ITO Vs Pallon Shapoorji Mistry ( ITAT Mumbai)
ITAT Mumbai held that change of method of accounting from mercantile to cash system for recording interest income on loan due to financial distress at the end of borrower is justifiable and legitimate.
Facts- Assessee is an individual and belongs to the promoter family of Shapoorji Pallonji and Co. Pvt. Ltd. (SPCPL) and Roxanna Consultancy Services Pvt. Ltd. (Roxanna). In the course of assessment proceedings, AO on perusal of Form 26AS of the assessee for the year under consideration noted an entry towards interest income of Rs.8,81,35,246/- from Roxanna with a corresponding TDS of Rs.88,38,525/-. He observed that this income has not been offered to tax so also TDS has not been claimed by the assessee. After considering the submissions made by the assessee, AO passed the assessment order making an addition towards interest income not accounted on accrual basis.
CIT(A) deleted the additions. Being aggrieved, revenue has preferred the present appeal.
Conclusion- Change in method of accounting is not prohibited when warranted by situations which has been justifiably explained by the assessee. Assessee had demonstrated that once changed, he has regularly followed the method in the subsequent years. Assessee has affirmed to offer the income as and when he receives it. Keeping all the above discussions in juxtaposition, in our considered view, change of method of accounting from mercantile to cash by the assessee in the year under consideration is a legitimate exercise. Assessee has explained that it is a genuine and bonafide exercise arising out of compelling reasons of financial distress at the end of borrowers.
