- (1.) This appeal was admitted by an order of this court dated 31-7-2002, on the following substantial questions of law: A. Whether the method of accounting referred to in section 145 of the Income-tax Act, 1961, prior to its substitution by the Finance Act, 1995, with effect from 1-4-1997, included the hybrid or mixed system of accounting and it was open to a company assessee to follow the cash system of accounting in respect of a particular source of income and the mercantile system in respect of the others ? B. Whether the provisions of section 209(3) of the Companies Act, 1956 as amended by the Companies (Amendment) Act, 1988 have any overriding effect on the provisions of section 145 of the Income-tax Act, 1961 and the income of the company assessee is required to be computed under the Income-tax Act, 1961, on the basis indicated in section 209(3) of the Companies Act, 1956, irrespective of the method of accounting regularly employed by such company ? C. Whether the Tribunal misdirected in law in upholding the assessment of interest income on accrual basis even though the appellant was admittedly following the cash system of accounting regularly in respect of interest income and expenditure which had all along been accepted in its assessments since inception ? D. Whether in case the Tribunal was right in holding that the accounting as to interest on cash basis is impermissible it should have further gone on, to revise the entire assessing procedure by recasting the whole accounts of the assessee in the mercantile form as distinguished from the cash form adopted ?. None appears for the respondent and the matter was heard on 29-6-2010. We, therefore, got the assistance of Mr. Khaitan alone who appeared for the appellant. He submitted that the learned Tribunal had completely erred in restoring the order of the Assessing Officer so far as it relates to the addition of a sum of Rs. 1,38,424 being the income from interest is concerned. He submits that in accordance with the provisions of the Income-tax Act then applicable his client maintained the mixed system of accounting. As far as the receipt of interest income and also expenditure on account of the same head is maintained from actual basis not on accrual basis. But accounts on other heads are maintained on accrual basis. Indeed such mixed accounting system was accepted by the Commissioner of Income-tax (Appeals) in the previous assessment year and no one questioned the same. This matter relates to the assessment year of 1991-92. The Assessing Officer without discarding the entire accounting system has merely recast a portion of the accounts, viz., income receipt on account of interest to maintain its mercantile system, viz., on accrual basis. He submits that when there is no reason assigned for discarding the entire accounting system it is not within the competence of the Assessing Officer to do so. Therefore, the decision of the Commissioner of Income-tax (Appeals) was absolutely perfect and justified and the learned Tribunal has committed an error on the plea that since the relevant provisions of section 209 of the Companies Act stood amended in 1988. In view of the amendment it was incumbent upon the appellant-assessee to maintain the accounts as mentioned in the amended provisions of sub-section (3) of section 209. According to him, the reliance of the Tribunal on the provisions of the Companies Act as amended was totally wrong approach. Under the Income-tax Act, as it was prevalent at that point of time with regard to the mercantile accounting system was permissible there was no reason to furnish such accounts following the Companies Act, 1956. This mixed accounting system has been wrongly discarded by the Tribunal. He further submits that this court in the cases of Juggilal Kamlapat Udyog Ltd. v. CIT,2005 278 ITR 52 and also in case of K.S. Mehta (HUF) v. CIT, 2005 278 ITR 59 and the Madras High Court in the case of CIT v. Shriram Transport Finance Co. Ltd., 2009 311 ITR 165 have held consistently that when the provisions of the Income-tax Act permits the assessee to maintain a mixed accounting system, viz., both mercantile as well as cash basis, it is for the assessee to exercise its option. Once it is done it is not for the income-tax authority without any reasoning to discard it altogether.
(2.) Accordingly, accounting system on cash basis in so far as income on account of interest is concerned should have been accepted by the learned Tribunal. He has relied on a decision of the Supreme Court CIT v. Bilahari Investment P. Ltd., 2008 299 ITR 1. In this judgment, it is observed, amongst others, the accounting system cannot be discarded unless the Department records a finding that the method adopted by the assessee results in distortion of profits, the Department cannot insist on substitution of the existing method. In this case, Mr. Khaitan submits that there was no finding nor any decision either by the Assessing Officer or by the learned Tribunal that the mixed accounting system needs to be discarded because the same results in distortion of profit. In other words, he said that he cannot make a piecemeal change in the accounting system. Ether the entire accounting system has to be discarded or not at all.
(3.) He submits that the amendment of the Companies Act has got no impact as wrongly held by the learned Tribunal though this amendment of the Companies Act is later piece of legislation but still then the income-tax authority is not bound by the provisions of the said amended provision.;