1. This is an appeal filed by Shri Bollam Narayana Reddy of Pedduru against the order of the Commissioner (Appeals) for the assessment year 1977-78. The assessee which is a HUF was not assessed to income-tax earlier. The family owns about 220 acres of agricultural land in and around Pedduru in Mahboobnagar district. About 100 acres were under cultivation and rest of the lands were used for grazing purposes. The karta of the family, Shri Narayanareddy, who is looking after the affairs is over about 80 years old with his brother, Gal Reddy, aged about 75. Out of five sons of both, four were/are either in Government service or settled abroad. The assessee's premises were searched on 21-2-1977, when it was noticed that the assessee had pronotes worth about Rs. 3,32,000 besides cash of Rs. 70,000 and jewellery consisting of 17.1 tolas of gold worth about Rs. 21,000 said to have been of primary gold over and above jewellery pawned by the borrowers. It appears that the first assessment made on the assessee for the assessment year 1977-78 included practically the entire amount of the assets as income.
2. The matter went in appeal when the first appellate authority set aside the entire assessment after observing that some of the additions appeared to have been made without proper enquiry. The present assessment is now in dispute and was made in pursuance of this order.
The ITO had proposed the additions which was partly reduced by the IAC under Section 144B of the Income-tax Act, 1961 ('the Act'), and further reduced in first appeal by the Commissioner (Appeals). The assessee, not having been satisfied with the reliefs, is in second appeal in respect of three disputed items.
3. The first dispute relates to the income that should be estimated for the money-lending business, both in respect of pronote advances and pawn-broking advances. It is not in dispute after the order in first appeal that the turnover should be about Rs. 3.5 lakhs. Though there are varying rates provided in the pronotes and in respect of jewellery loans, it is not in dispute that average rate at which such monies have been lent should be 15 per cent. On the basis of accrual, such interest amount should be Rs. 53,406 even as per the assessee's own working in a petition filed on behalf of the assessee before the Commissioner (Appeals), who heard the original appeal against the assessment which has since been set aside. This working was in a petition dated 25-3-1981. This is the amount that was taken as the figure to be assessed by the first appellate authority in his appellate order. While the figures are not in dispute, the assessee objects to the adoption of Rs. 53,406 on a question of principle. According to the assessee, he has been maintaining the accounts by making receipts of interest amounts just behind the pronotes themselves on cash basis. In respect of pawned jewellery, it was noticed that slips were attached to the jewellery, giving all the details of borrower, the amount, the date, etc. This was noticed during the search itself. A diary was also seized in respect of pawn-broking advances. This related to receipts in respect of pawn-broking transaction and that was also on cash basis.
The interest receipts were reckoned on cash basis for income-tax purposes and returned, accordingly. He, therefore, contended that the assessee was maintaining accounts on cash basis. It is the assessee's case that the assessee had made up his accounts on financial year basis for income-tax purposes; he adopted the cash basis and filed the list of receipts on this basis and that the income worked out to Rs. 18,264.
It is argued that only this amount should be assessed on the basis of cash system of accounting. It is pointed out that the assessee itself accounted for its income on cash basis for immediately succeeding year at Rs. 89,984, inasmuch as the assessee tried to collect the arrears due to him from the agriculturist borrowers during that year in view of the impending legislation protecting such borrowers. The fact that the assessee offered Rs. 89,984 as income on cash basis, while on accrual basis the income will be much smaller, shows, according to the assessee, its bona fides. No doubt, the income offered was assessed in the next succeeding year by the ITO only on a protective basis. The ITO had made the assessments for all the earlier years by bringing to tax interest on accrual basis. This gives rise to unrealistic assessments as the assessee had received only a small part of what is considered as accrued income. It is stated that the assessee being a big landlord in that village, he was obliged to lend monies to co-villagers, whether there is good prospect of recovery of principal amount and interest or not. But, the formality of a pronote and stipulation of interest is always gone through. The assessee is also not able to resort to legal action as a matter of course in the village due to his social standing.
