TMI Blog1937 (11) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... Income tax Officer which consisted of (a) a copy of the audited balance sheet and profit and loss account of the Company for the accounting year ending on December 31, 1930, which showed the profit for the year as ₹ 2,64,086, (b) a return of the total income of the Company for assessment, which included the income, profits and gains as per profits and loss account for the accounting year as ₹ 1,99,086 and (c) a covering letter which explained the adjustment of the figure in the profit and loss account so as to arrive at the figure of income in the return, and which was in the following terms:- We herewith beg to enclose the Income-tax Form No. 4449 for the year 1931-32 duly filled in showing therein the profits as per statement shown below, which please receive and pass the receipt for the same. Rs. 2,64,086. Profits as per Balance-sheet for the year ending December 31, 1930. 3,43,353. Add Difference for the undervaluation in Stock at the end of 1930 (at market rate). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing stock should also be left out of the same assessment. I accordingly set aside the question of the undervaluations of the opening as well as the closing stocks of the assessee Company in the current year's assessment and accept the profit of ₹ 2,64,086 shown in the statement of the profit and loss account of the Company. Under the circumstances, the claim of the assessee Company for ₹ 37,668 as a deduction from the current year's assessment is rejected . On an appeal by the assessees, the Assistant Commissioner of Income-tax confirmed the assessment by his order dated November 22, 1932. The assessee then applied to the present appellant to review the above orders under Sec. 33 of the Act, or alternatively, to make a reference of questions of law to the High Court under Sec. 66(2) of the Act. The appellant declined to review the orders, and, on the ground that no legal point was involved he also declined to make a reference. Thereafter the High Court, on an application by the assessee under Sec. 66(3) of the Act, required the appellant to make a reference and he made the present reference with the question of law as formulated by the High Court, v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir Lordships are clearly of opinion that the section relates to a method of accounting regularly employed by the assessee for his own purposes--in this case for the purposes of the Company's business--and does not relate to a method of making up the statutory return for assessment to income-tax. Secondly, the section clearly makes such a method of accounting a compulsory basis of computation unless in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom. It may well be that, though the profit brought out in the accounts is not the true figure for income-tax purposes the true figure can be accurately deduced therefrom. The simplest case would be where it appears on the face of the accounts that a stated deduction has been made for the purpose of a reserve. But there may well be more complicated cases in which nevertheless, it is possible to deduce the true profit from the accounts, and the judgment of the Income-tax Officer under the proviso must be properly exercised. It is misleading to describe the duty of the Incometax Officer as a discretionary power. Despite some statements in the reference which will be ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed balance-sheet and profit and loss account according to the accounts of the Company is presented to the shareholders as representing the true state of affairs and real profits of the Company, the Company say to the Income tax Department that the profits shown by them in their accounts and certified and duly audited balance sheet and profit and loss accounts is unreal . The two important findings of fact are made in the letter of reference, viz., (1) the assessees have been found to have been regularly adopting all along the method of accounting which they followed for the year 1930 and (2) the method of valuation of stocks by taking some price under both cost and market price adopted for the year 1930 has been regularly employed by them for years past. This makes clear that the method of accounting regularly employed by the respondents comes within the meaning of Sec. 13 and it, therefore, became the duty of the Income tax Officer to consider whether, in his judgment, the income, profits and gains for the purpose of Sec. 10 could be properly deduced from the accounts. In their Lordships' opinion, it is abundantly clear that he never applied his mind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igure is that claimed by the assessees as the under valuation of the opening stock in the accounting year of 1930, which is here in question. The Income-tax Officer could not reasonably conclude that the true profits could be properly deduced from a gross undervaluation. Lastly, if there were any doubt, the appellant himself has put the matter beyond possibility of doubt, by the statement in his order of April 16, 1933, that the object of the undervaluation was the creation of a secret reserve, which involves the retention of profits so as not to be included in the profits shown to the share-holders by the profit and loss account and balance sheet, but which constitute part of the taxable profits. This negatives any suggestion that these accounts show the true profit for income-tax purposes. Their Lordships desire to add that the view of the Assistant Commissioner that the Income-tax Officer is prima facie entitled to accept the profits shown by the accounts, where there is a method of accounting regularly employed by the assessee, is not a correct view. It is the duty of the Income-tax Officer, where there is such a method of accounting to consider whet ..... X X X X Extracts X X X X X X X X Extracts X X X X
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