The Judgment of the Court was delivered by

Sabyasachi Mukharji, J.:— In this reference under s. 256(2) of the I.T Act, 1961, we are concerned with two assessment years, being the assessment years 1968-69 and 1969-70. The assessee-company maintained its accounts for the relevant previous years ended on 31st December, 1968, and 31st December, 1969, respectively. The ITO completed the two assessments by including Rs. 1,36,170 as interest receivable from M/s. Associated Industries (Assam) Ltd. on accrual basis as the system of accounting followed by the assessee-company so long was mercantile. In this connection, it will be relevant to refer to certain portions of the assessment orders. In the assessment order for the year 1968-69 dealing with business, it was mentioned, inter alia, as follows:

“Business Rs. Net profit as per profit & loss account 40, 504 Add Bad debts-unrealisable advance, not to be allowed as bad debt in the four of such advances does not conform to the provision of sec. 36(2) 4, 313”

2. Again, dealing with income from other sources, it was provided in the said order, inter alia, as follows:

“Other Sources Rs. Rent from sub-tenants 42, 650 Interest as per profit & loss a/c. 8, 331. Interest receivable from M/s. Associated Industries (Assam) Ltd. taken on accrual basis as the system is mercantile 1, 44, 501 1, 36, 170 1, 87, 151 Total income 2, 15, 535”

3. Similarly, for the assessment year 1969-70 dealing with business income it was stated in the said order, inter alia, as follows;

“Business Net profit as per profit & loss a/c. 1, 94, 881 Deduct: Rent received considered separately 46, 660 Interest received considered separately 146 Sundry receipts considered separately 1, 833 48, 639 1, 46, 242”

4. And dealing with income from other sources the assessment order stated as follows;

Other sources Rent received from sub-tenant 45, 460 Sundry receipt 1, 833 Interest — as per profit & loss a/c. 146 Interest receivable from M/s. Associated Industries (Assam), Ltd. included on accrual basis as in earlier years 1, 36, 170 1, 36, 316 1, 83, 609 Total income 3, 81, 780”

5. Being aggrieved by the said assessment orders, the assessee preferred appeals before the AAC. It was submitted before him by the assessee that the amount of interest should be excluded as the assessee had changed the method of accounting from mercantile to cash system and, moreover, the interest not having been received for a number of years, in the past, and there being no chance of receiving that interest or the principal amount, the assessee did not want to give any impression of profits by showing’ the interest income in the account. These contentions were, however, rejected by the AAC on the ground that the assessee-company had been following the mercantile system of accounting and the assessee could not be permitted to follow the cash system with reference to interest receivable from a particular debtor. Being dissatisfied with the order of the AAC, the assessee preferred appeals before the Tribunal and reiterated its contention which was urged before the AAC on this aspect of the matter, The assessee also submitted a resolution dated 15th May, 1967, passed long before the close of the relevant previous year wherein it was decided to consider the interest due from the debtor on the basis of realisation. It was, moreover, contended that as the financial condition of the debtor-company was embarrassing, it was submitted, that the management of the debtor-company had been taken over by the Govt, of India by an order dated 14th December, 1972. The assessee's contention was that it wanted to reflect its real income and not an hypothetical income and that the company being assessed to income-tax assessment in respect of interest’ under the head “Other sources”, as it was done althroughout in the past, bad debts arising from non-realisation subsequently could not be claimed in the computation of income as there was no such provision permitting the deduction from income under “income from other sources”. The revenue, on the other hand, urged before the Tribunal that the assessee-company did not forgo the interest but had simply deferred the crediting thereof and justified its stand that the inclusion of interest on the accrual basis was correct and in this connection reliance was placed on certain decisions which the Tribunal noted. The Tribunal held against the assessee and, inter alia, observed as follows:

