Law:

Section:

Section 145 of the Income-tax Act, 1961 - Method of accounting - Hybrid system - Assessment year 1987-88 - Assessing Officer made addition on account of interest chargeable on debit balances of two parties on ground that it was waiver of interest income by assessee in favour of sister concerns - Both parties in whose names debit balances were shown had incurred losses and cases were pending before BIFR, thereby suggesting that recovery of principal amount itself was in doubt - Assessee was regularly employing hybrid method of accounting in maintaining his books of account - While in most cases assessee was following the mercantile system of accounting, but in respect of trade debts, it was consistently maintaining accounts of interest on receipt basis and that debit balances in question were trade debts, was not disputed - Whether amount of interest on notional basis could not have been included in income of assessee for assessment year 1987-88, unless it was found that method of accounting employed by assessee did not make it possible to correctly compute income - Held, yes - Whether assessee did not account for interest as assessee was almost certain that dues from two parties were not likely to be recovered and, therefore, decision not to debit interest in those accounts was directly relatable to business expediency - Held, yes FACTS The assessee in his accounts had not charged interest on the debit balances of two parties. The Assessing Officer was of the opinion that when the assessee was following mercantile system, not debiting the two parties with the interest accrued on the debit balances could not absolve it from inclusion of the interest which accrued on the debit balances during the relevant previous year in its total taxable income and that non-charging of interest was not due to their poor financial position but it was in fact waiver of interest income in favour of the sister concerns and thereby made additions on that account. On appeal, the Commissioner (Appeals) found that both the parties in whose names the debit balances were shown in books of account of the assessee had incurred losses and cases were pending before the BIFR. Therefore, the…

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