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TMI Blog1980 (4) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 considered 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d advance to M/s. Associated Industries (Assam) Ltd. was not credited in the accounts not because of a change in the accounting method but because there was no chance of realisation of either the principal or the interest." For a consideration of this question, on behalf of the revenue as well as on behalf of the assessee, our attention was drawn to a number of decisions to which we shall presently refer. We are not concerned, in this reference really, with the question whether it is permissible to maintain or keep what has been called the hybrid system of accounting. This expression " hybrid " system of accounting has been borrowed from some of the judicial decisions. The expression " hybrid " indicates the birth of system born out of an inter-mixture of the two. When the assessee simultaneously in respect of certain transactions following a mercantile system of accounting, in respect of others follows the cash system of accounting, then the proper expression should perhaps be that he maintains a dual or a plural system of accounting in respect of different transactions because the expression " hybrid " would be the result of intermixture of two systems and something of a third ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the rival contentions of the parties. The first decision which we must notice is the decision in the case of T. O. Foster v. CIT [1929] 3 ITC 435 where the Division Bench of the Rangoon High Court was considering s. 13 of the Indian I.T. Act, 1922, which was more or less in pari materia with s. 145 of the I.T. Act, 1961. There, an architect was keeping accounts and was assessed previously on the basis of earned income, that is to say, on the cash basis, viz., on the receipt basis. There, the assessee was assessed in the past on the basis of his accounts, viz., the income earned every year and not on the basis of income receivable or credited, claimed for the assessment year 1926-27 to deduct a sum of Rs. 85,000 on the ground that the said sum, though earned in that account year 1925-26 was not actually received in that year. It was held that the assessment based on the accounting regularly employed by the assessee was in accordance with the provisions of s. 13 and the assessee was not entitled to alter his system of accounting as claimed by him. Reliance was placed on the case In the matter of Chouthmal Golapchand [1938] 6 ITR 733 (Cal). There, the assessee carried on a busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the method of accounting regularly employed by the assessee. The assessing authority was bound by the assessee's choice of the method of accounting regularly employed by him, unless the income, profits and gains could not be properly deduced therefrom. The Division Bench further reiterated that the name by which the method of accounting was claimed was not so important, nor was it important whether the system of accounting adopted by the assessee conformed to the requirements of a known method of accounting so long as the profits of the business could fairly and properly be determined from the accounts. At pp. 590-591 of the report, Mr. Justice Viswanatha Sastry observed on the basis of the decision of the judicial Committee in the case of CIT v. Sarangpur Cotton Manufacturing Co. Ltd. [1938] 6 ITR 36 (PC) that s. 13 clearly made such a method of accounting a compulsory basis for computation unless in the opinion of the ITO the income, profits and gains could not be deduced therefrom. The Division Bench further observed that the method of accounting maintained by the assessee might be neither purely on a cash basis nor purely on a mercantile basis but a mixture of the two methods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 1948-49 to a firm, G, and had a return of interest from the aforesaid loan on mercantile system of accounting, that is to say, on accrual basis for the assessment years 1948-49 to 1956-57. But the accrued interest of Rs. 20,400 for the relevant year of accounting was not included in the return for the assessment year 1957-58 for the reason that the debtor was in embarrassed financial condition. The ITO added that sum to the income of the assessee for the assessment year 1957-58. The AAC set aside the order and it was restored by the Appellate Tribunal. The High Court held that the Tribunal was right in holding that the interest had accrued to the assessee during the previous year and was liable to be included in the assessee's total income. As we have noticed, there the Division Bench of the Allahabad High Court was concerned with the conduct of the assessee and not with the return of interest in respect of a particular transaction, viz., a transaction from a particular debtor, because the debtor was considered to be in an embarrassed financial condition. It was not, as such, so much a question of change of any method of accounting or maintaining a method of accounting. We make t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve to be deducted therefrom. It was held that the collection of sales tax constituted the receipts of the assessee and that as the assessee had been maintaining the cash system of accounting in respect of sales tax account, the liability to sales tax could be deducted only when the same was paid out to the Government. Therefore, it was apparent that one kind of transaction, viz., sales tax, was being treated regularly by the assessee in a different method of accounting. The facts of that case are not similar to the facts with which we are concerned in the instant reference. We may also mention that on behalf of the revenue reliance was also placed on a decision in the case of CIT v. Confinance Ltd. [1973] 89 ITR 292, where a Division Bench of the Bombay High Court held that under the income-tax law receipt of income, either actual or deemed, was not a condition precedent to taxability. Under the head " Business " what were charged were the profits and gains of the business and the profits and gains would not escape tax by reason only of the fact that these were not received in the accounting year in money or the equivalent of money or were not deemed to be so received. These were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion having been mentioned by the Tribunal and no such question having been referred as such, we have not considered this case on the basis of real income and no arguments were advanced before us on that basis either. On behalf of the assessee our attention was drawn to the decision in the case of British Paints India Ltd. v. CIT [1978] 111 ITR 53 (Cal). There we had to deal with the question whether for the purpose of valuation the assessee could change the method of valuation. We held that the true purpose of valuation of the unsold stock was to balance the cost of those goods entered on the other side of the account at the time of their purchase or production, so that cancelling out of the entries relating to the same stock from both sides of the account, would leave only the transactions on which there have been actual sales in the course of the year showing profit or loss actually realised an the year's trading. We further held, for the purpose of the aforesaid valuation, it is necessary to determine what in all circumstances represent the cost of the stock-in-trade and work-in-progress. What is and what is not profit or gain in those circumstances must necessarily be one of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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