DHAKESWAR PRASAD NARAIN SINGH Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee has amongst other sources of income a money-lending business. He keeps books of account which show the business transacted with each debtor, the interest which has accrued and the amount actually realized in each year. In paragraph 4 of the order of the Assistant Commissioner of Income Tax following facts are set forth : THE money-lending accounts of the assessee consist of personal accounts of his debtors in which the accrued interests from year to year are calculated and entered. THE amount actually realised is also similarly entered, but neither the accrued interest not the realised is also similarly entered, but neither the accrued interest not the realised interest are totalled and accounted for in an interest account and no profit or loss is computed. THEre is also a cash book in which the actual realisations are shown, but there is no interest ledge. 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 might determine, and he decided to adopt the accrued basis which was also followed in previous year 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 sum 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.

(2.) 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 mercantile basis. According to the former a record is, as in this case, kept of actual receipts and actual payments, entries being made only when money is actually collected or disbursed and if the profits of the business are accounted for in this way the tax is payable on the difference between the receipts and payment for the period in question. There is, secondly, the mercantile system under which a profit and loss account is maintained. At the end of the financial year the assets and liabilities are valued and entered in the account and the difference between the two is the profit upon which the tax is paid. In most cases the debts would be valued as of their face value, that is to say, at the moment at which it is shown as having accrued. Nevertheless the accounting is on a valuation basis and the debts in so far as they are entered in the accounts are considered in the light only of an asset. In this case the finding of fact by the Assistant Commissioner is that the assessee did not compute his profit by either of these two methods or at all. He merely brought his accounts and submitted to be assessed upon the debts which had accrued. If he had adopted the mercantile method and had valued the debts which had accrued to him at the end of the year and had balanced upon the assets against the liabilities he would have been rightly liable to tax upon the profits shown in accordance with that method of accounting. The assessee has however done nothing of the kind. It is true that he has kept accounts and that he has shown debts realised and debts which had accrued but he has nowhere accounted for the profits of the money-lending business. The Commissioner of Income Tax Notwithstanding this finding on the part of the Assistant Commissioner which is set forth in his statement of the case has held that whereas the assessee has hitherto been taxed upon the debts which have accrued to him he cannot now be allowed to say that this system of taxation is erroneous. He attributes to the assessee a desire to change his method of accounting and sets forth a motive on the part of the assessee for desiring to change the method of accounting and sets forth a motive on the part of the assessee for desiring to change the method of assessment. This motive, even if the Commissioners opinion be will founded, is in my opinion, entirely irrelevant. The accounts which have been supplied for the current year are precisely like the furnished by him as a basis for assessment. The assessee has made Neither in this year not 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 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 will 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 my opinion this is not a correct view of the matter. The method of accounting now presented is precisely similar to that heretofore followed. What the assessee desires to change is not the method of accounting for profits and gains but the method of assessment which the Income Tax Officer should employ. The question therefore really is whether the assessee is right in his contention that in future the actual sums realised in any year should be taxed, or whether the method heretofore followed in his case of taxing the accruals is correct.

(3.) WE start therefore with this fundamental definition of profits, namely, if the total assets of the business at the two dates be compared, the increase which they show at the later date as compared with the earlier date (due allowance, of course, being made for any capital introduced into or taken out of the business in the meanwhile) represents in strictness the profits of the business during the period in question.... To render the ascertainment of the profit of a business of practical use it is evident that the assets, of whatever nature they may be, must be represented by their money value. But as a rule these assets exist in the shape of things or right and not in the shape of money. The debts owed to the company may be good, bad or doubtful. The figure inserted to represented stock in trade must be arrived at by a valuation of the actual articles. Property of whatever nature it be, acquired in the course of the business has a value varying with the condition of the market. It will be seen, therefore, that in almost every item of the account a question of valuation must come in.