Mercantile accounting and branch profit credits can make foreign branch sums taxable in British India.

Income credited in the capital account of an assessee's head office in the books of foreign branches may be taxable in British India where the assessee keeps mercantile accounts and consistently treats those credits as head-office profits. Section 4 distinguishes income accruing, arising, or received in British India from foreign income received or brought into British India, and the explanation shows that mere book entries in British India do not by themselves constitute receipt. However, under Section 13, income must be computed by the method of accounting regularly employed, and a mercantile assessee cannot selectively disown its own accounting treatment when the amounts have long been returned as profits.

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Issues: Whether the sums credited in the capital account of the assessee's head office in the books of the out-of-British-India branches could be treated as income received or deemed to have been received in British India and therefore be included in the assessable profits.

Analysis: Section 4(1) brought within charge income accruing, arising, or received in British India, as well as income deemed under the Act to accrue, arise, or be received there. Section 4(2) dealt with foreign income received or brought into British India, while the explanation clarified that mere inclusion of such income in a balance-sheet prepared in British India did not by itself amount to receipt. However, the assessee had maintained its books on the mercantile system, and the disputed amounts had consistently been treated in the accounts as profits of the head office and returned on that basis in earlier years. Under Section 13, income had to be computed according to the method of accounting regularly employed by the assessee, and an assessee following the mercantile system could not selectively repudiate the effect of its own accounting treatment to avoid tax. The absence of corresponding entries in the head office books did not alter the character of the credited amounts when the established accounting system treated them as profits of the assessee.

Conclusion: The sums were rightly treated as taxable income in British India under the assessee's mercantile method of accounting, and the question was answered in the affirmative, in favour of the Revenue.

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