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TMI Blog1945 (2) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... and when they were examined it was found (a) that they were maintained on the mercantile system and (b) that the interest account showed a credit of ₹ 31,081. Although this interest had not yet been realised, the assessee had debited it in her books to the accounts of the debtors, credited it to the interest account and then transferred it to her own personal account. On these facts the Income-tax Officer held that Section 13 required him to take this sum of ₹ 31,081 as the assessee's gross money-lending income and after allowing ₹ 6,853 as bad debts and ₹ 828 as expenses he assessed her on ₹ 23,400. Her appeal against the assessment was rejected and she thereupon requested me to state a case to the High Court. Copies of the assessment order, the appellate order, and the application under Section 66 (2) are filed as Appendices A, B and C. Two questions of law which the assessee formulated subsequent to the application under Section 66 (2) are filed as Appendix D. 3. The question which I refer for your Lordships' decision is: Whether on the facts of this case the Income-tax Officer was justified in taking the assessee's gros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndly certified to me for necessary action. 9. As required by rule 7 of the rules framed by the High Court, a relevant portion of the statement of the case was sent to the assessee for observations and suggestions, if any, to be made within 14 days of its receipt. As the allotted time has expired and no communication has been received from her, I presume that the assessee has apparently no suggestions to offer. G. S. Pathak, for the Commissioner. Goip Nath Kunzru, Gopal Behari and B. L. Dave, for the assessee. JUDGMENT IQBAL AHMAD, C.J.-This is a reference by the Commissioner of Income- tax Central and United Provinces, under Section 66(2) of the Indian Income- tax Act (XI of 1922) and the question referred to this Court is:- Whether on the facts of this case the Income-tax Officer was justified in taking the assessee's gross income from money-lending to be ₹ 31,081. The facts that led to the reference, and as they appear from the statement of the case submitted by the Income-tax Commissioner, are very simple. Shrimati Singari Bai, the assesses, a professional money-lender, regularly kept her accounts according to what is known as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee appealed to the Assistant Commissioner who dismissed the appeal. On an application being then made by the assessee the present reference was made by the Commissioner of Income-tax. The question stated to as by the Commissioner of Income-tax is in effect-though certainly not in form-whether, according to the law in force in respect of the assessment year 1934-35, the Income-tax Officer was entitled to base his assessment of the profits or gains of the assessee's money-lending business, as for the accounting year 1933-34, on the mercantile accountancy system which was the assessee's own regular system, or whether the assessee was entitled to insist on an assessment based only on actual receipts and actual expenditure, that is to say, upon a cash method of accounting. The answer to the question rests entirely on the construction of five main sections, viz., Sections 3, 4, 6, 10 and 13 of the Income-tax Act (XI of 1922), before it was amended by the Indian Income-tax (Amendment) Act, 1939, and references in this judgment to the Act of 1922 will be to that Act in its unamended form except where otherwise stated. Section 3 of the Act of 1922 enacts that whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explains that (1) income, profits and gains charged are further described in Section 6; (2) It does not matter for the purpose of chargeability from what source the income, profits and gains are derived, provided they fulfil the condition of 'accruing' or 'arising' or being 'received' to or by the assessee in British India or of being 'deemed' under the provisions of the Act to 'accrue', 'arise' or be 'received' in British India to or by the assesses; and (3) where income, profits or gains are 'received' in British India- and so become assessable to the general charge of tax-after having 'accrued' or 'arisen' elsewhere, they are taxable in British India as income, profits or gains of the year of actual receipt in British India. Sub-section (3) of Section 4 excludes from the general charge particular classes of income or the income of certain particular classes of persons. Section 4 is couched in plain and simple language and there is nothing whatever in the section which makes either the actual or the deemed receipt of income, profits and gains the sole test of chargeability to tax. Indeed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng has been regularly employed, or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income- tax Officer may determine. It is argued on behalf of the assesses that the only thing in respect of which the Indian Income-tax Act makes tax payable under Sec. 10 is the profit or gain of the business carried on by the assessee. It is pointed out in this connection that it is fundamental to income-tax law that the subject cannot be charged to income-tax on anything which is not 'income' received by the assessee, either actually or in the sense that, by express enactment of the Legislature, it has to be 'deemed' to have been so received. That being so, it is maintained that Section 13 cannot enlarge a fundamental principle of taxation and that, whatever else Section 13 may mean, it certainly cannot mean that something is to be taxed which the assessee has never received and, in whole or in part, may never receive. It is, therefore, urged that the interest which had not been realized by the assessee in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a business for a given period is, therefore, by means of the double entry records. The mercantile accountancy system must, therefore, have been