Law:

Section:

Section 145 of the Income-tax Act, 1961 - Method of accounting - Change of - Assessment years 1991-92 to 1997-98 - Whether every assessee is entitled to arrange its affairs and follow method of accounting, which department has earlier accepted, and it is only in those cases where department records a finding that method adopted by assessee results in distortion of profits, that it can insist on substitution of existing method - Held, yes - Assessee - company was subscribing to chits as its business activity - In context of 'chit discount, it was following 'completed contract method' of accounting which was earlier accepted by department over several years - For relevant assessment years, Assessing Officer substituted that method by 'deferred revenue expenditure method' - Whether since in past department had accepted completed contract method; entire exercise arising out of change of method from completed contract method to deferred revenue expenditure was revenue neutral; and method adopted by assessee did not result in distortion of profits, High court was justified in holding that completed contract method of accounting adopted by assessee was valid, and that department had erred in spreading discount over remaining period of chit on proportionate basis - Held, yes FACTS The assessee was a private limited company subscribing to chits as its business activities. It was maintaining its accounts on mercantile basis and was computing profit/loss, as the case may be, at the end of the chit period following completed contract method, which was earlier accepted by the department over several years. For the assessment years under consideration, the Assessing Officer came to the conclusion that the completed contract method was not accurate in recognizing/identifying 'income' under the Act, and in the context of the 'chit discount', the correct method was deferred revenue expenditure calculated on proportionate basis. According to the department, chit dividend had to be subjected to tax on accrual basis as the assessee was following the mercantile system of accounting. On appeal, the Commissioner (Appeals) as well as Tribunal upheld order of Assessing Officer. On…

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