Accrual basis assessment cannot be shifted to cash basis; reassessment under escaped income provisions is limited to unassessed interest only.

Section 13 of the Indian Income-tax Act, 1922 did not permit the revenue to shift from the accrual basis to the cash basis for the same mortgage interest source after it had long been assessed on accrual terms. Section 34 could apply only to income that had genuinely escaped assessment, so amounts already brought or capable of being brought to tax on the accrual basis for earlier years could not be taxed again as escaped income. The reassessment was therefore confined to the balance of the interest actually omitted from assessment, with the quantified adjustment to be worked out accordingly.

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Issues: (i) Whether Section 13 of the Indian Income-tax Act, 1922 applied so as to permit the department to change from the accrual basis to the cash basis in assessing the interest income from the mortgage loans. (ii) Whether, and to what extent, the interest received in the relevant previous year could be treated as income that had escaped assessment within the meaning of Section 34 of the Indian Income-tax Act, 1922.

Issue (i): Whether Section 13 of the Indian Income-tax Act, 1922 applied so as to permit the department to change from the accrual basis to the cash basis in assessing the interest income from the mortgage loans.

Analysis: The assessment history showed that the department had long proceeded on an accrual basis in relation to the 1915 loan and had taxed the assessee accordingly for several years. Section 13 was not attracted on the facts because the question was not whether a new method of accounting could be imposed for a particular omitted loan, but whether the department could depart from the basis already adopted for the source of income. The method previously applied could not be changed merely because a later realization of the debt came to light.

Conclusion: Section 13 had no application to the facts, and the department could not invoke it to switch the basis of assessment.

Issue (ii): Whether, and to what extent, the interest received in the relevant previous year could be treated as income that had escaped assessment within the meaning of Section 34 of the Indian Income-tax Act, 1922.

Analysis: It was accepted that some interest income had escaped assessment when the true realization on the mortgage debt was discovered. However, Section 34 could operate only in respect of income that had in fact escaped assessment, and only to that extent. The income already brought to tax on the accrual basis for earlier years could not again be treated as escaped income. The taxable escaped amount therefore had to be reduced by the portion referable to interest already assessable for the period from September 1915 to 1924, and the exact figure was left to be worked out by the Commissioner.

Conclusion: Only the balance of the Rs. 90,345, after deducting the amount already assessable for the earlier period, could be assessed under Section 34.

Final Conclusion: The reference succeeded in part: Section 13 was held inapplicable, and reassessment under Section 34 was confined to the actual escaped portion of the interest income, with consequential reduction of the assessed figure and refund of any overpaid tax.

Ratio Decidendi: Where the revenue has adopted and acted upon a particular basis of assessment for a source of income, it cannot arbitrarily shift to another basis to tax the same receipts again, and Section 34 applies only to income that has genuinely escaped assessment.

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