adopted in England hundreds of years ago. We, however, find that. in the English statutes relating to income-tax there are no provisions analogous to the provisions of Section 13. Even in this country Section 13 was introduced for the first time in the Income-tax Act of 1922 (XI of 1922) and there was no provision in the Income-tax Acts preceding the Act of 1922 similar to the provisions of Section 13. The section does, to my mind, owe its origin to the controversy that culminated in the decision of a Full Bench of the Madras High Court in Secretary to the Board of Revenue, Income-tax, Madras v. Arunachalam Chettiar*. The question that arose for determination in that case was whether interest which had accrued due in the year of account to a money-lending firm that maintained its account on the mercantile basis, but was not realized in cash or by adjustment in the accounts, was liable to tax under the Income-tax Act (VII of 1918). Four of the five learned Judges constituting the Bench answered the question in the negative. In the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are these. The charge of income-tax is in accordance with and subject to the provisions of the Income-tax Act, a charge on all income, profits and gains of the assessee of the year by reference to which it is to be calculated. The income, profits and gains of an assessee are taxable, subject always to the provisions of the Act, from whatever source they are derived, whether as a matter of origin or of geography, provided they accrue or arise to or are received by the assessee in British India, or are deemed so to accrue or arise or to be received. Receipt, either actual or 'deemed', as such is not made by income- tax law a condition precedent to taxability. Under the head of source business what are charged are the profits and gains of the business; and that profit and those gains do not escape tax by reason only of the fact that they are not received in the accounting year in money or the equivalent of money, or are not 'deemed' to be so received. They are taxable, if they have arisen or accrued, or are under the Act 'deemed' to have 'arisen' or 'accrued', to the assessee in the accounting year, just as much as if they had been 'recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be gained by attempting to reason from one to the other. Again in Kamakshya Narain Singh v. Commissioner of Income-tax, Bihar Orissa*, their Lordships observed that the Indian Income-tax Act of 1922, which was a consolidating Act, is both in its general frame-work and its particular provisions different from the English Income-tax Acts, so that decisions upon the English Acts are in general of no assistance in construing the Indian Act . Nevertheless the assessee in the present case takes as his starting point those English decisions of high authority which, on the construction of the English Income-tax Acts, lay down that mere entries in accounts do not by themselves attract a charge of income-tax. In Gresham, Life Assurance Society, Ltd. v. Bishop**, it was said by the House of Lords that money not; actually received in England was not taxable under the English Income-tax Acts of 1842 and 1853. It was said by Lord Lindley: First, let us consider what is meant by the receipt of a sum of money. My Lords, I agree with the Court of Appeal that a sum of money may be received in more ways than one, e.g., by the transfer of a coin or a negotiable instrument or other document ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any assistance in construing the effect of Section 13 of the Indian Income-tax Act, 1922, although, in the latter case, Mr. Justice Rowlatt, in reference to the construction of the English Act, said:- It is to be remembered that for income-tax purposes 'receivability' without receipt is nothing. Before a good debt is paid there is no such thing as income- tax upon it. But there was no provision in the English Income-tax Acts which compels an Income-tax Officer to calculate profits and gains of a business in accordance with that method of accounting which the assessee himself has adopted. So far as the Indian decisions are concerned, the weight of authority is decidedly against the assessee's contention. In Commissioner of Income-tax, Madras v. A.T.K.P.L.S.P. Subramaniam Chettiar, a question arose in respect. of the computation to Indian income-tax under Sections 10 and 13 of the Indian Income-tax Act, 1922, of certain interest credited in the books of a firm in Rangoon but derived from a loan by the firm outstanding against an associated business in Penang. The interest had not actually been paid in any form, but a credit entry in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1922. In Feroze Shah v. Commissioner of Income-tax, Punjab** the question also arose whether mere credit entries during the accounting year of sales of timber appearing in the books of an assessee, who kept his accounts on the mercantile basis, could be regarded as including profits accruing in that year, when, as a matter of fact, the prices of such timber were neither realized, not even formally credited as income, during that year and could afford a basis for computing the assessee's profits and gains. It was held that they might and that the fact that the assesses had chosen to take the profits into his income account of the following year made not the least difference. Again in R.B. Dhakeshwar Prasad Narain Singh v. Commissioner of Income-tax, Bihar Orissa*, it was held by a Full Bench of the Madras High Court that an unrealised interest is assessable to income-tax, unless the method of accounting regularly employed by the assessee is a method which ignores such interest. The question whether interest included in a renewed promissory note, though not actually realized by the assessee, could be deemed to have arisen or accrued to him and was, therefore, liabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge, but the interest due under the earlier mortgage was not treated in the assessee's books of account as having been paid or