1936 (3) TMI 3 - HC - Income Tax

Summary

Issues Involved:
1. Method of Accounting for Income Tax Assessment
2. Assessment on Accrued vs. Realized Interest
3. Applicability of Section 13 of the Income Tax Act
4. Validity of Previous Assessments

Issue-wise Detailed Analysis:

1. Method of Accounting for Income Tax Assessment:
The court examined the methods of accounting, specifically the cash basis and the mercantile basis. It was found that the assessee did not compute his profit by either method. The Income Tax Officer adopted the accrued basis, which was followed in previous years without objection from the assessee. The court emphasized that the method of accounting should consistently display profits and gains, and the assessee's method lacked this consistency.

2. Assessment on Accrued vs. Realized Interest:
The assessee contended that he should be assessed on sums actually received, not on accrued interest. The court clarified that accrued amounts not paid do not furnish a basis for taxation unless they appear in a properly balanced profit and loss account as assets. The court concluded that the assessee could elect to be taxed on actual receipts less actual expenses, and the Income Tax Officer could not tax accrued interest unless it was shown as a valued asset in a profit and loss account.

3. Applicability of Section 13 of the Income Tax Act:
Section 13 was analyzed to determine if the assessee's method of accounting was regularly employed. The court found that the assessee did not maintain a proper profit and loss account, and therefore, the Income Tax Officer could determine the computation basis. The court emphasized that the Income Tax Officer could not tax what is not chargeable under the Act, even if it was taxed in previous years.

4. Validity of Previous Assessments:
The court addressed whether the previous method of assessment, which included taxing accrued interest, was correct. It was noted that the previous assessments were based on the method regularly employed by the assessee, which combined cash and accrued basis. The court concluded that the method of assessment followed was erroneous, and the Income Tax Officer could assess either on a cash basis or a mercantile basis, but accrued interest could only be included if shown as a valued asset in a profit and loss account.

Separate Judgments:
AGARWALA, J.:
Agarwala, J. emphasized that the assessee's method of accounting, though unscientific, was regularly employed by him. The assessment was challenged on the grounds that no method of accounting was regularly employed and that unrealized interest should not be assessed. Agarwala, J. concluded that the assessee's method of accounting was a recognized method, and unrealized interest could be included in the profits of a business.

MACPHERSON, J.:
Macpherson, J. detailed the history of the assessee's method of accounting, which combined cash and accrued basis. The court found that the assessee's method of accounting was regularly employed, and the assessment was made on this basis. Macpherson, J. concluded that the computation of profit was made under the substantive part of Section 13, and no point of law arose for decision under Section 66(5). The reference was answered in the affirmative, with each party bearing their own costs.