The judgement of the court was delivered by
MANCHANDA J. - This is a case stated by the Income-tax Appellate Tribunal, Delhi Bench (hereinafter referred to as the Tribunal), under section 66(2) of the Income-tax Act, 1922. The question referred is :
'Whether, in the circumstances of the case the amount of Rs. 13,751 is assessable in the year 1951-52, or in the year 1952-53
The facts, according to the statment of the case submitted are as follows :
The relevant assessment year is 1952-53, the previous year being the year ending 31st of October, 1951. The assessee is an individual. She is a forest contractor and maintains regular books account on the mercantile basis. During the year ending 31st October, 1950, i.e., she cut, inter alia, trees of the vlaue of Rs. 13,751 from the forests of which she had taken a contract. Before she could remove the timber an order was served upon her by the Divisional Forest Officer dated June 5, 1950, whereunder she was prohibited from removing and the burning of charcoal in Bakama forest. The ground given was that the Range Officer, Private Forests, had reported very heavy deviation by the assessee from the working scheme all over his forests. Thereupon, a complaint was lodged by the Range Officer, Private Forests, Dehra Dun, under section 15 of the U.P.Private Forests Act (Act VI of 1949) on the ground that the assessee had made heavy deviations from working scheme of Dobri Bakama forests, etc., after September 27, 1949, without any lawful authority. This complaint was tried by the Judicial Officer, Dehra Dun, who by his order dated January 16, 1951, acquited the assessee. The operative portion of his order reads :
'No evidence whatsoever has been produced by the compliment that the material detained by his department in the forests of and belonging to the accused is of unauthorised feeling. The detention of the material is, therefore, wrong and unjustified. Under the circumstances, I order that the material detained be released.'
Thereafter, the said stock was released. It had, however, not been released by the close of the accounting year for the assessment year 1951-52, which ended on October 31, 1950, but was released only in the year following which ended on October 31, 1951.
The profits in the books of account were as under :
Although the assessee maintained the books of account on the mercantile basis she did not include the stock of felled trees worth Rs. 13,751 in the closing balance of stocks on October 31, 1950, i.e., relevant to the assessment year 1951-52. After the said cease of stock she accounted for recorded in the books of account for the relevant assessment year 1952-53. The assessee filed two returns, one for the assessment year 1951-52 and the other for the assessment year 1952-53, declaring her income as shown in her books of account and set out hereinabove. Subsequent to the filing of the return for the assessment year 1952-53, the assessee claimed, before the Income-tax Officer, that the book profit for that year should be modified by deleting the sum of Rs. 13,751 and this should year should be added to the book loss of Rs. 7,745 returned for the earlier year ending on October 31, 1951 (assessment year 1951-52), as it represented the stock of that year, the felling of the threes having taken place in that year. In the assessment for the assessment year 1951-52, the assessee had, before the assessment was made, asked for the adjustment in the stock position to be made in her books of account for that year. This claim was not allowed by the Income-tax Officer and in the order of assessment for the assessment year 1951-52 the reasons given for this were :
'(1) That the assessee was not in possession of this stock at the end of the previous year (year ending October 31, 1950).
(2) He had no reasonable expectation to recover the whole or any part of this stock in the subsequent years.
(3) There is no adjustment of the value of this stock in the books at the end of the previous year. The closing stock will cover only such items of stock as were the property of the assessee on the closing day of the accounting year. Any stock lost to the assessee, and for which there is no expectation the recovery cannot be included in the closing stock.'
There is no indication in the statement of the case as to whether there was any appeal from this assessment order for 1951-52. Therefore, it is not unreasonable to conclude that this position was accepted by the assessee. In the assessment for the assessment year 1952-53, however, as already stated, the assessee, though she had made the return on the basis of her book profit which included the sum of Rs. 13,751 a claim was put forward that the book profit should be modified and the said sum should be deleted from the book profit of the assessment year 1952-53. The Income-tax Officer rejected the claim on the short ground that this very claim had already been considered and rejected by him in the assessment order for the assessment year 1951-52.
The Appellate Assistant Commissioner found that though the sum of Rs. 13,751 was subsequently adjusted in the return filed by the assessee for 1952-53, yet no corresponding adjustment in the books of account was made in the stock account on the closing date, i.e., October 31, 1950, relevant for the assessment year 1951-52. According to him the assessee her self did not consider this to form part of her stock for that year as it had been frozen by the forest department. It was only after the release of the stock and the sale thereof in the previous year relevant to the assessment year 1952-53, that the said sum of Rs. 13,759 was returned as income for that assessment year.
A further appeal to the Tribunal was also unsuccessful for the reason, firstly, that the assessee had neither shown the stock of timber in its closing stock for the assessment year 1951-52 (year ending October 31, 1950) nor had she adjusted this in the return of income for that year, and secondly, that there was no guarantee that the stock detained by Government would ever have come back to the assessee. The Tribunal, however, went on to observe that in a case of this type the profit could be related back to the earlier year by way of the value of the stock, but in the circumstances of this case it declined to do so.
The application under section 66(1) having been unsuccessful and upon this court being moved, the case was directed to be referred under section 66(2) of the Act.
The main contention of Mr. Banarsi Das, the learned counsel for the assessee, was that the system of accounting admittedly being mercantile the profit or loss account for the assessment year 1951-52 could not have been drawn up without taking into consideration the trees which had been felled prior to the close of the previous year ending on October 31, 1950, relevant to the assessment year 1950-51. Furthermore, that though the value of the trees which had been felled had not been entered by the assessee as its took in its books of account, nevertheless, such adjustment was bound to be made by the department or at least permission to make the necessary adjustment, when the matter was brought to the notice of the Income-tax Officer during the proceedings for the assessment year 1951-52, ought to have been given. Strong reliance was placed on the decision of the House of Lords in Commissioners of Inland Revenue v. Newcastle Breweries Ltd. and Supreme Court in Indermani Jatia v. Commissioner of Income-tax in order to show the special features which obtain in the mercantile system of accounting as contrasted as contrasted with the cash system.
