1. This is a reference made by the Income-tax Appellate Tribunal by their order dated 8-5-1952, referring the following two questions for the opinion of this Court:
1. Whether, on the facts above stated, the assessee's proportionate (on time basis) income, profits and gains for 12 months out of the period 11-10-1942 to 29-10-1943 -was correctly assessed for the assessment year 1944-45?
2. Whether the receipt of the profits of prior speculation transactions under the cheque dated 29-10-1942, received by the assessee on 2-11-1942, or of any portion thereof, fell to be considered in the assessment for the year 1944-45?
2. The case was previously stated by the Allahabad Bench in Civil Reference No. 11 of 1949 which, was heard by a Bench of this Court and was by an order of this Court dated 19-6-1950, sent back 'to the Delhi Tribunal for a better statement of the case.
3. Bhogilal M. Shah, the assessee, was at one time a servant of the Bombay Trading Company, Bombay, out as from l-10-1942, his services were dispensed with by a letter dated 20-9-1942. Bhogilal M. Shah then started an independent business of his own in partnership with his brother which was in the beginning restricted to forward delivery transactions. Two such contracts were entered into on the 27th and 29th September, 1942. No books of account were, however, started. On 11-10-1942, these two brothers started yarn business and maintained regular books of account as from 11-10-1942. Their accounts were made up for the period from 11-10-1942, to 29-10-1943, which showed a total income of Rs. 32,870-3-9. In the books of account that they had started they mentioned a profit of Rs. 11,651-13-0 as having been received on 2-11-1942. The cheque is dated 29-10-1942.
4. On 8-6-1944, for the assessment year 1944-45Messrs. Bhogilal M. Shah voluntarily submmitted a return under Section 22(1). Income-tax Act, showing a total income of Rs. 32,870-3-9. The return was made as a Hindu undivided family consisting of Bhogilal and his brother Shantilal and the return was for the year ending 29-10-1943. Along with this was filed a copy of the profit and loss account in which the following was stated;
'Net income of Rs. 32,870-3-9 is from 11-10-1942 to 29-10-1943 (Asho Sud 1 Samvat 1998 to Asho Vad Amus Samvat 1999 Gujerati'). Income is for thirteen months. I am keeping accounting period from 'Dewali' to 'Dewali'.'
The assessee was called upon to support his return and the case was fixed for 21-2-1945. On 16-2-1945, the assessee submitted an application that the return should be regarded as a return for two accounting periods. An extract from that application is as follows:
'A profit of Rs. 32870-3-9 is for 13 months, i.e., from 'Asuj' Section 1, 1998 to 'Asuj' B. 15, 1999. Assessee is maintaining from 'Katak' Section 1 to 'Asuj' B. 15, i.e., from 'Dewali' to Dewali. The profit from 'Asuj' Section 1 to 'Asuj' B. 15, 1998, is worked out as under: X X X X'
5. Thus for the first period, i.e., from the beginning of the business to 'Asuj Vadi' 15, 'Samvat' 1998 he claimed his net income to be Rs. 11651-13-0 which he claimed was assessable income for the assessment year 1943-44 and for the assessment year 1944-45 the income assessable was Rs. 21218-6-9. On 21-2-1945, he made another application stating that he was entitled, in terms' of Section 2(11) of the Income-tax Act, to exercise an' option to have a 'previous year' other than the financial year and that he had decided to adopt the 'Dewali' year as the 'previous year' for the business which was started on 11-10-1942. He also stated that although the account books had been formally closed on 29-10-1943, the exact income from his business from 11-10-42. to 8-11-44 (Dewali' 1942) was ascertainable and was Rs. 11.650/- (profits of specuiating transactions) less expenses which thus came to Rs. 11628-0-6. The difference between the two applications was the omission of an item of Rs. 23-12-6 as profit in 'Mal Knata up to 8-11-1942.
6. from this the conclusion drawn by the Tribunal in the statement, is that mere was no sale of yarn up to 8-11-1942. The income-tax Officer did not accept the submission of the assessee and was of me opinion that the assessee started books of the new business from 11-10-1942, and closed them for the first time on 29-10-1943, and he was further of the opinion that under Section 2 (11) (c) the entire period from 11-10-1942 (the date of commencement of the yarn business), to 29-10-1943 (the dale up to which the accounts were made up for the first time), was to be treated as' a 'previous year', and he calculated the total profits for twelve months and eighteen days to be Rs. 32,975/- and deducted the proportionate income for eighteen days, i.e., Rs. 1571/- from the income shown for this period and assessed the income for the assessment year 1944-45 at Rs. 31404/-. He also held that Rs. 1571/- would have to be assessed in the assessment year 1945-46.
