TMI Blog1954 (9) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee did not show any income with respect to the contracts of the Public Works Department or with respect to the military contract. The assessee, on the other hand, showed an income of ₹ 12,000 in respect of his share of profit from the partnership business. Before the Income-tax Officer the case of the assessee was that the contracts of the Public Works Department and the military contract were not closed within the accounting year and so the income from these contracts was not shown in the return filed by the assessee. The Income-tax Officer held that for the accounting year the assessee had realised a net income of ₹ 19,683 from the Public Works Department contracts. With respect to the military contract the Income-tax Officer held that the entire contract had been completed within the accounting year and the assessee had received a sum of ₹ 3,67,578 on account of this contract from the military authorities. In view of the defective state of the account books produced by the assessee the Income-tax Officer considered that the profit should be estimated at 15 per cent. of this amount. He determined the net income from the military contract as ₹ 55,135 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that the assessee had executed 9/10th of the contract work, he did not ascertain any profit or loss for the year of account. We therefore hold that the proviso to Section 13 is applicable to this case and that the assessee's profits have to be determined by estimate. In these circumstances the Tribunal has referred the following question of law for the opinion of the High Court : Whether the proviso to Section 13 of the Income-tax Act is applicable in regard to the accounts maintained for the contract business, which were not closed to profit at the end of each previous year but were closed to profit only after the completion of a contract? The answer to this question turns upon the construction to be placed on Section 13 of the Income-tax Act which states: Income, profits and gains shall be computed, for the purposes of Section 10 and 12, in accordance with the method of accounting regularly employed by the assessee : Provided that, if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounts to produce. For the assessment year 1944-45 the assessee produced two sets of accounts before the Income-tax Officer. One set of account was maintained for the two contracts he had taken from the Public Works Department but the profits of each contract was not separately worked out and there was one consolidated receipts and payments account maintained for both the contracts. For the military contract the assessee kept a separate set of accounts. These accounts were maintained from 14th of April, 1943, up till 3rd of December, 1944. The total value of the military contract was ₹ 3,78,766 and out of this amount the assessee received a sum of ₹ 3,00,000 before 31st of March, 1944. The assessee did not close the accounts on 31st March, 1944, or prepare balance sheet but the accounts were kept open till 3rd of December, 1944, when the execution of the contract was completed. It was argued by Mr. Dutt on behalf of the assessee that the accounts were maintained on completed contract basis and the assessee had no objection if the income of the Hirji Hospital contract was taxed of the assessment year 1945-46. The argument of the learned counsel was that there was a sing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax, Bombay v. Ahmedabad New Cotton Mills Co. Ltd. [1930] 57 I.A. 121 is of no assistance on the present question. On behalf of the assessee Mr. Dutt put forward the argument that in the case of the incomplete contract it was not possible to determine the profits of the assessee for the accounting year. It was pointed out by the learned counsel that the Hirji Hospital contract was taken up on the 14th of April, 1943, and the work was completed on the 3rd of December, 1944, and the total value of the contract was ₹ 3,78,766 and out of this amount the assessee received payments to the extent of about ₹ 3,00,000 during the accounting year. I do not agree with the argument of the learned counsel that the profits of the assessee for the accounting year in question cannot be ascertained in such a case. It s also fallacious to argue that merely because the military contract was completed after the accounting year, no profits arose or accrued tot he assessee in the accounting year. In the case of an incomplete contract there is a well-established method of calculating profits accruing in the accounting year. The method is set out at page 971 of Batlib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uation possible must be made. Valuation is an art, not an exact science. Mathematical certainly is not demanded, nor indeed is it possible. It is for the Commissioners to express in the money value attributed by them to the asset their estimate, and this is a conclusion of fact to be drawn from the evidence before them. In this connection the decision of the Judicial Committee in the case of British South Africa Company([1946] 14 I.T.R. Suppl. 17) is important. In that case the appellant company carried on the business of trading in mining rights and concession. It had acquired numerous mining rights and concessions over various territories and in the relevant accounting year made grants of mining rights to other companies in return for fully paid up shares in the latter and recurring annual payments in cash for a fixed number of years. The Income-tax authorities of Northern Rhodesia treated these amounts as rents, royalties. premiums and profits arising form property falling within Section 5(f) of the Income-tax Ordinance of Northern Rhodesia of 1926 and assessed to income-tax the full amount of the par value of the shares and the annual payments received by the appellant co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in question until the cost of the assets realised had been brought into account, was faced by the fact that by its own admission the cost could not be ascertained. It therefore contended that the proper and indeed the only method by which its gains or profits could be determined was to made good and thereafter to assess all receipts in full. In this contention the company claimed the support of the expert evidence of accountants that thus only could its profits be ascertained and of an arrangements made with the Inland Revenue Authorities in the United Kingdom that for the purpose of British income