This appeal is by revenue. assessee is transport operator. ITO observed in his order as follows: "It is seen from note for year ending 30-6-1979 forming part of director's report that freight earnings have been accounted for on cash basis as against actual basis as in earlier years. As seen from records, company was following mercantile system of accounting. This year it has changed to mixed system. reason given is to avoid disputes. As explanation is not convincing and also taking into account that assessee was following mercantile system of accounting and it cannot change system of accounting once followed, I add back sum of Rs. 1,48,491 being freight charges not yet realised and allow following expenses which are not provided for: Rs. Claims payable 31,657 Lorry hire charges 4,602 ------- 36,259 ------- net addition works out to Rs. 1,12,232." assessee went in appeal. Before Commissioner (Appeals), it was represented that facts have not been properly appreciated by ITO and IAC. It was stated before him that method of accounting adopted by assessee-company had always been cash in respect of most of customers. Only in respect of class of reputed customers credit system had been adopted. Bills were made on customers even before delivery of goods at respective destinations. It was assessee's case that he final settlement made with these reputed customers resulted in receipts which were less than billed amount due to differences in rates, short delivery, damages, etc. In some cases, assesse had entered into lengthy correspondence to find out reasons for short payments. stage was reached when system of accounting adopted by assessee led to assessment of notional income which was never realised by assessee. For above reasoning, assessee decided to change to cash system of accounting in respect of this class of reputed customers also. assessee started implementing this from accounting year relevant to assessment year 1980-81. As this system had been regularly followed in subsequent years also assessee pleaded that same should be accepted n d no addition should be made to trading account. Reliance was also placed on acceptance of similar change in method of accounting in respect of Prakash Roadlines (P.) Ltd. assessee representative also cited certain decisions of High Court to support his contention. 2. Commissioner (Appeals) noticed that amount of Rs. 1,48,491 related to 22 customers which included parties like Dunlop India, Kirloskar Systems Ltd., Voltas Ltd., etc. He then went on to observe that revenue cannot attribute mala fide intentions to assessee or collusion between assessee and parties in matter of accounting of freight receipts. He observed t h t other transport operators were also adopting similar system of accounting for freight receipts. In order to avoid confusion caused by frequent adjustment of entries in books of account regarding short payments t h e companies switched over to accounting receipts on cash basis. He then adverted to theory of real income. He finally concluded that assessee- company had for genuine and bona fide reasons effected change in system of accounting and while doing so had not violated any provisions of law and further, system being recognised by law and having been regularly followed could not be rejected by ITO. He also observed that adverse comments of Advocate General in case of public sector undertakings had nothing to do with system of accounting adopted by assessee. He, accordingly, deleted addition made by ITO. revenue is in appeal. 3. learned departmental representative firstly contented that assessee is not entitled to follow system of accounting which is neither cash nor mercantile. Further, he argued that in effect assessee was following mercantile system of accounting. Although he had not extended credit facilities mercantile system of accounting. Although he had not extended credit facilities to certain customers, it did not mean that he was following cash system in those cases. By efficient management he had collected bills in very year in which they were raised. fact that there were no outstandings regarding certain class of customers did not mean that system followed by assessee was cash. He further contended that during hearing, assessee's counsel had submitted that expenditure was being accounted for on mercantile basis while receipts were sought to be accounted for on cash basis. This was truly irrational system which did not indicate true profits made by assessee and was, therefore, liable for rejection by virtue of proviso to section 145(1) of Income-tax Act, 1961 ('the Act'). He then referred to footnote No. 8 at page 3435 of commentary on Law of Income-tax by Sampath Iyengar, 7th end., Vol. 4 and submitted that assessee cannot account for liabilities on mercantile basis and receipts on cash basis. Reliance was also placed on then decision of Allahabad High Court in case of CIT v. Cosmopolitan Trading Co. [1979] 116 ITR 728. Law and Practice of Income- tax, Vol. I, p. 883 where it is observed that true gains are to be ascertained as nearly as it can be done. 4. learned counsel for assessee referred to commentary on Income-tax Law by Chaturvedi and Pithisaria, 3rd end., pp. 2863, 2871 and 2872. It was argued that assessee was following hybrid system of accounting. recognition of hybrid system as acceptable method of accounting had been adverted to in various decision, notable one amongst them being Supreme Court's decision in CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122. He then adverted to various reasons which promoted assessee to change system of accounting in case of class of customers from whom amounts receivable were being accounted for in trading account to actual receipt. He also drew our attention to order of Commissioner (Appeals) from which it could be seen that assessee had no mala fide intentions in changing method of accounting. Hence, he submitted that order of Commissioner (Appeals) should be upheld. 