Reassessment for nondisclosure and accrual of interest under mercantile accounting: income taxed when the right to receive arises.

Omission of interest income from the return justified reassessment under section 147(a), because the assessee had a primary duty to disclose all income truly and fully and the escapement flowed from that omission rather than from mere error or change of opinion. Under the mercantile system, interest on advance tax accrued only when the assessee acquired an enforceable right to receive it, which arose when the regular assessments were completed. The interest was therefore assessable in assessment year 1957-58 and could not be shifted to earlier years merely because the advance tax had been paid earlier.

---

---

Issues: (i) Whether reassessment was validly initiated under section 147(a) of the Income-tax Act, 1961 on the ground of non-disclosure of income in the return; (ii) whether interest on advance tax received after the regular assessments for earlier years could be assessed only in the assessment year 1957-58.

Issue (i): Whether reassessment was validly initiated under section 147(a) of the Income-tax Act, 1961 on the ground of non-disclosure of income in the return.

Analysis: The assessee did not include the interest received on advance tax in its return. The primary duty under section 139 is to disclose all income truly and fully. The fact that the Income-tax Officer could have discovered the omission from the assessment records did not absolve the assessee of that duty. Since the escapement of income resulted directly from the omission to disclose the receipt, the case fell within clause (a) and was not one of mere error or change of opinion by the Assessing Officer.

Conclusion: Reassessment under section 147(a) was rightly assumed and this issue was decided against the assessee.

Issue (ii): Whether interest on advance tax received after the regular assessments for earlier years could be assessed only in the assessment year 1957-58.

Analysis: Under the mercantile system, income accrues when the assessee acquires a right to receive it. Interest under section 18A(5) became payable only when the regular assessments for the earlier years were made, because until then no enforceable right to interest had arisen. The relevant assessments were completed in March 1956, which fell within the previous year relevant to assessment year 1957-58. The income could not be related back merely because the advance tax had been paid in the earlier years.

Conclusion: The interest was taxable in assessment year 1957-58 and this issue was decided against the assessee.

Final Conclusion: Both referred questions were answered in favour of the Revenue, confirming the reassessment and the inclusion of the interest income in assessment year 1957-58.

Ratio Decidendi: Where an assessee omits income from the return, escapement attributable to that omission attracts reassessment under section 147(a); and under the mercantile system, income accrues only when the right to receive it arises, not when the underlying transaction occurred.

---