“We have carefully, considered the rival contentions. From the resolution of the assessee-company dated 16th May, 1967, it would be evident that the assessee-company decided to consider the interest due from M/s. Associated Industries (Assam) Ltd. for purpose of accounting on the basis of realisation. No doubt, this resolution was passed before the close of the relevant accounting period. It was also clear that the assessee did not forgo the interest as such but simply deferred the entry in accounts by changing the method of accounting from that of mercantile to cash system so far as the interest due from the debtor-company was concerned. The short question, therefore, before us is whether such a change was permissible and in this regard we do not find the Appellate Assistant Commissioner was in any way wrong in his decision. The departmental representative was justified to rely upon, the decision of the Allahabad High Court reported in [1966] 61 ITR 124 (Shiv Prasad Ram Sahai v. Commissioner Of Income-Tax, Uttar Pradesh. appearing at p. 130 reproduced could amply justify the departmental stand.

‘In the absence of any direct authority, but on the first principles it is clear that once the assess ee has adopted the mercantile system of accounting, there is no alternative for the Income-tax Officer but to compute the assessee's income on that system, i.e, on the accrual and not the receipt basis. The choice is entirely that of the assessee. He may even choose to adopt the mercantile system for certain transactions and the cash basis for other transactions, but once having chosen and regularly employed that system, it is not open to him unilaterally at any time during an accounting year to say that he will not now follow that system in respect of a particular transaction. It would be open to the assessee to vary the terms of a particular contract but the variation must be by mutual agreement. It is not open to him to keep alive the contract and his rights thereunder, but, for the purpose of income-tax, to say that he will not debit the interest which may have accrued as a debt in his accounts for any reason whatsoever. This is the very evil on account of which section 13 in the Act of 1922 was brought on the statute book. If the assessee could at any moment of time say that he will not debit the interest because of some reason or the other, then it would open the floodgates of evasion.’”

6. The Tribunal, thereafter, observed that in the facts of this case, as found by the Tribunal, the assessee's unilateral action could not be upheld and, therefore, the Tribunal sustained the addition of interest on income on due basis in the assessment orders. On these facts the Tribunal has referred the following question, as directed by the High Court under s. 256(2) of the I.T Act, 1961:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest on loan of M/s. Associated Industries (Assam) Ltd. was liable to be included in the assessment for the relevant assessment year?”

7. In view of the argument that was advanced before us it may not be in this connection, inappropriate to refer to the statement of case which was filed on behalf of the assessee along with an application for reference. In the said statement of case for both the years, it was stated, inter alia, as follows:

“In the appeal before the Tribunal, it was submitted that it was not a case of change of accounting method at all. The interest on the said advance to M/s. Associated Industries (Assam) Ltd. was not credited in the accounts not because of a change in the accounting method but because there was no chance of realisation of either the principal or the interest.”

8. For a consideration of this question, on behalf of the revenue as well as on behalf of the assessee, our attention was drawn to a number of decisions to which we shall presently refer. We are not concerned, in this reference really, with the question whether it is permissible to maintainor keep what has been called the hybrid system of accounting. This expression “hybrid” system of accounting has been borrowed from some of the judicial decisions. The expression “hybrid” indicates the birth of a system born out of an inter-mixture of the two. When the assessee simultaneously in respect of certain transactions following a mercantile system of accounting, in respect of others follows the cash system of accounting, then the proper expression should perhaps be that he maintains a dual or a plural system of accounting in respect of different transactions because the expression “hybrid” would be the result of intermixture of two systems and something of a third system emerges, but that is not the position with which we are concerned and that is not the case of either of the parties in ‘this reference. We are also not concerned with the question whether having chosen a system of accounting, the assessee was bound to follow that system of accounting unless the alteration was consented to or permitted by the other party, nor are we concerned with the question really whether unilaterally the assessee could alter the system of accounting in respect of some transactions. We are also not concerned in this reference to consider whether even in respect of a particular head certain class or certain groups of transactions could be differently account- ‘ed for in the account, viz., some on the basis of cash system and some on the basis of mercantile system. On behalf of the assessee it was urged that it was possible for the assessee to maintain in respect of certain heads one system and in respect of some other heads another system. It was further urged that it was possible for the assessee to maintain in respect of different items or classes of items under one head different systems of accounting, viz., in respect of some transactions, some class of customers or dealers, cash or mercantile and in respect of others mercantile or cash ‘It was also urged on behalf of the assessee that having chosen a particular system, which unless it was held by the ITO that it did not reflect the true profit or the income of the assessee, the assessee was free to alter or change that system of accounting without the consent or approval of the revenue. On the other hand, on behalf of the revenue, it was strenuously urged that the assessee was free to follow either the mercantile or cash system and the assessee was free to follow in respect of one head cash system and in respect of another mercantile system or vice versa but once he has chosen to adopt one system it was not possible for the assessee later on to alter or change that system of accounting except with the consent or approval of the revenue because there had to be, according to the revenue, certain amount of mutuality from that point of view between the revenue and the assessee after the initial choice having been made by the assessee. As we mentioned before, we are not directly concerned with that broad question. We shall notice several decisions which were placed before us in support of the rival contentions of the parties.

