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Rattan Chand Dhawan Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Reference No. 24 of 1970
Judge
Reported in[1973]87ITR660(P& H)
AppellantRattan Chand Dhawan
RespondentCommissioner of Income-tax
Appellant Advocate B.K. Jhingan, Adv.
Respondent Advocate D.N. Awasthy and; B.S. Gupta, Advs.
Cases Referred(Mad.) and Subramanyam Chetty v. Commissioner of Income
Excerpt:
.....no refund would have been made to him when the interest in the previous years had been taxed on accrual basis. (2) where the income-tax officeris not satisfied about the correctness or the completeness of the accounts ofthe assessee, or where no method of accounting has been regularly employed by theassessee, the income-tax officer may make an assessment in the mannerprovided in section 144.'10. it is maintained that the proviso in section 13, which is almost identical with the proviso to section 145(1), has been restricted to the cases where the method employed is such that in the opinion of the income-tax officer the income cannot properly be deduced therefrom, whereas' sub-section (2) of section 145 leaves it open to the income-tax officer to make an assessment in the manner..........the years 1959-60, 1960-61 and 1961-62. the interest was assessed to income-tax in these years on accrual basis. in each of these three years, a sum of rs. 2,750, representing the interest for each year, was included in the assessments made on the family on accrual basis. under a court's decree, the mortgage amount was recovered. the result was that the assessee realised interest amounting to rs. 40,529, besides the principal. the assessee claimed that the entire amount of interest received could not be taxed to income-tax on receipt basis. the contention was that it should be assessed on accrual basis. this contention has not prevailed either with the income-tax officer or on appeal with the appellate assistant commissioner and on further appeal with the tribunal. the tribunal disposed.....
Judgment:

1. The Income-tax Appellate Tribunal, Chandigarh Bench, has referredthe following question of law for our opinion:

' Whether, on the facts and in the circumstances of the case, theamount of Rs. 32,273 was assessable in the assessment year 1962-63 ?'

2. We proceed on the agreed basis that the interest which is sought to be brought to tax is to be assessed in the hands of Rattan Chand Dhawan, a Hindu undivided family. This agreement was reached before the Tribunal. The Hindu undivided family assessed in the name of Rattan Chand Dhawan had advanced some moneys in the year 1944 to Nawab Ahsan Ali Khan of Ludhiana, A sum of Rs. 55,000 was the original amount advanced on a mortgage. It carried interest at the rate of 5 per cent. per annum. This advance was not recorded by the Hindu-undivided family in any books of account inasmuch as the family did not maintain any regular books of account. The interest accruing on this mortgage was never assessed to income-tax except for the years 1959-60, 1960-61 and 1961-62. The interest was assessed to income-tax in these years on accrual basis. In each of these three years, a sum of Rs. 2,750, representing the interest for each year, was included in the assessments made on the family on accrual basis. Under a court's decree, the mortgage amount was recovered. The result was that the assessee realised interest amounting to Rs. 40,529, besides the principal. The assessee claimed that the entire amount of interest received could not be taxed to income-tax on receipt basis. The contention was that it should be assessed on accrual basis. This contention has not prevailed either with the Income-tax Officer or on appeal with the Appellate Assistant Commissioner and on further appeal with the Tribunal. The Tribunal disposed of the assessee's contention in the following terms :

' We have considered the matter carefully and in our opinion the most equitable, reasonable, and certain method of assessment in this type of case is the method of cash basis. If the assessee is in India the rule of law is that if an assessee does maintain an account book, he can claim as a matter of right that he should be assessed on the basis regularly adopted by him in the accounts (mercantile or cash), i.e., accrual or receipt basis. If there are no accounts maintained, the courts have to decide which is the proper method of assessment. In our opinion, the proper method of assessment, in such cases is cash basis, which has the added advantage of simplicity and certainty. Of course, there is one exception. If an assessee shows income on accrual basis and the department by agreement makes the assessment on that basis, then of course, the department cannot turn round and say that they will again assess on receipt (or cash) basis. (There appears to have been some element of agreement in the Patna High Court case referred to above). In the present case, we direct that the entire sum of Rs. 40,529 should be assessed in the year of receipt on cash basis. However, the Income-tax Officer has already assessed the sum of Rs. 8,250 in the three assessment years, namely, 1959-60, 1960-61 and 1961-62, on accrual basis and, therefore, we direct that the sum of Rs. 8,250 should be excluded from the interest realised in the previous years. This exclusion is made in the strength of the unwritten law of taxation that no income can be doubly taxed. The assessment should be made in the light of principles laid down in the afqresaid order and for carrying out these instructions all the orders passed by the authorities below in all the three cases are set aside.'

