Ita/119/1999 Of The Commissioner Of Income Tax v. Kerala Kaumudhi (P) Limited

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC & THE HONOURABLE MR. JUSTICE SHAJI P.CHALY WEDNESDAY, THE 29TH DAY OF JULY 2015/7TH SRAVANA, 1937 ITA.No. 119 of 1999 ( ) ------------------------ AGAINST THE ORDER IN ITA 386/COCH/1995 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 16-04-1999 APPELLANT(S): ------------------------ THE COMMISSIONER OF INCOME TAX,THIRUVANANTHAPURAM. BY ADVS.SRI.P.K.R.MENON(SR.),SR.COUNSEL FOR IT SRI.GEORGE K. GEORGE, SC FOR IT RESPONDENT(S): ---------------------------- M/S. KERALA KAUMUDI (P) LTD.,THIRUVANANTHAPURAM. R, BY ADV. SRI.M.PATHROSE MATTHAI (SR.) R, BY ADV. SRI.SAJI VARGHESE THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 29-07-2015,ALONG WITH I.T.A.124/99 AND CONNECTED CASES, THE COURT ON THE SAME DAYDELIVERED THE FOLLOWING: APPENDIX IN ITA.119/99 APPELLANT'S EXHIBITS: ANNEXURE A: TRUE COPY OF THE ORDER OF THE ASSESSING OFFICER DATED24.3.1993. ANNEXURE B: TRUE COPY OF THE ORDER OF THE CIT (APPEALS) DATED 28.2.1995. ANNEXURE C: TRUE COPY OF THE ORDER OF THE APPELLATE TRIBUNAL DATED16.4.1999. /True copy/ PS to Judge ANTONY DOMINIC & SHAJI P. CHALY, JJ. ----------------------------------- ----------------------------------- C.R. JUDGMENT Antony Dominic, J. 1.The captioned appeals are filed by the Revenue,aggrieved by the orders of the Income Tax AppellateTribunal, Cochin Bench in ITA.Nos.386/95, 387/95,620/95 and 679/95 respectively, concerning theassessment years 1990-91, 1991-92, 1992-93 and 1993-94 respectively. 2.The respondent assessee is a company which ispublishing the newspaper 'Kerala Kaumudi'. Thepublishing the newspaper 'Kerala Kaumudi'. The assessee is following mercantile system of accounting. However, as far as sales of newspaperand advertisement revenue are concerned, the assesseewas following cash system of accounting. Returnswere filed during the assessment years in question.Taking the view that the assessee, having adoptedmercantile system of accounting, cannot adoptaccounting on cash basis as regards the sale ofnewspaper and advertisement charges, the assessing ITA.119/99 & con cases officer made additions and completed the assessment.Appeals filed by the assessee before the Commissionerof Income Tax (Appeals) were allowed partly. Furtherappeals filed by the assessee were allowed by theTribunal and the assessing officer was directed torevise the assessments. It is in this background,the Revenue has filed these appeals. 3.The questions of law framed in these appeals beingcommon, those framed in ITA.119/99, filed in relationto the order passed for the assessment year 1990-91,are extracted below:common, those framed in ITA.119/99, filed in relationto the order passed for the assessment year 1990-91,are extracted below: “1. Whether, on the facts and in the circumstancesof the case and in the absence of a finding thatthere was no difficulty in ascertaining the correctincome for the assessment years 1990-91 and1991-92, the Tribunal is right in law and fact ininterfering with the assessment of theadvertisement charges and the newspaper sales onmercantile basis? 2. Whether, on the facts and in the circumstancesof the case and admittedly when “other incomesand expenses are accounted on the mercantilesystem” will not the assessment of advertisementcharges and the newspaper sales on cash system result in difficulty for the assessing officer inascertaining the correct income? 3. Whether, on the facts and in the peculiarcircumstances of the case the assessee is entitledto have different system of accounting consideringthe incomes and the head under which the incomeis assessed? 2. Whether, on the facts and in the circumstancesof the case and admittedly when “other incomesand expenses are accounted on the mercantilesystem” will not the assessment of advertisementcharges and the newspaper sales on cash system result in difficulty for the assessing officer inascertaining the correct income? 3. Whether, on the facts and in the peculiarcircumstances of the case the assessee is entitledto have different system of accounting consideringthe incomes and the head under which the incomeis assessed? 4. Whether, on the facts and in the circumstancesof the case the Tribunal is justified in finding inthe present case that “in respect of the earlieryears there was no difficulty in ascertaining thecorrect income” and is not the finding wrong,unreasonable unsupported by any material andevidence and hence vitiated and withoutjurisdiction? 