Income-tax reference and accounting method principles require courts to find the real legal issue and allow related bad-debt deductions.

In an income-tax reference, the High Court is not confined to the Commissioner's wording and may identify and decide the real question of law arising from the stated facts. On the accounting issue, where accumulated interest from earlier years is brought into the assessment year's income under the regularly employed method of accounting, the corresponding losses and irrecoverable debts from those earlier years must also be considered to determine true net income. The article treats section 13 as permitting assessment on the basis of the accepted accounting method, so credit entries cannot be isolated from the related debit entries that affect the same income computation.

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Issues: (i) Whether, on a reference under the income-tax reference provision, the High Court is confined to the questions framed by the Commissioner or may identify the real question of law arising between the parties; (ii) whether losses and irrecoverable debts relating to earlier years may be deducted in computing the income of the previous year where accumulated interest from those years is brought into the assessment year's income under the method of accounting.

Issue (i): Whether, on a reference under the income-tax reference provision, the High Court is confined to the questions framed by the Commissioner or may identify the real question of law arising between the parties.

Analysis: The statutory scheme was read as requiring the High Court to decide the question of law arising in the case stated, not merely to answer the form of words used by the Commissioner. The statement of case supplies the facts, and if necessary the Court may call for further facts, but the decisive matter is the real legal controversy disclosed by the competing contentions of the parties.

Conclusion: The High Court may reframe the issues and determine the real question of law arising on the reference.

Issue (ii): Whether losses and irrecoverable debts relating to earlier years may be deducted in computing the income of the previous year where accumulated interest from those years is brought into the assessment year's income under the method of accounting.

Analysis: The Court held that where accumulated interest from earlier years is treated as income of the previous year for assessment purposes, fairness and the accounting method accepted by the revenue require that the corresponding losses and bad debts of the relevant earlier years also be taken into account. Section 13 was understood as permitting assessment on the basis of the regularly employed method of accounting, and the officer having adopted the assessee's book-income basis could not isolate only the credit entries while ignoring the debit entries that were necessary to ascertain true net income.

Conclusion: The assessee was entitled to deduction of the actual losses and irrecoverable debts attributable to the relevant years.

Final Conclusion: The reference was answered in the assessee's favour by holding that the High Court could determine the real question arising on the facts and that the assessee could set off the relevant losses and bad debts against the income brought into the assessment year.

Ratio Decidendi: In a case stated for income-tax reference, the High Court is not bound by the Commissioner's formulation of questions and may determine the real legal issue arising on the stated facts; where income is assessed on an accounting basis that brings accumulated receipts into a later year, the corresponding losses and bad debts of the relevant earlier years must also be allowed in computing net income.

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