1. This appeal has been preferred by the revenue against order dated 5-2-1981 of the AAC.2. 1975-76 is the assessment year concerned. Financial year is the previous year. The assessee is a registered firm consisting of two partners, both of them being medicos. Assessment was completed by the ITO as per order dated 30-3-1978, determining total income at Rs. 43,836.
3. It is the first year of assessment. The assessee-firm had made up its accounts in such a way that whereas, in respect of receipts cash method was followed, in respect of outgoings or expenditure mercantile method was followed. The ITO concluded that by the said method, correct income of the assessee could not be deduced. The ITO proceeded to take into account cash receipts amounting to Rs. 1,30,409 and as regards expenditure, the ITO adopted the figure of Rs. 1,36,409 as expenditure, in place of the figure of Rs. 1,89,528 as worked out by the assessee according to mercantile method. Thus, in the assessment, a figure of Rs. 53,119 came to be added by way of adjustment.
4. The assessee carried the matter in appeal to the AAC. The AAC relied on the Tribunal's order in the assessee's case relating to the assessment year 1976-77 and reduced the figure of assessed total income by the said figure of Rs. 53,119. Thus, the assessment of the firm would come to be made at a negative figure of Rs. 9,283, as a result of relief granted by the AAC, in respect of the said adjustment. With other reliefs granted by the AAC on appeal, totalling Rs. 9,243, we are not concerned in the present appeal.
5. The revenue feels aggrieved from the AAC's finding as to adjustment of Rs. 53,119. Learned departmental representative submitted that the assessee was carrying on one business activity and that it was not open to the assessee, in Jaw, to keep mixed account regarding the same business activity, when all the transactions entered into by the assessee-firm, in connection with that business activity, were of identical character. The revenue did not dispute before us the proposition that for determining the question as to whether, in the case of a newly started business, an assessee has or has not regularly followed the same method of the account, the method as followed by the assessee, in years subsequent to the initial year of start of business can also be taken into account. Nor did the department dispute the aspect that if the subsequent year's method of accounting is taken into account, the assessee can be said to have followed a regular method of accounting for the previous year under consideration as well. The revenue, however, strongly urged that the proviso to Section 145(1) of the Income-tax Act, 1961 ('the Act') is attracted in the instant case, inasmuch as, if the mixed system as followed by the assessee is considered, the correct income of the assessee for the previous year under consideration cannot be deduced. Learned departmental representative emphasised that the finding regarding non-deductibility of the correct income, as aforesaid, is inherently essentially a finding of fact and that in that regard the Tribunal's finding relating to a subsequent assessment year is no bar. The Tribunal's judgment was also commented upon by the learned departmental representative to the effect that the aspect that the accounts would get evened out over a number of years, even in a case where receipts are shown on cash basis and expenditure is shown on mercantile basis, may not be the correct approach, inasmuch as, according to the well-settled legal proposition as noticed by the Supreme Court in a number of cases, each year's assessment is a separate unit of assessment. We see force in the revenue's reasoning and conclude as a fact that in the system followed by the assessee, correct income of the previous year under consideration cannot be deduced. Thus, in our opinion, the finding of the learned AAC cannot be sustained.
6. Next we proceed to examine the case law brought to our notice during the hearing. In Investment Ltd. v. CIT  77 ITR 533 (SC) it was laid down as follows : A taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts and for that purpose to value his stock-in-trade either at cost or at market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping account or of valuation. The method of accounting regularly employed may be discarded only if in the opinion of the taxing authorities income of the trade cannot be properly deduced therefrom. Valuation of the stock at cost is one of the recognised methods.(p. 534) 7. In Fatehchand Chhakodilal v. CIT  13 ITR 198 (Nag.) again cited on the assessee's side, it was laid down that when the assessee had followed a hybrid system, in the sense that he maintained eight years continuous accounts for debtors in which the receipts were recorded as cash paid, without any sort of allocation between principal and interest and subsequently, if and when allocation was made an entry., in respect of the interest portion of the receipt was not made, the ITO was, under the circumstances, fully entitled under the proviso to Section 13 of the Indian Income-tax Act, 1922 to make the computation that he made.
8. In Dhakeswar Prasad Narain Singh v. CIT  4 ITR 71 (Pat.) again cited on the assessee's side, it appears that the three Hon'ble Judges, who constituted the Bench, gave separate judgments. We are unable to discern from the said judgment any proposition which could be of aid to the assessee in a case like the instant case, 9. On the other hand, the learned departmental representative had referred us to the commentary of Kanga and Palkhiwala on the Law and Practice of Income-tax, 7th edition, Vol. 1 at page 866 under the heading 'Origin of section'. In the said para, firstly, the case of Board of Revenue v. AL.AR.RM. Antnachalam Chettiar & Bros. 1 ITC 75, arising under the Indian Income-tax Act, 1918, was referred to and then it was noticed that in pursuance of the suggestion for alteration of the law, as made in the aforesaid ruling, Section 13 of the 1922 Act was enacted.
10. On the revenue's side In re. B.M. Kamdar  14 ITR 10 (Bom.) was also referred to, to point out that the system followed by the assessee in the instant case could be described as a hopelessly confusing system as was the case in B.M. Kamdar (supra).
11. On the revenue's side CIT v. A. Krishnaswami Mudaliar  53 ITR 122 (SC) was also cited for the proposition that Section 13 imposed a statutory duty on the ITO to examine in every case the method of accounting employed by the assessee and to 'see, not only as to whether or not that method had been regularly employed, but also to determine whether the income, profits and gains of the assessee could properly be deduced from that method.
12. The above examination of the case law brought to our notice at the hearing does not in. our view detract in any manner, from the finding of fact arrived at by us that profits of the previous year under consideration could not be correctly deduced from the method of accounting followed by the assessee, even though that method was followed by the assessee in subsequent years as well. The revenue succeeds. The ITO's finding is restored. The AAG's finding is reversed.
Per Shri V. Dongzathatig, Accountant Member - On the facts of the case, 1 fully agree with my learned brother. The assessee-firm, in this case, is not a mere consultancy firm but carrying out treatment of indoor patients. In such a case, the bills raised by the assessee would include cost of medicines purchased in cash or credit. As such, mixed system of accounting as adopted by the assessee cannot deduce the correct income. Cases of professionals like lawyers, chartered accountants and doctors, who are doing only consultancy, are not comparable to the facts of the case.