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TMI Blog1960 (9) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the case submitted to us, in the following way. It appears that the assessee had advanced a certain sum of money on the basis of a mortgage deed which he put into suit on July 16, 1932, and in which he obtained a decree from the subordinate judge's court. Upon appeal, the appeal was allowed and the suit was dismissed on the ground that the transferors had no right to transfer the property. At that time the amount of ₹ 24,794 stood to the debit of the account of the mortgagor debtor. This was made up as follows : Principal amount ₹ 14,500-0-0 Expenses ₹ 2,995-4-0 Interest as determined and allowed by the court ₹ 7,298-12-0 Total ₹ 24,794-0-0 In the accounting year 1938-39, relevant for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his money-lending business kept a mixed method of accounting and that whereas he credited the interest account only upon the receipt of interest, where a suit was instituted the entire accrued interest was creidted with a corresponding debit to the debtor's account, and that with respect to litigation expenses in general the practice was to debit litigation expenses to the debtor's account and to write off so much of those expenses which remained irrecoverable only at the time when the litigation came to a finality. The Tribunal, however, held that whatever might be the system of accounting adopted by the assessee he could claim an allowance in respect of expenditure only in the accounting year in which it was incurred. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the fact remains that the matter had been taken to the Privy Council and in case of reversal of the decree of the High Court the mortgage amount together with interest could be recovered and also at least such part of the costs which would have been allowed for all stages of the litigation. No doubt strictly speaking expenses cannot be deducted only as expenditure. But the view that the assessee seems to have taken is that for the purposes of accounting it was best to go on debiting the mortgagor debtor with not only accrued and accruing interest but also with expenses incurred in the litigation and to adjust against the amounts so debited such sums as were later recovered as a result of the decrees passed. The advantage to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cited to us. It was contended that deductions can be permitted in respect of only those expenses (and losses) which are incurred in the relevant accounting year. Reliance for this proposition was and may be placed upon the cases of Commissioner of Income-tax v. Basant Rai Takhat Singh [1933] 1 ITR 197, Mackenzie v. Arnold [1952] 33 Tax Cas. 363, In re Chouthmal Golapchand [1938] 6 ITR 733 , Commissioner of Income-tax v. Mathuradas Mannalal [1942] 10 ITR 95, and Mulchand Hiralal v. Commissioner of Income-tax [1938] 6 ITR 151 . In Commissioner of Income-tax v. Chitnavis [1932] 2 Comp. Cas. 464 Lord Russell said as follows : "You may not, when setting out to ascertain the profits and gains of one year, deduct a loss which had in fact ..... 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 seems therefore to follow that if profits are to be computed in accordance with the method of accounting regularly employed by the assessee, then it is to the method of accounting that one must look. And if the method of accounting regularly employed is a method whereby litigation expenditure is, so to say, kept in a suspense account and is brought into the accounts only for the purpose of being claimed as expenditure when the fate of the litigation is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the interest ledger as well as in the interest account of the general ledger. This allocation was made, not necessarily in the year in which the money was actually received by the assessee, but sometimes in the following year and sometimes several years later. In the relevant assessment year the Income-tax Officer took first the amount which was allocated to interest and credited in the interest register in the previous year and which had not borne tax; he next examined the deposit register and in the case of sums there shown as received in the previous year but from which no allocation had been shown in the interest account, he himself calculated the proportion of each receipt which represented interest and added the result to the figure ..... X X X X Extracts X X X X X X X X Extracts X X X X
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