Regular accounting method governs income computation only where true taxable profit can properly be deduced from the books.

Section 13 of the Indian Income-tax Act, 1922 treats the assessee's regularly employed accounting method as the normal basis for computing business income, but only so long as true income, profits and gains can properly be deduced from it. If the accounts do not disclose taxable profit, the Income-tax Officer must examine whether a correct computation can still be made from those books and cannot treat audited book figures as binding merely because the method is regular. The text notes that the authorities had failed to apply this statutory judgment and that the accounts showed undervaluation of stock and a secret reserve, indicating that the profit and loss account did not reflect true taxable income.

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Issues: Whether, under section 13 of the Indian Income-tax Act, 1922, the income, profits and gains of a business must be computed in accordance with the method of accounting regularly employed by the assessee even where that method does not in fact disclose the true income, profits and gains.

Analysis: Section 13 makes the regularly employed method of accounting the normal basis of computation for business income under section 10. That basis is mandatory unless the Income-tax Officer forms the opinion that the income, profits and gains cannot properly be deduced therefrom. The section does not concern the method of making the statutory return, but the business accounting method regularly adopted by the assessee for its own purposes. If the accounts do not show the true taxable profit, the officer must still consider whether the true profit can properly be deduced from them; he cannot simply accept the figures because they appear in audited accounts or because the assessee has followed a regular method. On the facts, the officers below had treated the book figures as binding and had not exercised the judgment required by the proviso. The facts also showed systematic undervaluation of stock and the creation of a secret reserve, negativing any suggestion that the profit and loss account disclosed the true taxable income.

Conclusion: The Income-tax Officer was not entitled to compute income on the footing that the book results must be accepted merely because the method was regularly employed. The amended question was answered in the negative, and the assessee succeeded.

Final Conclusion: Regular accounting practice is the starting point for computation, but it does not compel acceptance of book profits where they do not disclose the true taxable income; the assessing authority must apply the statutory judgment under section 13.

Ratio Decidendi: Under section 13 of the Indian Income-tax Act, 1922, the regular method of accounting is binding only so long as income, profits and gains can properly be deduced from it; if not, the Income-tax Officer must determine the computation on a basis that reflects true taxable income.

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