realized, and it was held by their Lordships of the Judicial Committee that, in view of the method of accounting adopted by the assessee, the interest due on the earlier mortgage and included in the renewed mortgage was not liable to the payment of tax. Their Lordships in the course of their judgment pointed out that the assesses, it is important to bear in mind, keep their accounts on a cash basis. The interest of the case is that it seems to have been accepted by their Lordships of the Privy Council that the regular method of accounting adopted by the assessee was the test whether the unreceived interest in question was liable or not to be computed for Indian income- tax purposes as the profits and gains amenable to tax of the money-lending business of the assessee. In 1936 the Bombay High Court in the case of Messrs. Ramkumar Kedarnath v. Commissioner of Income-tax, Bombay*, dealt with a case in which certain selling agents kept their accounts on a mercantile or earnings basis, as opposed to a cash basis, but for the purpose of returning their ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f which have been referred to by me in this judgment, and also on the observations of Sadasiva Ayyar, J., in Secretary to the Board of Revenue, Income-tax, Madras v. Arunachalam Chettiar#. I may, however, with great respect, point out that, as Section 13 did not find a place in the Income-tax Act of 1918 and as provisions similar to that contained in Sec. 13 did not exist in the English statutes, neither the English decisions nor the Madras decision can be a guide for the true interpretation of Section 13. In Sahu Jagmandar Das's case a mortgagee (the assessee) who regularly kept his accounts in accordance with a system of mercantile accounting, obtained a decree for ₹ 23,000 odd in respect of the balance of unpaid interest due on his mortgage. Having obtained this decree, he credited the amount to the mortgagor in the mortgagor's ledger folio and then he squared the account by crediting the balance in his own (the assessee's) interest ledger. No part of the decree had in fact been received at the time of accounting for assessment and the assessee contended that the amount should be excluded from assessment as it was not likely to be realised . It was argued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived should refer only to the connection between the income and the country in question. They refer, I think, to what income, profits and gains are to be taxed, and it is made only an additional condition of taxation that nothing which does not accrue or arise or is not received in British India is to be taxed. It is true that sub-section (2) of Section 4 does go on to deal with income, profits and gains accruing or arising outside British India. But that, to my mind, is no reason for construing sub-section (1) in anything but the sense that everything which accrues or arises to, or is received by, the assessee is taxable, provided it is received by, or accrues or arises to, the assessee in British India or is deemed so to accrue, arise or be received. I am, therefore, inclined to take the view, with deference to the learned Judges who decided this case, that, if its facts are materially the same as those before us, it was wrongly decided. If any other view is accepted of the meaning of Section 13 of the Indian Income-tax Act, 1922, than that, where an assessee has himself adopted a particular method of accounting, the Income-tax Officer also is bound to accept that method for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, and (c) a covering letter which explained and adjusted difference between the figure of profits shown in the profit and loss account and the figure of profits and gains shown in its return for income-tax purposes. The Income-tax Officer seems to have rejected the letter of explanation and to have held himself bound to accept the profit and loss account figure regardless of any explanation of why it was not the true figure for income- tax purposes. The question accordingly which the Judicial Committee was asked to deal with was whether the Income-tax Officer was entitled to proceed on the basis of the actual profit and loss account without regard to the explanation contained in the letter. Their Lordships, however, themselves substituted a variation of the question by asking: Whether in view of the provisions of Section 13 of the Income-tax Act or otherwise the Income-tax Officer was right in computing for the purpose of Section 10 of that Act income, profits and gains in accordance with the method of accounting regularly employed by the assessee when that method in fact does not show the true income, profits and gains. If I have understood this case rightly, what was being con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1922, entitled, and bound, to compute the profits and gains of the assessee in accordance with the method of accounting regularly adopted by the assessee, that is to say the mercantile method of accounting, notwithstanding that, as a result of such computation, profits and gains of the assessee's business would or might, subject to any allowances proper to be made under the said Act, become chargeable to income-tax without having been actually received, or deemed by the said Act to have been received, by the assessee. A copy of this judgment under the seal of the Court and the signature of the Registrar will be sent to the Commissioner so that the case may be disposed of by him accordingly. A fee of ₹ 500/- is allowed to the counsel appearing on behalf of the Income-tax Department upon his filing the usual certificate within a period of one month. BRAUND, J.--I agree and have nothing to add. HAMILTON, J.--I agree. MALIK, J.--I agree. SINHA, J.--I concur and have nothing to add. BY THE COURT.-- The Income-tax Officer, on the facts set out in the case stated, was, for the purpose of Section 10 of the Indian Income-tax Act, 1922, entitled, and bound, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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