5. Whether, on the facts and in the circumstancesof the case wen the Tribunal is considering theappeal for the assessment years 1990-91 and 91-92, does the Tribunal have jurisdiction much lessevidence (unless there is a finding in the appeal forthe earlier year) to find that “in the presentcase ........... in respect of the earlier years therewas no difficulty in ascertaining the correctincome” and is not the finding in the circumstancesof the case wrong based on surmises andconjectures? 6. Whether, on the facts and in the circumstancesof the case and in the light of the findings that the assessee had not maintained log books in respectof the vehicles and in the absence of evidence thatthe telephones were used exclusively for businesspurpose the Tribunal is right in law and fact ininterfering with the disallowance made by theOfficer?” 4. We heard learned senior standing counsel for theRevenue and the learned senior counsel appearing forthe respondent assessee.Revenue and the learned senior counsel appearing forthe respondent assessee. 5.In sum and substance, the contention raised by thelearned senior counsel for the Revenue is that theassessee having adopted mercantile system ofaccounting, it cannot adopt accounting on cash basisin respect of sales of newspaper and advertisementrevenue alone. In other words, according to theRevenue, in respect of all the activities of theassessee, the accounting of income and expenditureshould be under the same system. This contention wassought to be substantiated relying on the judgmentsof the Apex Court in Keshav Mills Ltd.v.Commissioner of Income Tax, Bombay[(1953) 23 ITR ITA.119/99 & con cases 230] and G.Padmanabha Chettiar & Sonsv.Commissioner of Income Tax [(1990) 182 ITR 1]. 6.On the other hand, learned senior counsel appearingfor the respondent assessee contended that havingregard to the provisions of section 145 of the IncomeTax Act, 1961, as it stood at the relevant time, theassessee was entitled to adopt either the mercantilesystem or the cash system or hybrid system. Insupport, he placed reliance on the judgment of theApex Court in United Commercial Bankv. Commissionerof Income Tax [(1999) 240 ITR 355] and this Court inCommissioner of Income Tax v. Geo Tech ConstructionCorporation [(1996) 221 ITR 164]. Learned seniorcounsel also placed reliance on the judgments of theApex Court in UCO Bankv. Commissioner of Income Tax[(1999) 237 ITR 889] and of the Gujarat High Court inCommissioner of Income Tax v. Ganga Charity TrustFund[(1986) 162 ITR 612]. 7.We have considered the submissions made by bothsides. Before we deal with the contentions raised byboth sides on the merits of the controversy, at thesides. Before we deal with the contentions raised byboth sides on the merits of the controversy, at the ITA.119/99 & con cases 7.We have considered the submissions made by bothsides. Before we deal with the contentions raised byboth sides on the merits of the controversy, at thesides. Before we deal with the contentions raised byboth sides on the merits of the controversy, at the ITA.119/99 & con cases outset, we may state that dispute regardingaccounting of newspaper sales and advertisementcharges on cash basis, which is the subject matter inthese appeals, had been the subject matter ofadjudication by the Tribunal on earlier occasions.Dispute arising out of similar assessment orderspassed for the assessment years 1977-78, 1978-79 and1979-80 were adjudicated by the Tribunal and thesystem of accounting adopted by the assessee wasupheld. This has been stated in paragraph 5 of theorder of the Tribunal, which reads thus: “5. Admittedly, the issue relating to the accountingof the newspaper sales and the advertisementcharges had been considered by the Tribunal inrespect of the earlier years. The Tribunalconsidered the issue for the first time in respectof the assessment years 1977-78 and 1978-79 inthe order in ITA Nos.240 & 241 (Coch)/84 dated29.8.1986. In that order the Tribunal observed-“On merits also the appeals have to be dismissedbecause we have examined the system ofaccounting followed by the assessee in respect ofadvertisement receipts and we are satisfied thatthe assessee is consistently following cash systemof accounting for the advertisement charges andfollowed the same system for the assessment year under consideration. The I.T.O. is not correct instating that the assessee has suddenly changed itssystem of accounting with reference to theadvertisement receipts.” That order was followedby the Tribunal for the subsequent years also.Similarly, the issue regarding newspaper sales wasconsidered by the Tribunal for the first time forthe assessment year 1983-84 and held that theassessee was adopting a cash system of accounting.Reference application filed by the department forthe assessment years 1977-78, 1978-79 and 1979-80 were dismissed by the Tribunal by the order inRA Nos.362 to 364 (Coch)/86 dated 25.9.1987.The decision of the Tribunal was accepted by thedepartment evident from the letter C.No.406 RA(1)/20/T/Jcd1/86-87 dated 17.8.1990 from theCIT, Trivandrum addressed to the assessee. Itcan also be seen from the letterC.No.403/242/J/91-92 dated 15.6.1992 from theCIT, Trivandrum that the decision of the CIT(Appeals) on this point in favour of the assessee inITA No.58T/91-92 dated 9.10.1991 was acceptedby the department.” 