Decided on January 14,1994



P.J. Goradia, Accountant Member - (1.) THIS appeal arises out of the order dated 1-10-1991 passed by Commissioner (Appeals) (P. Misra) and raises the following ground: On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in making addition of Rs. 2,24,868 as interest income accrued on the date when the company changed its method of accounting and shifted to mercantile system from cash system for recognising revenue.
(2.) The relevant facts and the basis on which the Assessing Officer made the addition are stated in the following portion of the assessment order as under : On going through the notes to account attached with profit and loss account, it has been noticed that company has included interest of Rs. 2,24,868 into interest suspense account on liability side of the Balance Sheet. It has been explained in the notes that Rs. 2,24,868 is estimated to be the balance amount of interest receivable on accrual basis in respect of the earlier financial years ended up to 30-6-1988 after excluding therefrom the irrecoverable amount. In view of the company, the said sum has not been taken credit of in the P & L A/c for the year as it is not the income of this year but it has been brought into balance sheet as on 31-3-1989 under the head interest suspense account on liability side. The present accounting period is of 21 months from 1-7-1987 to 31-3-1989. The company has changed its accounting method from cash to mercantile for period of 9 months from 1-7-1988 to 31-3-1989. Though in view of company the interest accrued in earlier year is not taxable in the year under consideration but in earlier years company was following cash system, this interest cannot be said to be accrued in earlier year, this interest which company has not received and credited to suspense account will amount to have accrued on 1-7-1988 on the date on which company has changed its method of accounting and hence the interest of Rs. 2,24,868 should be included in the taxable income of the year under consideration. Therefore, I have reason to believe that income of Rs. 2,24,868 has escaped assessment.... Thereafter the assessee was required to show cause why the same should not be taxed in the year under consideration and the assessee in its letter dated 19-2-1991 stated as under: The company had changed the accounting from cash basis to accrual basis, the old interest which was accounted on cash basis will not enter into the profit and loss account till it is received. In other words, they will continue to be accounted on the cash basis or it cannot be said that since the amount is shown in the balance sheet all the interest for so many years which is accounted on cash basis are accrued in the year ended on 31-3-1989. According to the above opinion the company had accounted Rs. 87,959.19 interest pertaining to earlier years accounted on cash basis in earlier year but received in the year ended on 31-3-1989 had accounted the same as the income of the year and offered the same to taxation. The balance of interest of Rs. 2,24,868 will be accounted in the year of receipt and will be offered to taxation in the year of receipt along with the interest which will accrue for that year. 2.1 The Assessing Officer formed the opinion that since now the assessee had taken the credit to suspense account, it could not be said that the interest income had accrued in earlier year. In appeal, the assessment order was confirmed.
(3.) THE representatives of both the sides were heard. In our opinion, there is considerable force in the stand taken by the assessee. THE income is not received in the previous year and, therefore, the same cannot be taxed. THE income also has not accrued during the year and, therefore, it is not an income of the previous year. THErefore, this income can be taxed only in the year in which the income is actually received. THE time of accrual or arisal is of significance in taxation, since, in order to be chargeable, the income should have accrued or arisen to the assessee during the accounting year, i.e., the previous year. This is because in this year the assessee follows mercantile system of accounting as this was necessitated to comply with the changed provision of Section 209 of the Companies Act, 1956 effective from 15-6-1988. THE income had admittedly accrued earlier as per the agreement between the creditor, i.e., the assessee and the debtor and, therefore, the debt was created in favour of the assessee in earlier year. Since the income had accrued earlier to the previous year the same cannot again accrue in the year under consideration merely because the assessee has changed the system of accounting. It was explained before us that this income as and when received in this year as also in subsequent year is being offered by the assessee for taxation. Such being the position, there should not have been any grievance for the revenue.;

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