9. The first decision which we must notice is the decision in the case of T.O Foster v. CIT, [1929] 3 ITC 435 where the Division Bench of the Rangoon High Court was considering s. 13 of the Indian I.T Act, 1922, which was more or less in pari materia with s. 145 of the I.T Act, 1961. There, an architect was keeping accounts and was assessed previously on the basis of earned income, that is to say, on the cash basis, viz., on the receipt basis. There, the assessee was assessed in the past on the basis of his accounts, viz., the income earned every year and not on the basis of income receivable or credited, claimed for the assessment year 1926-27 to deduct a sum of Rs. 85/000 on the ground that the said sum, though earned in that account year 1925-26 was not actually received in that year. It was held that the assessment based on the accounting regularly employed by the assessee was in accordance with the provisions of s. 13 and the assessee was not entitled to alter his system of accounting as claimed by him.

10. Reliance was placed on the case In the matter of Chouthmal Golapchand, [1938] 6 ITR 733 (Cal). There, the assessee carried on a business in shares and held at the beginning of the accounting year 1935-36 an opening stock of shares valued at the cost price of Rs. 85,331. On the 9th March, 1936, in pursuance of an agreement entered into On the 8th January, 1936, to dissolve the firm on and from the 30th March, 1936, the shares were allotted to several partners at a valuation alleged to be the market price, which was agreed upon by the partners, viz., Rs. 51,966. The assessee claimed in 1936-37 that the difference between these two figures, viz., Rs. 33,365 was a loss in the share business and should be set off against-their income from other sources. It was found that the shares were acquired some years before the account year at a price higher than the ruling market price in March, 1935, and that had been carried forward from year to year at the cost price. The assessee had also not made any application for changing their method of account. On a reference, it was held by the Division Bench that, as there was nothing to show that the loss had occurred in the year of account the set-off could not be allowed. Further, as the assessee had adopted the system of valuing the shares at cost price at the end of every year and at the opening of the next year the cost price of the shares must be taken to have been their value at the beginning of the accounting year, the partition did not amount to a sale of the shares and there was no evidence of any loss. Every year, according to the Division Bench, was a self-contained period and the profits earned or the loss sustained either before or after that year were not at all relevant for the purpose of assessment relating to a particular year. There, at p. 741, Mr. Justice Costello observed that the assessee could not be permitted to change the system followed by it except on a proper application being made to the I.T authority in that behalf. The learned judge referred to certain instructions in the Manual in support of his views. The Andhra Pradesh High Court had occasion to deal with this question, to which our attention was drawn on behalf of the assessee in the case of S.R.V.G Press Co. v. CEPT, [1956] 30 ITR 583, where the Division Bench of the Andhra Pradesh High Court held that under s. 13 of the Indian I.T Act, 1922, the assessee was free to choose the proper method of accounting and the profits and gains had to be computed in accordance with the method of accounting regularly employed by the assessee. The assessing authority was bound by the assessee's choice of the method of accounting regularly employed by him, unless the income, profits and gains could not be properly deduced therefrom. The Division Bench further reiterated that the name by which the method of accounting was claimed was not so important, nor was it important whether the system of accounting adopted by the assessee conformed to the requirements of a known method of accounting so long as the profits of the business could fairly and properly be determined from the accounts. At pp. 590-591 of the report, Mr. Justice Viswanatha Sastry observed on the basis of the decision of the Judicial Committee in the case of CIT v. Sarangpur Cotton Manufacturing Co. Ltd., [1938] 6 ITR 36 (PC) that s. 13 clearly made such a method of accounting a compulsory basis for computation unless in the opinion of the ITO the income, profits and gains could not be deduced therefrom. The Division Bench further observed that the method of accounting maintained by the assessee might be neither purely on a cash basis nor purely on a mercantile basis but a mixture of the two methods, one method being adopted in respect of one class of transaction and the other in respect of a different category. If the assessee had employed such a different method regularly and consistently, the profits would have to be computed in accordance with the respective methods, provided a proper determination of the due profits could be arrived at.

