1937 (11) TMI 1 - HC - Income Tax

Income-tax Officer's Duty to Properly Assess Income Under Section 13 of Indian Income-tax Act

Commissioner of Income-tax Versus Sarangpur Cotton Manufacturing Co. Ltd.

The Privy Council held that the Income-tax Officer failed to exercise proper judgment under Section 13 of the Indian Income-tax Act, 1922, by accepting ... - Issues Involved:1. Whether the undervaluation of opening and closing stock should be considered in the computation of income.2. Whether the method of accounting regularly employed by the assessee should be accepted for income tax purposes.3. Interpretation and application of Section 13 of the Indian Income-tax Act, 1922.4. The role and judgment of the Income-tax Officer in determining true income, profits, and gains.Issue-wise Detailed Analysis:1. Undervaluation of Opening and Closing Stock:The respondents, a limited liability company, argued that the undervaluation of their closing stock for the year 1929, disallowed by Rs. 3,97,634 in the assessment year 1930-31, should be added to the opening stock of the current year 1930. They also contended that the undervaluation of the closing stock by Rs. 3,59,966 should be added to the closing stock for the current assessment. This method had been consistently adopted in previous assessments and was supported by the ruling in Commissioner of Income-tax, Bombay v. Ahmedabad New Cotton Mills Co. Ltd.2. Method of Accounting Regularly Employed:The respondents submitted their return for the year ending March 31, 1932, including a copy of the audited balance sheet and profit and loss account for the accounting year ending December 31, 1930. The Income-tax Officer initially accepted the profit shown in the profit and loss account, rejecting the claim for deduction based on undervaluation. The Assistant Commissioner confirmed this assessment, stating that the method of accounting had been regularly and properly employed by the assessee.3. Interpretation and Application of Section 13:The High Court amended the question referred to it, focusing on whether the Income-tax Officer was entitled to compute income based on the profit and loss account without regard to any undervaluation of stock. The High Court answered this in the negative, stating that the covering letter explaining the adjustments formed part of the method of accounting. The High Court held that the Income-tax Officer was not entitled to split the method of accounting and must consider it as a whole.4. Role and Judgment of the Income-tax Officer:The Privy Council disagreed with the High Court's interpretation of Section 13, clarifying that the section relates to the method of accounting regularly employed by the assessee for their business purposes, not for making statutory returns. The Income-tax Officer must consider whether the income, profits, and gains can be properly deduced from the accounts. The Privy Council found that the Income-tax Officer had not exercised his judgment under the proviso of Section 13 and had incorrectly accepted the profit shown in the accounts as the true figure for income-tax purposes.The Privy Council emphasized that the Income-tax Officer's duty is not discretionary but requires proper judgment. The Officer must determine if the true income can be accurately deduced from the accounts, even if they do not show the true figure for income-tax purposes.The Privy Council noted that the undervaluation of stocks had been systematic and gross in previous years, confirming that the accounts did not reflect the true profits. The Assistant Commissioner and the Income-tax Officer had failed to perform their duty under Section 13 by accepting the profits shown in the accounts without proper consideration.Conclusion:The Privy Council advised that the High Court's order should be varied by substituting the amended question and answering it in the negative. The Income-tax Officer must now properly discharge his duty under Section 13, considering whether the true income, profits, and gains can be deduced from the accounts. The appeal was dismissed with costs.