1970 (4) TMI 40 - HC - Wealth-tax

Interest accrued but not received was not included in balance-sheet filed - accounts are maintained on cash basis - as per section 7(2)(a), such amount is excludible from the computation of net wealth

Summary

Issues:
Whether the accrued interest of Rs. 1,50,000 due to the assessee as at the valuation date should be included in the net wealth of the assessee.

Analysis:
The case involved a reference made by the Appellate Tribunal under section 27 of the Wealth-tax Act regarding the inclusion of accrued interest in the net wealth of the assessee. The assessee, a Hindu undivided family, maintained accounts on a cash basis and did not include the accrued interest of Rs. 1,50,000 in its wealth-tax return. The Wealth-tax Officer added the amount, but the Tribunal directed its exclusion based on the interpretation of section 7(2)(a) of the Act, which allows adjustments in determining the net value of assets for businesses maintaining regular accounts. The Tribunal held that changing the accounting system from cash to mercantile was not within the officer's power. The Tribunal's decision was based on the principle that accrued income not received should not be considered for an assessee using the cash basis of accounting.

The judgment highlighted the difference between the cash and mercantile systems of accounting, emphasizing that under the cash basis, income is recognized upon receipt, while under the mercantile system, income accrues when the right to receive arises. The court referred to a Supreme Court decision under the Income-tax Act, stating that income under the mercantile system includes accrued income, whereas under the cash system, only actual receipts are considered. The court noted that the Wealth-tax Act does not provide for a different mode of computation, making it inappropriate to include accrued income in the net wealth of an assessee using the cash basis of accounting. The court reasoned that accrued income may not be realized and could potentially become a bad debt, making its inclusion in net wealth unjustified for cash-based accounting.

Ultimately, the High Court agreed with the Tribunal's decision to exclude the accrued interest from the computation of the assessee's net wealth, affirming that under section 7(2)(a) of the Wealth-tax Act, accrued income not received should not be considered for businesses maintaining accounts on a cash basis. The court answered the reference question in the negative, indicating that the sum of Rs. 1,50,000 due as accrued interest was not includible in the net wealth of the assessee. The judgment concluded without any order as to costs, with the Chief Justice concurring with the decision.

This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the court's reasoning behind the decision to exclude the accrued interest from the net wealth calculation of the assessee.