TMI Blog2007 (1) TMI 275X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Supreme Court reported in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172 and the Madras High Court reported in CIT v. E. A. E. T. Sundararaj [1975] 99 ITR 226, relied on by the assessee without stating why the said decisions were not applicable? 4. Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was right in law and had sufficient material to reverse the factual finding of the Commissioner of Income-tax (Appeals) that the settlement of the additional interest charged was through negotiations without the Tribunal itself examining this factual situation and bringing on record any material to substantiate its finding that the Commissioner of Income-tax (Appeals) was wrong? 5. Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that merely because according to the agreement of finance the additional finance charges accrued the applicant was not entitled to change the method of accounting?" The assessee is a finance company engaged in the business of hire purchase and leasing of assets. Till the assessment year 1986-87, the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, tax is charged in respect of the total income of the previous year of every assessee. It viewed that it was only the real income as commercially understood as earned by the assessee which has to be taxed. The Tribunal referred to the passage from the Commentary on the Income-tax Act, by Kanga, 5th Edition, which is reproduced by the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102. The Tribunal held that even if the assessee had not made entries in the books of account, they could not escape the liabilities. It held that there was no reason why the assessee should be allowed to change the system of accounting in respect of interest receivable from the lessees on overdue payments. It held that change in system of accounting could not be allowed since it presented a distorted picture of profits and gains of business and the real income of the assessee could not be properly deduced from the changed method of accounting. Consequently, the Tribunal rejected the plea of the assessee and allowed the appeal by the Revenue. Aggrieved by this, the assessee has preferred this reference to this court on the questions stated above. Learned counsel appearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counting of the assessee otherwise was mercantile. The tax case was concerned with other issues too, with which we are not concerned in the present case. Referring to the decision of the Bombay High Court reported in CIT v. Matchwell Electricals (I) Ltd. [2003] 263 ITR 227 and the decision of the Calcutta High Court reported in Hela Holdings P. Ltd. v. CIT [2003] 263 ITR 129 this court summarised the general principle guiding on the question of change of method of accounting, which is as follows: "(i) the distinction between tax evasion and tax avoidance is still prevalent. (ii) generally speaking, tax evasion is the result of such things as illegality, suppression, misrepresentation and fraud. (iii) tax avoidance is the result of actions taken by the assessee, none of which is illegal or forbidden by the law in itself and no combination of which is similarly forbidden or prohibited. (iv) the permissibility of a tax avoidance, will fall to be decided, when and only when, on the basis of the facts and transactions truly and correctly disclosed by the assessee, a point of law arises, whether on a certain reasonable construction of one part of the taxing statute, as applied to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s doubtful. Hence, no recovery was effected for the last three years. Consequently, the assessee excluded the said sum while calculating the total income. Referring to the method of account, the apex court held at page 893 that, "The method of accounting which is followed by the assessee-bank is the mercantile system of accounting. However, the assessee considers income by way of interest pertaining to doubtful loans as not real income in the year in which it accrues, but only when it is realised. A mixed method of accounting is thus followed by the assessee-bank. This method of accounting adopted by the assessee is in accordance with accounting practice. . . . " The decision also recognised the hybrid system of maintenance of accounts and the choice was left to the assessee to decide. A perusal of section 145 as it stood at the relevant time, shows that even where the accounts are maintained correctly and to the satisfaction of the assessing authority, where the method employed is such that the income could not be properly deduced, then it is open to the assessing authority to compute the income on such basis and in such manner as he may determine. The provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He also submitted that the difficulties in the realisation of the overdue interest on the default forced the assessee to change the method of accounting so that the true picture on the computation of its income could emerge. He submitted that such change in the method was effected with all bona fides, since otherwise it found that it had to offer for assessment the interest income which it might not have received at all at the time of settlement of the hire purchase amount. He further submitted that the difficulties in recovery had only resulted in the change in the method of accounting. Consequently, the Tribunal was not right in ignoring the decision of the Supreme Court. He submitted that even though the said decision was in connection with the circular, yet, it must be noted that the apex court had taken note of the hybrid system of accounting and had approved the same as one of the recognised methods of accounting. He further pointed out that the unamended section 145 recognised a hybrid method of maintenance of accounts. As such the amended provision could not be relied upon by the Revenue. We agree with the submission made by the learned counsel for the assessee. The reli ..... 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