3. The learned counsel for the assessee has raised the contention that inasmuch as the interest on this mortgage was taxed on accrual basis in the assessment years 1959-60, 1960-61 and 1961-62, it is not open to the department to tax it on receipt basis in the assessment year 1962-63. It is common ground that the assessee is not maintaining any account. Reliance, has been placed by the assessee on Section 13 of the Indian Income-tax Act, 1922, and Section 145 of the Income-tax Act, 1961.

4. Considerable reliance has been placed on the decision of the PatnaHigh Court in Commissioner of Income-tax v. Jug Sah Muni Lal Sah, [1939] 7 I.T.R. 522 (Pat.)particularly on the following passage in the judgment, of ManoharLall J.:

' It was open to the department in that year either to adopt the cash system by which they could not have been able to tax any portion of the income from 1924 to 1935 or to have adopted, as they did, the accrual basis ; but having adopted the first system or the second, they cannot be allowed to change their ground whenever it suits them to do so.'

5. In the aforesaid case, no method of accounting had been employed by the assessee. Therefore, the Income-tax Officer could act under Section 13 of the 1922 Act. The Income-tax Officer decided to act on the accrual basis. The loan transactions of the assessee were some time before the year 1921-22. The interest on these loans was never included by the assessee in any of the assessments made prior to 1924-25. In the year 1924, the Income-tax Officer discovered for the first time the existence of the first loan, raised on the mortgage bond of September, 1915. He also knew that no interest had been received by the assessee. The Income-tax Officer, however, from the year 1924 onwards proceeded to add to the assessable income of the assessee a sum of Rs. 8,750 every year calculating this amount not on the basis of what the assessee actually received but on the basis of the amount of the interest accruing to the assessee from the year 1924 onwards. The assessment was persisted in this way for a period of 11 years, that is, up to 1935. In the year 1935, fresh discovery was made by the Income-tax Officer. The discovery was that the assessee had realised, on the basis of a mortgage decree, the amount due to him under the three mortgages of 1915, 1919 and 1921. The sale in pursuance of the mortgage decree was confirmed on 16th December, 1932. The interest realised under the mortgage decree was sought to be taxed not on the accrual basis but on the receipt basis. It was in this context that the observations quoted above were made by the learned judge. Fazl Ali J. (as he then was) who agreed with Manohar Lall J. made the following observations :

' The question is whether the income-tax authorities having once elected to adopt this mode of taxation, which was undoubtedly open to them, can now turn round and adopt a totally different mode. In my opinion they cannot do so and the whole matter can be tested in this way. Let us assume that the assessee's suit on the basis of the mortgage bond had not succeeded but failed either on the ground that the mortgage bond had not been duly executed or on the ground that it had not been properly attested, or that a decree had been passed for a smaller sum than that for which it was actually passed. The income-tax authorities could not then be made to refund either the whole or any part of the amount which they had realised during the last eleven years. Can they now, in spite of the fact that they have taxed the assessee so far on what they call mercantile basis, turn round and tax him now on the basis of the income actually accrued especially as the interest which the assessees have now recovered includes interest prior to 1924-25. The income-tax authorities have already recovered taxed interest which was payable to the assessee between 1924-25 and the date of the decree. What they are now taxing is the interest which was due to them prior to 1924-25, In my opinion the clear implication of the step taken by them when they taxed for the year 1924-25 is that the so called escaped income had already escaped prior to 1924-25. As their case is that the assessees had concealed their mortgage bond until they discovered it at the time of assessing them for 1924-25, they might have proceeded under Section 3 4 at that time and recovered from them whatever they could recover. Section 34 is quite clear and does not enable the department to tax escaped income more than a year after it ought to have been taxed.'

6. It is contended by the learned counsel for the assessee that in the present case also the interest in the three previous assessments was assessed to income-tax on accrual basis. Therefore, the interest that has accrued in pursuance of the court's order has to be taxed on accrual basis and not on receipt basis. In short, the assessee wants to invoke the rule of estoppel.

