1953 (7) TMI 11 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Income-tax Officer's order demanding tax from the assessee firm is in accordance with Section 12(5) of the Hyderabad Income-tax Act.
2. Interpretation of "paid" under Section 12(5) of the Hyderabad Income-tax Act.
3. Applicability of Section 24(4) and Section 24(12) of the Hyderabad Income-tax Act.
4. Relevance of the mercantile system of accounting in determining tax liability.

Issue-wise Detailed Analysis:

1. Whether the Income-tax Officer's order demanding tax from the assessee firm is in accordance with Section 12(5) of the Hyderabad Income-tax Act:
The Income-tax Officer noted that the assessee, a resident but unregistered firm, credited four non-residents with interest amounting to Rs. 21,968-15-9 on monies borrowed. The Officer, acting under Section 24(12) of the Hyderabad Income-tax Act, directed the assessee to pay income-tax at the maximum rate on the said amount. The assessee firm appealed, arguing that no interest was actually paid but only credited to the accounts of the non-residents. The Appellate Assistant Commissioner dismissed the appeal, interpreting "paid" as "actually paid or incurred" according to the method of accounting.

2. Interpretation of "paid" under Section 12(5) of the Hyderabad Income-tax Act:
The Supreme Court's decision in Keshav Mills Ltd. v. Commissioner of Income-tax, Bombay, was referenced, where it was held that under the mercantile system of accounting, profits or gains are treated as arising or accruing at the date of the transaction, even if not received. The Court noted that the mercantile system treats book profits as liable to tax, irrespective of actual receipt. The definition of "paid" in Section 12(5) includes amounts "actually paid or incurred" according to the accounting method, thus encompassing credits in a mercantile system.

3. Applicability of Section 24(4) and Section 24(12) of the Hyderabad Income-tax Act:
The question was whether crediting interest to the lenders' accounts under a mercantile system constitutes "payment" within the meaning of Section 24(4), thereby attracting Section 24(12). Section 24(4) mandates that any person responsible for paying interest to a non-resident must deduct income-tax at the maximum rate "at the time of payment." The Court concluded that "payment" in this context implies actual payment, not notional. The interpretation was supported by precedents such as Paton v. Inland Revenue Commissioners and Inland Revenue Commissioners v. Oswald, where it was held that capitalization of interest does not constitute actual payment.

4. Relevance of the mercantile system of accounting in determining tax liability:
The Court emphasized that under the mercantile system, credited amounts are deemed to have accrued but are not considered as actually received or paid. The decision in Raja Raghunandan Prasad Singh v. Income-tax Commissioner highlighted that giving security for a debt does not equate to paying the debt. The Court held that both the language of Section 24(4) and relevant authorities support the interpretation of "payment" as actual payment, not merely a credit entry in the books.

Conclusion:
The Court concluded that the Income-tax Officer's order demanding tax based on credited interest amounts was not in accordance with law, as "payment" under Section 24(4) requires actual payment. The reference was answered in the negative, and the assessee was awarded costs. The judgment underscores that under the mercantile system, credited amounts do not constitute actual payments for tax deduction purposes.