TMI Blog2008 (7) TMI 387X X X X Extracts X X X X X X X X Extracts X X X X ..... al questions of law. "(A) Whether, the Appellate Tribunal is right in law and on facts in holding that change in the method of accounting from mercantile to cash basis was bona fide and thereby deleting the addition made on account of interest chargeable ? (B) Whether, the Appellate Tribunal is right in law and on facts in holding that penalty Under section 271(1)(c) is not attracted?" 2. This Court has admitted Appeal on 6.9.2000 on the following substantial question of law: "Whether, in the peculiar facts and circumstances of the case, the Appellate Tribunal was right in law and on facts in holding that the change in the method of accounting made by the present assessee, a subsidiary of the holding company with whom deposits were placed, from mercantile to cash basis was bona fide and deletion of the addition made on account of interest chargeable was justified in law ?" 3. This Appeal is heard at great length alongwith other group matters. It was agreed and understood by and between the parties that this is a lead matter and decision rendered in this matter would govern all other Appeals involving the same substantial question of law. The Court, therefore, consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of Alkapuri. This account was to carry interest @ 10.1/2 % per annum. There was, however, no stipulation with regard to any periodicity of payment of interest. 2. In January, 1985 the Board of Directors of the assessee company resolved to open a current account of the Company with Alkapuri with authority to keep a sum or sums not exceeding Rs. 25 lacs therein. The amounts paid to Alkapuri pursuant to this Resolution were accounted in the current account of Alkapuri. This account carried interest at 5.1/2 % p.a. There was, however, no stipulation with regard to the periodicity of payment of interest. 3. As per Balance Sheet of the assessee Company as at 30.9.1985, the debit balance in these two accounts of Alkapuri were as under:- Current Account Rs.19,70,000/- Loan Account Rs. 32,68,000/- These two were the only interest earning accounts with the assessee Company. 4. Ever since its inception the assessee was following the mercantile method of accounting and apparently in order that its accounts showed a true and fair view of its profit or loss and of its state of affairs as required under the Companies Act, 1956, its income and expenditure had to be accounted on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mercantile method of accounting, Alkapuri also followed that method. Accordingly, in order that its accounts showed a true and fair view as required by the Companies Act, Alkapuri had to account for interest expenditure in the year of accrual irrespective of the year of actual payment. This, it did by crediting the amount to interest payable account in the year of accrual, especially keeping in view that there was no stipulation with regard to the periodicity of the payment of interest. According to Alkapuri so long as interest was not actually paid to the assessee or credited to the account of the assessee, the provisions of Section 194A were not attracted. Therefore, Alkapuri deducted TDS only at the time of actual payment of interest to the assessee or at the time of crediting it to the assessee's account, whichever was earlier. However, a difficulty arose in that wise that the department took the view in Alkapuri's case that they had failed to deduct TDS in the year in which interest had accrued and was credited to the interest payable account and that deduction of TDS in the subsequent period when it was actually paid or credited resulted into deferment of payment of TDS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income-tax (Appeals) is based on material on record. The Tribunal was satisfied on the basis of the facts available on record that the change of method of accounting was bona fide. The decision of this Court in the case of Ganga Charity Trust Fund, reported in [1986] 162 ITR 612 supports the action of the assessee. The Tribunal relying on the decision of the Apex Court in the case of UCO Bank v. CIT, reported in (1999) 237 ITR 889 took the view that the facts of the assessee's case are covered by the decision of the Apex Court and hence no interference is called for in the order passed by the learned Commissioner of Income-tax (Appeals). 12. Mr. Manish Bhatt, learned Senior Standing Counsel appearing for the Revenue has submitted that the Appellate Tribunal has erred in law and on facts in holding that change in the method of accounting from mercantile to cash basis was bona fide and thereby further erred in deleting the addition made by the Assistant Commissioner of Income Tax on account of interest chargeable. He has further submitted that the tribunal has upheld the order of the learned Commissioner of Income-tax (Appeals) following the decision of Apex Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hedule A forming part of annual accounts of the assessee and also by putting a note appearing on the statement of computation of total income accompanying the return of income for the assessment year. He has further submitted that Alkapuri has also made an identical change in its method of accounting simultaneously with the assessee. The changed method of accounting has been followed for three assessment years, namely, assessment year 1986-87, 1987-88 and 1988-89. 14. In support of his submission Mr. Patel has relied on the decision of this Court in the case of CIT v. Ganga Charity Trust Fund, reported in [1986] 162 ITR 612 and the decision of Calcutta High Court in the case of Snow White Food Product Company (P) Ltd. v. CIT, [1983] 141 I.T.R. 861. 15. Mr. Patel has further submitted that the learned Assistant Commissioner of Income Tax had unwarrantedly proceeded on the assumption that the true reason for making the change in the method of accounting was that the assessee did not want to pay income tax on the income due to it and that, in any case, it wanted to defer its payment so as to suit the convenience of itself and its associate companies from which it earne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He has, therefore, submitted that the Appeal filed by the Revenue deserves to be dismissed. 17. We have considered the rival submissions of the parties. We have also gone through the orders passed by the authorities below. We have given our thoughtful consideration to the relevant provisions as well as authorities cited before us. Having considered the facts and circumstances of the present case, we are of the view that the view taken by the learned Commissioner of Income-tax (Appeals) as well as the Tribunal after having considered the entire facts and circumstances and having applied the correct principle of law to the facts of the assessee, is the correct view, which cannot be interfered with by this Court while exercising its appellate jurisdiction. The Tribunal had enumerated the difficulties which led the assessee company for changing its accounting system which are as follows :- (i) Compulsion of payment of tax without receipt of interest. (ii) Aspect of TDS. (iii) Not allowing the TDS while calculating the interest under Section 215. (iv) Commencement of penalty proceedings etc. under Sections 273 and 271(1)(c) of the Act. (v) Not giving credit while raising t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the cash system of accounting in the previous year relevant to the assessment year 1972-73 was not bona fide. Besides, it was not shown by the Revenue that this change lacked durability or regularity and was merely a stop gap arrangement to avoid payment of tax. The assessee-trust was entitled to switch over to the cash method of accounting in view of the peculiar circumstances in which the trust was placed. Here in the present case the assessee Company was placed in somewhat similar situation. It cannot be said that the change was not bona fide nor can it be said that the change adopted by the assessee lacked durability or regularity or that it was merely a stop gap arrangement to avoid payment of tax. This decision squarely applies to the facts of the present case. 19. In the case of UCO Bank v. Commissioner of Income Tax [1999] 237 ITR 889, it is held by the Apex Court that under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such accrual of interest is doubtful or not, may also be problematic, if, therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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