It was for these reasons that there were only nominal recoveries in the earlier years. It was also stated that many of the pronotes were renewed with interest just to keep the matter alive. The interest added in the new pronote has been treated by the authorities as interest accrued or received in earlier years. It is stated that the assessee had not been able to recover even the principal amounts themselves in a number of cases and that this kind of treatment has resulted in very unrealistic assessments. It is, therefore, contended that there is no justification for rejecting the claim of the assessee that the assessee's method is cash system of accounting. The learned Counsel for the assessee relied upon the decisions of the Mysore High Court in CIT v. K. Doddabasappa  54 ITR 221 and the Gauhati High Court in N.R.Sirker v. CIT  111 ITR 281. This is the first controversy in the appeal before us.
4. The learned departmental representative, on the other hand, claimed that the pronotes were merely documents evidencing loans. It is customary to record the part payments at the back of the pronotes. It cannot be stated that this practice by itself constitutes a system of accounting adopted by the assessee. Even in the mercantile system of accounting, cash received has always to be noted. On that account, it cannot be said that cash system is followed. It was claimed that the assessee does not have any accounts and much less a system of accounting for money-lending business. Even in respect of the entries in the diary, he claimed that it is in the nature of memorandum, recording receipts and payments. This cannot be stated to be accounts in any sense of the word. Merely making a statement for income-tax purposes does not mean that the assessee was keeping account. He claimed that with reference to a decision of the Tribunal in IT Appeal Nos. 718 to 722 (Hyd.) of 1980, the expectations of the statute, when a claim for cash system of accounting is made, is that the assessee should maintain regular accounts and such accounts should disclose the adoption of cash system. He relied on those decisions, which were cited in the said decision of the Tribunal.
5. We have carefully considered the records as well as the arguments.
For money-lending business, the only contemporaneous record is of entries at the back of pronotes. For pawn-broking, besides slips, entries were made regularly in diaries. At the time of assessment, a record was made of actual cash receipts in the reference to the original documents on financial year basis. The cash receipts, thus, compiled were offered as income from money-lending business on cash basis. The assessee had made up its accounts for preparation of return on the basis of such receipts in the pronotes and the diary. Those pronotes and the diary were themselves the original records. The accounts have been made up for the purpose of income-tax with reference to documents, the authenticity of which is not in dispute. The income-tax return is on this basis. It is true that the assessee should have the benefit of his own system of accounting even as provided under Section 145(1) of the Act. The assessee should keep accounts and the system is one that must be regularly employed. Once a system of accounting is claimed by the assessee and accepted by the department, it is not intended that he should change the system. Here is a case where the assessee maintained original records of transaction, but he did not contemporaneously make up the accounts for any accounting year.
It could be said to have made up the accounts from the original records maintained on cash basis for the first time when it compiled the receipts on an annual basis (financial year) and submitted its return.
It had not been hitherto assessed. It is not, therefore, correct to say that the assessee's claim is based merely on the basis of pronotes besides diary as was claimed by the learned departmental representative as evidencing transactions and not as accounts by themselves. It is also based on the statement made therefrom. In other words, the assessee's case is based on these documents not because they themselves represent accounts, but they serve as original records on the basis of which the accounts are made. The assessee's accounts, according to the assessee, have solid and contemporaneous basis. We have no difficulty in accepting the departmental claim as to correct principle of law in cases relating to disputes relating to method of accounting based on the decision of the Tribunal cited before us. The assessee, in order to claim the benefit of a particular method, should keep the accounts following a particular system and follow the same, consistently. The assessee has now made up the accounts on cash basis for the year under consideration, earlier years and later year consistently by preparation of statements from year to year on cash basis, with reference to these documents and diary for the first time. It had not been assessed earlier and, hence, the question of pinning down the assessee to any assessments made earlier than the one originally made on the assessee cannot arise. We have, no doubt, as pointed out by the Gujarat High Court in the case of Bhailal Tribhovandas & Co. v. CIT  68 ITR 136, that the accounts should be ordinarily capable of being accepted as accounts 'in the ordinary commercial sense'. It should be possible to ascertain the profit or loss suffered for a definite period. The High Court had quoted with approval, the meaning assigned to the phrase 'making up of accounts' by the Shorter Oxford English Dictionary, 'to set out the items of (an account) in order; to add up and balance (an account)'. The High Court proceeded to observe that there should be a balance sheet and ascertaining of the profits as of a particular date, in order that the assessee should have an option for availing the benefit of Section 2(11)(c) of the Indian Income-tax Act, 1922. The assessee has an uncontrovertible list of money-lending assets as income therefrom. There is no reason why the test of comprehensive availability of all materials (items) should not be applied for purpose of Section 145 also. We are concerned with Section 145 because it is this section which enables the assessee to have the income computed on the basis of its accounting. Pages 4 to 26 of the paper book furnished by the assessee (copies of which are already on record) gives a list of items constituting the cash receipts detailing the name of the borrower, the amount