Assessee can adopt hybrid system for income computation provided the same followed consistently

Brief of the case:

The Hon’ble Kerala HC in the case of Kerala Kamudi P. Ltd. held that the assessee is allowed to follow hybrid system of accounting for different nature of transactions provided the same is followed consistently and income can be deduced from such accounting.

Facts of the case:

• The assessee company is engaged in publishing and selling newspaper named ‘Kerala Kaumudi’. The assessee is following mercantile system of accounting. However, for the purpose of accounting income from sale of newspaper and advertisement income the assessee accounted the same on receipt basis.

• During the course of assessment proceedings, AO pointed out such mismatch in income and expense recognition and concluded to tax the income from sale of newspapers and advertisement income also on mercantile basis.
• Tribunal allowed the appeal in favour of assessee by noting that the assessee consistent in recognizing expenses and incomes in hybrid manner, therefore, the same being method of accounting regularly employed cannot be interfered with.
• Against such of order of tribunal, Revenue is in appeal before Hon’ble High Court.

Contention of Assessee:

• The provisions of section 145 of the Income Tax Act, 1961, as it stood at the relevant time, the assessee was entitled to adopt either the mercantile system or the cash system or hybrid system.

• Reliance was placed on the decision this court in the case of Geo Tech Construction Corporation and also on the decision of Hon’ble Gujarat HC in the case of Ganga Charity Trust.
• Further, such hybrid accounting is adopted by assessee consistently and tribunal in earlier has upheld such practice which has been accepted by Revenue as well by not challenging the order of tribunal.

Contention of Revenue:

• The assessee has adopted mercantile system of accounting, so it cannot use cash system for accounting income from sale of newspaper and advertisement income.
• The accounting of income and expenditure should be under same system of accounting so that there could be some sort of matching.
• In this regard, Revenue placed reliance on the judgment of Apex Court in the case of Keshav Mills Ltd.
• Further , the principal of res-judicata does not apply against revenue i.e. revenue cannot be prevented to take a different view to assess the income which is valid as per law

Held by Hon’ble High Court:

• Sec 145 of the I.T Act, 1961 prior to   amendment by  Finance Act,1997 provides that the income from business &0 profession and other sources to be computed as per method of  accounting regularly employed by the assessee.
• Therefore, section 145 of the IT Act gave liberty to the assessee to compute income chargeable under the heads mentioned in the section in accordance with the method of accounting regularly employed by the assessee itself.
• The HC placed reliance on the decision of Hon’ble Supreme Court in the case of UCO Bank vs. CIT wherein the court held that hybrid system of accounting i.e. different method for different nature of transactions is acceptable provided the same is regularly and consistently followed by assessee.

• Further , court also relied on the judgment of Apex Court in the case of United Commercial Bank wherein the court held that the method of accounting regularly employed may be discarded only if, in the opinion of the taxing authorities, income of the trader cannot be properly deduced therefrom.
• Revenue at any point of time in this case did not contend that the income cannot be deduced from hybrid system adopted by assessee.
• HC respectfully following the above decision of Supreme Court concluded that different method used by assessee consistently for income and expenses recognition are permissible.
• In result the appeal filed by revenue was dismissed.

Author’s Comment:

• The judgment is no longer effective as of today as Sec 145 has been amended by Finance Act,1997 to provide that income from business and other sources  shall be computed in  accordance with either cash or mercantile system of accounting regularly employed by the assessee. Thus , by specifically providing  to opt one of the method of accounting the choice to adopt hybrid method has been taken away.