11. Learned advocate for the assessee also drew our attention to the observations of the Diyision Bench judgment of the Allahabad High Court in the case of Gappumal Kanhiyalal v. Commissioner Of Income-Tax, U.P & V.P, [1961] 42 ITR 446, where the Division Bench was concerned with the question as to whether, in view of the hybrid system of accounting maintained by the assessee, he could claim to deduct an expenditure incurred in the previous year in the subsequent year in question. The Division Bench observed that income-tax had to be paid by an assessee finder s. 10(1) of the Indian I.T Act, 1922, in respect of the profits and gains of the business, profession or vocation. Express provision was not made under that section for the deduction of an expenditure. But commercial profits and gains could not be worked out without a deduction being made in respect of an expenditure incurred. Section 10(2) of the Act also specified and made provision for certain statutory deductions and those deductions had also to be made in computing the profits of a business and if an hybrid system of accounting was maintained regularly then, according to the Division Bench, such a system was permissible.

12. On behalf of the revenue, however, reliance was placed on the observations of the Allahabad High court in the case of Shiv Prasad, Ram Sahai v. CIT, [1966] 61 ITR 124. There, the Division Bench observed that if the assessee had once chosen the mercantile system of transaction and had regularly employed that system it was not open to him unilaterally at any time during a subsequent accounting period to change that system. The variation could, according to the Division Bench, be done by mutual consent. It was not open to him to keep alive-the contract and its rights thereunder. But, for the purpose of income-tax, it was not open to him to say that he would not debit in his account the interest which would have accrued. There, the Division Bench was concerned with an assessee which was a registered firm carrying on money-lending business and it had advanced a sum of Rs. 71,010 in 1948-49 to a firm, G, and had a return of interest from the aforesaid loan on mercantile system of accounting, that is to say, on accrual basis for the assessment years 1948-49 to 1956-57. But the accrued interest of Rs. 20,400 for the relevant year of accounting was not included in the return for the assessment year 1957-58 for the reason that the debtor was in embarrassed financial condition. The ITO added that sum to the income of the assessee for the assessment year 1957-58. The AAC set aside the order and it was restored by the Appellate Tribunal. The High Court held that the Tribunal was right in holding that the interest had accrued to the assessee during the previous year and was liable to be included in the assessee's total income. As we have noticed, there the Division Bench of the Allahabad High Court was concerned with the conduct of the assessee and not with the return of interest in respect of a particular transaction, viz., a transaction from a particular debtor, because the debtor was considered to be in an embarrassed financial condition. It was not, as such, so much a question of change of any method of accounting or maintaining a method of accounting. We make this observation because this decision of the Allahabad High Court has been considered by two Division Benches of this High Court. In the case of CIT v. Rajasthan Investment (P.) Ltd., [1978] 113 ITR 294, dealing with the said decision, Mr. Justice Dipak Kumar Sen observed that the facts in the case of Shiv Prasad Ram Sahai, [1966] 61 ITR 124 (All) were different from the facts before their Lordships because, according to their Lordships, in that case, that is to say, in the Allahabad case, there was no general change of the method of accounting, one particular item was sought to be accounted for on a mercantile basis for the first time during the accounting year, which was not permitted according to the Division Bench. But, in the case of Reform Flour Mills P. Ltd. v. CIT, that is to say, the present assessee's case for the previous year, reported in [1978] 114 ITR 227 (Cal) in another Division Bench, Mr. Justice Deb had observed, inter alia, as follows (p. 229):

