9911796707
TMI Blog1984 (7) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... to have been of primary gold over and above jewellery pawned by the borrowers. It appears that the first assessment made on the assessee for the assessment year 1977-78 included practically the entire amount of the assets as income. 2. The matter went in appeal when the first appellate authority set aside the entire assessment after observing that some of the additions appeared to have been made without proper enquiry. The present assessment is now in dispute and was made in pursuance of this order. The ITO had proposed the additions which was partly reduced by the IAC under section 144B of the Income-tax Act, 1961 (' the Act '), and further reduced in first appeal by the Commissioner (Appeals). The assessee, not having been satisfied with the reliefs, is in second appeal in respect of three disputed items. 3. The first dispute relates to the income that should be estimated for the money-lending business, both in respect of pronote advances and pawn-broking advances. It is not in dispute after the order in first appeal that the turnover should be about Rs. 3.5 lakhs. Though there are varying rates provided in the pronotes and in respect of jewellery loans, it is not in dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the assessee had received only a small part of what is considered as accrued income. It is stated that the assessee being a big landlord in that village, he was obliged to lend monies to co-villagers, whether there is good prospect of recovery of principal amount and interest or not. But, the formality of a pronote and stipulation of interest is always gone through. The assessee is also not able to resort to legal action as a matter of course in the village due to his social standing. It was for these reasons that there were only nominal recoveries in the earlier years. It was also stated that many of the pronotes were renewed with interest just to keep the matter alive. The interest added in the new pronote has been treated by the authorities as interest accrued or received in earlier years. It is stated that the assessee had not been able to recover even the principal amounts themselves in a number of cases and that this kind of treatment has resulted in very unrealistic assessments. It is, therefore, contended that there is no justification for rejecting the claim of the assessee that the assessee's method is cash system of accounting. The learned counsel for the assessee rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn system of accounting even as provided under section 145(1) of the Act. The assessee should keep accounts and the system is one that must be regularly employed. Once a system of accounting is claimed by the assessee and accepted by the department, it is not intended that he should change the system. Here is a case where the assessee maintained original records of transaction, but he did not contemporaneously make up the accounts for any accounting year. It could be said to have made up the accounts from the original records maintained on cash basis for the first time when it compiled the receipts on an annual basis (financial year) and submitted its return. It had not been hitherto assessed. It is not, therefore, correct to say that the assessee's claim is based merely on the basis of pronotes besides diary as was claimed by the learned departmental representative as evidencing transactions and not as accounts by themselves. It is also based on the statement made therefrom. In other words, the assessee's case is based on these documents not because they themselves represent accounts, but they serve as original records on the basis of which the accounts are made. The assessee's ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e accounts do give the interest income on cash basis as on any particular date and the cumulative income for each accounting year. The entire list of borrowers with moneys due from each of them towards principal is also available as at the end of each year serving the purpose of a balance sheet. While a regular system of accounting is certainly warranted under section 145, it cannot be said that the fact that it was not maintained in perfect manner, as warranted by accountancy experts, could be used to discredit the assessee's accounts thus made up. The statute does not expect such rigid standards. In our opinion, all that the statute warrants, when it requires that the accounts should be made up by a particular system, is that the system should have been clearly chosen and be available at the time of first assessment on the assessee and that the assessee should follow the same consistent method, so that the income over the years is not capable of manipulation in a manner that any income escapes taxation by charging the method from year to year. While so much is expected for the income to be declared year after year, the assessee's financial position as at the end of accounting yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est, in our opinion, in the present dispute, is satisfied because the accounts prepared with reference to the original records and made up for each year could be treated as accounts in the commercial sense. This could be so, nothwithstanding the fact that these accounts had not been made up at the time of search though the primary records relating thereto were available. The income from interest is also easily ascertainable with reference to such accounts and this, as noticed earlier, is another test of a recognizable system of accounting. The Gauhati High Court in N.R. Sirker's case found that a particular