Commissioner of Income Tax vs M.P. Financial Corporation

S.K. Kulshrestha, J.—Ms. Veena Mandlik, counsel for the appellant/ Revenue. This appeal has been filed u/s 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act) against the order dated October 19, 2006, of the Tribunal in I.T.A. No. 739/Ind/2005, 740/Ind/2005, 741/Ind/2005, 742/Ind/2005 and 743/Ind/2005 for the assessment years 1997-98, 1998-99, 1999-2000, 2000-2001 and 2001-2002. The Department has raised the following question purporting to be question of law:

Whether, on the facts and in circumstances of the case, the Income Tax Appellate Tribunal is justified in law in confirming the order passed by the Commissioner of Income Tax (Appeals), without appreciating the fact that the assessee is following cash system of accounting and prior period''s expenses cannot be allowed in the assessment year under reference?

Learned Counsel for the Revenue contends that since the assessee had switched over to the cash system of accounting with effect from April 1, 1990, from that of the mercantile system, the assessee was not entitled to the benefits that had already accrued in the previous years while the assessee was following the mercantile system.

The Tribunal repelled the contention of the Revenue that on shifting to the cash system of accounting the assessee was not entitled to what he would have got, had he not changed the system of accounting. The relevant observations contained in the order of the Tribunal are extracted here-under:

2.3. We have heard the contentions of both the parties. These appeals are against the order passed u/s 143(3) of the Income Tax Act. It is an undisputed fact that the assessee has switched over the system of accounting from mercantile system to cash system with effect from the assessment year 1991-92. The change in the system of accounting was duly approved by the IDBI and accepted by the Department. Once the assessee has changed the system of accounting from mercantile to cash system, he is required to make certain reverse entries of those amounts, which had been credited on due basis in earlier years, but in fact, have not been received so far. The waiver, decompounding or rebate is a notional payment and has to be allowed as an expenditure incurred by the assessee. We are in agreement with learned authorised representative that in case, it is not allowed, then the same may be treated as bad debt/trading loss to arrive at the correct profit of the assessee. Though the amount is recoverable on the settlement or under an agreement and as such it is allowable in both the circumstances either expenditure or bad debts. The learned Commissioner of Income Tax (Appeals) has rightly observed that the liability of rebate, decompounding and waiver of interest, etc., has arisen due to the agreements executed by the assessee with its clients and this is certainly allowable liability as the assessee duly claimed the same and the Assessing Officer was not justified in rejecting the claim of the assessee that he is now following the cash system of accounting and the rebate on interest, etc., related to the period when the assessee was following the mercantile system of accounting.

We have heard learned Counsel for the Revenue and gone through the record.

We find that there is no provision of law that creates an embargo against credit of the amount to which the assessee is entitled after the system of accounting is changed. We are fully in agreement with the Tribunal that the change of the system of accounting does not divest the assessee from receiving the benefits which have already accrued to him in the previous years.

In this view of the matter, we do not find any merit in this appeal. The appeal is, summarily, dismissed.