Clause wise discussion on form 3CD Clause 10

[gopalji]

The Calcutta High Court in Snow White Food Products v CIT [1983] 141 ITR 861, and Madras High Court in CIT v Carborandum Universal Limited [1966] 149 ITR 759 and several other decisions like CIT v. Mopeds India Ltd. [1998] 173 ITR 347, Triveni Engg. Works Ltd. v. CIT [1987] 167 ITR 742 (All), CIT v. Ganga Trust Fund [1986] 162 ITR 612 (Guj) have held that it is open to an assessee to change the method of accounting provided the changed method is the regular method of accounting and the assessee has not merely abandoned or changed it for a casual period to suit his own purposes. Any such change which is followed consistently has to be accepted by the Department, even if it results in reduction of tax liability

[gopalji]

There are three methods for recording business transactions in the books of account viz.

1. Accrual method (also known as merchantile method)
2. Cash method
3. Hybrid Method (Mix of the two i.e. accrual and cash)

These terms have not been defined in the Income tax Act but as per Guidance note issued by ICAI, these terms have been defined: Accrual basis’ or ‘Mercantile basis’ has the following characteristics :

1. Revenues, costs, assets and liabilities are reflected in the accounts in the period in which they accrue.

2.It includes considerations relating to deferrals, allocations, depreciation and amortisation

[gopalji]

The apex court has very elaboratedly defined the terms in the case of CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 as under:

“Among Indian businessmen, as elsewhere, there are current two principal systems of book-keeping. There is, firstly, the cash system in which a record is maintained of actual receipt and actual disbursements, entries being posted when money or money’s worth is actually received, collected or disbursed. There is, secondly, the mercantile system, in which entries are posted in the books of account on the date of the transaction, i.e., on the date on which rights accrue or liabilities are incurred, irrespective of the date of payment. For example, when goods are sold on credit, a receipt entry is posted as of the date of sale, although no cash is received immediately in payment of such goods; and a debit entry is similarly posted when a liability is incurred although payment on account of such liability is not made at the time. . . Whereas under the cash system no account of what are called the outstandings of the business either at the commencement or at the close of the year is taken, according to the mercantile method actual cash receipts during the year and the actual cash outlays during the year are treated in the same way as under the cash system, but to the balance thus arising, there is added the amount of the outstandings not collected at the end of the year and from this is deducted the liabilities incurred or accrued but not discharged at the end of the year. . . Again where the cash system is adopted, there is no question of bad debts or outstanding at all, in the case of mercantile system against the book profits some of the bad debts may have to be set of when they are found to be irrecoverable.”