Sabyasachi Mukharji, J. - (1.) In this reference under Section 256(2) of the I.T. Act, 1961, we are concerned with two assessment years, being the assessment years 1968-69 and 1969-70. The assessee-company maintained its accounts for the relevant previous years ended on 31st December, 1968, and 31st December, 1969, respectively. The ITO completed the two assessments by including Rs. 1,36,170 as interest receivable from M/s. Associated Industries (Assam) Ltd. on accrual basis as the system of accounting followed by the assessee-company so long was mercantile. In this connection, it will be relevant to refer to certain portions of the assessment orders. In the assessment order for the year 1968-69 dealing with business, it was mentioned, inter alia, as follows : " Business Rs. Net profit as per profit & loss account AM 40,504 Bad debts -- unrealisable advance, not to be allowed as bad debt in the four of such advances does not conform to the provision of sec. 36(2) 4,313" Again, dealing with income from other sources, it was provided in the said order, inter alia, as follows : " Other Sources Rs. Rent from sub-tenants 42,650 Interest as per profit & loss a/c. 8,331 Interest receivable from M/s. Associated Industries (Assam) Ltd, taken on accrual basis as the system is mercantile 1,44,501 1,36,170 1,87,151 Total income 2,15,535" Similarly, for the assessment year 1969-70 dealing with business income it was stated in the said order, inter alia, as follows : " Business Net profit as per profit & loss a/c. 1,94,881 Deduct : Rent received considered separately 46,660 Interest received cosidered separately 146 Sundry receipts considered separately 1,833 48,639 1,46,242" And dealing with income from other sources the assessment order stated as follows : " Other sources Rent received from sub-tenant 45,460 Sundry receipt 1,833 Interest -- as per profit & loss a/c. 146 Interest receivable from M/s. Associated Industries (Assam) Ltd. included on accrual basis as in earlier years 1,36,170 1,36,316 1,83,609 Total income 3,81,780"
(2.) Being aggrieved by the said assessment orders, the assessee preferred appeals before the AAC. It was submitted before him by the assessee that the amount of interest should be excluded as the assessee had changed the method of accounting from mercantile to cash system and, moreover, the interest not having been received for a number of years, in the past, and there being no chance of receiving that interest or the principal amount, the assessee did not want to give any impression of profits by showing the interest income in the account. These contentions were, however, rejected by the AAC on the ground that the assessee-company had been following the mercantile system of accounting and the assessee could not be permitted to follow the cash system with reference to interest receivable from a particular debtor.
(3.) Being dissatisfied with the order of the AAC, the assessee preferred appeals before the Tribunal and reiterated its contention which was urged before the AAC on this aspect of the matter, The assessee also submitted a resolution dated 15th May, 1967, passed long before the close of the rele vant previous year wherein it was decided to consider the interest due from the debtor on the basis of realisation. It was, moreover, contended that as the financial condition of the debtor-company was embarrassing, it was submitted, that the management of the debtor-company had been taken over by the Govt. of India by an order dated 14th December, 1972. The assessee's contention was that it wanted to reflect its real income and not an hypothetical income and that the company being assessed to income-tax assessment in respect of interest under the head "Other sources", as it was done althroughout in the past, bad debts arising from non-realisation subsequently could not be claimed in the computation of income as there was no such provision permitting the deduction from income under "income from other sources". The revenue, on the other hand, urged before the Tribunal that the assessee-company did not forgo the interest but had simply deferred the crediting thereof and justified its stand that the inclusion of interest on the accrual basis was correct and in this con nection reliance was placed on certain decisions which the Tribunal noted. The Tribunal held against the assessee and, inter alia, observed as follows : "We have carefully considered the rival contentions. From the resolution of the assessee-company dated 16th May, 1967, it would be evident that the assessee-company decided to consider the interest due from M/s. Associated Industries (Assam) Ltd. for purpose of accounting on the basis of realisation. No doubt, this resolution was passed before the close of the relevant accounting period. It was also clear that the assessee did not forgo the interest as such but simply deferred the entry in accounts by changing the method of accounting from that of mercantile to cash system so far as the interest due from the debtor-company was concerned. The short question, therefore, before us is whether such a change was permissible and in this regard we do not find the Appellate Assistant Commissioner was in any way wrong in his decision. The departmental representative was justified to rely upon the decision of the Allahabad High Court reported in [1966] 61 ITR 124 (Shiv Prasad Ram Sahai v. CIT). Observations appearing at p. 130 reproduced could amply justify the departmental stand. 'In the absence of any direct authority, but on the first principles it is clear that once the assessee has adopted the mercantile system of accounting, there is no alternative for the Income-tax Officer but to compute the assessee's income on that system, i. e., on the accrual and not the receipt basis. The choice is entirely that of the assessee. He may even choose to adopt the mercantile system for certain transactions and the cash basis for other transactions, but once having chosen and regularly employed that system, it is not open to him unilaterally at any time during an accounting year to say that he will not now follow that system in respect of a particular transaction. It would be open to the assessee to vary the terms of a particular contract but the variation must be by mutual agreement. It is not open to him to keep alive the contract and his rights thereunder, but, for the purpose of income-tax, to say that he will not debit the interest which may have accrued as a debt in his accounts for any reason whatsoever. This is the very evil on account of which Section 13 in the Act of 1922 was brought on the statute book. If the assessee could at any moment of time say that he will not debit the interest because of some reason or the other, then it would open the floodgates of evasion.' ";