“With due respect to their Lordships of the Allahabad High Court, in the case of Shiv Prasad Ram Sahai v. CIT, [1966] 61 ITR 124, we are unable to accept their opinion, namely, that an assessee cannot change the method of accounting unilaterally.”

13. Therefore, it appears that their Lordships were unable to accept the view of the Allahabad High Court that the assessee could not change the method of accounting unilaterally. But, their Lordships did not express any doubt as to the view expressed by the Allahabad High Court as it was understood by the Division Bench of this High Court in the case of CIT v. Rajasthan Investment (P.) Ltd., [1978] 113 ITR 294. The Allahabad High Court dealt mainly not with the change of accounting but only the treatment of one particular item of the assessee in a particular year.

14. In order to complete the cases, the next decision to which we must refer is the decision in the case of Commissioner Of Income-Tax, Madras-I v. E.A.E.T Sundararaj., [1975] 99 ITR 226 (Mad) to which our attention was drawn by the learned advocate for the assessee. There, the Division Bench of the Madras High Court held that in respect of sales tax collections and payments, the assessee had maintained a separate account and those were not brought into his trading-account. The ITO treated this excess collection as the assessee's income but the AAC and the Tribunal had held that the assessee's actual liability to sales tax would have to be deducted therefrom. It was held that the collection of sales tax constituted the receipts of the assessee and that as the assessee had been maintaining the cash system of accounting in respect of sales tax account, the liability to sales tax could be deducted only when the same was paid out to the Government. Therefore, it was apparent that one kind of transaction, viz., sales tax, was being treated regularly by the assessee in a different method of accounting. The facts of that case are not similar to the facts with which we are concerned in the instant reference.

15. We may also mention that on behalf of the revenue reliance was also placed on a decision in the case of CIT v. Confinance Ltd., [1973] 89 ITR 292, where a Division Bench of the Bombay High Court held that under the income-tax law receipt of income, either actual or deemed, was not a condition precedent to taxability. Under the head “Business” what were charged were the profits and gains of the business and the profits and gains would not escape tax by reason only of the fact that these were not received in the accounting year in money or the equivalent of money or were not deemed to be so received. These were assessable if they have arisen or accrued or are under the Act deemed to have arisen or accrued to the assessee in the accounting year just as much as if they had been received or deemed to have been received in that year. This principle ‘would be attracted in cases where an assessee followed the mercantile system of accounting. However, in examining any transaction or situation, the court would have more regard to the reality of the situation rather than the purely theoretical or doctrinaire aspect of it and greater emphasis would be laid on the business aspect of the matter viewed as a whole when that could be done without disregarding the statutory language. The assessee was a limited company carrying on money-lending and banking business. It followed the mercantile system of accounting. For the accounting year ending March 31, 1959, the company stated that no credit was taken in its balance-sheet in respect of interest on several loans advanced by it as the interest payment had remained unpaid from March 31, 1956. For the assessment year 1959-60, interest in respect of amounts due by debtors amounting to Rs. 9,275 was brought to tax and similarly for 1960-61 an amount of Rs. 13,033 was brought to tax. The order of the ITO was reversed by the Appellate Tribunal which took the view that the records showed that there had hardly been any receipts of interest for a number of years past. On a reference, it was held that the fact that there were hardly any receipts in respect of items of interest or that the bona fides of the assessee in not charging interest was not disputed, were circumstances which were by themselves insufficient to support the conclusion that there was no real income in respect of items of interest as none of the debts due by the several debtors were written off by the assessee and no evidence was produced to show that interest in respect of the debts were given up. The interest amount of Rs. 9,275 was, therefore, according to the Division Bench of the Bombay High Court, properly included in the total income of the assessee for the assessment year 1959-60 and the amount of Rs. 13,033 was properly included in the total income of the assessee for the assessment year 1960-61.

