Aloke Chakrabarti, J.:— This is an appeal under section 260A of the Income-tax Act, 1961, against the judgment and order of the Income-tax Appellate Tribunal, C Bench, Calcutta, dated January 21, 1999.

2. The facts relevant for the present purpose are that the assessee-company filed its return on December 31, 1999, declaring total income of Rs. 12,14,520 under the heads “Business” and “Other sources”. The return was initially processed under section 143(1)(a). In the preceding years, the assessee-company carried on business of trading in jute goods and shares and debentures of companies. The assessee also earned service charges and export handling commission for rendering various services to the parties. The assessee further earned interest on fixed deposit, debentures/bonds and dividends on shares apart from income from agricultural activities. Heard Mr. J.P Khaitan, learned counsel for the appellant, and Mr. Dipak Deb, learned counsel for the Revenue.

3. The contention of the appellant is that the assessee, as stated hereinabove, had a number of sources of income and one of them was export handling.

4. In respect of such export handling the assessee all along maintained its accounts on mercantile system as regards the expenditure and on cash system as regards the receipts. The Assessing Officer while passing the assessment order considered the aspect of having hybrid system of maintaining accounts and asked the assessee to explain the reasons. The assessee explained that M/s. The Ganges Mfg. Company Ltd., from whom export handling commission was earned, the amount falling due in a particular year was not considered as its income on mercantile basis in view of uncertainty of realisation as the said M/s. The Ganges Mfg. Company Limited was not carrying on business in a good shape. This explanation was not accepted by the Assessing Officer and the accrued export handling commission of Rs. 1,94,216 due for the year from the said M/s. The Ganges Mfg. Company Limited was treated as the assessee's income during the year on mercantile basis over and above the sum of Rs. 5,67,520 shown by the assessee on receipt on that account during the year. On appeal by the assessee, the Commissioner of Income-tax (Appeals) considered the aforesaid aspect regarding export handling commission and the explanation of the assessee showing the uncertainty of realisation as the said M/s. The Ganges Mfg. Company Limited had been referred to the BIFR on the ground of sickness but did not accept the case of the appellant and the decision of the Assessing Officer was confirmed. In the appeal before the Tribunal, the aforesaid aspect was again taken into consideration in paragraph 29 of its judgment and confirmed the view of the Commissioner of Income-tax (Appeals) and the contention of the assessee in this regard was rejected.

5. The contention of the appellant is that the assessee all through is following the said practice of maintaining accounts in respect of export handling business on the mercantile system in respect of the expenditure and on the cash system in respect of its receipts and the law recognises such maintenance of accounts in hybrid system under section 145 of the Income-tax Act, 1961, as it was prevailing at the relevant point of time. This practice has been disapproved subsequently when the said section 145 was amended with effect from April 1, 1997. But in respect of the relevant year, the said amendment was not available and the hybrid system was permissible. It is contended that, therefore, the authorities concerned erred in rejecting the contention of the assessee particularly when there is no finding by any of the authorities that in the accounting system maintained by the assessee, the income of the assessee cannot be deduced nor is there any finding that the hybrid system was introduced by the assessee for the concerned year altering its earlier accounting system in another form. In support of the contention, reliance was placed on the judgments in the cases of Investment Ltd. v. The Commissioner Of Income Tax, Calcutta, [1970] 77 ITR 533 (SC); Commissioner Of Income-Tax, Madras-I v. E.A.E.T Sundararaj., [1975] 99 ITR 226 (Mad); CIT v. North Arcot District Cooperative Spinning Mills Ltd., [1984] 148 ITR 406 (Mad); G. Padmanabha Chettiar and Sons v. CIT, [1990] 182 ITR 1 (Mad); Wood Craft Products Ltd. v. CIT, [1993] 204 ITR 545 (Cal); Commissioner Of Income-Tax v. Woodcraft Products Ltd., [1996] 217 ITR 862 (Cal); CIT v. Citibank N.A, [1994] 208 ITR 930 (Bom) and Commissioner Of Income-Tax v. United Credit Ltd., [2002] 257 ITR 443 (Cal).

6. Mr. Dipak Deb, learned counsel for the Revenue, contended that new law after amendment of section 145 specifically prohibited maintenance of accounts in hybrid system and even under the old Act, the proviso entitled to the Assessment Officer to reject such maintenance of accounts and in the present case the authorities having exercised such power, cannot be held to have done so illegally. In support of his contention, Mr. Deb, learned counsel for the Revenue, relied on the judgments in the cases of CIT v. British Paints India Ltd., [1991] 188 ITR 44 (SC); Commissioner Of Income-Tax v. Uco Bank, [1993] 200 ITR 68 (Cal) and Veerayee Ammal v. Seeni Ammal., (2002) 1 SCC 134 : AIR 2001 SC 2920. Learned counsel also dealt with the judgments cited on behalf of the appellants contending that those judgments did not deal with the provisions of section 145 particularly the provisions contained in the first proviso to the said old section.

