1938 (9) TMI 15 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sums credited in the capital account in the name of the Ajmere firm in the books of the Tonk and Jaipur firms can be said to have accrued or been received in or brought into British India.
2. The applicability of Section 4 and Section 13 of the Indian Income-tax Act, 1922.
3. The method of accounting and its implications on assessing income.

Issue-wise Detailed Analysis:

1. Whether the sums credited in the capital account in the name of the Ajmere firm in the books of the Tonk and Jaipur firms can be said to have accrued or been received in or brought into British India:

The court examined whether the sums of Rs. 32,723-14-6 and Rs. 1,714-2-6 credited in the capital account in the books of the Tonk and Jaipur firms respectively can be considered as having accrued or been received in British India. The Income-tax Officer assessed the income of the family at Rs. 2,71,576, which was later modified by the Assistant Commissioner. The Commissioner of Income-tax was directed to state a case regarding the interest on capital account credited to the Ajmere head firm.

The court noted that the sums were credited to the Ajmere firm in the books of the branches at Tonk and Jaipur but not in the headquarters' books at Ajmere. The Commissioner of Income-tax opined that these book entries amounted to constructive receipt in British India, thus forming part of the firm's profits assessable for the year.

2. The applicability of Section 4 and Section 13 of the Indian Income-tax Act, 1922:

Section 4(1) of the Act states that the Act applies to all income, profits, or gains accruing or arising, or received in British India or deemed under the Act to accrue, arise, or be received in British India. Section 4(2) further provides that income accruing or arising outside British India to a person resident in British India, which is received or brought into British India, shall be deemed to have accrued or arisen in British India. The explanation to Section 4(2) states that income accruing outside British India shall not be deemed to be received in British India merely because it is taken into account in a balance-sheet prepared in British India.

The court referred to the case of The Commissioner of Income-tax, Bombay v. Chuni Lal B. Mehta, Bombay, where profits made on transactions outside British India were not considered as accruing or arising in British India. However, the court distinguished this case, noting that the profits in question were brought into or received in British India.

3. The method of accounting and its implications on assessing income:

The assessees used the mercantile system of accounting, which was regularly employed by them. Under Section 13 of the Act, income, profits, and gains are computed according to the method of accounting regularly employed by the assessee. The court found that the assessees had always included interest credited to their capital account in the books of branches in Native States in their income. This method was consistently followed in previous years, and the assessees could not change it to avoid tax liability.

The court referred to the case of The Commissioner of Income-tax, Madras v. A.T.K.P.L.S.P. Subramaniam Chettiar, where the Full Bench of the Madras High Court held that interest credited in the account of a business, though not physically received, was considered as income accruing or arising in British India under the mercantile system of accounting.

Conclusion:

The court concluded that, although the profits did not physically arise or accrue in British India, they must be deemed to have arisen, accrued, or been received in British India due to the method of accounting followed by the assessees. The assessees had always treated such profits as received in British India, and their accounts had been accepted by the taxing authorities on this basis. Therefore, the court answered the question submitted in the affirmative, agreeing with the Commissioner of Income-tax's view.