8. It is also seen from this order that the samecontroversy was repeated in the assessment years1980-81 and 1981-82, when also, the appeals filed bythe assessee before the Commissioner (Appeals) wereallowed and which orders were affirmed by thecontroversy was repeated in the assessment years1980-81 and 1981-82, when also, the appeals filed bythe assessee before the Commissioner (Appeals) wereallowed and which orders were affirmed by the ITA.119/99 & con cases Tribunal in ITA. 507 & 508(Coch)/85 as per orderdated 27.3.1991. These findings in the order of theTribunal, therefore, confirms that the system ofaccounting adopted by the assessee, viz., accountingon cash basis, was confirmed by the Tribunal in theprevious assessment years and the orders of theTribunal were accepted by the Department.Accordingly, assessments were completed in thesubsequent assessment years until the issue was againraised in the assessment years in question. ITA.119/99 & con cases Tribunal in ITA. 507 & 508(Coch)/85 as per orderdated 27.3.1991. These findings in the order of theTribunal, therefore, confirms that the system ofaccounting adopted by the assessee, viz., accountingon cash basis, was confirmed by the Tribunal in theprevious assessment years and the orders of theTribunal were accepted by the Department.Accordingly, assessments were completed in thesubsequent assessment years until the issue was againraised in the assessment years in question. 9.It is true, as contended for the Revenue, in theproceedings under the IT Act, principles of resjudicata and estoppel are inapplicable and as held bythe Apex Court in its judgment in Toticorin AlkaliChemicals & Fertilizers Ltd. Madrasv. Commissionerof Income Tax, Madras[227 ITR 172], acceptance ofthe method of accounting even for long number ofyears cannot be treated as sanctioned by law, still,consistency is the hallmark of any system ofgovernance and is required to be maintained by theIncome Tax Department also. This is all the more soin a case where the very issue has been decided by the Tribunal and which order has attained finalityand was accepted by the Department also. InRadhasami Satsangv. Commissioner of Income Tax[193ITR 321], the Supreme Court had occasion to considerthe question of applicability of the principles ofres judicata to income tax proceedings. Thisjudgment has been followed by the Apex Court in itssubsequent judgment in Municipal Corporation of Cityof Thanev. Vidyut Metallics Ltd.[(2007) 8 SCC 688].In Radhasami Satsang(supra), the Supreme Courtconsidered the issue and held thus: “We are aware of the fact that strictly speakingres judicata does not apply to income taxproceedings. Again, each assessment year being aunit, what is decided in one year may not apply inthe following year but where a fundamental aspectpermeating through the different assessmentyears has been found as a fact one way or theother and parties have allowed that position to besustained by not challenging the order, it wouldnot be at all appropriate to allow the position to bechanged in a subsequent year, (unless there was)any material change justifying the Revenue to takea different view of the matter.” ITA.119/99 & con cases 10.Referring to this judgment and various otherauthorities and answering the very same contention,the Apex Court, in its judgment in Bharat SancharNigam Limitedv. Commissioner of Income Tax[282 ITR273] summarised the legal position thus: “The decisions cited have uniformly held thatres judicata does not apply in matters pertainingto tax for different assessment years because resjudicata applies to debar courts from entertainingissues on the same cause of action whereas thecause of action for each assessment year isdistinct. The courts will generally adopt an earlierpronouncement of the law or a conclusion of factunless there is a new ground urged or a materialchange in the factual position. The reason why thecourts have held parties to the opinion expressedin a decision in one assessment year to the sameopinion in a subsequent year is not because of anyprinciple of res judicata but because of the theoryof precedent or the precedential value of