True income must be reflected in accounts: proviso to section 13 allowed taxation of credited commission and foreign sales commission was assessable locally.

Where an assessee's accounting method does not disclose the true income of the relevant period, the revenue may invoke the proviso to section 13 of the Income-tax Act, 1922 and compute income on a basis that correctly reflects taxable profits. On the facts stated, commission credited in the mills' accounts but not entered in the assessee's books was rightly brought to tax because it was ascertainable and available without real impediment to corresponding entries. The document also states that commission on sales effected in the Indian States accrued and arose in British India, applying an earlier Supreme Court principle, and was therefore assessable there. The reference was answered for the Revenue.

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Issues: (i) Whether, having regard to the assessee's method of accounting, the proviso to section 13 of the Income-tax Act, 1922 could be applied to bring to tax commission credited in the mills' accounts but not entered in the assessee's books; and (ii) whether commission payable on sales effected in the Indian States accrued and arose in British India so as to be assessable there.

Issue (i): Whether, having regard to the assessee's method of accounting, the proviso to section 13 of the Income-tax Act, 1922 could be applied to bring to tax commission credited in the mills' accounts but not entered in the assessee's books.

Analysis: The assessee claimed to follow cash basis, but the commission payable under the agreement was ascertained and credited in the mills' books and was available to the assessee without any real obstacle to corresponding entries in its own books. The pattern of later years also showed a substantial time lag in bringing such amounts into the assessee's accounts, especially in respect of annual profit commission. On these facts, the system adopted did not disclose the true income of the relevant accounting period, and the Department was entitled to invoke the proviso to section 13.

Conclusion: The proviso to section 13 was properly applied, and the assessment of the commission credited in the mills' accounts was justified against the assessee.

Issue (ii): Whether commission payable on sales effected in the Indian States accrued and arose in British India so as to be assessable there.

Analysis: The point was covered by the principle already laid down in an earlier Supreme Court decision dealing with substantially similar circumstances. Applying that principle, the commission payable on the relevant sales was treated as accruing and arising in British India.

Conclusion: The commission was assessable in British India and the issue was decided against the assessee.

Final Conclusion: The reference was answered in favour of the Revenue on both questions, and the assessee was held liable for the costs of the reference.

Ratio Decidendi: Where the accounting method regularly employed by an assessee does not reflect the true income of the relevant period, the proviso to section 13 permits the revenue authorities to disregard that method and compute income on a basis that correctly brings out the taxable income.

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