borrowed, payments of interest, repayment of principal, if any, etc. These details are extracted from the pronotes and diary. These accounts do give the interest income on cash basis as on any particular date and the cumulative income for each accounting year. The entire list of borrowers with moneys due from each of them towards principal is also available as at the end of each year serving the purpose of a balance sheet. While a regular system of accounting is certainly warranted under Section 145, it cannot be said that the fact that it was not maintained in perfect manner, as warranted by accountancy experts, could* be used to discredit the assessee's accounts thus made up. The statute does not expect such rigid standards. In our opinion, all that the statute warrants, when it requires that the accounts should be made up by a particular system, is that the system should have been clearly chosen and be available at the time of first assessment on the assessee and that the assessee should follow the same consistent method, so that the income over the years is not capable of manipulation in a manner that any income escapes taxation by charging the method from year to year. While so much is expected for the income to be declared year after year, the assessee's financial position as at the end of accounting year should be precisely available in the form of balance sheets with details of assets and liabilities. In the assessee's case, there are no liabilities. The list of assets with details are available. The details of income (every receipt) is also available. In other words, all the details normally expected of accounts regularly maintained or closed year to year are available in the accounts made up by the assessee. Necessary margin will have to be allowed for semi-literate businessmen, who may return the income for income-tax purposes on the basis of recognised system of accounting consistently, but maintain the accounts in a manner that it is not strictly warranted by text books on accountancy. It is in this light that we would approach the question before us. The Punjab and Haryana High Court in Salig Ram Kanhaya Lal v. CIT  133 ITR 915 pointed out that the assessing authority should look to the substance of the situation, so that there is no unreasonable hardship to the taxpayer. A practical view was advocated though the comment was made in the context of a peculiar business transaction which was presented by the assessee in its accounts in a particular way as the transaction could not be presented in a strait-jacket manner either under the mercantile or cash system of accounting. The Andhra Pradesh High Court in Addl. CIT v. K. Ramachandra Rao  127 ITR 414 had occasion to deal with the question of previous year in respect of 'salary'. The assessee has made up his accounts in respect of his salary income for the year ending on 31st July and claimed a different accounting year for salary income different from his accounting year for his professional income. Though the decision was rendered in the context of the right to adopt a different previous year for salary income, the decision supports the view that there could be accounts even for such receipts as salary and that the accounting year would be different depending upon the manner in which salary income was accounted by the assessee in accounts kept for the purpose. In matters like money-lending interest, we are of the view that the accounts made up for such interest income should have even greater weight in the context of the uncertain periodicity of the income receipt. As pointed out by the Gujarat High Court, the accounts should be acceptable as accounts 'in the commercial sense'. This test, in our opinion, in the present dispute, is satisfied because the accounts prepared with reference to the original records and made up for each year could be treated as accounts in the commercial sense. This could be so, notwithstanding the fact that these accounts had not been made up at the time of search though the primary records relating thereto were available. The income from interest is also easily ascertainable with reference to such accounts and this, as noticed earlier, is another test of a recognizable system of accounting. The Gauhati High Court in N.R.Sirker's case (supra) found that a particular amount was not assessable on mercantile basis because it was not the case that proper accounts were maintained on mercantile system. On the basis of this decision, the learned Counsel for the assessee had suggested that even if it is contended that the assessee's accounts could not be treated as proper accounts, only cash system should be the basis. We do not think that this decision lays down a general proposition that cash system should be treated as normal system of accounting, wherever there are no proper accounts on mercantile basis. In fact, we are of the view that the general proposition is otherwise. It is because the system of accounting on accrual basis accords more with mercantile system of accounting than with cash system. However, the intention of the taxpayer, the manner in which accounts were maintained and returned for income-tax purposes, the reasonableness of the income disclosed and the consistency of the basis adopted, are also factors that are relevant to a smaller or larger degree in deciding the assessee's claim one way or the other. This Tribunal had occasion to deal with the claim that a statement of account of salaries received by an assessee (supported by salary certificate from employer) constituted 'accounts'--Third Member (Vice President) on a difference of opinion between the two members, who heard the case, had this to say in the case of John Peter v. ITO  9 ITD 160 (Mad.), as regards 'accounts', though in the context of Section 3(1) of the Act: 6. The point of difference, as framed by my learned Brothers also, points out whether the statement filed along with the return is sufficient to show that the assessee has made up his accounts within the financial year within the meaning of Section 3(1)(b). It is to be noted at the outset that the Act does not anywhere define 'accounts' and for that matter even the method of account referred to elsewhere in several sections of the Act. The expression 'accounts' used by the Parliament in Section 3(1)(b), which I do not think, I need quote here, is to be understood in the sense in which that expression is commonly understood by a common man in the business world as also by the Accountants all over.
