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Issues Involved:
1. Accrual of interest income. 2. Method of accounting. 3. Jurisdiction of the Income-tax Officer (ITO) Hazaribagh. 4. Taxability of interest income in the hands of the assessee. Issue-wise Detailed Analysis: 1. Accrual of Interest Income: The primary question was whether the sum of Rs. 42,595 accrued as interest on the advances made by the assessee to M/s. Ramgarh Industries Coal Co. The Income-tax Officer (ITO) Hazaribagh included this interest as income from other sources. The Appellate Assistant Commissioner (AAC) and the Income-tax Appellate Tribunal (ITAT) had differing views on whether this interest should be included in the assessee's income. The Tribunal found that the firm had been assessed at a net loss, and therefore, the interest should not be included in the assessee's income separately. The High Court emphasized that the question of interest accrual could not be answered without further factual findings, particularly regarding the method of accounting and the impact of the deed of release executed by the assessee. 2. Method of Accounting: The High Court directed the Tribunal to determine the method of accounting adopted by the assessee, whether it was on a mercantile or cash basis. The Tribunal found that the assessee did not follow any regular method of accounting, and the ITO was justified in estimating the income on a mercantile basis under section 13 of the Indian Income-tax Act, 1922. The method of accounting is crucial as it determines the point at which income is chargeable to tax-either on accrual (mercantile) or receipt (cash) basis. The Tribunal concluded that the interest income accrued to the assessee on March 31, 1956, and the deed of release was executed because the income had accrued. 3. Jurisdiction of the Income-tax Officer (ITO) Hazaribagh: The High Court had to decide whether the ITO Hazaribagh had the jurisdiction to assess the interest income without awaiting a report from the ITO Calcutta, who assessed the firm. The Tribunal, in its supplementary statement, held that the interest income should be included in the total income of the firm and then allocated to the partners. The ITO Hazaribagh could not separately assess the interest income without the allocation by the ITO Calcutta. The High Court agreed, stating that the ITO Hazaribagh could not determine the assessee's share of the firm's loss or interest income afresh and include it as a separate item of assessable income. 4. Taxability of Interest Income in the Hands of the Assessee: The High Court concluded that the interest income had indeed accrued to the assessee, but it was not taxable in her hands separately. The Tribunal was correct in excluding the interest income from the assessee's total income in the absence of an allocation order from the ITO assessing the firm. The High Court answered the reference by stating that the interest accrued to the assessee but was not taxable in her hands as a separate item of income. Conclusion: The High Court held that the sum of Rs. 42,595 accrued as interest to the assessee but was not taxable in her hands separately. The ITO Hazaribagh did not have the jurisdiction to assess this interest income without the allocation by the ITO Calcutta. The assessee succeeded substantially and was entitled to costs.
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