theearlier pronouncement. Where facts and law in asubsequent assessment year are the same, noauthority whether quasi-judicial or judicial cangenerally be permitted to take a different view.This mandate is subject only to the usual gatewaysof distinguishing the earlier decision or where theearlier decision is per incuriam. However, theseare fetters only on a coordinate Bench which,failing the possibility of availing of either of these gateways, may yet differ with the view expressedand refer the matter to a Bench of superiorstrength or in some cases to a Bench of superiorjurisdiction.” gateways, may yet differ with the view expressedand refer the matter to a Bench of superiorstrength or in some cases to a Bench of superiorjurisdiction.” 11. Admittedly, the orders passed by the Tribunal werein respect of previous assessment years and going bythe principles laid down in the judgments referred toabove, each assessment year is a separate unit andtherefore, an order passed for one assessment yeardoes not operate as res judicata in the succeedingassessment years. However, the issue resolved by theTribunal and which was accepted by the Department onthe basis of which assessments were also finalised inthe succeeding assessment years as well, is attemptednow to be re-opened. That departure is possible onlyif the exemptions pointed out in the aforesaidjudgments are in existence. For that purpose, theAssessing Officer has mainly relied on the judgmentof the Calcutta High Court in Commissioner of IncomeTaxv. UCO Bank[200 ITR 68] and reference is alsomade to State Bank of Travancorev. Commissionerof Income Tax[(1986) 158 ITR 102]. In so far as theUCO Bank (supra) is concerned, that judgment has been overruled by the Apex Court in United Commercial Bankv. Commissioner of Income Tax[(1999) 240 ITR 355].The judgment in the case of State Bank of Travancore(supra) was not followed by the Apex Court itself inits judgment in UCO Bankv. Commissioner of IncomeTax[(1999) 237 ITR 889]. Therefore, these laterjudgments of the Apex Court render the very basis onwhich the Assessing Officer has proceeded nonexistent. 12.As we have already stated, the method of accountingon cash basis which is now objected by the Revenuehas been upheld by the Tribunal in its orders andthese orders of the Tribunal have become final andwere accepted and acted upon by the Revenue. This,therefore, shows that the fundamental aspectpermeating though the assessment orders is the systemof accounting on cash basis adopted by the assesseeand which has been found by the Tribunal in favour ofthe assessee. The parties have also allowed thatposition to be sustained by not challenging theorder. In such a case, as held by the Apex Court inRadhasami Satsang(supra) and Bharat Sanchar Nigam ITA.119/99 & con cases Limited (supra), it would not at all be appropriateto allow the position to be changed in subsequentyears. 13.Such being the situation, in our view, it was notopen to the Income Tax Officer or the Commissioner ofIncome Tax (Appeals) to have ignored the bindingorders of the Tribunal and to complete theassessments in the manner it has been done. Further,the Revenue has no case that the accounting disabledit from quantifying the taxable income or that theTribunal's orders in the previous years are vitiatedfor any illegality. Therefore, we are in completeagreement with the senior counsel for the assesseethat the view taken by the Tribunal in these cases,which is consistent with the orders passed by it forthe previous assessment years, deserves to be upheld.open to the Income Tax Officer or the Commissioner ofIncome Tax (Appeals) to have ignored the bindingorders of the Tribunal and to complete theassessments in the manner it has been done. Further,the Revenue has no case that the accounting disabledit from quantifying the taxable income or that theTribunal's orders in the previous years are vitiatedfor any illegality. Therefore, we are in completeagreement with the senior counsel for the assesseethat the view taken by the Tribunal in these cases,which is consistent with the orders passed by it forthe previous assessment years, deserves to be upheld. 