9911796707
TMI Blog1985 (4) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 been properly appreciated by the ITO and the IAC. It was stated before him that the method of accounting adopted by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O. He also observed that the adverse comments of the Advocate General in the case of public sector undertakings had nothing to do with the system of accounting adopted by the assessee. He, accordingly, deleted the addition made by the ITO. The revenue is in appeal. 3. The learned departmental representative firstly contended that the assessee is not entitled to follow the system of accounting which is neither cash nor mercantile. Further, he argued that in effect the assessee was following the mercantile system of accounting. Although he had not extended credit facilities to certain customers, it did not mean that he was following the cash system in those cases. By efficient management he had collected bills in the very year in which they were raised. The fact that there were no outstandings regarding certain class of customers did not mean that the system followed by the assessee was cash. He further contended that during the hearing, the assessee's counsel had submitted that the expenditure was being accounted for on the mercantile basis while the receipts were sought to be accounted for on the cash basis. This was truly an irrational system which did not indicate the true profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 prohibiting adoption of this system of accounting by assessees. There is no law that only professionals can follow the hybrid system of accounting for receipts on cash basis and liabilities on mercantile basis. But the system has to be tested in the light of the proviso to section 145(1). From a theoretical point of view it can be argued that the cash system does not give a correct picture of the profits of an assessee. So also the mercantile system. In cash system, the assessee may account for less profits than what is actually due to him. In another year he may account f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he profits made by him and then proceed to add the valuation of stock. He cannot say that the cash system of accounting is not correct and, therefore, profits have to be ascertained only according to the mercantile system. We reproduce the observations of the learned authors Chaturvedi and Pithisaria's commentry on Income-tax Law, 3rd edn. "An assessee may choose the mercantile system for certain transactions and the cash basis for other transactions [Shiv Prasad Ram Sahai v. CIT [1966] 61 ITR 124, 130 (All.)]. An assessee may employ one method of accounting for one part of business or one class of customers, and a different method for another part of his business or another class of customers. He may also keep accounts in respect of different parts of the 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 (Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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