1970 (7) TMI 23 - HC - Income Tax

Assessee, a widow of partner received interest on amounts due to her husband - method of accounting in which year such interest is assessable

Summary

Issues:
Assessment of interest income under the mercantile system of accounting for the assessment year 1962-63.

Analysis:
The judgment pertains to a reference under section 256(1) of the Income-tax Act, 1961, regarding the assessability of a sum of Rs. 50,000 in the previous year relevant for the assessment year 1962-63. The deceased partner's widow, the assessee, was entitled to interest on the deceased partner's share in five partnership firms. The partnership deeds stipulated that accounts were to be settled on the date of death, and legal heirs were entitled to interest. A settlement was reached where the assessee received Rs. 5,76,582, with Rs. 50,000 representing interest accrued up to April 2, 1960, which was not disputed. The Income-tax Officer assessed the interest income during the relevant previous year for the assessment year 1962-63, despite the assessee following the mercantile system of accounting.

The Appellate Assistant Commissioner and the Tribunal upheld the assessment based on the receipt basis. However, the method of accounting chosen by the assessee was the mercantile system, as per section 145 of the Income-tax Act. The judgment emphasized that unless under specific provisions, the Income-tax Officer cannot assess income differently from the elected method. The interest accrued to the assessee from the death of her husband till the settlement date, falling outside the relevant accounting period for the assessment year 1962-63. Therefore, under the mercantile system, the entire interest income of Rs. 50,000 should not be assessed for that year.

The High Court held that the Tribunal erred in assessing the sum of Rs. 50,000 for the assessment year 1962-63. The court answered the question in the negative, favoring the assessee and awarding costs. This judgment clarifies the importance of adhering to the chosen method of accounting and ensuring that income is assessed in the correct accounting period as per the provisions of the Income-tax Act.