TMI Blog1958 (10) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... made in the accounts kept on mercantile basis - both the questions answered against the appellant. Appeals dismissed. - - - - - Dated:- 3-10-1958 - Judge(s) : A. K.SARKAR., GAJENDRAGADKAR., VENKATARAMA AIYAR JUDGMENT The judgment of the court was delivered by GAJENDRAGADKAR, J.--These are appeals by special leave and they arise from the assessment proceedings taken against the appellant's husband Seth Ganga Sagar Jatia in respect of his income for the assessment years 1943-44 and 1944-45. The said Seth Ganga Sagar died on September 22, 1944, leaving behind him his widow the appellant Shrimati Indermani Jatia. After the death of her husband, the appellant continued the assessment proceedings as his representative and administrator of his estate. The appellant as well as her husband were residents and ordinarily residents in British India for the relevant years. The sources of the assessee's income for the purposes of income-tax assessment were his business, his house property and the dividends earned by him. This business was carried on by the appellant after his death at Khurja and Aligarh which are part of India and at Chistian in the Indian State of Bahawalpur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court was dismissed by the High Court on April 23, 1954. Thereupon the appellant applied for and obtained special leave on December 10, 1954. That is how these appeals have come to this court. Mr. Viswanatha Sastri, for the appellant, did not challenge before us the correctness of the view taken by the High Court on the second question in respect of the expenditure of Rs. 7,512. He conceded that the finding recorded by the Income-tax authorities against the appellant on this point is a finding of fact, and, having regard to the material on the record, the correctness of the said finding cannot be effectively challenged. He, however, urged that the answer given by the High Court on the first question referred to it was erroneous in law. The High Court has held that the two amounts of interest credited in the books of the appellant were liable to tax under section 4(1) of the Act as they must be deemed to have been received by the appellant in British India. Mr. Sastri argues that the expression "deemed to be received" means, deemed by the relevant provisions of the Act to be received. It is not disputed that though income may not have been received by the assessee in reality, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is well known that the mercantile system of accounting differs substantially from the cash system of book-keeping. Under the cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits ; whereas, under the mercantile system, credit entries are made in respect of amounts due immediately they become legally due and before they are actually received ; similarly, the expenditure items for which legal liability has been incurred are immediately debited even before the amounts in question are actually disbursed. Where, accounts are kept on mercantile basis, the profits or gains are credited though they are not actually realised and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. The same is the position with regard to debits made. This position is not disputed by Mr. Sastri. He, however, contends that the entries in respect of the receipt of interest are nevertheless merely book entries and it would not be reasonable to infer actual receipt of the said amount merely from these entries. In support of this argument, Mr. Sastri invited our attention to the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., appears to have been substantially reproduced in explanation (1) to section 4(1). The argument that the principle thus statutorily recognized in respect of balance-sheets should be extended to private books of account kept according to mercantile system cannot, in our opinion, be accepted. Mr. Sastri has also invited our attention to the decision of Keshav Mills Ltd. v. Commissioner of Income-tax. In this case a non-resident company manufactured textile goods in Petlad outside British India and sold the goods ex-mills. The firm of R. Co., guaranteed the sale price of goods sold ex-mills by the assessee company to purchasers at Ahmedabad within British India. The assessee maintained its accounts according to the mercantile system and so debited R. Co., with the price of goods sold and credited the sales account with the bills. R. Co. collected the amounts of the bills from the purchasers on behalf of the assessee and credited the sums realised in the assessee's account with banks at Ahmedabad and also disbursed them to creditors of the assessee in British India. During the relevant accounting year, the assessee thus received Rs. 12,68,418. The assessee also received Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not actually paid in British India. The assessee had a business of his own in Rangoon carried on by an agent and he was also interested with another or others in a money-lending business in Penang in which he was a chief partner. From the Rangoon business a sum of Rs. 78,768 and odd was transferred in cash to the Penang business under the orders of the assessee. In the books of the Rangoon business a sum of Rs. 12,174 was entered as interest on that money from Penang and the assessee had been assessed in respect of this interest under section 4, sub-section (1), of