7. A generally accepted definition of accounting describes it as '...the art of recording, classifying, and summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.' 8. Accounting, which has been referred to the language of business, is not an end in itself; it is essentially a service function designed to provide relevant information concerning an entity for those who are interested in interpreting and using that information. It, therefore, followed that accounting, if it is to be useful, must be adopted to the particular needs of the enterprise and of those interested in it.
Broadly, there are those who require information relating to past events and others who are equally concerned, if not more, with the future and, thus, need accounting data projected into periods ahead.
Information generated by the accounting process is of interest to various groups directly or indirectly concerned with a business unit.
Parties interested in the performance of a business enterprise include among others, Governments which are mostly for the purpose of taxing the income or to fixing a cost. Vitally affecting the whole of accounting method is the requirement that the records must conform to the rules of law. These rules arise by virtue of a force outside the enterprise itself and must be read into the recording of events and transactions to which they apply. The practice of accounting is influenced and guided by conventions, doctrines and various rules, methods and standards which have from experience proved acceptable and useful. It is difficult to reduce accounting practice to a rigid set of rules. Rules governing the formation of accounting axioms and the principles derived from them have arisen from common experiences, historical precedents, statements by individuals and professional bodies and regulations of governmental agencies. Thus, the accounting process is based on conventions designed from experience to serve the needs of those using accounting information.
9. From the definition of 'accounts', thus, seen above, it will be at once clear that it is the art of recording, classifying and summarising in a significant manner, the transactions and events that have taken place so as to provide the relevant information to different users of the accounts, constitute accounts and accounting. Thus, the art of classifying transactions must necessarily depend upon the need and the skill of the person maintaining accounts subject to the conventions, methods and standards which have by experience proved acceptable and useful, taking into account the regulations of the governmental agencies, if any. If accounting or maintaining accounts is regarded as an art of recording transactions, the art of recording, classifying and summarising the transactions relating to income from salary can be maintained in as many ways as human ingenuity can think of alternatives. It cannot, thus, be laid down rigidly that recording of salary transactions must of necessity be always in a particular way.
The object of accounts being to provide the relevant information concerning salaries, the accounts can be maintained in any manner provided the relevant information is furnished and its authenticity is established." (p. 171) The accounts presented by the assessee to the ITO, thus, affords evidence in support of the income returned. The ITO may accept the account as truly reflecting the income or may reject it as unreliable. Rejecting the accounts as unreliable and not reflecting the true income or the relevant income, is not to be confused with either the method of accounting maintained by the assessee or the accounts themselves. Maintaining of accounting is one thing.
Arriving at the income on the basis of that account is another thing and accepting the results as disclosed by those accounts as reflecting the true income is yet another thing....
