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TMI Blog1963 (8) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... terest income is accounted by the assessee 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 Credits Rs. Rs. Opening balanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the debtors. It is purely a question when the debtors approach the assessee for the settlement and this is the method of accounting followed by the assessee". The assessee supported the method adopted by it as under: "As a matter of fact the rate of interest should always be calculated in proportion to the realisations during the years as accounts are maintained on cash basis. If a loan is overdue by 4 or 5 years and if it is realised during the year, naturally the assessee received the interest for all the years during the year only, which will work out to 2 or 3 times of the original rate of interest to the parties. The total realisations will vary from year to year which will depend on good yield of crops and favourable prices of produce raised as most of the parties belong to village parts who are mostly agriculturists. We have taken a copy of realisations received from the parties for the accounting years 1954-55 and 1955-56 for comparative purposes. The realisations amounted for the accounting year 1955-56 to ₹ 1,02,191 and the interest realisations amounted to ₹ 34,458 and it works out at a rate of 33.8 per cent. over realisations towards principal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e book result and estimating interest by resorting to the application of the proviso to section 13 of the Income-tax Act. The order of the Appellate Assistant Commissioner is annexure "C" and forms part of case. The department came on appeal to the Tribunal. It upheld the order of the Appellate Assistant Commissioner. A copy of the Tribunal's order is annexure "D" and forms part of the case. The question of law is: "Whether, on the facts and circumstances of the case, having regard to the method of accounting adopted by the appellant, the application of the proviso to section 13 of the Income-tax Act was proper and justified in law and whether the inclusion of ₹ 39,659, ₹ 23,427 and ₹ 28,274 representing interest was proper and legal?" [After setting out the statement of the case as above, K.S. HEGDE J. continued:] The method of accounting employed by the assessee was the one regularly employed by him. There is no dispute on that point. Hence, prima facie, the assessee's case comes within the main part of section 13 of the Indian Income-tax Act, 1922. The controversy centers round the question whether the method employed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the provisional assessment of sales tax and including the refunds and rebates in the income of the year in which they were received. That system was followed regularly and accepted by the authorities for income-tax and excess profits tax purposes until the year 1945; in the official year ending 31st March, 1945, an amount of ₹ 47,276 was paid under a provisional demand for sales tax; the whole of the amount was allowed for income-tax purposes as usual, but as the Excess Profits Tax Act expired on the 31st March, 1946, the Excess Profits Tax Officer, purporting to exercise his powers under rule 12 of Schedule 1 of the Excess Profits Tax Act, allowed only a sum of ₹ 17,055 which in his opinion represented the actual liability for the tax apportioned on time basis for the turnover of the chargeable accounting period in question on the basis of the final assessments and refunds made in April, 1946, and that decision was upheld by the Tribunal. The Division Bench consisting of Subba Rao C.J. (as he then was) and Visvanatha Sastry J. held that the assessee had followed a regular method of accounting and that method of accounting was accepted by the authorities. Hence, it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e proviso if the method does not show correct profits of the year. I fail to see how this decision helps the department. In the instant case, there is no gainsaying the fact that the method of accounting employed by the assessee was one regularly employed. He has been employing that method for years. Therefore, it is for the department to demonstrate before discarding that method, that the method in question does not show the correct income, profits and gains of the year. As observed by the Judicial Committee in Commissioner of Taxes v. Melbourne Trust Limited [1914] A.C. 1001, 1011: "As regards the question of when a profit is earned their Lordships' view is that a profit can be said to be earned when it is dealt with as a profit. In ordinary cases this synchronizes with the realization of the sums which swell the assets of the person or company, and which entering the account (whether on the creditor or debtor side will depend on the particular account in view) go to bring out the balance which is deemed profit. But for the reasons already given their Lordships think that in a case like this the company are entitled to hold at least a part of their realizations in sus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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