14.Turning to the merits, as we have already stated,the short question raised is whether the assessee isentitled to maintain the accounts regarding the salesof newspaper and advertisement charges on cash basis,instead of mercantile basis adopted by it in respectthe short question raised is whether the assessee isentitled to maintain the accounts regarding the salesof newspaper and advertisement charges on cash basis,instead of mercantile basis adopted by it in respect of its other areas of operation. Section 145 of theIT Act provides for method of accounting. Prior toits substitution by Finance Act, 1997, section 145(1) provided that “income chargeable under the head“Profits and gains of business or profession” or“Income from other sources” shall be computed inaccordance with the method of accounting regularlyemployed by the assessee. Therefore, section 145 ofthe IT Act gave liberty to the assessee to computeincome chargeable under the heads mentioned in thesection in accordance with the method of accountingregularly employed by the assessee itself. However,with the substitution of the section by the FinanceAct, 1997, it has been made mandatory that the saidcomputation shall be in accordance with either cashor mercantile system of accounting regularly employedby the assessee. 15.The concept of mercantile system of accounting andcash system has been explained by the Apex Court inits judgment in Keshav Mills Ltd.v. Commissioner ofIncome Tax, Bombay[(1953) 23 ITR 230]. In thisjudgment, it was held that the mercantile system ofcash system has been explained by the Apex Court inits judgment in Keshav Mills Ltd.v. Commissioner ofIncome Tax, Bombay[(1953) 23 ITR 230]. In thisjudgment, it was held that the mercantile system of accounting or what is otherwise known as the doubleentry system is opposite to cash system of bookkeeping under which a record is kept for actualreceipts and actual cash payments, entries being madeonly when money is actually collected and disbursed.It is also stated that mercantile system brings intocredit what is due, immediately it becomes legallydue and before it is actually received and it bringsinto debit expenditure the amount for which a legalliability has been incurred before it is actuallydisbursed. In mercantile system, the profits orgains of the business which are thus credited are notrealised but having been earned are treated asreceived though in fact there is nothing more than anaccrual or arising of the profits at that stage. 16.It has been held in Bhagwandas Jagdishprasad & Co.v. Commissioner of Income Tax[(1983) 144 ITR 845]that an assessee may employ different methods ofaccounting for different sources of income, or onemethod of accounting for one part of his business orone class of customers and a different method foranother part of his business or another class of customers. It is also held that if he employs suchdifferent methods regularly and consistently, theprofits would have to be computed in accordance withthe respective methods. 17.Having thus seen the difference between themercantile system and cash system and also theliberty that an assessee has in opting for the systemof accounting he regularly adopts, we shall nowaddress the controversy raised before us. mercantile system and cash system and also theliberty that an assessee has in opting for the systemof accounting he regularly adopts, we shall nowaddress the controversy raised before us. customers. It is also held that if he employs suchdifferent methods regularly and consistently, theprofits would have to be computed in accordance withthe respective methods. 17.Having thus seen the difference between themercantile system and cash system and also theliberty that an assessee has in opting for the systemof accounting he regularly adopts, we shall nowaddress the controversy raised before us. mercantile system and cash system and also theliberty that an assessee has in opting for the systemof accounting he regularly adopts, we shall nowaddress the controversy raised before us. 18.As we have already seen, the issue raised is whetherthe assessee having opted for mercantile system ofaccounting in respect of its activities, could haveadopted cash system in respect of sale of newspaperand advertisement charges. A reading of theassessment orders show that the assessing officerheld this issue against the assessee mainly relyingon the judgment of the Calcutta High court inCommissioner of Income Taxv. UCO Bank [200 ITR 68].This judgment, as rightly pointed out by the learnedcounsel for the assessee, has since been overruled bythe Apex Court in its judgment in United Commercialthe assessee having opted for mercantile system ofaccounting in respect of its activities, could haveadopted cash system in respect of sale of newspaperand advertisement charges. A reading of theassessment orders show that the assessing officerheld this issue against the assessee mainly relyingon the judgment of the Calcutta High court inCommissioner of Income Taxv. UCO Bank [200 ITR 68].This judgment, as rightly pointed out by the learnedcounsel for the assessee, has since been overruled bythe Apex Court in its judgment in United Commercial ITA.119/99 & con cases Bankv. Commissioner of Income Tax[(1999) 240 ITR355]. In that judgment, referring to the judgment inInvestment Ltd.v. Commissioner of Income Tax[(1970) 77 ITR 533], the Apex Court held that amethod of accounting adopted by the traderconsistently and regularly cannot be discarded by thedepartmental authorities on the view that he shouldhave adopted a different method of accounting andthat the method of accounting regularly employed maybe discarded only if, in the opinion of the taxingauthorities, income of the trader cannot be properlydeduced therefrom. 