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TMI Blog1936 (3) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... h book in which the actual realisations are shown, but there is no interest ledger. Clearly therefore the assessee has not computed his profit at all and no particular method of accounting can be said to be regularly employed by him. The Income Tax Officer had therefore to make the computation of profit upon such basis and in such manner as the Income Tax Officer might determine, and he decided to adopt the accrued basis which was also followed in previous years without objection on the part of the assessee". It appears that the assessee for the purposes of his return for income tax in previous years totalled the amount of interest which had accrued in the particular year in question and paid tax on the amount so found. He now contends that he should not have been assessed in the past on the sums entered in this books as accrued interest and for the current year he desires to correct this situation by demanding to be assessed not upon the interest which has accrued during the year but upon the sums actually received by him. Now, there are two methods of accounting for the income, profits and gains of a business which are generally referred to as the cash basis and the mercant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee and were furnished by him as a basis for assessment. The assessee has made and desires to make no change in his method of keeping accounts. Neither in this year nor in past years has he computed the profit or loss on his business and therefore according to the proviso to Section 13 of the Income Tax Act it is open to the Income Tax Officer to make the computation of income, profits or gains upon such basis and in such manner as the Income Tax Officer may determine. This however does not mean that the Income Tax Officer is at liberty to tax what is not chargeable to income tax under the Act and if it be true that in past years the Income Tax Officer with the assent of the assessee has taxed that which under the Act is not assessable this is no justification for continuing such a practice. An assessee may well discover that in past years he has paid his tax on an erroneous basis or has returned as profit that which was not profit at all. This fact will not prevent him in any given year from making a return on a correct basis. In this case the Commissioner considers that the assessee wishes to change his method of accounting from the cash basis to the accrued basis. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gains of his business. Accordingly the profits and gains cannot be computed "in accordance with the method of accounting regularly employed by the assessee." There is furthermore no question of the assessee changing his method of accounting; for the accounts now supplied are precisely similar to those supplied heretofore. The matter of assessment must be approached therefore as though the year of assessment in question were the first in which the business had been carried on and the merits of the basis of assessment must be considered de novo. The nature of the word "profits" was discussed by the Court of Appeal in England in In re: The Spanish Prospecting Company, Limited and LORD JUSTICE MOULTON at page 98 said: "The word "profits" has in my opinion a well-defined legal meaning, and this meaning concides with the fundamental conception of profits in general parlance, although in mercantile phraseology the word may at times bear meanings indicated by the special context which deviate in some respects from this fundamental signification. "Profits" implies a comparison between the state of a business at two specific dates usually separ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of previous years". The statement of the question is followed by the following observation: "As a matter of fact the assessee has been assessed neither on a strictly cash basis nor on accrual basis" and then follows a statement of the way in which the assessee submitted his accounts as found by the Assistant Commissioner. The facts are perfectly clear and are clearly found by the Assistant Commissioner and it is clear that there has been no proper accounting for profits. The answer to the question in my opinion is that the method of assessment heretofore followed was in any case erroneous. It is open to the Income Tax Officer to assess the assessee either upon a cash basis or upon a mercantile basis but in the latter case the accrued interest can only be dealt with if a profit and loss account is drawn up and the accrued but unpaid interest is brought in as a valued asset and it is not open to the Income Tax Officer to take accrued interest into the assessment on any other basis. AGARWALA, J.--The assessee, who is a large landowner also carries on the business of a money-lender. For the year 1931-32 he was assessed at ₹ 50,987 in respect of the profits of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. As I understood this argument it went to this length, that as there was no addition of the items in the two statements, no profit or loss account and no balance sheet, there was no method of accounting at all. I am unable to agree. It may be said that the assessee's method of keeping the accounts of his money-lending business is not scientific but it is the method adopted by himself and it is the method by which he has regularly ascertained the sum of which he considered himself to be assessable in respect of the profits of his business. The next ground on which the assessee challenges the assessment is this; he contends that interest not actually received is not assessable and that if he has previously included in his profits sums which are not taxable that circumstance does not prevent him from raising the point now. It may be conceded at once that an assessee is not liable to be assessed in respect of an amount which is not subject to income tax even though he has permitted himself to be taxed in respect of similar sums in previous years. But is this the case in the present instance? It is contended that interest unrealised in fact, and not treated by the assessee as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid the purchase price, agreed to pay interest, on the amount due, on a certain date. The company was assessed in respect of this interest although it was not paid on the due date, or at all, during the year for which the assessment was made. The Privy Council held that the amount was not assessable in that year. It will be observed that the assessment was in respect of what was considered by the assessing authority to be income, and not in respect of the profits and gains of the company's business, for the company had ceased to carry on business before the year in question. The distinction was clearly indicated by Lord Wrenbury, who delivered the judgment of the Judicial Committee where his Lordship said: "It is said, and truly, that a commercial company in preparing its balance sheet and profit and loss account does not confine itself to its actual receipts-does not prepare a mere cash account but values its book debts and its stock in trade and so on and calculates its profits accordingly. From the practice of commerce and of accountants and from the necessity of the case this is so. But this is far from establishing that income arises or accrues from an investment whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication on the 28th November, 1931, requiring the Commissioner of Income Tax to refer to the High Court the question of law "Whether it is open to the Income Tax Officer to regard interest unrealised as taxable income" alleged to arise out of the appellate decision under Section 31 of the Income Tax Act, 1922, of the Assistant Commissioner, dated the 7th November 1931, and the Commissioner has made the present reference of 13th October, 1933 (not within sixty days but after nearly two years), purporting to be under Section 66(2) of the Act formulating the question for opinion as: "Whether in the circumstances of this case, the assessee is liable to be taxed on his income from money lending on the mixed cash and accrued basis which has been followed in his assessments of previous years?" (partly perhaps because their Lordships of the Judicial Committee deprecate the statement of a question of law in an abstract form and divorced from the facts of the particular case and partly for other reasons which will later appear) and expressing his own opinion that the answer is in the affirmative. 2. As is well-known, Section 66(2) is indifferently framed (see also Shi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -15-9 as against over ₹ 11,000 shown in 1930-31 (apart from ₹ 15,669-8-0 mentioned below) and over ₹ 30,000 shown in 1929-30. 5. The Income Tax Officer thereupon took action under Section 23(2) and Section 22(4) and the assessee caused to be produced the evidence and documents on which he relied in support of his return, and upon an examination of the assessee's accounts which admittedly exhibited no change of system from previous years, and his documents, the Income Tax Officer calculated therefrom "the assessable income" (or profits, as defined in In re Spanish Prospecting Company) of the year by taking the state of the business at the end of 1336 F. 1929-30 and at the end of 1337 F. 1930-31, and comparing the assets of the business at the two dates. Finding from Exhibit A the total investment up to the end of 1337 F. he deducted therefrom the aggregate of the total investment up to the end of 1336 F. and of the new loans advanced in 1337 F. and held as follows:-"In the income return the assessee showed only ₹ 222-15-9 as income from interest on the basis of actual realisation (cash basis), whereas the previous records show that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method of accounting can be said to be regularly employed by him. The Income Tax Officer had therefore to make the computation of profit upon such basis and in such manner as the Income Tax Officer may determine and he decided to adopt the accrued basis which was also followed in previous year without objection on the part of the assessee". The Assistant Commissioner then negatived the contention on behalf of the assessee that the proviso to Section 13 of the Act did not entitle the Income Tax Officer to compute the profits on the accrual basis, the basis of which contention was that the accrued interest not actually received is not "income, profits or gains" within the meaning of the Income Tax Act. What he failed to observe was that the Income Tax Officer had not proceeded under the proviso. In the result he maintained the computation of income and held it assessable subject to the deductions mentioned. 7. It was in consequence of the rejection of the contention mentioned that the application was, as already stated, made under Section 66(2) to refer the question whether the Income Tax Officer was entitled to regard interest unrealised as taxable income. The argum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of (a) the amount of interest accrued in 1930-31, when no interest has been realised and (b) the amount of interest realised in 1930-31 less the amount thereof previously assessed to income tax." 11. The above statement of the facts expands what the Commissioner of Income Tax has said by the application of his Annexures A and B and the other papers. 12. In the statement of the case he then goes on to affirm that "as a matter of fact the assessee has been assessed neither on strictly cash basis nor on accrual basis." Computation of income in the year under assessment had he points out, been made on the same lines as had been adopted at the instance of the assessee himself in previous years; for certain reasons (which are set out but which are irrelevant) he had in 1931-32 claimed assessment on the cash basis under deduction of interest included in the cash realisation of the year where that interest had already been taxed on the accrual basis in the previous years. The Commissioner had in fact come to realise the inapplicability of some of the observations in the appellate judgment in which the computation of profit by the Income Tax Officer had been affirmed on a g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry modification). There is apparently no question that in the circumstances of this assessee, as disclosed by himself and his accountant the profit of the year may safely be computed as it has always been by himself as equal to the full interest (less remission shown) which has accrued within the year. 14. Thus the assessee's contention is that the legitimacy of the principles of computation applied by the assessee is a question of law and that the accrued interest debt due to him cannot be taxed as profits unless be treats it as such while the case for the Commissioner is that what has been held liable to income tax is not the unrealised accrued interest but the profit of the business computed on the assessee's own method of computation though it happens to be of the same amount (subject to the assessee's remissions and deductions mentioned) as the accrued interest. But the case stated implies that the assessee has treated the accrued interest as received by him (so that in the eye of the law it is a receipt) and (subject to deductions which are not in controversy) as profits of his business during the year. It, would thus appear that the assessee's point is not h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purpose of Section 10 is made on the method of accounting regularly employed by the assessee which though no doubt a mixed system, is one from which his profits can properly be and have been deduced. 16. I am accordingly constrained to the view that on the statement of the case referred for opinion it must be held that the Computation of profit for assessment to income tax has as it stands, been genuinely made under the substantive part of Section 13, that is to say, on the method of accounting regularly employed by the assessee and that accordingly no point of law arises thereon for decision under Section 66(5). A reference back to the Commissioner under Section 66(4) has not been suggested and it would probably not be helpful at this stage. 17. I may deal briefly with two incidental contentions for the assessee. 18. The first of these is that "in the circumstances of the case" the assessee in fact employs no method of accounting within the meaning of Section 13 so that a computation of profit thereon is not possible. But though it may be unscientific, a method of accounting is certainly regularly employed by him, which moreover he has himself utilised for over ..... X X X X Extracts X X X X X X X X Extracts X X X X
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