7. An appeal was then taken to the Appellate Assistant Commissioner and the assessee took, up the position that the business started not from 11-10-1942 (the date from which the books began), but on 27-9-1942, (the date of the first contract). He submitted that Rs. 11650 could not be held to have arisen on 2-11-1942, when it was put down in the accounts and that the income for the first eighteen days should be Rs. 11628/- and not Rs. 1571/-. The Appellate Assistant Commissioner held that the 'previous year' for the assessment year 1944-45 was from 30-10-1942, to 29-10-1943, and therefore the profit of the first eighteen days should be excluded from the assessment for the assessment year 1944-45. but he was of the opinion that no profit accrued or arose during the period 11-10-1942 to 29-10-1943, and therefore, he directed enhancement of the assessment by a sum of Rs. 1571/-.
8. An appeal was then taken to the Income-tax Appellate Tribunal which held that new business was started from 11-10-1942, that the assessee closed the accounts of his business on 29-10-1943, that the profits from 'speculative business' done in Bombay were not incorporated in the accounts of any date prior to the 29-10-1942, but were incorporated in the accounts as they were finally made Up on 29-10-1943, and that the cheque for the profits of the two contracts was dated 29-10-1942, but it was received by the assessee on 2-11-1942. After referring to Section 2(11)(c) of the Income-tax Act, they restored the assessment made by the Income-tax Officer and set aside the enhanced assessment made by the Appellate Assistant Commissioner.
9. An application was made under Section 66 (1), Income-tax Act, and after a better statement was called for by this Court two questions, which have already been given, have been referred to this Court for its opinion.
10. We thought it proper to take the second question up first because if the profits of the two speculative contracts are to be accounted in the previous year 30-10-1942, to 29-10-1943--then tat that case the whole of the income would have accrued in that year and would be assessable tan the assessment year 1944-45.
11. The assessee submits that his method of accounting is mercantile system and that the profits accrued to him on 29-10-1942, when the cheque was drawn by the Bombay firm in favour of the, assessees.
12. Section 4 provided-
'4 (1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which-- (a) are received or are deemed to be received in British India in such year by or on behalf of such person, or (b) if such person is resident in British India during such year,
(i) accrue or arise or are deemed to accrue or arise to him in the British India during such year, or
X X XX'
13. Section 13 deals with the method of accounting and is as under:
'13. Income, profits and gains shall be computed, for the purpose of Sections 10 and 12, in accordance with the method of accounting regularly employed by the assessee: Provided that-
(a) if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, the Income-tax Officer may after recording the reasons for his opinion, compute the income, profits and gains on such basis and in such manner as he may determine;
(b) where, in computing the income of the third year immediately preceding the previous year, an allowance has been made for any amount due but not actually paid by the assessee in that year and such amount remains unpaid at the end of the previous year, such amount shall be deemed to be income, profits and gains and to accrue or arise in the taxable territories during the previous year;
(c) where any amount which has been deemed to be income, profits and gains under Clause (b) is actually paid by the assessee subsequently, an allowance of the amount so paid shall be made from the income of the year in which it is paid;
(d) where, at any time prior to the previous year, an allowance has been made in respect of any trading debt or loss incurred by the assessee, any amount received by him during the previous year in respect of such debt or loss by way of compensation or otherwise, shall be deemed to be the income, profits and gains and to accrue or arise in the taxable territories during the previous year.'
14. There were no account books starting from 27-9-1942. The books started to be kept from 11-10-1942 and the entries made therein do not show whether the accounting was on the mercantile system or the actual receipt system, No men-tion is made of these profits at any time before 2-11-1942, and the books snow that for the period from ll-10-1942, to 29-10-1942, the income was nil. According to the statement of the case they were put down as having been received by cheque. It cannot therefore be said that there was any method adopted by the assessee and we must take it that the profits from the speculative transactions were rightly shown in the accounts by the petitioner and would fall within the previous year --30-10-1942, to 29-10-1943--for the assessment year 1944-45. The answer to the second question would therefore be in the affirmative, i.e., this profit of Rs. 11651-13-0 ought to be in the assessment year 1944-45. In view of this answer, the other question does not arise in the present case and therefore it is not necessary to answer that. As the answer is against the assessee, the Commissioner of Income-tax will have his casts. Counsel's fee Rs. 260/-.
15. I must point out that the printed paper-book which has been prepared for the use of Judges in this case is very badly printed and full of mistakes even in regard to figures and it is necessary that paper-books of proper size and proper print should be printed in all income-tax references.
16. I agree.