16. We are really not concerned in the instant case with the said decision because though the contention about the real income had been urged before the Tribunal no such question having been mentioned by the Tribunal and no such question having been referred as such, we have not considered this case on the basis of real income and no arguments were advanced before us on that basis either.

17. On behalf of the assessee our attention was drawn to the decision in the case of British Paints India Ltd. v. CIT, [1978] 111 ITR 53 (Cal). There we had to deal with the question whether for the purpose of valuation the assessee could change the method of valuation. We held that the true purpose of valuation of the unsold stock was to balance the cost of those goods entered on the other side of the account at the time of their purchase or production, so that cancelling out of the entries relating to the same stock from both sides of the account, would leave only the transactions on which there have been actual sales in the course of the year showing profit or loss actually realised on the year's trading. We further held, for the purpose of the aforesaid valuation, it is necessary to determine what in all circumstances represent the cost of the stock-in-trade and work-in-progress. What is and what is not profit or gain in those circumstances must necessarily be one of fact, and fact to be ascertained by the tests of ordinary business and that could be done only either by valuing them at cost or valuing them at market price, whichever is easier.

18. The principles which are applicable in valuing the unsold stocks at the end of a particular year for the purpose of arriving at a true profit would not be attracted in a case where an assessee following a particular method had in respect of a particular transaction wanted to be treated differently on certain considerations. The basic principle to be borne in mind is not as we have mentioned before whether it is a question of change of method as such but the expression “method”, which, as per dictionary, means “a system followed”. When it is followed regularly it is called a method regularly followed but where there is no system or the procedure as such in respect of a particular transaction, then no question of change of any method arises. Therefore, the theoretical question of whether a method of accounting could be unilaterally changed in the sense that after having chosen a particular method for a particular class of transactions altering the same later on without consent or approval or knowledge of the revenue is not a question before us. Here, as we have stated before, the facts are identical as the facts were in the Allahabad Division Bench case, which we have mentioned previously, where a particular method was being followed in respect of particular items or a system of transaction was being sought to be treated differently from the method or procedure that was being followed. In this case incidentally we may mention that the assessee's own case, as it appears from the statement of the case, was that this was not a case of a change of the system of accounting; as such we have referred to the necessary averments in the statement of the case before. If that is the position then, as was observed in the case of CIT v. Ram Kumar Agarwalla & Bros., [1977] 108 ITR 457 (Cal), at p. 461, by Mr. Justice Deb, sitting in the Division Bench, that there could be no issue of a fact, either admitted or conceded, by a party. The intention of the assessee is one of the relevant factors and it must be gathered from the fact which is either admitted or conceded before the Tribunal because an admission is substantive evidence of the fact admitted, as decided by the Supreme Court. In the instant case, the statement of the case in a reference application, it was categorically stated by the assessee, there was no question of the change of any method as such. Indeed the fact as revealed from the assessment order for these two years would indicate that there was no question of change of a method as such but only treatment of a particular transaction differently or separately from the method followed by the assessee. That, in our opinion, is not permissible and in that light the Tribunal had decided this case.

19. In the aforesaid view of the matter, the question referred to us must be answered in the affirmative and in favour of the revenue. In the facts and circumstances of the case there will, however, be no order as to costs.

Sudhindra Mohan Guha, J.:— I agree.