Law:

Section:

Section 5, read with section 145 of the Income-tax Act, 1961 - Income - Accrual of - Assessment years 1973-74, 1976-77 and 1977-78 - Assessee, following mercantile system of accounting, started to credit interest on loans which had not been recovered for more than three years in, interest Suspense Account, whether there being no change in method of accounting, disputed amounts were liable to be included in total income of assessee on accrual basis although same were credited in 'suspense account' - Held, yes Section 119 of the Income-tax Act, 1961 - Central Board of Direct Taxes - Instruction to subordinate authorities - Whether subsequent withdrawal of a circular will not take away right of taxpayer to enjoy benefit conferred on taxpayer by circular during validity of circular - Held, yes FACTS The assessee was crediting the interest on loans which had not been recovered for there years in the "interest suspense account" instead of crediting it in the "interest account". The assessee was also making debit entries in the account of the respective debtors. As the assessee was following the mercantile system of accounting, the ITO brought to tax the said interest. The appellate authority accepted the case of the assessee that such interest was not exigible to tax and accordingly, directed deletion of the same from the total taxable income. The Tribunal dismissed the revenue's appeal. On reference, the assessee raised a new contention that there was no real income and, therefore, it was not exigible to tax and also brought to the notice of the High Court certain circulars which according to the assessee supported its plea. HELD The system of accounting adopted by an assessee is just an aid to compute the income chargeable under the head "Profits and gains of business or profession" or "Income from other sources". Section 145 deals with the "system of accounting". That section envisages two main methods of accounting. They are mercantile system and cash system. There is yet another system of accounting. That is called the hybrid or heterogeneous system. Under the cash system, the assessee maintains a record of actual receipts and actual payments. Under the…

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