5. We have heard rival submissions. At page 265 of Accountancy by William Pickles, 3rd end., mention is made of hybrid system. It is stated as follows: "Receipts and Expenditure Account - account of this nature confines income earned to cash received and at same time includes all expenses, whether paid or not. This method is usually adopted in preparing accounts of business of professional nature (e.g., doctors and solicitors) on ground that debtors are of very uncertain nature, so that fee may not be considered as earned until cash is received." At page 2863 of Commentary on Income-tax Law by Chaturvedi and Pithisaria, 3rd, end., it is stated that there are innumerable other systems of accounting which are called hybrid or heterogeneous in which certain elements and incidents of cash and mercantile systems are combined A. Krishnaswami Mudaliar's case (supra). It is not incumbent upon assessee to follow purely cash method of accounting or purely mercantile method of accounting. It may be mixture of both. Thus, it appears that there is nothing wrong in assessee adopting hybrid system of accounting. type of system adopted by assessee conforms to what is stated at page 265 of Pickles' Accountancy. There is of course nothing in Act prohibiting adoption of this system of accounting by assessees. There is no law that only professionals can follow hybrid system of accounting for receipts on cash basis and liabilities on mercantile basis. But system has to be tested in light of proviso to section 145(1). From theoretical point of view it can be argued that cash system does not give correct picture of profits of assessee. So also mercantile system. In cash system, assessee may account for less profits than what is actually due to him. In another year he may account for more profits because he receives moneys for work done or transactions effected in earlier years. mercantile system, on other hand, may account for profits not actually received. part of dues may becomes bad and in later years he may write off those amounts. Therefore, it can be said that no system will give true profits earned by assessee. In case of banks, etc., mercantile system is not followed in respect of certain transactions, particularly, regarding what are known as sticky loans. This is on basis that what person does not hope to realise in near future cannot be treated as his income. Therefore, it appears that law permits changes to be made in method of accounting in order to arrive at true income. In that case, question to be faced is whether cash system and hybrid systems are to be totally rejected because, in opinion of ITO, true profits cannot be ascertained when books of account are maintained on such basis. If some sanctity is to be attached to method of accounting regularly adopted by assessee, we have to examine how proviso to section 145(1) is to be reconciled with substantive portion of that section. 6. In our opinion, while ascertaining true profits ITO has to make such adjustment to trading account of assessee which is in conformity with that system. For example, if profits are being ascertained on cash basis, ITO has to first give finding that even according to cash system adopted by assessee true profits are not being reflected in account. He has then to rope in those items which could really be taken as receipts according to cash system although assessee might says that they are not his receipts at all. Similar changes have to be made with regard to liabilities also. In our opinion, in guise of applying proviso to section 145(1) ITO cannot throw overboard entire system of accountancy followed by assessee. Some guidance can be had from decision of Supreme Court in case of A. Krishnaswami Mudaliar (supra) where it is clearly stated that even where cash system of accounting is adopted stock has to be valued. assessee cannot say that stock valuation has no place in cash system. Then ITO can say that system of accounting adopted by assessee is not giving true picture of profits made by him and then proceed to add valuation of stock. He cannot say that cash system of accounting is not correct and, therefore, profits have to be ascertained only accounting is not correct and, therefore, profits have to be ascertained only according to mercantile system. We reproduce observations of learned authors Chaturvedi and Pithisaria's commentary on Income-tax Law, 3rd edn. "An assessee may be choose mercantile system for certain transactions and cash basis for other transactions [Shiv Prasad Ram Sahai v. CIT [1966] 61 ITR 124, 130 (All.)]. v. CIT [1966] 61 ITR 124, 130 (All.)]. assessee may employ one method of accounting for one part of business or one class of customers, and different method for another part of his business or another class of customers. He may also keep accounts in respect of different parts of same business on different basis. If such different methods are employed regularly and consistently profits have to be computed in accordance with respective methods, provided it results in proper determination of true profits [CIT v. E. A. E. T. Sundararaj [1975] 99 ITR 226, 231 (Mad); Bhagwandas Jagdishprasad & Co. v. CIT [1982] 28 CTR (MP) 33, 34; Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 847, 859 (Cal.)." (p. 2863) 6.1 case cited by learned departmental representative, viz., Cosmopolitan Trading Co.'s case (supra) is distinguishable on facts. 7. We have, therefore, to examine whether assessee has been regularly employing particular method of accounting, whether there has been change in that method of accounting, whether change is bona fide and in being uniformly followed in subsequent years. This is necessary because Courts have now held that change in method of accounting for bona fide reason is permissible provided it is properly followed in future. 8. In assessee's case it was already adopting hybrid system of accounting in sense that though expenditure was being accounted for on accrual basis, it was collecting bills on cash and carry method in respect of quite of few customers. Credit facility had been allowed to other customers. Even now it cannot be said that credit facility is denied to said customers. only difference is, in manner of accounting, assessee has changed from accrual to cash and carry basis. reasons given for change in method have been adverted to by Commissioner (Appeals) in detail and we do not repeat them. In any case, annexure to appellate order shows that for year ended 30-6-1978 out of billed amount of Rs. 55,196.35, Rs. 42,688.40 was not i collected. Out of this, Rs. 40,462 was collected in next year. In next year, there was balance of Rs. 1,48,490 to be collected. This increased to Rs. 2,32,495 but it is seen that for year ended 30-6-1980 assessee collected Rs. 6,57,680 out of Rs. 8,37,240 billed. For year ending 30-6-1982 outstanding was Rs. 2,97,000 but during year ended 30-6-1982 it decreased t o Rs. 2,22,776. It is also noteworthy that out of Rs. 18,05,004 billed on 30-6- 1982 as much as Rs. 16,72,826 was collected during same year. On whole, it does not appear that change in method of accounting is to defraud revenue. As matter of fact, facts leading to such inference have not been noticed by ITO in his order. We, therefore, do not see any reason to interfere with order of Commissioner (Appeals). appeal filed by revenue is dismissed. *** INCOME TAX OFFICER v. GEMLINES (P.) LTD.