AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
1964 (4) TMI 7
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....s expenses and Rs. 1,00,000 as the amount disbursed for acquiring the exploitation rights. Thereby in the computation of the profits of the business, the firm debited the amount paid for acquiring the rights of exploitation of the film, but did not take credit for the value of the unexpired exploitation rights at the end of the " previous year ". On August 15, 1948, a deed of dissolution of the partnership was executed, and Damodara Mudaliar sold, with effect from August 6, 1948, his half interest in the assets of the partnership to Krishnaswami Mudaliar for Rs. 2,000 and retired from the partnership. On August 27, 1948, a trial balance-sheet of the firm's books of account was prepared showing a cash balance of Rs. 190-12-4, a debit against Krishnaswami Mudaliar for Rs. 2,641-8-8 and credits in favour of Damodara Mudaliar and Thangaraja Mudaliar respectively for Rs. 1,888-2-11 and Rs. 944-2-1. Thereafter, Krishnaswami Mudaliar, Thangaraja Mudaliar and V. S. Lakshmanan (an outsider) formed themselves into another partnership to exploit the film for the unexpired period. From this partnership Krishnaswami Mudaliar retired on February 22, 1949, agreeing to receive Rs. 12,000 for his s....
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....ncome-tax Act and in confirming the assessment on a mercantile basis of accounting ?" The High Court held that it was open to the assessee to maintain accounts according to a recognised system of accounting and the assessee having adopted the cash system of accounting, and the Tribunal having assigned no reasons for discarding that system in the computation of the profits, the Tribunal was in error in making the assessment on the basis of the mercantile system of accounting. The High Court observed : "When we reach the position that it was the cash system that the assessee had adopted in this case, and that valuation of the closing stock was not an incident of that system for ascertaining the profits, it should be obvious that the Income-tax Officer had no power under the proviso to section 13 to force a different system on the assessee either the mercantile system or a hybrid system of cash plus valuation of closing stock." The High Court accordingly answered the question referred in the negative. Against the order, with special leave, this appeal is preferred. The question to be determined in this appeal is whether in the computation of the income of the firm under the he....
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....he Tribunal. The High Court has under the Income-tax Act power to call upon the Appellate Tribunal to state a case, only if the High Court is not satisfied about the correctness of the decision of the Tribunal that no question of law arises from the order of the Tribunal. The grounds of appeal filed before the Tribunal and before the Appellate Assistant Commissioner make it abundantly clear that the question as to the applicability of the proviso to section 13 to the profits disclosed by the respondent firm was never challenged. Nor could it be said that the Tribunal forced the ... firm to adopt for the purpose of computation of its profits a system of accounting other than the one adopted by the firm. In the title of the order by the Income-tax Officer it was recited that the method of accounting adopted by the firm was " mercantile ", but that does not amount to saying that he proposed to compute the income on the basis that the accounts should be re-written on the mercantile system. The question referred to the High Court asks for advice on the justification for applying the proviso to section 13 and computation of the income on the basis of the mercantile system of accounting....
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....1922), because in a case decided under the Income-tax Act, 1918, Wallis, C.J., delivering the principal judgment of the Full Bench in Secretary, Board of Revenue, Madras v. Arunachalam Chettiar, expressed the view that whatever may be the system of accounting adopted by an assessee income assessable to tax means the income actually or constructively received and that the words of the charging section placed limits upon the succeeding sections specifying the different classes of income liable to tax. To supersede this exposition of the law the legislature while enacting Act 11 of 1922 found it necessary to enact section 13. The section leaves it to the assessee to adopt any system of accounting and obliges the Income-tax Officer to compute the income, profits and gains for the purposes of sections 10 and 12 in accordance with such method of accounting regularly employed, if profits of the business can properly be deduced therefrom. The judicial Committee of the Privy Council observed in Commissioner of Income-tax v. Sarangpur Cotton Manufacturing Co. Ltd. : " ... the section relates to a method of accounting regularly employed by the assessee for his own purposes . . . and does no....
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....is and in such manner as he may determine. The section does not compel the Income-tax Officer to accept a balance-sheet of cash receipts and outgoings prepared from the books of account ; he has to compute the income in accordance with the method of accounting regularly employed by the assessee. The only departure made by section 13 of the Indian Income-tax Act from the tax legislation in England is that whereas under the English legislation the Commissioner is not obliged to determine the profits of a business venture, according to the method of accounting adopted by the assessee, under the Indian Income-tax Act, prima facie, the Income-tax Officer has for the purpose of sections 10 and 12 to compute the income, profits and gains in accordance with the method of accounting regularly employed by the assessee. If, therefore, there is a system of accounting regularly employed and by appropriate adjustments from the accounts maintained taxable profit may properly be deduced, the Income-tax Officer is bound to compute the profits in accordance with the method of accounting. But where in the opinion of the Income-tax Officer the profits cannot properly be deduced from the system of ac....
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....of the bad debts may have to be set off when they are found to be irrecoverable. Besides the cash system and the mercantile system, there are innumerable other systems of accounting which may be called hybrid or heterogeneous---in which certain elements and incidents of the cash and mercantile systems are combined. But whichever method of book-keeping is adopted in the case of a trading venture, for computing the true profits of the year the stock-in-trade must be taken into account. If the value of stock-in-trade is not taken into account, in the ultimate result the profit or loss resulting from trading is bound to get absorbed or reflected in the stock-in-trade unless the value of the stock-in-trade remains unchanged at the commencement of the year and the end of the year. It must be remembered that under the Income-tax Act, tax is levied on income, profits and gains, and not on receipts ; taxable profits therefore cannot ordinarily be deduced from cash receipts alone ; if in the computation of profits of a trading venture, only the cash receipts and outgoings are taken into account, in substance the profits would be deferred, till the firm's capital outlay is completely recoup....
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....e value of that asset at the end of the year altogether. Under the Income-tax Act for the purpose of the assessment each year is a self-contained unit, and if out of the receipts the cost of the film was to be deducted in the absence of an entry crediting the value of the asset at the end of the year, for arriving at the income, the profit of the firm would either wholly or substantially be absorbed in the amortization of the capital value of the asset. The result of the accounting would, therefore, give a false picture of the partnership, however lucrative the business may in reality be. The methods of computation of taxable incomes prescribed by the Act of different kinds of income are undoubtedly highly artificial, but the Act does not compel the Income-tax Officer to accept a statement of account which is not prepared according to any recognised accounting practice. In Commissioners of Inland Revenue v. Cock, Russell and Co. Ltd. Croom-Johnson J.,in dealing with valuation of stock-in-trade for purposes of taxation, observed : " There is no word in the statutes or rules which deals with this question of valuing stock-in-trade. There is nothing in the relevant legislation w....
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....ple, the ordinary principles of commercial accounting require that in the profit and loss account of a merchant's or manufacturer's business the values of the stock-in-trade at the beginning and at the end of the period covered by the account should be entered at cost or market price, whichever is the lower ; although there is nothing about this in the taxing statutes." Similarly, in Commissioner of Income-tax v.Chari and Ram Rajamannar C.J. observed that stock-in-trade in hand is an essential item in the computation of the profits for a period. " Profits " as observed by Fletcher Moulton L.J. in .In re Spanish Prospecting Co. Ltd. " ... implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates. We start, therefore, with this fundamental definition of profits, namely, if the total assets of the business at the two dates be compared, the increase which they shew at the later date as compared with the earlier date ... represents in strictness ....