1971 (5) TMI 22 - HC - Income Tax

Ordinarily an assessee maintaining his accounts on the mercantile system is entitled to deduction only if the appropriate debit entry has been made in the account. But that it seems to us is not an absolute rule. The liability arose by virtue of section 144 of the Code and we do not see why it should be taken as not having accrued merely because of the omission of the assessee to enter the liability in its account books. The liability arose because of the operation of law. It could not be denied merely because it was not entered in the accounts. Its existence did not depend upon entries being made in the assessee s books. The omission of the assessee to make the entries in its books merely rendered the accounts inaccurate. We are in agreement with the Appellate Tribunal that the absence of entries in the account books cannot deprive the assessee of his right to the deduction.

Issues:
1. Whether the interest receipts of Rs. 11,029 and Rs. 21,572 were assessable in the hands of the assessee family.
2. Whether the liability of the assessee to repay the amount recovered from the Government together with interest accrued on the date when the High Court dismissed the suit.
3. Whether the assessee was entitled to deduct the interest claimed without making necessary entries in its account books.

Analysis:

Issue 1:
The Income-tax Appellate Tribunal referred a question regarding the assessability of interest receipts of Rs. 11,029 and Rs. 21,572 in the hands of the assessee Hindu undivided family. The assessee had claimed these amounts as interest accrued during relevant previous years in a separate account called the amanat khata. The Income-tax Officer included these amounts in the total income of the assessee, but the Appellate Tribunal allowed the appeals, stating that the liability for refunding the amounts to the Government had accrued during the relevant previous years, irrespective of entries in the account books. The Tribunal held that the liability arose under section 144 of the Code of Civil Procedure and allowed the deduction. The court agreed with the Tribunal's decision, emphasizing that the liability arose automatically upon the reversal of the trial court decree, and the absence of entries in the account books did not negate the right to deduction.

Issue 2:
The court examined whether the liability of the assessee to repay the amount recovered from the Government along with interest accrued when the High Court dismissed the suit. The court held that under section 144 of the Code of Civil Procedure, upon the reversal of a decree, the party receiving the benefit of the erroneous decree is obligated to make restitution to the other party. The court emphasized that the liability to effect restitution arises automatically on the date when the trial court decree is reversed. The court rejected the argument that the assessee disputing its liability in an appeal to the Supreme Court affected the obligation to effect restitution, as the obligation was to place the Government in the position it would have been but for the trial court decree.

Issue 3:
Regarding the deduction of interest claimed without making necessary entries in the account books, the court held that although generally an assessee on the mercantile system is entitled to deduction if the appropriate debit entry is made, in this case, the liability arose due to the operation of law under section 144 of the Code. The court stated that the existence of the liability was not dependent on entries in the account books and that the absence of entries rendered the accounts inaccurate but did not deprive the assessee of the right to deduction. The court upheld the Tribunal's decision, allowing the deduction of interest claimed by the assessee.

In conclusion, the court affirmed the decision of the Appellate Tribunal, holding that the interest receipts were not assessable in the hands of the assessee family, and the assessee was entitled to the deduction of interest claimed, even without making necessary entries in its account books.

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