the Act as income accruing, arising or received in British India. It was admitted that the assessee kept his books according to the mercantile method of book-keeping. What the assessee sought to do was to treat the relevant entries of interest on cash basis though he adopted the mercantile basis in regard to other entries in the interest account. This attempt did not succeed because the High Court held that the assessee's own accounts were "dead against his contention" and they precluded him from arguing that the interest in question is income arising outside British India and not received in British India because in l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s early as 1887 that Palles, C.B., observed in Dublin Corporation v. M'Adam (Surveyor of Taxes) that "no man, in my opinion, can trade with himself ; he cannot, in my opinion, make, in what is its true sense or meaning, taxable profit by dealing with himself." In this case, a city corporation had been empowered by its Waterworks Act to supply waters beyond the city boundaries. Any income thus arising had to be put into a consolidated account of the corporation for all the purposes of the Act. It was held that the excess of receipts over expenditure in respect of the extra municipal supply constitutes profits chargeable to income-tax. Distinction was made between the extra municipal supply of water and supply within the limits of the municipality ; and it was held that it was only the excess of receipts over expenditure in respect of the former that constitutes profits chargeable to income-tax. The argument that the income received from the ratepayers residing within the limits of Dublin Municipality should be taken into account was repelled on the ground that the corporation cannot be treated as in any sense a body distinct from the inhabitants of Dublin. It was also observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent." Mr. Sastri also contended that the decision of the Allahabad High Court in Ram Lal Bechairam v. Commissioner of Income-tax supported the same view. On the other hand, the Solicitor-General contends that the principle on which Mr. Sastri relies can no longer be regarded as inflexible and universal ; and according to him, permissible invasion of this principle has been recently recognized by the House of Lords in Sharkey (Inspector of Taxes) v. Wernher. In this case Lady Zia carried on a stud farm, an activity which was admittedly husbandry and taxable under Schedule 'D' ; she also carried on a separate activity, racing stables, which gave rise to no liability to tax being a "recreational" enterprise. Horses were bred at the stud farm for the racing stables. On the transfer of five horses in the relevant year of assessment from the stud to the stables it was held by the House of Lords (Lord Oaksey dissenting) that "where a person carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se I of Schedule 'D' to treat a man who supplies himself in his own trade as trading with himself on ordinary commercial terms and stated that the said decision which was given in 1942 laid down a principle that must continuously affect a great many taxpayers and it was only in 1955 that it was said that the case was wrongly decided. The learned law Lord also considered the decision in Back (Inspector of Taxes) v. Daniels and referred to the observations of Mr. Justice Rowlatt, about the assessees' admission that "in addition to their liability to income-tax under Schedule 'B' the assessees may be liable to income-tax on a sum in the nature of a commission to themselves for selling their own potatoes, in the same way as they sell other people's potatoes in London on the market." The assessees in the case before Rowlatt, J., were a firm of wholesale potato merchants who carried on business in London where they sold all the potatoes raised by them on land in Fen District. The effect of the decision was that Schedule 'B' assessment on the profits of occupation prevented any assessment under Schedule 'D' in respect of the profit the firm made when they sold the potatoes as wholesale me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclose the real controversy between the parties. The reference to the deeming provisions of the Act which is presumably implied in the question as framed by the Tribunal and answered by the High Court is clearly out of place ; but the fact still remains that the appellant never raised the contention that the two entries in the interest account cannot in law show profits received by her because the appellant could not trade with herself. If the appellant wanted to rely upon this principle the point should have been urged at the earlier stage of the proceedings. Besides, there are some other factors which would introduce complications in case the point raised by Mr. Sastri were to be upheld. The business conducted by the appellant in the shop at Chistian attracted the provisions of section 14(2)(c) of the Act which was then in force ; and so no tax was payable by the appellant in respect of the income, profits or gains accruing or arising to her from the said shop unless such income, profits or gains were received or deemed to be received in or brought into British India in the previous year by or on behalf of the appellant. In other words, though the appellant is a resident in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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