MANCHANDA, J. -
(1.)THE judgement of the court was delivered by
This is a case stated by the Income-tax Appellate Tribunal, Delhi Bench (hereinafter referred to as the Tribunal), under section 66(2) of the Income-tax Act, 1922. THE question referred is :
Whether, in the circumstances of the case the amount of Rs. 13,751 is assessable in the year 1951-52, or in the year 1952-53 ?
(2.)THE facts, according to the statment of the case submitted are as follows :
THE relevant assessment year is 1952-53, the previous year being the year ending 31st of October, 1951. THE assessee is an individual. She is a forest contractor and maintains regular books account on the mercantile basis. During the year ending 31st October, 1950, i.e., she cut, inter alia, trees of the vlaue of Rs. 13,751 from the forests of which she had taken a contract. Before she could remove the timber an order was served upon her by the Divisional Forest Officer dated June 5, 1950, whereunder she was prohibited from removing and the burning of charcoal in Bakama forest. THE ground given was that the Range Officer, Private Forests, had reported very heavy deviation by the assessee from the working scheme all over his forests. THEreupon, a complaint was lodged by the Range Officer, Private Forests, Dehra Dun, under section 15 of the U.P.Private Forests Act (Act VI of 1949) on the ground that the assessee had made heavy deviations from working scheme of Dobri Bakama forests, etc., after September 27, 1949, without any lawful authority. This complaint was tried by the Judicial Officer, Dehra Dun, who by his order dated January 16, 1951, acquited the assessee. THE operative portion of his order reads :
No evidence whatsoever has been produced by the compliment that the material detained by his department in the forests of and belonging to the accused is of unauthorised feeling. THE detention of the material is, therefore, wrong and unjustified. Under the circumstances, I order that the material detained be released.
THEreafter, the said stock was released. It had, however, not been released by the close of the accounting year for the assessment year 1951-52, which ended on October 31, 1950, but was released only in the year following which ended on October 31, 1951.
The profits in the books of account were as under :
Although the assessee maintained the books of account on the mercantile basis she did not include the stock of felled trees worth Rs. 13,751 in the closing balance of stocks on October 31, 1950, i.e., relevant to the assessment year 1951-52. After the said cease of stock she accounted for recorded in the books of account for the relevant assessment year 1952-53. The assessee filed two returns, one for the assessment year 1951-52 and the other for the assessment year 1952-53, declaring her income as shown in her books of account and set out hereinabove. Subsequent to the filing of the return for the assessment year 1952-53, the assessee claimed, before the Income-tax Officer, that the book profit for that year should be modified by deleting the sum of Rs. 13,751 and this should year should be added to the book loss of Rs. 7,745 returned for the earlier year ending on October 31, 1951 (assessment year 1951-52), as it represented the stock of that year, the felling of the threes having taken place in that year. In the assessment for the assessment year 1951-52, the assessee had, before the assessment was made, asked for the adjustment in the stock position to be made in her books of account for that year. This claim was not allowed by the Income-tax Officer and in the order of assessment for the assessment year 1951-52 the reasons given for this were :
(1) That the assessee was not in possession of this stock at the end of the previous year (year ending October 31, 1950).
(2) He had no reasonable expectation to recover the whole or any part of this stock in the subsequent years.
(3) There is no adjustment of the value of this stock in the books at the end of the previous year. The closing stock will cover only such items of stock as were the property of the assessee on the closing day of the accounting year. Any stock lost to the assessee, and for which there is no expectation the recovery cannot be included in the closing stock.
There is no indication in the statement of the case as to whether there was any appeal from this assessment order for 1951-52. Therefore, it is not unreasonable to conclude that this position was accepted by the assessee. In the assessment for the assessment year 1952-53, however, as already stated, the assessee, though she had made the return on the basis of her book profit which included the sum of Rs. 13,751 a claim was put forward that the book profit should be modified and the said sum should be deleted from the book profit of the assessment year 1952-53. The Income-tax Officer rejected the claim on the short ground that this very claim had already been considered and rejected by him in the assessment order for the assessment year 1951-52.
The Appellate Assistant Commissioner found that though the sum of Rs. 13,751 was subsequently adjusted in the return filed by the assessee for 1952-53, yet no corresponding adjustment in the books of account was made in the stock account on the closing date, i.e., October 31, 1950, relevant for the assessment year 1951-52. According to him the assessee her self did not consider this to form part of her stock for that year as it had been frozen by the forest department. It was only after the release of the stock and the sale thereof in the previous year relevant to the assessment year 1952-53, that the said sum of Rs. 13,759 was returned as income for that assessment year.
A further appeal to the Tribunal was also unsuccessful for the reason, firstly, that the assessee had neither shown the stock of timber in its closing stock for the assessment year 1951-52 (year ending October 31, 1950) nor had she adjusted this in the return of income for that year, and secondly, that there was no guarantee that the stock detained by Government would ever have come back to the assessee. The Tribunal, however, went on to observe that in a case of this type the profit could be related back to the earlier year by way of the value of the stock, but in the circumstances of this case it declined to do so.
(3.)THE application under section 66(1) having been unsuccessful and upon this court being moved, the case was directed to be referred under section 66(2) of the Act.
THE main contention of Mr. Banarsi Das, the learned counsel for the assessee, was that the system of accounting admittedly being mercantile the profit or loss account for the assessment year 1951-52 could not have been drawn up without taking into consideration the trees which had been felled prior to the close of the previous year ending on October 31, 1950, relevant to the assessment year 1950-51. Furthermore, that though the value of the trees which had been felled had not been entered by the assessee as its took in its books of account, nevertheless, such adjustment was bound to be made by the department or at least permission to make the necessary adjustment, when the matter was brought to the notice of the Income-tax Officer during the proceedings for the assessment year 1951-52, ought to have been given. Strong reliance was placed on the decision of the House of Lords in Commissioners of Inland Revenue v. Newcastle Breweries Ltd. and Supreme Court in Indermani Jatia v. Commissioner of Income-tax in order to show the special features which obtain in the mercantile system of accounting as contrasted as contrasted with the cash system.
The learned standing counsel for the department, on the other hand, contended that the system of accounting adopted by the assessee was a hybrid one inasmuch as the Income-tax Officer had in passing observed that the practice if such forest contractors was to account for the logs floated down stream not on the mercantile system but upon their reaching their destination. Several authorities were cited for the proposition that when the system is a hybrid system the assessee would be bound by his past practice.
It is not necessary to consider the cases cited by the standing counsel as there is no warrant for assuming that the system employed by the assessee was a hybrid system. As already noticed, she is a forest contractor and maintains regular books of account on mercantile basis. In the heading of the assessment order the system of accounting is mentioned as Mercantile.