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Interpretation of accounting system - Cash vs. Mercantile system Assessment of interest on hire-purchase basis - Realisation vs. Accrual basis Analysis: The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the assessment year 1969-70. The primary issue was whether the interest on hire purchase should be assessed on the basis of realisation or accrual. The assessee, a Government Corporation, sold goods on hire-purchase basis and credited interest due to a suspense account. The Income-tax Officer contended that the assessee followed the mercantile system of accounting and included the total interest due in the income. The Appellate Assistant Commissioner and the Tribunal concurred with this view, leading to a reference to the High Court. The Tribunal found that the assessee was following the cash system of accounting based on realisation, considering the nature of the business as a Government undertaking. However, the High Court disagreed, emphasizing that the sum due to the assessee was shown as accrued interest, indicating the use of the accrual system or mercantile system of accounting. The court referenced precedents like CIT v. K.R.M.T.T. Thiagaraja Chetty & Co. and James Finlay & Co. v. CIT to support the position that interest accrued should be included in income. The court also highlighted the Kerala High Court's decision in State Bank of Travancore v. CIT, reinforcing the accrual basis for income recognition. The court rejected the Tribunal's conclusion that the assessee followed the realisation basis, asserting that the facts indicated adherence to the accrual system. The court differentiated the case from previous judgments by clarifying that the accounting method was crucial, not the explicit admission of following a particular system. Ultimately, the court held that the interest on hire-purchase should be assessed on the accrual basis, not realisation basis. The judgment was delivered with the concurrence of both judges, disposing of the reference without costs.
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