1963 (8) TMI 50 - HC - Income Tax

Summary

Issues Involved:
1. Whether the method of accounting employed by the assessee was appropriate.
2. Whether the application of the proviso to section 13 of the Indian Income-tax Act, 1922, by the Income-tax Officer was justified.
3. Whether the inclusion of additional interest income by the Income-tax Officer was proper and legal.

Issue-wise Analysis:

1. Method of Accounting Employed by the Assessee:
The assessee, a Hindu undivided family engaged in money-lending, maintained its accounts on a cash basis. Interest income was accounted for at the time of final settlement with debtors. This method had been consistently followed since 1925-26 and was accepted by the department until 1955-56. The Appellate Assistant Commissioner and the Tribunal found this method to be regularly employed and capable of reflecting true income, profits, and gains. The High Court emphasized that the method of accounting regularly employed by the assessee should be the basis for computation unless it fails to properly deduce income, profits, and gains.

2. Application of Proviso to Section 13 by the Income-tax Officer:
The Income-tax Officer opined that the method of accounting did not allow for proper deduction of income, profits, and gains, leading to the application of the proviso to section 13. However, this view was not shared by the Appellate Assistant Commissioner and the Tribunal, who found that the assessee's method did allow for proper deduction of income. The High Court highlighted that the Income-tax Officer's judgment must be based on good grounds and is subject to review by appellate authorities. The court referenced the Andhra High Court's decision in S.R.V.G. Press Co. v. Commissioner of Excess Profits Tax, which supported the assessee's right to choose a proper method of accounting regularly employed.

3. Inclusion of Additional Interest Income:
The Income-tax Officer estimated interest income at 11% on the adjusted capital lent out, resulting in additions of Rs. 39,659 for 1956-57, Rs. 23,427 for 1957-58, and Rs. 28,274 for 1958-59. This was based on the view that the average rate of interest on capital lent out was low compared to the rates charged by the assessee. The Appellate Assistant Commissioner and the Tribunal rejected these additions, citing the consistent method of accounting followed by the assessee and the lack of any detected omissions in the accounts. The High Court concluded that the department could not impose a new system of accounting on the assessee and that the method employed did not result in any income escaping assessment.

Conclusion:
The High Court answered the question in the negative, ruling in favor of the assessee. It held that the method of accounting employed by the assessee was proper and justified, and the application of the proviso to section 13 by the Income-tax Officer was not warranted. The inclusion of additional interest income was deemed improper and illegal. The department was ordered to pay the costs, with an advocate's fee of Rs. 250.