question, i.e. accrued interest on seed money loans, are recognized only when the same are actually received by the assessee. No doubt, there is a legal right to receive the interest, but there are also ground realities which do not permit strict enforcement of this right. In our considered opinion, any other view of the matter will result in distortion in the financial results disclosed by the books of accounts maintained by the assessee. It is also important to remain alive to the fact that the provisions of s. 145(1) are subject to, inter alia, mandate of AS-1 which also prescribes that "Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented by on the basis of such accounting policies. In the name of compliance with s. 145(1), it cannot be open to anyone to force adoption of accounting policies which result in a distorted view of the affairs of the business. We, therefore, uphold the claim of the assessee that even under the mercantile method of accounting, and, on peculiar facts of this case, the assessee is justified in following the policy of not recognizing these interest revenues till the point of time when the uncertainty to realize the revenues vanishes. There is one more aspect of the matter. Let us assume for a minute that the method of accounting followed by the assessee is indeed contrary to the provisions of s. 145(1) but then the AO is not entitled to make adjustments in those books of accounts to bring the same in conformity with the provisions of s. 145(1). All that he can do in such a situation is to lean on s. 145(3) which permits him to make a best judgment assessment under s. 144. A notification issued by the Government of India cannot be taken lightly nor can the AO be simply dismissive about it. In our considered view, this notification is sound basis to come to the conclusion that the revenues in question can be treated as income only when the revenues are realized. A best judgment assessment is also required to be a sound and rationale judgment about the income of the assessee. From this point of view also, the assessee cannot be forced to pay tax on the interest accrued on seed money loans. Thus, we are of the considered view that the CIT(A) was not justified in confirming the addition on account of accrued interest on seed money loans. We, therefore, direct the AO to delete this addition. The assessee gets the relief accordingly. In the result, the appeals allowed.
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