SHETH BROTHERS, ALAPPUZHA vs. DY.COMMISSIONER OF INCOME TAX

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ITA/8/2005HC KeralaKLHC01023391200510 June 2008Author: HONOURABLE MR.JUSTICE V.K.MOHANAN,HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR3 pages
AI SummaryDismissed

What did the High Court hold?

The Tribunal held that the assessee's claim to shift from the mercantile system of accounting to the cash system was not maintainable in view of the amendment to Section 145 of the Income Tax Act, 1961, effective from April 1, 1997. The Tribunal reasoned that the assessee had consistently followed the mercantile system for several years and could not arbitrarily change its accounting method to avoid tax liability on interest income. The original advances were treated as loans, and interest was charged. Therefore, the assessee could not contend that interest was discontinued without a valid claim that the interest on the loan was irrecoverable. The High Court found no ground to interfere with the Tribunal's finding and held that no substantial question of law arose from the order. The appeal was dismissed.

What were the facts?

The appeal concerns the assessment year(s) not explicitly stated but implied to be subsequent to 1997. The assessee, Sheth Brothers, Alappuzha, is challenging an order passed by the Income Tax Appellate Tribunal (ITAT), Cochin Bench. The dispute revolves around the taxability of interest on loans advanced by the assessee to its sister concerns and the wife of a partner of a sister concern. The assessee had been following the mercantile system of accounting for charging interest from 1992-93 but claimed to have shifted to a cash system. The ITAT found this shift untenable in light of the amendment to Section 145 of the Income Tax Act, 1961, effective from April 1, 1997.

What were the issues?

1. Whether the assessee is liable to pay tax on interest for loans advanced to sister concerns and the wife of a partner of a sister concern, considering the amendment to Section 145 of the Income Tax Act, 1961, effective from April 1, 1997? Assessee's contention: The assessee claimed to have changed its accounting pattern from the mercantile system to the cash system. Revenue's contention: The revenue, through the ITAT's finding, argued that the assessee, having consistently followed the mercantile system for several years, could not unilaterally shift its stand to the cash system and contend that no interest was being charged on the borrowers, especially when the advances were originally treated as loans and interest was being charged. The revenue relied on the amendment to Section 145 of the Income Tax Act, 1961, which became effective from April 1, 1997.

Which sections of the Income-tax Act were involved?

Section 145

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN TUESDAY, THE 10TH JUNE 2008 / 20TH JYAISHTA 1930 ITA.No. 8 of 2005() ------------------- ITA.247/COCH/2004 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/ASESSEE. ----------------------------------- SHETH BROTHERS, ALAPPUZHA. BY ADV. SRI.A.KRISHNAN RESPONDENTS: ASSESSING OFFICER. ------------------------------- 1. THE DEPUTY COMMISSIONER OF INCOMETAX, CIRCLE I, ALAPPUZHA. 2. THE COMMISSIONER OF INCOME TAX(APPEALS) IV, KOCHI. 3. INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, KOCHI. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL,GOI(TAXES) FOR R1 SRI.GEORGE K. GEORGE, SC FOR IT FOR R1 THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 10/06/2008, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR & V.K.MOHANAN, JJ. .................................................................... I.T. Appeal No.8 of 2005 .................................................................... Dated this the 10th day of June, 2008.

JUDGMENT Ramachandran Nair, J. Heard counsel for the appellant and Standing Counsel for the Income Tax Department. The question raised is whether appellant is liable to pay tax on interest for the loans advanced to sister concerns and wife of one of the partners of a sister concern. We find from the Tribunal's order that the appellant has been consistently following mercantile system in charging interest from 1992-93 onwards. However, appellant claims to have changed the pattern of accounting to cash. On facts, Tribunal found that in view of the amendment to Section 145 with effect from 1.4.1997, appellant's claim is not maintainable. In other words, Tribunal held that having followed mercantile system of accounting for several years, appellant cannot now shift the stand and contend that no interest is being charged on the borrowers. We do not find any ground to interfere with the finding of the Tribunal because originally the advances were treated as loans by the appellant and interest was being charged. The appellant, therefore, cannot contend that appellant discontinued charging of interest without any claim

2 that interest on the loan cannot be recovered. No substantial question of law arises from the finding of the Tribunal. We, therefore, dismiss the appeal. C.N.RAMACHANDRAN NAIR Judge V.K.MOHANAN Judge pms

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