9911796707
TMI Blog2008 (7) TMI 387X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, considers the above referred substantial question of law in this Appeal. 4. The principal issue in this appeal relates to the Assistant Commissioner of Income Tax disapproval of a change in the method of accounting effected in the accounting for income and expenditure by way of interest from the mercantile method of accounting which the assessee was following hitherto, to the cash method of accounting. Apparently, this change in the accounting system resulted into the profit of the assessee Company being lower by a sum of Rs. 4,39,888/- then what it would have been if the erstwhile method of accounting had been continued. The Assistant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 accrual basis under that method. Accordingly, even though there was no specific stipulation with regard to the periodicity of payment of interest on the above two accounts, interest thereon used to be accounted on accrual basis. 5. The assessee, however, subsequently started facing difficulties in following mercantile method of accounting in respect of interest income. The difficulties are as under:- (a) It had to offer for tax interest income in the year of accrual even though it was not actually received. This, in turn, resulted into the assessee having to find resources for meeting tax liability on such interest income a difficulty which was insuffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racted. 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 liability. This resulted into further avoidable litigation so much so that even prosecution proceedings have been initiated in their case for an alleged failure to deduct TDS and to pay it to the credit of the government in time. 9. To get over the difficulties, with effect from the accounting year ended 30.9.1985 corresponding to the present assessment year, the assessee decided to discontinue accounting for interest income in general on mercantile basis. Instead, it was decided to account for interest income in the year of actual receipt or in the year in which the interest paying party had credited its account with the amount of interest. The Board of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned 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 the case of UCO Bank v. CIT [1999] 237 ITR 889. The said decision was in respect of banking company/ financial institution and the said interests were in respect of 'sticky loans' whereas the assessee in this case is an investment company and the loans were not sticky. Further in respect of the assessment years for and before 1988-89 the Act provided vide Sections 18 to 21 as they stood at the relevant time that the income under the head "interest on securities" shall be chargeable on due basis. Thus, the assessee had no power to change the method of accounting in respect of interest receivable. For the assessment years 1989-90 and, thereafter, the change in accounting system w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 earned interest income. He has submitted that the very assumption of the learned Assistant Commissioner of Income Tax is incorrect. Although the interest could be said to have been accrued, in absence of stipulation for periodicity of its payment, it could not be said that it had fallen due. Further the assessee was seeking the change in the method of accounting only to ensure that interest income was accounted in the year of actual receipt so that it did not have to run here and there for funds required for payment of tax liability in the year of accrual of interest. The assessee was of the view that by changing the method of accounting it would be able to avoid litigation with the department in the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the demand of 'tax deductible' and (vi) Launching of prosecutions by filing 123 complaints against different group companies son the same point though ultimately this Court has quashed and set aside all these complaints while exercising its extraordinary writ jurisdiction. 18. All the above factors proved beyond any doubt that the system changed by the assessee is bona fide and for genuine reason. The Tribunal has also taken into consideration the fact that the Company had gone into liquidation voluntarily under the Companies Act, 1956 and hence it had to follow cash system of accounting for both the income and expenditure. The assessee had been following the mercantile system of Company right from the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion 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 Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all Income-tax Officers should treat such amounts as not forming part of the income of the assessee until realised, this direction by way of a circular cannot be considered as travelling beyond the powers of the Board under Section 119 of the Income-tax Act. 20. Following the aforesaid decision of the Hon'ble Supreme Court the Madras High Court in the case of Commissioner of Income-tax v. India Equipment Leasing Ltd., reported in [2007] 293 ITR 350 (Madras) took the view that the interest on sticky loans not being brought into the profit and loss account but being taken to the suspense account was an accept ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