The Tribunal (Third Member) also referred to the decision of Punjab and Haryana High Court in CIT v. Patiala Saks Corpn.  77 ITR 443, wherein, the admission by the assessee of the accounts on cash basis on the basis of its books was considered sufficient to have the income from dividends assessed on the basis of books though the decision was again rendered in the context of 'previous year' for dividend prior to amendment of law in this regard. But this decision does highlight the assessee's admission also as a factor. On the assessee's facts where monies are advanced not purely as money-lender but as a financier for co-villagers at times of their hardship more as a matter of social prestige with or without interest, as a matter of course, the adoption of accrual basis can work hardship. This is also a consideration which cannot be overlooked. The assessee is not in money-lending business as such, but undertakes money-lending as part of his social obligation as a big landlord in his village who is ordinarily expected to assist his co-villagers in times of need. Out of five sons (karta's and his brother's) in the family, two were or are employed in the Government service (one as a professor in Medical College and the other a Block Development Officer who died during service) and two employed in the States (one as an Engineer and the other as a Doctor). It is in the context of all these facts that one has to consider the passage cited by the learned Counsel in N.R. Sirker's case (supra), reproduced below: It can safely be assumed that ordinarily people keep accounts in cash system, that is to say, when certain sum is received, it is entered in his account and in the case of firms, etc., where regular method of accounting is adopted, we find sometimes accounts are kept in mercantile system. In the instant case it is not the case of the department that the assessee's accounts were kept in mercantile system. On the other hand, the assessment orders show that no proper accounts were kept. That being so it would not be justified to presume that the assessee kept his accounts in the mercantile system. Income-tax is normally paid on money actually received as income after deducting the allowable deductions. In the case of an assessee maintaining accounts in mercantile system, there is some variation, inasmuch as moneys receivable and payable are also shown as received and paid in the books. In order to apply this method, the proved or admitted position must be that the assessee keeps his accounts in mercantile system.
6. This Tribunal is often called upon to adjudicate claims from the taxpayers or revenue as to whether the accounts kept by the taxpayers are regular or otherwise reliable. These accounts are not always contemporaneous or kept in a perfect manner. If the entries in the account books can be proved with reference to the original records of entries or otherwise capable of verification and would fairly indicate the profits which can be reasonably considered as the income of that business, this Tribunal in such cases does not uphold the total rejection of accounts. Even when the accounts are partly unsupported, it is proper only that part which is unreliable is rejected. For example, if some expenses are unproved, such expenses would alone be disallowed. If purchases are found to be inflated, the extent of inflation could be added back. It does not mean that in such cases, even the sale figures should invariably be rejected if the sales are otherwise supported or completed. It is in this view that the accounts statement furnished from the original records can be accepted as accounts as long as they are supported by the original records and there is no omission or other fault noticed therein. It would be so, even if the accounts had not been made up originally as noticed in this case as at the time of seizure. In our opinion, the accounts which had been made up at the time of furnishing the return of income with reference to the original documents could not be dismissed as not constituting the accounts unless, of course, they lack credibility for other reasons. It is under all these circumstances and for the reasons hereinbefore stated, we must hold that the assessee's claim for assessment on cash basis should be supported. Incidentally, for pawn-broking income, the assessee is in a much better position inasmuch as it is noticed by the authorities even at the time of search that they are supported by a diary and slips. The entries in the diary were on cash basis. Apparently, the assessee was keeping the accounts contemporaneously for pawn-broking purposes on cash basis. No doubt, even for pawn-broking business, it was not made up with reference to any particular date. That omission was, however, rectified when the accounts were made up. We also find that the assessee, itself, has shown a much larger income in the next succeeding year on cash basis, though it tries to offset such increase rightly or wrongly with a claim for bad debts. It may be that the claim for bad debt will automatically get abated, at least, partly, if the income of earlier years is not taxed on accrual basis. Again if part of the loan is only capitalisation of past interest which has not been taxed, there can be no bad debts to this extent unless such incomes were assessed. It may not be allowable for other reasons as well. However, we are not concerned with this question in the present dispute before us. The point, we notice, is that the subsequent disclosure of larger income from interest on cash basis does show the bona fides of the assessee's claim. No doubt, there appears to be some further dispute as to what happens when a pronote is renewed along with interest. The revenue, we are informed, seeks to tax the addition in the new pronote as accrued interest and may well try to treat it as cash receipt. We do not have to go into this question at this stage, as this issue does not appear to arise directly for this year. At any rate, we are of the view that having held that the assessee is entitled to have the income from money-lending transactions computed on cash basis, we would leave the matter to the ITO to verify the correctness of the assessee's figures inasmuch as he did not examine the assessee's statements in the view that the assessee is not entitled to return the income on cash basis.