19.In United Commercial Bank (supra), one of thecontentions raised by the learned counsel for theRevenue and noticed at page 362 of the report is thatsince the assessee had finalised his accounts as perthe statutory provisions, thereafter, it is notpermissible to adopt for income tax purposes a methoddifferent from the one on the basis of which thefinal accounts were prepared. This contention wassought to be substantiated by relying on the judgmentin State Bank of Travancore v. Commissioner of Income Tax[(1986) 158 ITR 102]. The Apex Court hasspecifically held that the contention does not haveany substance and has finally concluded thus: “Hence for the purpose of income tax whichever method is adopted by the assessee a truepicture of the profits and gains, that is to say,the real income is to be disclosed. Fordetermining the real income, the entries in abalance sheet require to be maintained in thestatutory form, may not be decisive orconclusive. In such cases, it is open to theincome Tax Officer as well as the assessee topoint out the true and proper income whilesubmitting income tax return.” 20.Thereafter, the principles were summarised thus: “From the decisions discussed above, it can beheld: (1) That for valuing the closing stock, it is opento the assessee to value it at the cost or marketvalue, whichever is lower; (2) In the balance-sheet, if the securities and “Hence for the purpose of income tax whichever method is adopted by the assessee a truepicture of the profits and gains, that is to say,the real income is to be disclosed. Fordetermining the real income, the entries in abalance sheet require to be maintained in thestatutory form, may not be decisive orconclusive. In such cases, it is open to theincome Tax Officer as well as the assessee topoint out the true and proper income whilesubmitting income tax return.” 20.Thereafter, the principles were summarised thus: “From the decisions discussed above, it can beheld: (1) That for valuing the closing stock, it is opento the assessee to value it at the cost or marketvalue, whichever is lower; (2) In the balance-sheet, if the securities and shares are valued at cost but from that no firmconclusion can be drawn. A taxpayer is free toemploy for the purpose of his trade, his ownmethod of keeping accounts and for that purpose, to value stock-in-trade either at cost or marketprice. (3) A method of accounting adopted by the taxpayer consistently and regularly cannot bediscarded by the departmental authorities on theview that he should have adopted a differentmethod of keeping accounts or of valuation. (4) The concept of real income is certainlyapplicable in judging whether there has beenincome or not, but, in every case, it must beapplied with care and within their recognisedlimits. (5) Whether the income has really accrued orarisen to the assessee must be judged in the lightof the reality of the situation. (6) Under section 145 of the Act, in a case where accounts are correct and complete but themethod employed is such that in the opinion of theIncome-tax Officer, the income cannot beproperly deduced therefrom, the computationshall be made in such manner and on such basis asthe Income-tax Officer may determine.” 21.Again at page 367, the Apex Court held thus: “In our view, as stated above, consistently for30 years, the assessee was valuing the stock-in-trade at cost for the purpose of statutorybalance sheet, and for the income-tax return,valuation was at cost or market value, whicheverwas lower. That practice was accepted by the Department and there was no justifiable reasonfor not accepting the same. Preparation of thebalance-sheet in accordance with the statutoryprovision would not disentitle the assessee insubmitting he income-tax return on the realtaxable income in accordance with the method ofaccounting adopted by the assessee consistentlyand regularly.