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[2007] 292 ITR 232 (MAD.) HIGH COURT OF MADRAS Sakhi Finance Ltd. v. Commissioner of Income-tax P.D. DINAKARAN AND MRS. CHITRA VENKATARAMAN, JJ. T.C. NO. 311 OF 2001 JANUARY 18, 2007 Section 145 of the Income-tax Act, 1961 - Method of accounting â–  Where assessee-finance-company changed method of accounting, in respect of additional overdue charges as regards defaulted payments, from mercantile to cash and it was found that change was warranted by needs of business, change of method could not be rejected [Assessment year 1986-87] The assessee was a finance company engaged in the business of hire purchase and leasing of assets. Till the assessment year 1986-87, the assessee was following the mercantile system of accounting for both finance charges and additional finance charges. However, from the assessment year 1987-88, while the assessee followed the mercantile system of accounting as regards finance charges as before, with reference to the additional finance charges, it switched over to the cash system of accounting. This resulted in the assessee not declaring a sum of Rs. 24 lakhs on the ground that the same was not received in the year under consideration and it did not represent the income to be assessed for the year under consideration. The Assessing Authority rejected the claim for change of method of accounting and added the said sum in the assessment. Held that the provisions of section 145 were amended with effect from 1-4-1997, recognizing only two methods of accounting, namely, cash or mercantile. Hybrid system of maintenance of accounts was a recognized mode at least till the amendment was brought under Finance Act, 1995 with effect from 1-4-1997. Additional overdue charges were attracted only as regards the defaulted payment. The fact that such charges had been continuously accounted for on accrual basis and later on switched over to cash basis in the current year was only on account of difficulties faced by the assessee in realisation of the dues. Even on the principal amount and the interest carried thereon, the assessee made entries in respect of expenditure on the basis of the mercantile system of accounting. If the accrued interest was…

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