1971 (3) TMI 41 - HC - Income Tax

Change in method of accounting - When interest was earlier assessed on the basis of accrual system of accounting, whether subsequently it can be assessed on receipt basis Held, no

Summary

Issues Involved:
1. Assessability of interest on a mortgage in the assessment year 1962-63.
2. Basis of taxation (accrual vs. receipt) for the interest income.
3. Applicability of the rule of estoppel in changing the method of assessment.
4. Provisions under section 13 of the Indian Income-tax Act, 1922, and section 145 of the Income-tax Act, 1961.
5. Avoidance of double taxation.

Detailed Analysis:

1. Assessability of Interest on a Mortgage in the Assessment Year 1962-63:
The primary issue was whether the interest amount of Rs. 32,273 was assessable in the assessment year 1962-63. The Hindu undivided family (HUF) of Rattan Chand Dhawan had advanced money on a mortgage in 1944, accruing interest at 5% per annum. This interest was not recorded in any regular books of account and was only assessed for income-tax in the years 1959-60, 1960-61, and 1961-62 on an accrual basis. The Tribunal had directed that the entire amount of Rs. 40,529 should be assessed on a cash basis in the year of receipt, excluding Rs. 8,250 already taxed on an accrual basis in previous years.

2. Basis of Taxation (Accrual vs. Receipt) for the Interest Income:
The assessee contended that the interest should be taxed on an accrual basis, as it had been in the previous years. The Tribunal, however, decided that the most equitable, reasonable, and certain method of assessment in this type of case was the cash basis, citing simplicity and certainty. The Tribunal's decision was influenced by the fact that the assessee did not maintain any regular books of account.

3. Applicability of the Rule of Estoppel in Changing the Method of Assessment:
The assessee argued that the department could not switch from the accrual basis to the receipt basis after having taxed the interest on an accrual basis in prior years. The court referred to the decision in Commissioner of Income-tax v. Jug Sah Muni Lal Sah, where it was held that once a method of taxation is adopted, the department cannot change it arbitrarily. The court held that the rule laid down in Jug Sah Muni Lal Sah's case applied, and the department could not switch to a receipt basis to cover its own default.

4. Provisions Under Section 13 of the Indian Income-tax Act, 1922, and Section 145 of the Income-tax Act, 1961:
The court compared section 13 of the 1922 Act and section 145 of the 1961 Act. Both sections allow the Income-tax Officer to determine the method of accounting if the method employed by the assessee does not properly reflect income. However, the court noted that the Income-tax Officer did not proceed under section 144 of the 1961 Act, which would allow for an assessment if the accounts were not correct or complete. Instead, the officer merely changed the method of accounting, which was deemed inappropriate.

5. Avoidance of Double Taxation:
The Tribunal had mentioned an "unwritten law of taxation" that no income could be doubly taxed. The court pointed out that section 5, Explanation 2, of the 1961 Act explicitly prevents double taxation by stating that income already included on an accrual basis cannot be taxed again on a receipt basis.

Conclusion:
The court concluded that the interest should not be taxed on a receipt basis in the assessment year 1962-63, as it had already been taxed on an accrual basis in prior years. The question referred to the court was answered in the negative, favoring the assessee and against the department. The court also noted the difficult nature of the question and decided that there would be no order as to costs.