Income Tax Appellate Tribunal - Nagpur
Fatehchand Chhakodilal vs Commissioner Of Income-Tax, C. P. & U. P. on 8 March, 1945
Equivalent citations: [1945]13ITR198(NAG)
JUDGMENT
The non-applicant assessee is the firm of Fatehchand Chhakodilal of Jubbulpore which carries on a hosiery business under the name of Fatehchand Chhakodilal and a cloth and money-lending business under the name of Ratanchand Laxmichand. This firm on the receipt of a notice under Section 22 (2) of the Income-tax Act, calling upon it to make a return for the year ending the 23rd September 1934, returned the income of Rs. 1,157-2-3 for the hosiery and Rs. 491-10-0 for the cloth and money-lending business, but the Income-tax Officer did not accept it and under Section 22 (4) of the Act issued a notice to the firm calling upon it to produce the books of account for the previous 3 years. The Income-tax Officer found that these books, particularly those which related to the cloth and money-lending business, were not only incomplete and incorrect but so maintained as to conceal the true income from money-lending and he after enquiry estimated the income for the year Rs. 15,624. Appeals to the Assistant Commissioner and Commissioner of Income-tax were dismissed. The firm thereafter made an application to this Court under Section 66 (3) of the Act and Pollock, J., directed the Commissioner of Income-tax to refer the following the two questions to this Court :-
(1) Whether interest not actually received in cash but debited to accounts or various debtors during the year could be included in the income of that year ?
(2) Whether the Income-tax Officer was entitled to call for accounts of more than three years back ?
2. The answer to question (1) depends, as the Commissioner of Income-tax, Central and United provinces, pointed out, upon the method of accounting employed by the assessee. If it has chosen to adopt the mercantile basis of accountancy, it would, as was held in Ahmad din Alla Ditta v. Commissioner of Income-tax, Punjab, be assessed to income-tax upon that basis and that basis alone. The outstanding feature of this kind of accountancy was recognised by their Lordships of the Judicial Committee of the Privy Council in Feroz Shah v. Commissioner of Income-tax, Punjab, as being the recording of transaction on the dates when they were effected whether cash payment was then made or not. In the "cash basis" method of accountancy, on the other hand, a record is kept of actual receipts and actual payments, entry being made only when money is actually collected or disbursed. If an assessee regularly employs this cash method of account his income will be computed on the cash basis and if in fact he regularly employs some reasonable and consistent combination of the cash and mercantile systems, for example, following the one system for some kinds of transactions and the other for other kinds of transactions, his income will be computed accordingly : (Sundarams "The Income-tax Act," 5th edition, page 672).
3. The question as to what method of accounting was employed by the present assessee is a question of fact and it is clear from the orders, Exhibits A - C of the Income-tax Officer, Assistant Commissioner of Income-tax and the then Commissioner of Income-tax that the assessee had not followed a system of accounting from which its correct income for the year could be accurately determined. There was, indeed, as the Assistant Commissioner pointed out, no real system of accounting at all but a hybrid system in the sense that the assessee maintained 8 years continuous accounts for debtors in which the receipts from it were recorded as cash paid without any sort of allocation between principal and interest, and subsequently if and when the allocation was made an entry in respect of the interest portion of these receipts was not made, and the allocation, if any, was not necessarily made in the year in which the money was actually realised. The Income-tax Officer was in the circumstances fully entitled under the proviso to Section 13 of the Income-tax Act to make the computation in question and the assessee cannot now re-agitate the claim that they employed the cash method of account. This was a pure question of fact and the findings against them were abundantly justified. We would in the circumstances answer question (1) in the affirmative. In fact, it seems to us that the question cannot essentially be regarded as one of law at all, as it is entirely contingent on a finding as to the method of account employed.
4. We would also answer question (2) in the affirmative. In T. M. M. Sankaralinga Nadar v. Commissioner of Income-tax, a Full Bench made the following observations at page 215 :-
"... we think that the proviso to sub-section (4), Section 22, when read with Section 23, sub-section (4), only limits the power to call for accounts for more than three years prior to the previous year, when the Income-tax Officer has to make the assessment to the best of his judgment, where the conditions mentioned in sub-section (4), Section 23, exist. Where, however, during the course of an enquiry the Income-tax Officer is not going to make the assessment to the best of his judgment owing to want of materials but proceeds to make an enquiry as regards the truth or otherwise of the allegations made an enquiry as regards the truth or otherwise of the allegations made by the assessee in his return in order to determine whether the assessee has made out his allegation, there is nothing to prevent the Income-tax Officer from requiring the assessee to produce any evidence including accounts. It will be unreasonable to suppose that where, for example, an assessee claims certain deductions and the Income-tax Office wants to make an enquiry into the truth or otherwise of the allegations, it is open to the assessee to refuse to produce any accounts beyond the three years fixed in the proviso to sub-section (4), Section 22, and require the Income-tax Officer to come to a decision on the materials afforded by the three years accounts."
We are in respectful agreement with that view and also consider that no limit of time has been laid down in Section 23 (3) and 37 of the Act in the matter of calling for accounts for the reason that in the course of an assessment circumstances may, as in the present case, arise necessitating scrutiny into accounts of a period prior to three years before the previous year.
5. This is clearly a case in which the assessee should bear the Commissioners costs in addition to their own and we order accordingly.
Reference answered in the affirmative.