“ 22.Learned senior counsel for the assessee invited our attention to the Division Bench judgment of thisCourt in Commissioner of Income Tax v. Geo TechConstruction Corporation [(1996) 221 ITR 164]. Thatwas the case of a contractor whose system ofaccounting showed that the receipts were accounted oncash basis and expenses on mercantile basis. In thisjudgment, upholding the system of accounting of theassessee and recognising the liberty available to anassessee to maintain the hybrid system of accounting,the Division Bench held thus: “The accounting process is the individualfunction of the assessee to know his position ofaccounts and in this context if it is found that theassessee has maintained accounts according to hissystem, may be based on convenience to adopt one 22.Learned senior counsel for the assessee invited our attention to the Division Bench judgment of thisCourt in Commissioner of Income Tax v. Geo TechConstruction Corporation [(1996) 221 ITR 164]. Thatwas the case of a contractor whose system ofaccounting showed that the receipts were accounted oncash basis and expenses on mercantile basis. In thisjudgment, upholding the system of accounting of theassessee and recognising the liberty available to anassessee to maintain the hybrid system of accounting,the Division Bench held thus: “The accounting process is the individualfunction of the assessee to know his position ofaccounts and in this context if it is found that theassessee has maintained accounts according to hissystem, may be based on convenience to adopt one known system, it has always been understood thatthe assessee who maintains his own accounts hasthe liberty to employ his system for the purposeof maintaining accounts in respect of histransactions. The courts and even those engagedin the ancillary field have sought to introduce andstamp labours in regard thereto and, as is common,a ready phrase from the field of horticulture getsintroduced to describe such system as a hybridsystem of accounting, really leading to onefundamental fact of life that accountconsciousness gets reflected in the process ofsystem of keeping accounts which have to beunderstood and appreciated in the context of theperson or assessee concerned.” 23.Reading of this judgment also shows that theDivision Bench had distinguished the judgment of theMadras High Court in G.Padmanabha Chettiar and Sonsv. Commissioner of Income Tax[(1990) 182 ITR 1],which was relied on by the learned standing counselfor the Revenue, in order to substantiate thecontention that the assessee cannot be permitted toadopt the hybrid system of accounting. Similarly,this Court has also referred to the judgment of theApex Court in Commissioner of Income Taxv. CentralIndia Industries Ltd.(1971) 82 ITR 555], which ITA.119/99 & con cases contained the undisputed principle that no one gets avested right in an erroneous order. 24.The other judgment of the Apex Court relied on bythe counsel for the assessee is UCO Bankv.Commissioner of Income Tax[(1999) 237 ITR 889].Reading of this judgment shows that the Apex Courtdeclined to follow the judgment in State Bank ofTravancore(supra), which again was relied on by theassessing officer. This was a case where theappellant, which had adopted mercantile system ofaccounting, had credited amounts by way of interestto suspense account since recovery of the saidamount was doubtful. On that basis, the assesseeexcluded the said amount from computing the totalincome. Though the Commissioner of Income Tax heldthe exclusion to be erroneous, the Tribunal allowedthe appeal of the assessee. The matter went to theHigh Court and the High Court answered the referencein favour of the Revenue, following the judgment inState Bank of Travancore(supra). The appeal filedby the assessee was considered by the Apex court andthe judgment shows that a mixed method of accounting ITA.119/99 & con cases was followed in as much as the assessee had madecredit to the suspense account as mentioned above.In this judgment, approving the mixed system ofaccounting adopted by the assessee, the Apex Courtheld that the very fact that the assessee, althoughgenerally adopted the mercantile system ofaccounting, keeps such interest amounts in a suspenseaccount and does not bring these amounts to theProfit and Loss account, goes to show that theassessee was following a mixed system of accountingby which such interest is included in its income onlywhen it is actually received. ITA.119/99 & con cases was followed in as much as the assessee had madecredit to the suspense account as mentioned above.In this judgment, approving the mixed system ofaccounting adopted by the assessee, the Apex Courtheld that the very fact that the assessee, althoughgenerally adopted the mercantile system ofaccounting, keeps such interest amounts in a suspenseaccount and does not bring these amounts to theProfit and Loss account, goes to show that theassessee was following a mixed system of accountingby which such interest is included in its income onlywhen it is actually received. 