Hybrid accounting system permitted for specified receivables; cash basis for interest and rent upheld despite revenue impact.

A genuine hybrid system of accounting is permissible, so an assessee may adopt the cash basis for specified items such as interest and rent receivable while retaining the mercantile basis for other items. The method cannot be disallowed merely because it reduces revenue in a particular year. On that principle, the assessee was held entitled to change the accounting treatment for the specified receivables, and the question was answered in favour of the assessee and against the Revenue.

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Issues: Whether the assessee was entitled to change from the mercantile system of accounting to the cash system in respect of interest and rent receivable while continuing the mercantile system for other items.

Analysis: The assessee had adopted a mixed or hybrid method by following the cash system only for interest and rent that had remained unrealised for a long period, while continuing on the mercantile basis for other matters. The earlier view that such a method was impermissible could not stand in light of the principle that a genuine hybrid system of accounting is permissible. A change in accounting method cannot be rejected merely because it may reduce the revenue for a particular year.

Conclusion: The assessee was entitled to adopt the cash system for interest and rent receivable while continuing the mercantile system for other items, and the question was answered in favour of the assessee and against the Revenue.

Ratio Decidendi: A genuine hybrid system of accounting, including adoption of the cash basis for specified items while retaining the mercantile basis for others, is permissible and cannot be disallowed solely because it results in a revenue loss in a particular year.

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