Law:

Section:

Section 145 of the Income-tax Act, 1961 - Method of accounting - Change of - Assessment year 1986-87 - In accounting year 1984-85, assessee-company had given loan to a company 'A' on interest - Since its inception, it was following mercantile system of accounting and, accordingly, even though there was no specific stipulation with regard to periodicity of payment of interest on loan given to 'A', interest on it used to be accounted for on accrual basis - However, subsequently, assessee started facing certain difficulties in following mercantile system of accounting in respect of interest income, viz., compulsion of payment of tax without receipt of interest; not allowing TDS while calculating interest under section 215; commencement of penalty proceedings under section 273; not giving credit while raising demand of tax deductible, etc. - Assessee, therefore, decided to change its method of accounting for interest income and interest payment from mercantile system to cash system of accounting - Whether change in method of accounting adopted by assessee was genuine and bona fide - Held, yes FACTS In the accounting year 1984-85, the assessee-company had given a loan to a company 'A' on interest. Ever since its inception, it was following the mercantile method of accounting and, accordingly, even though there was no specific stipulation with regard to the periodicity of payment of interest on the said loan yet interest thereon used to be accounted for on an accrual basis. It, however, subsequently, started facing difficulties in following the mercantile method of accounting in respect of interest income. The difficulties were as follows: (a) it had to offer interest income for tax in the year of accrual, even though it was not actually received; (b) since as per provisions of section 194A, 'A' would deduct tax at source on interest payable to the assessee on the said loan at the time of crediting it to the assessee's accounts in its books or at the time of its payment to the assessee, whichever was earlier, TDS certificate from 'A' in favour of the assessee would not be forthcoming even by the time the assessee's income-tax returns were to be filed. There again,…

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