Mixed accounting for interest income and expenditure was permissible before section 145 amendment where profits remained true and fair.

Before the amendment of section 145 of the Income-tax Act, an assessee could maintain a mixed method within the same head of interest by recognising interest income on a cash basis while accounting for interest expenditure on a mercantile basis. The method was treated as permissible because it was not prohibited at the material time and did not prevent the accounts from reflecting true and fair profits over a reasonable span of assessment years. On that footing, the additions for the relevant years were deleted and the assessee succeeded.

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Issues: Whether the assessee could follow the cash system of accounting for interest income while following the mercantile system for interest expenditure, and whether the resulting additions for the assessment years in question were rightly deleted.

Analysis: For the relevant assessment years, before the amendment of section 145 of the Income-tax Act, 1961, the assessee maintained a mixed system within the same head of interest by crediting only interest actually received on the cash basis while debiting interest liability on the mercantile basis. Such a method was held to be permissible because it was not forbidden at the material time and did not prevent the accounts from reflecting the true and fair profits over a reasonable span of assessment years.

Conclusion: The questions were answered in the affirmative, and the assessee succeeded.

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