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TMI Blog1934 (6) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... and the manufacture and sale of bricks and owns house property. The firm consists of two partners, Sh. Ahmad Din and Sh. Allah Ditta, each having equal shares. In connection with the assessment for 1931-32, the petitioner returned under Section 22(2) of the Act, a net income of ₹ 1,961-8-4 from property, a net profit of ₹ 6,021-5-1 from money-lending and a loss of ₹ 7,541-6-0 in the brick kiln business. This reference is concerned only with the income from the money-lending business and will be confined to it alone. In a statement of the income and expenses of the money-lending business attached to the return, the assessee gave the following details:- INTEREST INCOME. Rs. As. P. By income from interest on deposits in the Peoples Bank of Northern India, Gujrat ... 3,006 12 7 By income from interest on deposit in the Lyallpur Bank, Gujrat ... 639 14 6 By income from interest on deposits in the Punjab National Bank, Lahore ... 2,536 13 0 By interest from sundry debtors ... 887 0 0 Total ... (Rs.) 7,270 8 1 A note was added to the return that "the actual receipts (from interest) amounted to ₹ 887. The sum of ₹ 2,500 was included on accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as regularly employed by the assessee is The mercantile system of accountancy. Under this system Entries are made in the accounts on the date not of receipt of money or expenditure of money but on the date of transactions irrespective of the date of payment. A profit and loss account prepared on this basis is accepted as evidence of the assessee's income and assessment is made accordingly. If any part of these "book profits" is later on found to have become irrecoverable it is deducted from the assessment as a bad debt. Now it will be interesting to note here that the sum of ₹ 6,383-8-1 returned by the assessee and offered for assessment as interest received from various banks includes a sum of ₹ 4,647-0-6 which represents the aggregate of a number of items of interest which were not actually realized but were merely adjusted and included in the renewed receipts of fixed deposits. The assessee has tried to distinguish the case of banks from individual depositaries on the ground of security, but the difference is only one of degree. It is therefore the method of keeping accounts according to which the assessee regularly enters in his profit and loss accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest should be added to principal and the whole amount carried forward in the creditor's books as being due for principal is not different from a transaction wherein the creditor receives actual payment of the amount due for interest and lends the same back again to the debtor. When both parties agree to such a settlement and the accounts are so adjusted, the adjustment operates as a payment of interest." In the present case the renewal of the pronote is a proof of the parties having agreed to such a settlement which is accompanied by an adjustment in the assessee's books. It may be mentioned that the payments of interest to his creditors similarly adjusted by an assessee debtor in his books are invariably admitted and allowed as deduction in the assessment of the debtor in accordance with Section 10(3) which is practically on the same lines as Section 13. What therefore applies to expenses must equally apply to income. Moreover the institution of bad debts pre-supposes the assessment of what are called "book profits" and no claim for bad debts should ever arise if the only test of :- The question of law referred by the Commissioner of Income Tax in this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he so-called mercantile system of accountancy or book profit system. Under this system entries are made in the account on the date not of the receipt of money or expenditure of money but on the date of the transactions irrespective of the date of cash payment. A profit and loss account prepared on this basis is accepted as evidence of the assessee's income and assessment is made accordingly. If any part of these "book profits" is later on found to have become irrecoverable, it is deducted from the assessment as bad debt. According to this method the assessee regularly entered in his profit and loss account income which might not have been actually received but was treated as such by the assessee for all purposes of his business and the Commis- sioner was of opinion that it was the financial valuation, according to this method, which must form the basis of assessment. In our judgment the opinion of the Commissioner is correct. It was held in Commissioner of Income Tax, Madras v. Subrahmanyan Chettiyar (I.L.R. 50 Mad. 765), that as the assessee had chosen to adopt the so-called mercantile basis of accountancy in keeping his accounts, it was upon that basis and upon tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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