tax it should be thus assessed. Their Lordships can see no justification in law for this contention. It is no doubt true from the point of view of accountancy that there is no other way of finding the company's ultimate profit and equally it may be a convenient arrangement if the taxing authority chooses to adopt it. But it is impassable to find support for it in the terms of the Ordinance. The question under the Ordinance is, what is the income of the company in the particular year of assessment, and it must be answered by applying its relevant provisions as best they can be ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon this basis held that the question of assessing profits arises only when the venture came to an end. This decision was followed by the Rangoon High Court in Commissioner of Income-tax, Burma v. A.K.A.R. Family [1941] 9 I.T.R. 347, This case also preceeded upon the basis that there was a single transaction or a single venture in the nature of trade and therefore profits could not be ascertained for the purpose of tax till the whole transaction was complete. That is also the ratio of the decision of the Madras High Court in A.L.V.R.S.P. Veerappa Chettiar v. Commissioner of Income-tax, Madras [1941] 9 I.T.R. 56.The facts of the present case are wholly dissimilar, for it is not the case of the assessee that execution of the military contract was a single venture in the nature of trade. I do not, therefore, think that the principle laid down in K.H. Mody, In re [1940] 8 I.T.R. 179 and A.L. V.R.S.P. Veerappa Chettair v. Commissioner of Income-tax*, and Commissioner of Income-tax Burma v. A.K.A.R. Family [1941] 9 I.T.R. 347 should be applied to the present case. The last case upon which Mr. Dutt relied is Messrs. Bansilal Abirchand v. Commissioner of Income-tax, C.P. Berar [1928 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. The Appellate Tribunal has in appeal against that order affirmed the finding of the Assistant Commissioner to the extent that the contract was not executed before the 31st of March, 1944, 1944, and that the account showed that expenditure n account of the contract had been incurred after the 31st of March, 1944, and further by implication also accepted the view of the Assistant Commissioner that it was finally executed on the 3rd of December, 1944, and the accounts were kept open till before that date without any calculation of profit from that business. Then the Appellate Tribunal has come to its own finding that the account was not, as claimed by the assessee, closed on the completed job basis as no separate profit on the various jobs involved in his other contract business was found to have been worked out by him. The other finding arrived at by the Tribunal is that the assessee never produced any account till the assessment in the present case and that no account was maintained by the assessee, and therefore, he had no method of accounting till 1943-44. The Tribunal has also found that 9/10th of the military contract work had been by the end of March, 1944, execu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that year at a flat rate of 15% profit on the amount received by the assessee in the accounting period 1943-44. Against that order the assessee prayed for a reference to be made under Section 66 of the Indian Income-tax Act whereupon the following question of law has been referred by the Tribunal for the opinion of this Court: Whether the proviso to Section 13 of the Income-tax Act is applicable in regard to the accounts maintained for the contract business, which were not closed to profit at the end of each previous year but were closed to profit only after the completion of a contract. Section 13 of the Income-tax Act in general terms enacts: Income, profits and gains shall be computed, for the purposes of Section 10 and 12, in accordance with the method of accounting regularly employed by the assessee : but thereafter adds a proviso to it which reads: Provided that if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Officer in the next year was one in accordance with a method regularly employed by the assessee, we are faced by the finding of fact given by the Tribunal that the method employed by the assessee in that account is such that the income, profits and gains cannot properly be deduced therefrom. On that finding also the proviso to Section 13 at once comes into play and the duty is cast on the Income-tax Officer to compute the income, profits and gains of the assessee upon such basis and upon such manner as the Income-tax Officer may determine. Mr. Dutt appearing for the petitioner, in substance, in his argument tried to challenge this finding of fact given by the Tribunal and in support of his argument he submitted that in the case of running contracts like that of the present one, no income, profits or gains can in fact be computed unless the contract is completed and if the contract is completed in a period of more than a year, the crucial time for calculating the income, profits and gains arrives only when the entire contract is completed. In other words, his argument was that the only method by which the gains or profits of the assessee could be determined was to wait until th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by Mr. Dutt stands negatived by the decision in the case of British South Africa Co. v. Commissioner of Income-tax [1946] 14 I.T.R. Suppl. 17. There the facts were practically of similar nature and on those facts their Lordships of the Privy Council observed: Therefore the company, while contending that there could be no gains or profits from its trade in respect of the sums in question until the cost of the assets realised had been brought into account, was faced by the fact that by its own admission the cost could not be ascertained. It therefore contended that the proper and indeed the only method by which its gains or profits could be determined was to wait until the whole of the unrecouped balance of expenditure had been made good and thereafter to assess all receipts in full. In this contention the company claimed the support of the expert evidence of accountants that thus only could its profits be ascertained and of an arrangement made with the Inland Revenue Authorities in the United Kingdom that for the purpose of British income-tax it should be thus assessed. Their Lordships can see no justification in law for this contention. It is no doubt true from the point of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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