JUDGMENT Rajes Kumar, J.
1. The Income Tax Appellate Tribunal, Allahabad has referred the following question of law under Section 256(1) of the Income Tax Act, 1961, (hereinafter referred to as "the Act") for opinion of this Court.
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in confirming the order of the C.LT. (A), who had upheld the order of the I.T.O. In calculating the interest income on accrual basis, while the assessee had shown such income on receipt basis ? "
2. The present Reference relates to the Assessment Year 1980-81.
3. Brief facts of the case are as follows:
The assessee had interest inline by advancing loans against security of ornaments It was noticed by the I.T.O. That the assessee has shown his interest income from such business oil receipt basis whereas interest was being paid to its creditors on accrual basis. He had, therefore, opined that this was not a correct and consistent method The assessee had explained before the I.T.O. That this was perfectly permissible method of accounting, and it is open to an assessee to maintain part of his accounts on cash basis and part of his accounts on mercantile basis. But the I.T.O. did not agree with the contention of the assessee. He has noted that the assessee is following mercantile system of accountancy inasmuch as it has been mentioned in the return in sub-part-C, Annexure-D that the assessee is following mercantile system of accountancy. He also observed that even if the assessee had been following a mixed system of accountancy, which he is not doing, then also in a single transaction of business, that is, interest received and interest paid, the, system should have been the same. He could apply different method of accounting to different sources of income but not for the same source of income. In the circumstances, he had calculated the interest on accrual basis @ 14%, which worked out to Rs. 18,263/-. The assessee had shown interest from pledging of goods at Rs. 9,451/-. Thus, difference of Rs. 8,812/- was added to the income of the assessee.
4. The assessee earned the matter in appeal before C.I.T. (A), who agreed with the findings of the I.T.O. He observed that on the basis Adopted, true profits will not be deduced because interest received can always be controlled by the assessee by simply agreeing to receive the same late or to receive at a future date in the following accounting year. In other words, he will be able to control his rate of taxation and this cannot be considered to be a valid method of accounting from the Department's point of view He. therefore, held that the assessee was not justified in adopting hybrid system only for the purposes of interest income.
5. The assessee, being aggrieved by the order of the C.I.T.(A), carried the matter in further appeal before the Tribunal, but failed.
6. Tribunal held as follows:
"The next dispute is whether the C.I.T. (Appeals) was justified in confirming the addition of Rs 8812A- on account of alleged interest on pledging of the ornaments. The I.T.O. Noticed that the appellant had been showing the income on interest on loans by pledging ornaments at security on receipt basis, while the payments of interest by the assessee to its creditors were done on mercantile basis i.e. On accrual basis. The I.T.O. Was, therefore, of the opinion that this was not a collect and a consistent method and the assessee explained before the I.T.O. That this was perfectly permissible method of accounting and it is open to the assessee to maintain part of the account on cash basis and part of the accounts on mercantile basis. The I.T.O did not agree with the contention of the assessee and made addition of Rs. 881/- on account of interest pledging of the ornaments. On appeal, the C.I.T. (Appeals) agreed with the finding of the I.T.O. For the reason that on the basis adopted by the assessee true profits would not be deducted because interest received can always be controlled by the appellant by simply agreeing late or to receive at a future date in the following accounting year. The C.I.T. (Appeals) did not consider it valid method of accounting. He, therefore, held that the assessee was not justified in adopting hybrid system only for the purpose of interest income. He, therefore, approved the action of the I.T.O."
7. We have heard Sri R.S. Agarwal, learned counsel for the applicant and Sri Shambhu Chopra, learned Standing Counsel appearing for the Revenue.
8. Learned counsel for the applicant submitted that mixed system of accountancy for one head of the income is recognised system and, therefore, if the assessee had maintained cash system for the receipt of the interest, income from the business on receipt basis whereas interest was being paid to the creditor on accrual basis, the system should be accepted being well recognised system. He submitted that this system has been followed regularly. In support of his submission, he relied upon the decision of the Calcutta High Court in the case of CIT v. United Credit Limited, reported in 257 I.T.R. 443. Learned Standing Counsel submitted that the assessee can not adopt two systems of accounting for one head of the income. He submitted that no doubt, for the different head of the income, different system of accounting can be adopted but for one head of the income, only one method of accounting should be adopted and. therefore, the assessee should have adopted one system of accounting both for receipt of the interest and for the payment of interest.
9. We have given our anxious consideration to the submission of learned counsel for the parties. We are of the opinion that the question involved in the present case is squarely covered by the decision of Calcutta High Court in the case of CIT v. United Credit Limited (Supra). In this case, the assessed followed in regard to the head of interest, a mercantile system of debiting it its own liability to pay interest and a cash system in regard to showing receipts only for cash interest actually received. Calcutta High Court held as follows:
"As against one case decided by the Madras High Court cited on behalf of the Department, numerous cases were cited by Mr. Muraka 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 account of the assessee over a reasonably long range and span of assessment years."
10. Respectfully following the aforesaid decision of Calcutta High Court, we are of the view that two method of accounting adopted for single head of income by the assessee can not be said to be unjustified. Thus the Tribunal was not justified in calculating the interest income on the accrual basis, which was disclosed on receipt basis by the assessee.
11. In view of the foregoing discussion, we answer the question referred to us in negative, i.e. in favour of the assessee and against the revenue. There shall be no order as to costs.