D.K.Seth, J. - (1.) The short question involved in these two appeals is as to whether hybrid method/system of accounting was permissible; if permissible, then could its consequences be avoided or ignored and the first proviso to Section 145 of the IT Act, 1961 (IT Act), as it stood for the respective previous years 1986-87, 1987-88 and 1988-89, could be invoked for the purpose of holding that the income could not be deduced from such mixed accounting system.
(2.) In this case, the facts are more or less admitted. The assessee used to maintain mercantile system of accounting in respect of its outgoings, whereas it used to maintain cash system of accounting in respect of the receipt of interest against financing of vehicles, a part of its business. In the earlier years, this mixed system of accounting was permitted and accepted by the IT authorities and its income was accordingly assessed. But for the previous years 1986-87, 1987-88 and 1988-89, the AO took a different view. The AO held that the hybrid system of accounting could not be permitted. The CIT(A) reversed the said orders holding, inter alia, that Section 145 permitted maintaining of hybrid system of accounting provided the accounts were complete and accurate. Therefore, it set aside the addition. The learned Tribunal also upheld that the hybrid system of accounting was permissible. But, however, according to it, in this case the cash system in respect of the receipt of interest earned on the financing of vehicles represented a distorted picture of the income inasmuch as, the income shown was less than that what would have been shown under the mercantile system of accounting. Therefore, it reversed the order of the CIT(A) and restored that of the AO; and hence the appeal.
(3.) Mr. J.P. Khaitan, learned counsel for the appellant, pointed out from the materials that there was no inaccuracy or incompleteness in the hybrid system of accounting. One part of the business, namely, in relation to the outgoings of the assessee, the mercantile system of accounting was followed, whereas only in respect of all the transactions related to the receipt of interest out of its business of financing vehicles was maintained on the cash receipt basis. Mr. R.N. Bajoria, senior counsel leading Mr. Khaitan, pointed out that the Madras view was not accepted by the Calcutta High Court. In CIT v. United Credit Ltd., this Court had held that mixed accounting system is permissible when it was followed over a long range and span of assessment years. This view was reiterated in Juggilal Kamlapat Udyog Ltd. v. CIT (IT Appeal No. 82 of 1999), disposed of by Hon'ble Aloke Chakrabarti and Hon'ble S.K. Gupta, JJ. on 16th Jan., 2004. Speaking for the Court, Hon'ble Chakrabarti, J. had taken the same view that hybrid system of accounting was permissible.;