25.The judgment of Gujarat High court in Commissionerof Income Taxv. Ganga Charity Trust Fund[(1986)162 ITR 612] was also relied on by the counsel forthe assessee. This judgment shows that though theassessee had initially followed the mercantile systemof accounting for the assessment year 1972-73, it hadswitched over to accounting on cash basis. Approvingthis, the Gujarat High Court held thus: “On the second question regarding thechange of system of accounting, we find thatwhen the assessee-trust experienced difficultyin the assessment year 1971-72, because of non-receipt of income from interest from twoparties with which it had placed its funds by wayof deposits, it decided to switch over to cashsystem of accounting, so that it may not berequired to pay income-tax on notional income ason earlier occasions. There is nothing in the Actwhich precludes the assessee, who bona fidedesires to switch over to another system ofaccounting, from doing so. There is no findingof fact that the switch over to the cash systemof accounting in the previous year relevant tothe assessment year 1972-73 was not bona fide.Besides, it is not shown by the Revenue thatthis change lacked durability or regularity andwas merely a stop-gap arrangement to avoidpayment of tax. In such fact situation, we failto understand, why a bona fide assessee shouldbe precluded from switching over to anothersystem of accounting which he finds convenientand which would reflect his real income. In CITv. Rajasthan Investment Co. (P) Ltd. [1978] 113ITR 294, the Calcutta High Court held that onthe Tribunal's finding that the change in themethod of accounting of the assessee was bonafide and in keeping with the real state ofaffairs of its business, the change in themethod of accounting was proper andpermissible. In Reform Flour Mills P. Ltd. v. CIT [1978] 114 ITR 227, the Calcutta HighCourt held that it was open to a taxpayer toadjust his own affairs in such a way that his taxliability may be reduced, provided the meansemployed are lawful. It further held thatsection 145(1) of the Act does not place anyembargo on the assessee's right to alter themethod of accounting. In other words,according to their Lordships, the assessee wasentitled to change his method of accountingunilaterally. In Snow White Food Products Co.Ltd. v. CIT [1983] 141 ITR 861, the CalcuttaHigh Court reiterated that an assessee isentitled to change his regular method ofaccounting by another regular method and sucha change can be effected even in respect of apart of the assessee's income. According totheir Lordships, a recognised method ofaccounting followed regularly would necessarilyresult in a proper computation of the assessee'sreal income. Even if one regular method ofaccounting is substituted by another regularmethod, the same result will follow. It is only ina case where the assessee changes his regularmethod of accounting by another method anddoes not follow the changed method regularlythereafter that it may be possible to say thatby introducing successive changes in his methodof accounting, he proposes to exclude certainitems in the computation of his total income. Insuch a case, the bona fides of the assessee maybe doubted. Unless there is material on record to hold that the assessee's action is not bonafide, the change in the method of accountingmush be accepted.” 26.Reading of the judgments therefore show that havingregard to the provisions of section 145 of the ITAct, the Apex Court, this Court and the Gujarat HighCourt have approved the liberty available to theassessee to follow either of the two systems ofaccounting or the hybrid system. As reiterated bythe Apex Court in Taparia Tools Ltd.v. Commissionerof Income Tax [(2015) 276 CTR 1], the entries in thebooks of accounts are not determinative or conclusiveand any matter relevant are to be examined on thetouchstone of provisions contained in the Act. Apartfrom arguing that for the sales of newspaper andadvertisement charges, it was not permissible toadopt accounting on cash basis, it was not evencontended by the Revenue that the taxable incomecould not be deduced from the accounts of theassessee. ITA.119/99 & con cases In the light of the principles of law deducible fromthe statutory provisions and the judgments that wehave referred to, we are of the view that noillegality can be attributed to the decision of theTribunal. In such circumstances, answering thequestion of law in favour of the assessee and againstthe Revenue, these appeals are dismissed. Sd/- ANTONY DOMINIC, Judge. Sd/- SHAJI P. CHALY, Judge. kkb.