7. After considering the aforesaid contentions, we find that the question falls for our consideration is as to whether the hybrid system of accounting followed by the assessee is permissible or not.

8. On behalf of the assessee, it has been argued that in respect of the export handling business of the assessee, the expenditures are maintained in mercantile system and receipts are all maintained in cash system in view of uncertainty for recovery from concerned party, namely, M/s. The Ganges Manufacturing Co., Ltd., which has admittedly been referred to the BIFR on the ground of sickness. The authorities have not come to a finding that such hybrid system is not being followed by the assessee for quite some time nor the facts stated as reasons for such hybrid system, have been disbelieved by the authorities.

9. In considering in this regard, we find that in the case of Investment Ltd., [1970] 77 ITR 533 (SC) the following observation was recorded by the apex court (page 537):

“A taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts, and for that purpose to value his stock-in-trade either at cost or market price. A method of accounting adopted by the trader consistently, and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping account or of valuation. The method of accounting regularly employed may be discarded only if, in the opinion of the taxing authorities, income of the trade cannot be properly deduced therefrom.”

10. In the case of E.A.E.T Sundararaj, [1975] 99 ITR 226, the Division Bench of the Madras High Court held as follows (page 231):

“An assessee may employ one method of accounting for one part of his business or one class of customers, and a different method for another part of his business or another class of customers. He may also keep accounts in respect of different parts of the same business on difference basis. If such different methods are employed regularly and consistently the profits have to be computed in accordance with the respective methods, provided it results in a proper determination of the true profits.”

11. In the case of North Arcot District Co-operative Spinning Mills Ltd., [1984] 148 ITR 406 (Mad), the hybrid system has also been approved when the Division Bench of the Madras High Court held as follows (page 411):

“Based on the payment recorded in November 1968, the deduction has been claimed in the assessment year 1970–71, as in the earlier years. The same method of accounting had been followed by the assessee in the previous years. The Revenue has not chosen to question the said recording of payment subsequent to the year when the interest fell due. It is seen from the order of the Tribunal that the assessee has been regularly following this method and it has been regularly accepted by the Revenue as a method of accounting from which the true profits earned by the assessee could be ascertained……It is well established that even apart from the two systems of accounting referred to above, there is a possibility of an assessee adopting a hybrid system of accounting if it is possible to ascertain the true profits on the basis of such accounting. In this case, though the assessee has generally adopted the mercantile system of accounting, so far as the transaction of import of plant and machinery from foreign sellers is concerned, it has been regularly showing the payment of interest in the year in which the interest was actually paid and not in the year in which the interest legally fell due.”

12. The general principles of accounting including a hybrid system was also approved by the Division Bench of the Bombay High Court in the case of Citibank N.A, [1994] 208 ITR 930. It was also considered therein the circumstances when the Income-tax Officer can interfere in such matter and the following observations were made therein (page 937):

“Though the cash system and mercantile system of accounting are the two most common systems of accounting prevalent in the country, there can be no dispute about the fact that there are also innumerable other systems of accounting besides these two systems. Such systems are commonly known as ‘hybrid systems of accounting’. In such a system, there is certain element of both cash and mercantile systems. An assessee following such a system may employ one method of accounting for one class of business or one class of customers or transactions and a different method for another class. If an assessee follows such a hybrid system and in respect of certain loan transactions does not follow the mercantile system of accounting for debiting interest to the accounts of the parties and crediting the same to the profit and loss account, no fault as such can be found with the system followed by the assessee. The only power the Income-tax Officer has in such cases is the power under the proviso to section 145(1) of the Act which permits him, on being satisfied that the method employed by the assessee is such that his income cannot be properly deduced therefrom, to compute his income upon such basis and in such a manner as he may determine.”

13. The other judgments cited on behalf of the assessee, do not require detailed discussion. With regard to the cases cited by the Revenue, we find that learned counsel gave much stress on the finding in the case of British Paints India Ltd., [1991] 188 ITR 44 (SC). But considering the said judgments, we do not find any proposition in law which is different from the law as has been upheld in the cases mentioned hereinabove.

14. The finding relied on by the respondent in the case of United Credit Ltd. ( Commissioner Of Income-Tax v. Uco Bank ) supports the contention of the assessee. This judgment though has been reversed by the apex court in United Commercial Bank v. CIT, [1999] 240 ITR 355 but the above proposition does not appear to have been interfered with. In the above view of the matter as we find that such hybrid system is fully permissible in law and the only requirement is that the income should be deducible from such accounting system and in the absence of that the authorities of the Revenue can interfere with. But as there is admittedly no finding that the income cannot be deduced from the accounts maintained by the assessee in the present case, we do not find the interference by the Assessment Officer is permissible.

15. Therefore, the appeal is allowed and the findings of the Tribunal, Commissioner of Income-tax (Appeals) and the Assessing Officer are modified by quashing the finding as regards deduction claimed for export handling commission.

S.K Gupta, J.:— I agree.