SENGUPTA,J. - (1.) IN this reference under S. 256(1) of the IT Act, 1961 ('the Act') for the asst. yrs. 1983-84 to 1985- 86 the following common question of law has been referred to this Court: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not allowing the changeover in the system of accounting from mercantile to case ?" Shortly, stated, the facts are that the assessee HUF had given an advance of Rs.3,50,000 to Dupent Trading and Investment Co. Ltd. the said advance carried interest at the rate of 12.5 per cent per annum. Earlier, the assessee was accounting for the interest on the said loan on accrual basis. From the accounting year ending on 20th April, 1983, being the previous year relevant to the asst. yr. 1983-84, the assessee did not account for the interest on accrual basis. Before the AO the assessee claimed that since the debtor company was not paying the interest for same years in the past, it had decided to account for the interest on cash basis. The AO rejected this contention of the assessee and brought to tax the interest of the said loan on accrual basis in all the assessment years under reference.
(2.) THE assessee challenged the action of the AO before the CIT (A) and contended that it was entitled to change the method of accounting in respect of the interest income from mercantile to cash as the debtor company was not paying interest regularly. The assessee further claimed that the above change was bona fide. The CIT (A) declined to interfere with the order of the AO on this point.
(3.) THE assessee came up in second appeal before the Tribunal. The Tribunal after considering the rival submissions of the parties and the facts of the case held that the assessee was entitled to change the method of accounting regularly followed by it. For this purpose prior approval of the AO was not necessary. However, the AO was entitled to going to the bona fides of the change. The Tribunal held that the change of method of accounting from mercantile to cash was not bona fide.;