amount was not assessable on mercantile basis because it was not the case that proper accounts were maintained on mercantile system. On the basis of this decision, the learned counsel for the assessee had suggested that even if it is contended that the assessee's accounts could not be treated as proper accounts, only cash system should be the basis. We do not think that this decision lays down a general proposition that cash system should be treated as normal system of accounting, wherever there are no proper accounts on mercantile basis. In fact, we are of the view that the gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n relating to past events and others who are equally concerned, if not more, with the future and, thus, need accounting data projected into periods ahead. Information generated by the accounting process is of interest to various groups directly or indirectly concerned with a business unit. Parties interested in the performance of a business enterprise include among others, Governments which are mostly for the purpose of taxing the income or to fixing a cost. Vitally affecting the whole of accounting method is the requirement that the records must conform to the rules of law. These rules arise by virtue of a force outside the enterprise itself and must be read into the recording of events and transactions to which they apply. The practice of accounting is influenced and guided by conventions, doctrines and various rules, methods and standards which have from experience proved acceptable and useful. It is difficult to reduce accounting practice to a rigid set of rules. Rules governing the formation of accounting axioms and the principles derived from them have arisen from common experiences, historical precedents, statements by individuals and professional bodies and regulations of g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the basis of books though the decision was again rendered in the context of ' previous year ' for dividend prior to amendment of law in this regard. But this decision does highlight the assessee's admission also as a factor. On the assessee's facts where monies are advanced not purely as money-lender but as a financier for co-villagers at times of their hardship more as a matter of social prestige with or without interest, as a matter of course, the adoption of accrual basis can work hardship. This is also a consideration which cannot be overlooked. The assessee is not in money-lending business as such, but undertakes money-lending as part of his social obligation as a big landlord in his village who is ordinarily expected to assist his co-villagers in times of need. Out of five sons (karta's and his brother's) in the family, two were or are employed in the Government service (one as a professor in Medical College and the other a Block Development Officer who died during service) and two employed in the States (one as an Engineer and the other as a Doctor). It is in the context of all these facts that one has to consider the passage cited by the learned counsel in N.R. Sirker ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, the accounts which had been made up at the time of furnishing the return of income with reference to the original documents could not be dismissed as not constituting the accounts unless, of course, they lack credibility for other reasons. It is under all these circumstances and for the reasons hereinbefore stated, we must hold that the assessee's claim for assessment on cash basis should be supported. Incidentally, for pawn-broking income, the assessee is in a much better position inasmuch as it is noticed by the authorities even at the time of search that they are supported by a diary and slips. The entries in the diary were on cash basis. Apparently, the assessee was keeping the accounts contemporaneously for pawn-broking purposes on cash basis. No doubt, even for pawn-broking business, it was not made up with reference to any particular date. That omission was, however, rectified when the accounts were made up. We also find that the assessee, itself, has shown a much larger income in the next succeeding year on cash basis, though it tries to offset such increase rightly or wrongly with a claim for bad debts. It may be that the claim for bad debt will automatically get abated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income which would actually be treated as having accrued on this basis even if we had accepted the principle canvassed by the department that the accrual should be the basis of assessment. Since, however, we have accepted the assessee's case for adoption of cash system, the comment which we have made in this paragraph is merely an alternative finding. In conclusion, we direct the adoption of the cash system and remit the matter to the ITO for getting the assessee's figures and computing the income on that basis for computing the income from interest on pronotes and pawn broking advances. 8. The next ground relates to the addition of Rs. 10,000 under the head as unexplained investment in relation to the jewellery seized by the Central Excise Authorities to the extent of 398 grams and, subsequently, released by the Government on payment of fine. The ITO valued the same at Rs. 21,000. It was the assessee's case that out of the four items of jewellery, one belonged to deceased sister and that two belonged to the two wives of the karta of the assessee family. All of them had died and the jewellery was said to have been kept intact in honour of their memory. Considering the status of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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