Mixed accounting method rejected where cash receipts and mercantile failed to yield correct income under section 145(1).

A mixed accounting method that recorded receipts on cash basis and expenditure on mercantile basis was held incapable of properly deducing true income under the proviso to section 145(1). The test remained whether the method regularly employed could produce correct profits for the relevant year, and a hybrid system for the same business activity failed that standard on the facts. The use of a similar method in later years did not cure the defect for the year under consideration, so the Revenue's objection succeeded and the assessee's accounting method was rejected for that year.

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Issues: Whether the assessee's mixed method of accounting, under which receipts were recorded on cash basis and expenditure on mercantile basis, permitted correct computation of income under the proviso to section 145(1) of the Income-tax Act, 1961.

Analysis: The assessee followed a hybrid system for the same business activity by combining cash and mercantile methods. The accounting method was examined in light of the statutory requirement that the method regularly employed must still be capable of yielding the correct income. On the facts, the mixed system did not permit the true profits of the previous year to be properly deduced, and the fact that a similar method had been followed in later years did not alter that conclusion for the year under appeal.

Conclusion: The proviso to section 145(1) was attracted and the Revenue's objection succeeded; the assessee's method of accounting was rejected for the year in question.

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