Commissioner of Income Tax vs Pondicherry Industrial Promotion Development Investment Corporation Ltd.

R. Jayasimha Babu, J.—The assessee which is a corporation set up by the State to promote industrial development and investments,

adopted the hybrid system of accounting before the close of the accounting year 1980-81, with regard to the interest and rent receivable as it

found that large amounts under these two heads had remained unrecovered for a long period of time, and it was considered desirable to adopt the

cash system of accounting with respect to those two heads. Such a hybrid system was followed in the following assessment year as well. The

Assessing Officer and the appellate authority having held that the assessee could not have changed the system of accounting to a hybrid system, the

assessee took up the matter in further appeal to the Tribunal. The Tribunal having agreed with the view of the assessee, this reference before us has

been brought by the Revenue.

Counsel for the Revenue fairly invited our attention to the decision of the Supreme Court in the case of UCO Bank, Calcutta Vs. Commissioner

of Income Tax, West Bengal, , wherein the Supreme Court was concerned with the case of hybrid accounting. In that case the assessee had while

following the mercantile system of accounting considered the income by way of interest pertaining to doubtful loans as not real income in the year in

which it accrued, but only when it was realised. Such a mixed system of accounting was held by the court to be in accordance with the accounting

practice.

Having regard to that decision of the apex court, it cannot be said that it was impermissible for the assessee here to have followed a mixed or a

hybrid system of accounting and that while following the mercantile system, it was permissible for it to adopt a cash system of accounting so far as

interest and rent were concerned.

The assessee cannot be held to be disentitled to change the method of accounting even when it is genuine solely on the ground that such a mixed

system of accounting would result in loss to the Revenue for that year.

The question referred to us as to whether the Tribunal was right in holding that the assessee was entitled to change the method of accounting

from mercantile to cash system in respect of interest and rent receivable only, even when adopting the cash system for the interest and rent payable

in continuing with the mercantile system with regard to other matters for the assessment years 1981-82 and 1982-83, is answered in favour of the

assessee and against the Revenue.