Permissibility of mixed accounting system for interest income and expenditure.

Ajoy Nath Ray, Indira Banerjee

( 1 ) THE questions referred to us are as follows :" (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in its view that the assessee could follow the cash system of accounting in respect of interest income and continue to follow the mercantile system of accounting in respect of interest expenditure ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the additions of Rs. 44,90,434 and Rs. 25,44,968 for the assessment years 1987-88 and 1988-89, respectively ?"

( 2 ) THE second question is consequential to the first ; in the relevant assessment years which came before the amendment of Section 145, the assessee followed in regard to the head of interest, a mercantile system of debiting its own liability to pay interest, and a cash system in regard to showing receipts only for cash interest actually received.

( 3 ) AS against one case decided by the Madras High Court cited on behalf of the Department, numerous cases were cited by Mr. Murarka appearing for the assessee, showing that the courts have, on an overwhelming majority of occasions, held that the above type of mixed accounts, even within a single head itself, is permissible. The reason is, that it was not forbidden at the material time and further that such a mixing of accounts is not an accounting process of that nature which stops the true state of profits from being known fairly and accurately from the accounts of the assessee over a reasonably long range and span of assessment years.

( 4 ) THUS, both the questions are answered in the affirmative and in favour of the assessee.

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