1934 (6) TMI 30 - HC - Income Tax

Summary

Issues Involved:
1. Justification for charging tax on a sum of Rs. 2,500.
2. Method of accounting used by the assessee.
3. Treatment of accrued interest in tax assessment.

Detailed Analysis:

1. Justification for Charging Tax on a Sum of Rs. 2,500:
The core issue was whether the Income Tax Officer was justified in charging tax on a sum of Rs. 2,500, which was included as interest income in the assessee's accounts but had not been actually received. The assessee, a partner in a registered firm engaged in money-lending, manufacturing, and selling bricks, reported a net income from money-lending and included Rs. 2,500 as accrued interest on a renewed promissory note. The Income Tax Officer included this amount in the assessment, arguing that it had been credited to the interest account and thus should be taxed. The Assistant Commissioner upheld this decision, noting that the interest was recorded as income in the assessee's books.

2. Method of Accounting Used by the Assessee:
The assessee employed the mercantile system of accounting, where entries are recorded on the date of the transaction rather than the date of cash payment. This system was consistently used by the assessee and accepted by the Income Tax authorities. Under this method, income is recognized when it is earned, not when it is received. The Commissioner of Income Tax and the High Court emphasized that once the mercantile system is adopted, it must be applied consistently for tax assessment purposes. The High Court cited precedents, including decisions from the Madras High Court and the Privy Council, affirming that the method of accounting determines when income is taxable.

3. Treatment of Accrued Interest in Tax Assessment:
The High Court discussed the treatment of accrued interest, referencing several cases to support its decision. In "Subramanyan Chettiar v. Commissioner of Income Tax," it was held that an assessee using the mercantile system must be assessed on that basis alone. The court also referred to "Secretary to the Board of Revenue v. Al.Ar.Rm. Arunachalam Chettiyar," where it was implied that interest adjusted in accounts is assessable to income tax. Additionally, the court mentioned "Raghunandan Prasad v. Commissioner of Income Tax," where it was decided that interest is taxable based on the method of accounting used. The High Court concluded that since the assessee's system of accounting included the Rs. 2,500 as income, it was correctly included in the assessment.

Conclusion:
The High Court affirmed the decision of the Income Tax authorities, stating that the sum of Rs. 2,500 was properly included in the assessment based on the mercantile system of accounting used by the assessee. The court answered the question in the affirmative and awarded costs to the Commissioner. The judgment highlighted the importance of consistency in the method of accounting for tax purposes and reinforced the principle that accrued interest recorded in the books is taxable, even if not received in cash.