TMI Blog1963 (8) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee at the time of final settlement of accounts by the debtors. The whole method adopted by the assessee is as under: Advances are given to various parties. The account of each is debited with the amount of the advance. When moneys are received from them they are credited to their accounts. No apportionment between capital and interest is made, if there is continuity of dealings with the debtor. But when the debtor comes for settlement then adjustments are made towards interest. If, for example, there is a continuity of transactions over a period of 10 years, and in the 10th year the account is settled, then interest is taken for credit in the year of receipt for the whole period. Similarly, if the account is settled in the same year, interest is adjusted in the same year. If the settlement is not for cash but for other consideration, say, by way of transfer of land, then the value of the land is credited to the debtor's account and interest is also taken credit. The following transactions of the assessee with one party will serve as an instance. L.F. 91: KAMPLY SARANAPPA: Assessment year Debits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he capital lent out less mortgage loans, gross receipts less interest on mortgage loans and the average rate of interest: Assessment year Capital less mortgage loans Gross interest less interest on mortgage loans Average rate of interest Rs. Rs. Rs. 1956-57 6,56,511 32,556 5.95 1957-58 5,86,380 41,066 7 1958-59 5,97,274 37,418 6.26 The Income-tax Officer considered the average rate of interest on capital lent out as low when compared to the rates charged by the assessee which was generally at 12 per cent. He examined the books in detail. His conclusion, on the examination of the accounts was that the assessee was advancing monies to the debtors and realising monies from the debtors continuously year after year but not accounting for any interest income or adjusting interest to the accounts in the first three years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cable in regard to the other assessment years, viz., 1957-58 and 1958-59. The additions were ₹ 23,427 and ₹ 28,274 respectively. These orders are also annexed as annexures B and B-1 and form part of the case. There were appeals to the Appellate Assistant Commissioner. He referred to the past practice of the assessee. He observed that other rural money-lenders also followed similar methods: that section 13 of the Income- tax Act did not permit subjective or arbitrary assessments and that it was not open to the Income-tax Officer to impose a new system of accounting upon the appellant. He observed further: It is quite true that the appellant advances to agriculturists at exhorbitant rates of interest. This is not denied by the appellant at all. It is equally true that agriculturists can pay interest only when they have a good harvest. This is the main reason why the appellant accounts for the interest as and when agriculturists settle their accounts. After stating that no single omission either in respect of lent out capital or in respect of interest realisation had been detected by the Income-tax Officer, that the Income-tax Officer had referred to certain advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. It may be that the method of accounting employed by the assessee would give him benefit in certain years. The law permits the assessee to so arrange his affairs as to get the maximum permissible relief. The decision of the Andhra High Court in S.R.V.G. Press Co. v. Commissioner of Excess Profits Tax, [1956] 30 I.T.R. 583 bears on the point under consideration. Therein, it was laid down that under section 13 of the Income-tax Act, the assessee is free to choose a proper method of accounting and the profits and gains have to be computed in accordance with the method of accounting regularly employed by the assessee; the assessing authority is bound by the assessee's choice of a method of accounting regularly employed by him, unless the income, profits and gains cannot properly be deduced therefrom; the name by which a method of accounting is called is not so important nor is it important whether the system of accounting adopted by the assessee conforms to the requirements of a known method of accounting so long as the profits of the business could fairly and properly be determined from the accounts. In that case, in respect of the payment made for sales tax, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be that the account maintained by the assessee is neither purely on a cash basis nor purely on a mercantile basis but is a mixture of the two methods, one method being adopted in respect of one class of transactions and the other in respect of different category. If the assessee employs such different methods regularly and consistently the profits would have to be computed in accordance with the respective methods provided a proper determination of the true profits could be arrived at. Relying on the decision of the Supreme Court in S.N. Namasivayam Chettiar v. Commissioner of Income-tax [1960] 38 I.T.R. 579; [1960] 2 S.C.R. 885, it was urged on behalf of the department that the power to compute profits under the proviso to section 13 arises only where no method of accounting has been regularly employed by the assessee or where the method employed is such that the income, profits and gains cannot properly be deduced therefrom; it means that the method adopted by the assessee must, prima facie, prevail where it is regularly employed, though the Income-tax Officer can resort to the proviso if the method is such that true profits cannot be correctly determined therefrom; in othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee's income and in dubio what the assessee himself chooses to treat as income may well be taken to be income and to arise when he so chooses to treat it. Next, reliance was placed on the decision in Ghanshyamdas Permanand v. Commissioner of Income-tax [1952] 21 I.T.R. 79, in support of the department's contention that the sufficiency of the accounts for the purposes of deducing the income, profits and gains therefrom is left by the proviso to section 13 of the Act, to the judgment of the Income-tax Officer; once the judgment has been exercised by the officer against the assessee, it cannot be assailed unless it can be demonstrated that the action was not judicial but capricious . But this contention overlooks the further observation made in that case that though the officer is not expected to lead evidence in refutation of the books his action should have some foundation; it is impossible to say as a matter of law what should be the material on which the officer would be entitled to apply the proviso to an assessee, regard being had to the infinite variety of cases likely to come up for decision; ordinarily if there is any material , that is to say, good ..... 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