TMI Blog1934 (6) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... house property. The firm consists of two partners, Sh. Ahmad Din and Sh. Allah Ditta, each having equal shares. In connection with the assessment for 1931-32, the petitioner returned under Section 22(2) of the Act, a net income of ₹ 1,961-8-4 from property, a net profit of ₹ 6,021-5-1 from money-lending and a loss of ₹ 7,541-6-0 in the brick kiln business. This reference is concerned only with the income from the money-lending business and will be confined to it alone. In a statement of the income and expenses of the money-lending business attached to the return, the assessee gave the following details:- INTEREST INCOME. Rs. As. P. By income from interest on deposits in the Peoples Bank of Northern India, Gujrat ... 3,006 12 7 By income from interest on deposit in the Lyallpur Bank, Gujrat ... 639 14 6 By income from interest on deposits in the Punjab National Bank, Lahore ... 2,536 13 0 By interest from sundry debtors ... 887 0 0 Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Section 33, and therefore proceed to state a case to the High Court under Section 66(2). The method of accounting found by the Income Tax Officer And admitted before me as regularly employed by the assessee is The mercantile system of accountancy. Under this system Entries are made in the accounts on the date not of receipt of money or expenditure of money but on the date of transactions irrespective of the date of payment. A profit and loss account prepared on this basis is accepted as evidence of the assessee's income and assessment is made accordingly. If any part of these book profits is later on found to have become irrecoverable it is deducted from the assessment as a bad debt. Now it will be interesting to note here that the sum of ₹ 6,383-8-1 returned by the assessee and offered for assessment as interest received from various banks includes a sum of ₹ 4,647-0-6 which represents the aggregate of a number of items of interest which were not actually realized but were merely adjusted and included in the renewed receipts of fixed deposits. The assessee has tried to distinguish the case of banks from individual depositaries on the ground of security, but th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passage occurring on page 219 of Rustomji's Limitation Act: A transaction between a creditor and debtor whereby they agree that the amount due for interest should be added to principal and the whole amount carried forward in the creditor's books as being due for principal is not different from a transaction wherein the creditor receives actual payment of the amount due for interest and lends the same back again to the debtor. When both parties agree to such a settlement and the accounts are so adjusted, the adjustment operates as a payment of interest. In the present case the renewal of the pronote is a proof of the parties having agreed to such a settlement which is accompanied by an adjustment in the assessee's books. It may be mentioned that the payments of interest to his creditors similarly adjusted by an assessee debtor in his books are invariably admitted and allowed as deduction in the assessment of the debtor in accordance with Section 10(3) which is practically on the same lines as Section 13. What therefore applies to expenses must equally apply to income. Moreover the institution of bad debts pre-supposes the assessment of what are called book pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee then asked the Commissioner of Income Tax either to accept his contention or in the alternative to refer the question for the decision of this Court. The Commissioner refused to interfere under Section 33 but stated the case to the High Court under Section 66(2). He found that the method of accounting admitted before him to have been regularly employed by the assessee, was the so-called mercantile system of accountancy or book profit system. Under this system entries are made in the account on the date not of the receipt of money or expenditure of money but on the date of the transactions irrespective of the date of cash payment. A profit and loss account prepared on this basis is accepted as evidence of the assessee's income and assessment is made accordingly. If any part of these book profits is later on found to have become irrecoverable, it is deducted from the assessment as bad debt. According to this method the assessee regularly entered in his profit and loss account income which might not have been actually received but was treated as such by the assessee for all purposes of his business and the Commis- sioner was of opinion that it was the financial valuati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich had been applied in the two previous years without objection, should be applied. Having regard to the first finding and to Section 13 of the Act sales made during the year of accounting were brought into charge, although they were not recorded in the books until later. The appellant sought to have a case stated for the opinion of the High Court relative to the two findings above stated, the second not being challenged as to principle. It was held by their Lordships that the High Court had rightly refused to require a case to be stated under Section 66 of the Act, as the findings in question were findings of fact. In the course of their judgment their Lordships stated as follows: Too much emphasis had, they think, throughout the case been attached to the use by the Income Tax Officer and the Assistant Commissioner of the term 'mercantile system'. The finding of both, in its essential substance, was that the appellant's system of accounting, by whatever name called, required the inclusion in his accounts of 1926-27 of the ₹ 90,618 referred to, and the only question open to judicial determination is whether there was any evidence before these officers upon w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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