Iqbal Ahmad, C.J. - (1.) THIS is a reference by the Commissioner of Income-tax, Central and United Provinces, under Section 66(2), Income-tax Act (11 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 Rs. 31,081.
(2.) 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 assessee, a professional money-lender, regularly kept her accounts according to what is known as the "mercantile accountancy system" or the "book profits system of accountancy" or the "complete double entry book-keeping." Under this system the net profit or loss is calculated after taking into account all the income and all the expenditure relating to the period, whether such income has been actually received or not and, whether such expenditure has teen actually paid or not. That is to say, the profit computed under this system is the profit actually earned, though not necessarily realized in cash, or the loss computed under this system is the loss actually sustained, though not necessarily paid in cash. THE distinguishing feature of this method of accountancy is that it brings into credit what is due immediately it becomes legally due and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. THE "mercantile accountancy system" is the opposite of the "cash system of bookkeeping" under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. In actual business practice however the systems of book-keeping followed in many cases are such that they can be called neither the full "mercantile accountancy system" nor the cash basis of book-keeping. THEy are simply mixtures of the two systems and are styled as "pybrid systems of bookkeeping" : vide Book-keeping and Accounts by Rupram Gupta, pages 269 and 270. In the case before us, for the accounting year 1933-34, the assessee submitted a return showing her income from money-lending to be Rs. 1499. For the purpose of this return, she chose a cash method of accounting. Her accounts were then called for by the Income-tax Officer, and it was found that they were, and had been regularly kept, according to the mercantile system, and that the interest account showed a credit of Rs. 31,081. Even though this amount had not been actually realized, 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. The Income-tax Officer held that, in view of the provisions of Section 13, Income-tax Act, he was not only entitled, but bound, to treat this sum of Rs. 31,081 as the assessee s gross money-lending income and, after allowing certain permissible deductions, he assessed her on Rs. 23,400 on account of profits from money-lending business. The 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 us 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 1984-85, 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, Income-tax Act, 11 of 1922, before it was amended by the 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 where any Act of the Indian Legislature enacts that income-tax shall be charged for any year at any rate or rates applicable to the total income of an assessee, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of all income, profits and gains of the previous year of every individual, company, firm and Hindu undivided family.
(3.) THAT this section casts liability for the payment of income-tax and is, therefore, the charging section is clear from para. 1 of the judgment of their Lordships of the Privy Council in Raghunandan Prasad Singh v. Commissioner of Income-tax, Bihar and Orissa It provides for a rate of tax which may be varied from time to time. It enacts that, subject to, and in accordance with, the provisions of the Act, tax shall be charged on "all income, profits and gains" of the assessee. THAT is the general charge of tax. It makes the income, profits and gains of the year previous to the year of assessment the basis for ascertaining income, profits and gains. And, finally, it casts the income-tax net over associations of individuals and corporations as well as over individuals. Section 4, while not itself the primary or general charging section, is one of those provisions referred to in Section 3 "in accordance with and subject to" which, the general charge on all income, profits and gains is to operate. The relevant portion of Section 4 is as follows: 4. (1) Save as hereinafter provided, this Act shall apply to all income, profits or gains, as described or comprised in Section 6, from whatever source derived, accruing or arising, or received in British India, or deemed under the provisions of this Act to accrue, or arise, or to be received in British India. (2) Profits, and gains of a business accruing or arising without British India to a person resident in British India shall be deemed to be profits and gains of the year in which they are received or brought (into British India notwithstanding the fact that they did not so accrue or arise in that year, provided that they are (so) received or brought in within three years of the end of the year in which they accrued or arose. Section 4 is explanatory of the general charging section-Section 3-in that it explains that (1) income, profits and gains charged are further described in Section 6; (2) it does not matter for the purpose of charge-ability 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 assessee, 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 the very reverse is the case. Section 4 draws the clearest distinction between what is. received by the assessee and what has merely accrued or arisen to the assessee. And, with a full consciousness of this distinction, the Act provides that the general charge of tax is to extend not only to what has been received or is to be "deemed to have been received, but also to what has accrued or arisen or is to be deemed to have accrued or arisen. It follows that actual or deemed receipt of income, profit, or gain is not the sole test for the levy of tax and that income, profits or gains that have accrued or arisen or are deemed to have accrued or arisen are also liable to the charge of income-tax.;