TMI Blog1993 (3) TMI 157X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 of the Companies Act was amended by the Companies (Amendment) Act, 1988, w.e.f 15-6-1988 whereby it was made mandatory for all companies to maintain accounts on accrual basis i.e., mercantile system of accounting only. In compliance with this amendment, the assessee started maintaining accounts on mercantile system of accounting w.e.f.1-4-1988. Accordingly the accounts for the previous year ended on31-3-1989were prepared on the basis of mercantile system of accounting. However, as far as the Income-tax Act was concerned the assessee prepared its return of income on cash system of accounting, as was hitherto being followed by the company and accepted in past. The Assessing Officer did not accept the income returned on the basis of cash system of accounting and made an addition of Rs. 2,68,870 being the interest amount accrued but not received, not taken into account while taking the return of income on cash basis. He was of the view that as per the provisions of section 145(1) the income chargeable under the head profits and gains, had to be computed in accordance with method of accounting regularly employed by the assessee and since the method followed by the company was mercanti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of cash system of accounting. Besides Revenue had no right to impose altered method of accounting. Moreover, if the basis of taxing the assessee on cash basis was continued not only Revenue's interest was protected but at the same time the assessee could be saved of hardships and this had to be the approach of the court as was canvassed by their Lordships of Punjab and Haryana High Court in the case of Salig Ram Kanhaya Lal v. CIT [1982] 133 ITR 915 and the SLP against this decision was also dismissed vide. Even under the Income-tax Act, there were provisions which converted the system of accounting to cash, for example, section 43B. If the assessees were to be assessed on mercantile basis merely because of the amendment in the Companies Act then many financial companies and banks would be put to lot of hardships because by very nature of their business, there is bound to be sticky loans and advances apart from the deferred loans and advances on which no income is received even though accrued but not due because of terms of contract. He further placed reliance on the following decisions (i) in the case of CIT v. Sarangpur Cotton Mfg. Co. Ltd. [1938] 6 ITR 36 (PC), (ii) in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases still hold the field of assessments. Mr. Vaish contended that the change from cash system to mercantile system was effected only to comply with the amended provisions of the Companies Act. But the fact remains that the assessee did change over to mercantile system of accounting for all practical purposes except one for preparing the statutory return for Income-Tax purpose. Mr. Vaish further contended that had the assessee continued to follow the cash system of accounting then at the most there could have been only a qualification in the statutory report to be obtained from the statutory auditors under the Companies Act and there were no other penal provisions. Even if it is accepted that there were no other compelling reasons or penalties not envisaged under the Companies Act for not switching over to mercantile system of accounting, yet the assessee did change over in spite of this aspect and that itself clarifies the intention of the assessee to change over to mercantile system of accounting for all practical purposes though in the Resolution passed by the Board of Directors it is stated that for the purpose of Income-tax Act only, the company shall follow the cash system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion, it would be necessary, besides detailed time consuming enquiries will not be resorted to by the Assessing Officer to find out what exactly are the amounts received by the assessee and what is the element of interest/principal paid by the assessee and reconciling the same with books of accounts maintained on mercantile system of accounting. All these undue hardships will be removed by the course adopted by the Assessing Officer. Immediate advantage that will accrue from our this decision would be there will not be need of any modification of the assessment and if the Tribunal's Order is accepted then litigation will come to an end not only for this year but for all subsequent years. To our mind this too is a great advantage to the assessee. 5.4 While ending we would like to refer to one more aspect, the intention behind the amendment made to section 209 of the Companies Act. Sachar Committee, formed for reforms in the Companies Act, had found that certain Corporate Bodies maintained all or certain accounts on cash basis in which event a true and fair picture of the state of affairs of the Company might not always be reflected and, therefore, it was desired by the Committe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Krishnaswami Mudaliar it was held that section 13 of the Old Act did not compel the Assessing Officer to accept a balance-sheet of cash receipts and out-going prepared from the books of accounts but he had to compute the income in accordance with the method of accounting regularly employed by the assessee. Similarly the decision in the case of Shiv Prasad Ram Sahai also supports the case of Revenue. It was held therein that if the assessee had once chosen the mercantile system and had regularly employed that system. It was not open to him unilaterally at any time during subsequent accounting year to change that system because the variation could only be by mutual consent. In this case as we have stated earlier except for Income-tax purposes, the assessee changed the system of accounting and to which consent is accorded by the Assessing Officer. The learned Departmental Representative had placed reliance on the decision of Cuttack Bench of the Tribunal in the case of Prajatantra Prachar Samiti where it was held that the assessee was prohibited from adopting regularly one method of accounting for his own purpose and yet another method of accounting for Income-tax purposes. Mr. Vais ..... X X X X Extracts X X X X X X X X Extracts X X X X
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