Hence, for purpose of computing the income on cash basis, the matter is remitted to the ITO for fresh consideration in accordance with law.
7. We would, however, like to further add for purposes of record that even if we were to accept the departmental view that the income should be assessed on accrual basis, we would not consider it proper to compute the income merely with reference to the stipulated interest on all the pronotes. It is the assessee's consistent case that in view of the impending legislation in favour of agriculturist-debtors and even for other reasons, the principal amount itself was doubtful of realisation. Accrual system does not mean that the interest is receivable merely because it is stipulated. There should be reasonable prospect of recovery even for purposes of treating the expected recovery as income on accrual basis and for that matter, the same consideration should prevail for treating the stipulated interest as income under the mercantile system of accounting as well. We would have ordinarily remitted the matter back to the ITO on the point of ascertaining the income which would actually be treated as having accrued on this basis even if we had accepted the principle canvassed by the department that the accrual should be the basis of assessment.
Since, however, we have accepted the assessee's case for adoption of cash system, the comment which we have made in this paragraph is merely an alternative finding. In conclusion, we direct the adoption of the cash system and remit the matter to the ITO for getting the assessee's figures and computing the income on that basis for computing the income from interest on pronotes and pawn-broking advances.
8. The next ground relates to the addition of Rs. 10,000 under the head as unexplained investment in relation to the jewellery seized by the Central Excise Authorities to the extent of 398 grams and, subsequently, released by the Government on payment of fine. The ITO valued the same at Rs. 21,000. It was the assessee's case that out of the four items of jewellery, one belonged to deceased sister and that two belonged to the two wives of the karta of the assessee family. All of them had died and the jewellery was said to have been kept intact in honour of their memory. Considering the status of the assessee family, the extent of agricultural holding under cultivation (100 acres), employment of four out of five sons of the family in lucrative employments (two of them in the states) either then or earlier extent (sic) of money-lending outlay and the business said to have been carried on for the past two generations, which are some of the pointers to the inference that the value of jewellery cannot be treated as not being commensurate with the past savings, with the result that there is no case for treating any part of the amount as having been unexplained and, therefore, as the income of the assessee. The assessing authority himself accepted the assessee's version partly when he sustained only Rs. 10,000 as against the value of Rs. 21,000. We are of the view that there is no case for addition of this amount as well.
9. The next ground relates to the investment in pledge of pawned jewellery first advanced during the year to the extent of Rs. 16,880.
The ITO was of the view that this should also be taken as unexplained.
It was contended on behalf of the assessee that there were also mostly renewals as in the case of pronotes and that there were no fresh advances. We are of the view that even if the assessee's argument is not to be accepted, no addition is possible for reasons as pointed out in the immediately preceding paragraph in view of large agricultural and other income. We are of the view that the probabilities of such amounts being available, out of assets already held in some or other form, are very strong. Even during the search, no materials were found to justify the treatment of this outlay as the income of this year. The authorities have accepted substantial cash of Rs. 70,000 only because of this fact. It is under these circumstances that we are of the view that there is no case for this addition as well. The addition of Rs. 16,880 will also stand deleted.
10. The last ground is relates to the estimate of agricultural income of Rs. 40,000 as against the returned income of Rs. 50,000. The assessee has also objected to the computation of the income for earlier years on this basis. It is needless to point out that we are not concerned with the extent of agricultural income in the disputes before us. As for a lower estimate of the agricultural income than what has been offered by the assessee, the assessee could not be aggrieved by this finding for this assessment for the year under consideration. In an indirect way, ancillary questions as to the source of investments could arise for other years when the assessee tries to attribute such investments to such agricultural income. For this year, even such an ancillary issue does not arise. Under these circumstances, we do not adjudicate upon the claim of the assessee on the ground that the assessee could not be aggrieved by the decision, which adopts a lesser income than what has been claimed. It is, accordingly, not gone into.
The appeal on this point fails.
11. In the result, the appeal is treated as allowed substantially in the manner indicated in the preceding paragraphs.
12. Since the appeal is disposed of, the stay petition has become infructuous and it is also, accordingly, dismissed.