1945 (2) TMI 14 - HC - Income Tax

Court Upheld Income Assessment of Rs. 31,081 under Mercantile Accounting System

COMMISSIONER OF INCOME-TAX Versus SHRIMATI SINGARI BAI

COMMISSIONER OF INCOME-TAX Versus SHRIMATI SINGARI BAI - [1945] 13 ITR 224 (All) Issues Involved:1. Whether the Income-tax Officer was justified in taking the assessee's gross income from money-lending to be Rs. 31,081.2. Interpretation of Section 13 of the Indian Income-tax Act, 1922.3. Applicability of the mercantile system of accounting for tax assessment.4. Relevance of actual receipt of income for tax purposes.5. Comparison with English income-tax laws and precedents.Issue-wise Detailed Analysis:1. Justification of Income-tax Officer's Assessment:The primary issue was whether the Income-tax Officer was justified in taking the assessee's gross income from money-lending to be Rs. 31,081. The assessee, a professional money-lender, maintained her accounts on the mercantile system, which records income when it accrues, not when it is received. The Income-tax Officer assessed her based on this system, including the Rs. 31,081 as income, even though it had not been realized in cash. The Court upheld this assessment, stating that under Section 13, the Income-tax Officer was bound to compute the profits and gains according to the method of accounting regularly employed by the assessee.2. Interpretation of Section 13:Section 13 of the Indian Income-tax Act, 1922, requires the computation of income, profits, and gains according to the method of accounting regularly employed by the assessee. The Court emphasized that this section was introduced to provide clarity and to prevent evasion of tax by adopting inconsistent accounting methods. The section mandates that if an assessee maintains their accounts on a mercantile basis, the Income-tax Officer must compute the income accordingly, even if it includes unrealized income.3. Applicability of the Mercantile System of Accounting:The assessee's accounts were maintained on a mercantile basis, which records income when it becomes legally due, regardless of actual receipt. The Court noted that this system is widely used in business and is recognized for tax purposes under Section 13. The Court rejected the argument that only actual receipts should be taxed, affirming that income accrued under the mercantile system is taxable.4. Relevance of Actual Receipt of Income:The Court clarified that the actual receipt of income is not the sole criterion for taxability under the Indian Income-tax Act. Sections 3 and 4 of the Act charge tax on all income, profits, and gains, whether received, accrued, or deemed to have arisen. The Court distinguished between 'accrued' income and 'received' income, stating that income accrued under the mercantile system is taxable even if not received.5. Comparison with English Income-tax Laws and Precedents:The Court noted that decisions based on English Income-tax laws are not directly applicable to the Indian context due to differences in statutory provisions. The Court referred to several Indian cases supporting the view that income accrued under the mercantile system is taxable. The Court rejected reliance on English cases that emphasized actual receipt, highlighting that the Indian Act explicitly includes accrued income within its scope.Conclusion:The Court answered the reference in the affirmative, stating that the Income-tax Officer was justified in computing the assessee's income based on the mercantile system of accounting. The judgment emphasized that under Section 13, the method of accounting regularly employed by the assessee must be used for tax assessment, even if it includes unrealized income. The decision clarified the interpretation of key sections of the Indian Income-tax Act, reinforcing that both accrued and received income are taxable.