Accrual-based income computation and scrutiny of older accounts are permitted where books do not show a consistent accounting system.

Where an assessee does not maintain a regular and consistent system of accounting, income may be computed on the basis justified by the books and surrounding circumstances, including accrual treatment under the mercantile method or actual receipts under the cash method. On the facts noted, interest credited to debtors' accounts could be included in assessable income despite non-receipt in cash during the year because the books reflected a hybrid and unreliable system, making the department's computation sustainable under the proviso to Section 13 of the Income-tax Act, 1922. The text also states that an Income-tax Officer may call for accounts older than three years when needed for a truthful enquiry into the return, and that the proviso to Section 22(4) does not impose an absolute bar.

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Issues: (i) Whether interest credited to debtors' accounts, though not actually received in cash during the year, could be included in the assessable income for that year; (ii) Whether the Income-tax Officer could require production of accounts for a period exceeding three years back.

Issue (i): Whether interest credited to debtors' accounts, though not actually received in cash during the year, could be included in the assessable income for that year.

Analysis: Liability to tax depended on the method of accounting regularly employed by the assessee. Under the mercantile system, income is computed on accrual, while under the cash system it is computed on actual receipts and payments. The assessee's books did not disclose any regular or consistent system, but a hybrid arrangement in which receipts were entered as cash received without proper allocation between principal and interest, and the interest element was not necessarily brought into account in the year of realisation. On those findings, the computation made by the assessing authority was justified under the proviso to Section 13 of the Income-tax Act, 1922.

Conclusion: The answer was in the affirmative, in favour of the Revenue.

Issue (ii): Whether the Income-tax Officer could require production of accounts for a period exceeding three years back.

Analysis: The limitation in the proviso to Section 22(4) operates where the Income-tax Officer proceeds to assess to the best of his judgment under the relevant assessment provisions. It does not prevent the officer, in the course of enquiry into the truth of the return or claims made by the assessee, from calling for older accounts where the circumstances of the assessment require scrutiny of an earlier period. Sections 23(3), 23(4) and 37 of the Income-tax Act, 1922 were treated as not imposing any absolute time limit on such enquiry.

Conclusion: The answer was in the affirmative, in favour of the Revenue.

Final Conclusion: The reference was answered against the assessee, and the Revenue's right to assess the income on the basis found by the department, including scrutiny of earlier accounts where necessary, was upheld.

Ratio Decidendi: Where an assessee does not maintain a regular and consistent system of accounting, the assessing authority may compute income on the basis justified by the books and surrounding circumstances, and may call for older accounts when necessary for a truthful enquiry into the return.

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