1961 (6) TMI 25 - HC - Income Tax

Summary

Issues Involved:
1. Accrual of income.
2. Method of accounting.
3. Taxability of income during relevant assessment years.
4. Nature of the transaction between the assessee and Mewar Sugar Mills Ltd.

Issue-wise Detailed Analysis:

1. Accrual of Income:
The primary issue was whether certain sums received by the assessee during the financial years 1949-50 and 1950-51 should be included in the income for assessment purposes. The sums were Rs. 1,08,205 received on February 21, 1950, and Rs. 6,243 received on April 4, 1950. The assessee argued that these amounts accrued during the previous years ending on March 31, 1949, and March 31, 1950, respectively, and should not be included in the income for the assessment years 1950-51 and 1951-52. The Tribunal and the Assistant Commissioner held that the amounts accrued only after the accounts were closed and audited, which happened after March 31 of each year. The court disagreed, stating that the income accrued at the close of the financial year when the profits were determined, not when the accounts were audited or passed by the directors.

2. Method of Accounting:
The method of accounting followed by the assessee was crucial in determining the taxability of the income. The Income-tax Officer held that the assessee's system was on a "cash basis" since amounts were credited when actually realized. The Tribunal opined that the system was a "hybrid system, it being neither mercantile nor cash." The court emphasized that the method of accounting affects the computation of income and taxation. Since the assessee failed to prove that its accounts were maintained on the mercantile basis, the Income-tax Officer was justified in assessing the income on a receipt basis.

3. Taxability of Income During Relevant Assessment Years:
The court reframed the question to focus on whether the amounts received were liable to assessment during the previous years relevant for the assessment years 1950-51 and 1951-52. The court held that the amounts were indeed liable to assessment as income during those years since they were received on behalf of the assessee. The court noted that the Income-tax Officer's method of assessing the income when it was actually received was more in consonance with the law than the approach taken by the Assistant Commissioner and the Tribunal.

4. Nature of the Transaction Between the Assessee and Mewar Sugar Mills Ltd.:
The assessee contended that the transaction was a joint business venture, and the profits payable were akin to a partner's share, which should be assessed when credited in the lessee's books. The court rejected this argument, noting that it was not raised at any earlier stage and required factual investigation. The court also found that the deed of agreement clearly indicated a lease relationship, with the assessee entitled to 10% of the net profits as rent. The court concluded that the argument of a joint venture was inconsistent with the terms of the lease deed and the assessee's previous contentions.

Conclusion:
The court answered the reframed question in the affirmative, holding that the amounts of Rs. 1,08,205 and Rs. 6,143 received on behalf of the assessee were liable to assessment as income during the previous years relevant for the assessment years 1950-51 and 1951-52. The court directed that parties bear their own costs of the reference and regretted the unavoidable delay in deciding the matter.