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TMI Blog1985 (4) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... iven is to avoid disputes. As the explanation is not convincing and also taking into account that the assessee was following mercantile system of accounting and it cannot change the system of accounting once followed, I add back a sum of Rs. 1,48,491 being freight charges not yet realised and allow the following expenses which are not provided for: Rs. Claims payable 31,657 Lorry hire charges 4,602 ------ 36,259 ------- The net addition works out to Rs. 1,12,232." The assessee went in appeal. Before the Commissioner (Appeals), it was represented that the facts have not bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Commissioner (Appeals) noticed that the amount of Rs. 1,48,491 related to 22 customers which included parties like Dunlop India, Kirloskar Systems Ltd., Voltas Ltd., etc. He then went on to observe that the revenue cannot attribute mala fide intentions to the assessee or collusion between the assessee and parties in the matter of accounting of freight receipts. He observed that the other transport operators were also adopting similar system of accounting for freight receipts. In order to avoid the confusion caused by frequent adjustment of entries in the books of account regarding short payments the companies switched over to accounting receipts on cash basis. He then adverted to the theory of real income. He finally concluded that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was, therefore, liable for rejection by virtue of proviso to section 145(1) of the Income-tax Act, 1961, ('the Act'). He then referred to footnote No. 8 at page 3435 of the commentary on Law of Income-tax by Sampath Iyengar, 7th edn., Vol. 4 and submitted that an assessee cannot account for liabilities on mercantile basis and receipts on cash basis. Reliance was also placed on the decision of the Allahabad High Court in the case of CIT v. Cosmopolitan Trading Co. [1979] 116 ITR 728. Reference was also made to the commentary of Kanga and Palkhivala in Law and Practice of Income-tax, Vol. I, p. 883 where it is observed that the true gains are to be ascertained as nearly as it can be done. 4. The learned counsel for the assessee referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cash is received." At page 2863 of the Commentary on Income-tax Law by Chaturvedi and Pithisaria, 3rd edn., it is stated that there are innumerable other systems of accounting which are called hybrid or heterogeneous in which certain elements and incidents of cash and mercantile systems are combined---A. Krishnaswamy Mudaliar's case. It is not incumbent upon an assessee to follow a purely cash method of accounting or a purely mercantile method of accounting. It may be a mixture of both. Thus, it appears that there is nothing wrong in the assessee adopting the hybrid system of accounting. The type of system adopted by the assessee conforms to what is stated at page 265 of Pickles' Accountancy. There is of course nothing in the Act pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be ascertained when books of account are maintained on such basis. If some sanctity is to be attached to the method of accounting regularly adopted by the assessee, we have to examine how the proviso to section 145(1) is to be reconciled with the substantive portion of that section. 6. In our opinion, while ascertaining the true profits the ITO has to make such adjustments to the trading account of the assessee which is in conformity with that system. For example, if profits are being ascertained on cash basis, the ITO has to first give a finding that even according to the cash system adopted by the assessee true profits are not being reflected in the accounts. He has then to rope in those items which could really be, taken as the rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same business on different basis. If such different methods are employed regularly and consistently the profits have to be computed in accordance with the respective methods, provided it results in a proper determination of true profits [CIT v. E.A.E. T. Sundararaj [1975] 99 ITR 226, 231 (Mad.) ; Bhagwandas Jagdishprasad Co. v. CIT [1982] 28 CTR (MP) 33, 34; Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 847, 859 (Cal.)]." 6.1 The case cited by the learned departmental representative, viz., Cosmopolitan Trading Co.'s case is distinguishable on facts. 7. We have, therefore, to examine whether the assessee has been regularly employing a particular method of accounting, whether there has been a change in that method of account ..... X X X X Extracts X X X X X X X X Extracts X X X X
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