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2017 (5) TMI 841 - HC - Income TaxMethod of accounting - switch over from the mercantile to the cash system in the midst of the accounting year - whether the Tribunal was right in holding that the assessees could not adopt a cash system of accounting in respect of the commission received from MAL? - Held that:- Under the second agreement, although the commission was fixed at 1.5 per cent. The receipt thereof may well have been the subject matter of controversy and uncertainty, inter alia, on account of clauses 11 and 13. The controversy and the disputes could lead to litigation which in turn would be resolved only after years. The assessees, therefore, would not at any given point of time know with any degree of certainty as to the amount that they would be entitled to during the financial year. The uncertainty of receiving the amount, the quantum of the amount and the time of receipt are crucial factors in the assessees decision as to which of the accounting systems ought to be followed. The assessee was, therefore, entitled to switch over from one system to the other.In these circumstances, the assessees were entitled to follow a different system of accounting in respect of their transactions under the new agreement although with the same party, namely, MAL. A switch over in the midst of an accounting year, especially in such cases, could lead to skewed results. An assessee could then avoid paying the correct advance tax by following the cash system at first and then justifying the non-payment or short payment by switching over to the mercantile system. Further, the assessee could do this, theoretically at least, more than once leaving the entire assessment in a state of uncertainty and confusion. This would considerably fragment an assessment year. Apart from placing a burden on the Assessing Officer and the other authorities under the Act in carrying out the assessment in terms of time and resources, it would pose considerable difficulties in carrying out the assessment. The authorities would understandably be far more reluctant to accept a switch over in the midst of the financial year. Their decision to refuse to accept the switch over in the midst of financial year ought not be interfered with lightly. A switch over in the midst of financial year ought to be permitted by the authorities only in exceptional cases where the same poses no difficulty whatsoever in computing income and the switch over is justified. The burden to establish the same must rest heavily upon the assessee who desires the switch over in the midst of the financial year. The reference to the first question, therefore, is answered in favour of the Revenue in so far as it relates to the assessees' right to switch over from the mercantile to the cash system in the midst of the accounting year. - Decided in favour of the Revenue
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