The learned standing counsel for the department, on the other hand, contended that the system of accounting adopted by the assessee was a hybrid one inasmuch as the Income-tax Officer had in passing observed that the practice if such forest contractors was to account for the logs floated down stream not on the mercantile system but upon their reaching their destination. Several authorities were cited for the proposition that when the system is a hybrid system the assessee would be bound by his past practice.
It is not necessary to consider the cases cited by the standing counsel as there is no warrant for assuming that the system employed by the assessee was a hybrid system. As already noticed, she is a forest contractor and maintains regular books of account on mercantile basis. In the heading of the assessment order the system of accounting is mentioned as 'Mercantile'.
The learned standing counsel also attempted to support the finding of the Tribunal that there was no guarantee that the stock which was detained by Government would ever have come back to the assessee. There is no force in this contention. The Tribunal no doubt considered the main hurdle in permitting the adjustment to be made in the closing stock of the preceding assessment year, i.e., 1951-52, to be that on October 31, 1950, the date on which that year ended, there was no guarantee that the stocks would ever come back to the assessee, but unfortunately the provisions of the U.P. Private Forest Act (Act VI of 1949) were not brought to its notice. Mr. Banarsi Das has taken us through the relevant provisions of this Act and it is fairly clear, that the possession of the trees felled by the assessee was with her. If there was any deviation from the working plan as laid down by the forest department, the latter had the right to file a complaint under section 15 of the Act and only upon conviction could the stock have been forfeited. As already observed, the Judicial Magistrate had acquitted the assessee and found that the logs belonging to the assessee and detained by the forest department were not unauthorised failings and the detention was, therefore, wrong and unjustified. Therefore, the assessing authorities, and the Tribunal were in error in assuming that on October 31, 1950, i.e., the close of the previous year relevant for the assessment year 1951-52, the assessee had no guarantee that the stock would come back to her and as such she could not have taken the trees felled into her closing stock for the year ending October 21, 1950, even if she wanted to do so.
Be that as it may, the main hurdle in the way of the assessee is her deliberate and not accidental failure to take the trees felled, during the year ending October 31, 1950, into her closing stock for that year. The books of account for that year having been duly closed without deliberately making such an entry and the return of income having also been made on that basis, there can be no warrant for permitting the reopening of accounts once closed. It is no doubt true, that under the mercantile system of accounting the profits cannot be determined unless the value of the stock on hand at the year of account is taken into account, and the value of the closing stock in any year necessarily constitutes the opening stock for the next year; but when no entry is made in the closing stock the question of its being taken into account will not arise.
The Supreme Court in Chainrup Sampatram v. Commissioner of Income-tax, has laid down the value of any unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period. There is no quarrel with this proposition or with the aforementioned authorities cited by Mr. Benarsi Das dealing with the mercantile system of accounting, but the difficulty in this case, as already observed, is that assessee herself did not care to include in the closing stock for the year ending October 31, 1950, the value of the said trees felled. It was only in the subsequent year that they were taken to stock and sold. After the books were closed for that year, the profit and loss account determined and a return field on that basis, it was too late for the assessee to make any adjustment in the closed accounts thereof.
The doctrine of relating back of a receipt or stock to the year in which the income could be said to have accrued or stock received and the reopening of closed books of account for earlier years according to the English practice has been deprecated by the Supreme Court in recent decision. In Commissioner of Income-tax v. A. Gajapathy Naidu the Madras High Court had held that where a receipt is co-related to and arises out of a recurring transaction between the parties the right or liability should be deemed to have been established in the past accounting period and it had directed that the accounts be reopened when the payment was received. This decision was reversed by the Supreme Court. They considered the characteristics of two prevalent systems of accounting. The mercantile system, it was observed :
'....brings into credit what is due immediately it becomes legally due and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. The books profits are taken for the purpose of assessment of tax, though the credit amount is not realised or the debit amount is not actually disbursed.......... It is said that on the basis of proper commercial accounting practice, if a transaction takes place in a particular year, all that has accrued in respect of it, irrespective of the year when it accrues, should belong to the year of transaction and for the purpose of reaching that result closed accounts could be reopened. Whether this principle is justified in the English law, it has no place under the Indian Income-tax Act...Nor is the question of reopening of accounts relevant in the matter of ascertaining when a particular income accrued or arose.'
In Commissioner of Income-tax v. Swadeshi Cotton and Flour Mills Ple. Ltd., it was again reiterated :
'The system of re-opening of accounts does not fit in with the scheme of the Income-tax Act. As far as receipts are concerned there can be no re-opening of accounts, and the position is the same in respect of expenses.'
The Supreme Court also considered the case of Commissioners of Inland Revenue v. Newcastle Breweries Ltd. relied upon by Mr. Banarsi Das and it was of the view that the English decisions on the question of reopening of accounts were inapplicable in view of the scheme of the Indian Act.
The assessees deliberate failure to make the necessary entries in the closing stock for the year ending October 31, 1950, and the profit and loss account having been prepared on that basis, the department was right in not permitting the closed accounts to be reopened and the adjustments to be made, which would have been necessary both for the assessment years 1951-52 and 1952-53.
Our answer to the question referred, therefore, is that on the facts of this case of the amount of Rs. 13,751 was assessable in the year 1952-53.
The reference is answered accordingly. In the circumstances of the case we make no order as to costs. Counsels fee is assessed at Rs. 200.