7. The short question is whether the department can, having adopted one basis of assessment under Section 13 of the 1922 Act or under Section 145 of the 1961 Act switch over to another basis ?

8. After considering the respective contentions of the learned counsel for either side, we have come to the conclusion that the rule laid down in Jug Sah Muni Lal Sah's case applies. It is significant that the existence of the mortgage was discovered by the Income-tax Officer in the assessment year 1959-60. At that time, two courses were open, to him. He could have waited till the interest was received 'and then brought it to tax, or he could have proceeded to assess the interest on accrual basis as he did, in that assessment year and in the subsequent to assessment years. It was also open to him to reopen the previous assessments that were within limitation and to tax the interest that had accrued. Having failed to do that, he cannot, now, in order to cover his own default, switch over to receipt basis and bring the interest to tax. It will also be pertinent to note that in case the assessee had failed to realise -the interest by the court's decree no refund would have been made to him when the interest in the previous years had been taxed on accrual basis. The observations of Sir Fazl Ali J. (as he then was), which have already been quoted, are very pertinent. The same view was taken by the Judicial Commissioner's Court at Nagpur in Bansilal Abirchand v . Commissioner of Income-tax, [1928] 3 I.T.C. 57 (J.C. at Nag.). The facts of this case were that the assessee was keeping accounts in respect of each line of business. These accounts were not closed each year. The figures were carried forward from year to year as book balances. The final gains or losses were ascertained at the end of the period when the transaction in that particular line of business ceased. He was being assessed up to the year 1925-26 on the basis of his special account keeping. In the year 1925-26 the assessee claimed a set-off of about 6 lakhs of rupees shown in his accounts as losses in his stock-jobbing and certain other businesses. The income-tax authorities while accepting the asses.see's account-keeping basis, when it showed a profit, rejected this claim on the ground that the assessee ought to have closed his accounts every year and that the sums claimed represented in reality the losses of the previous years when they ought to have been claimed. It was held that until the income-tax authorities acting under the proviso to Section 13 issued specific orders disapproving of the assessee's system of account-keeping as an unsuitable or improper one and directing the adoption of a different method of account-keeping, the assessee was entitled to be assessed and to claim the set-off for loss on the basis of his special method of account-keeping. Support was derived from Commissioner of Income-tax v. Chengalvaraya Chetty, [1929] 2 I.T.C. 14 (Mad.) and Subramanyam Chetty v. Commissioner of Income-tax, [1927] 2 I.T.C. 365 (Mad.) [F.B.].

9. Faced with this situation, Mr. Awasthy argued that the scheme of Section 13 of the 1922 Act has been altered by the corresponding provision in the 1961 Act, namely, Section 145. In order to appreciate the contention both Section 13 of the 1922 Act and Section 145 of the 1961 Act are reproduced below:

1922 Act1961 Act

'13.Income, profits and gains shall be computed, for the purposes of sections 10 and 12, inaccordance with the method of accounting regularly employed by the assessee:

145. (1) Income chargeable under the head 'Profits and gains ofbusiness or profession' or 'Income from other sources' shall becomputed in accordance with the method of accounting regularly employed by theassessee:

Provided that, if no method ofaccounting has been regularly employed, or if the methodemployed is such that, in the opinion of the Income-tax Officer, the income,profits and gains cannot properly be deduced therefrom, then the computation shall bemade upon such basis and in such manner as the Income-tax Officer maydetermine.

Provided that in any case wherethe accounts are correct and complete to the satisfaction of the Income-taxOfficer, but the method employed is such that, in the opinion of theIncome-tax Officer, the income cannot properly be deduced there-from, thenthe computation shall be made upon such basis and in such manner as theIncome-tax Officer may determine.

(2) Where the Income-tax Officeris not satisfied about the correctness or the completeness of the accounts ofthe assessee, or where no method of accounting has been regularly employed by theassessee, the Income-tax Officer may make an assessment in the mannerprovided in section 144.'

10. It is maintained that the proviso in Section 13, which is almost identical with the proviso to Section 145(1), has been restricted to the cases where the method employed is such that in the opinion of the Income-tax Officer the income cannot properly be deduced therefrom, whereas' Sub-section (2) of Section 145 leaves it open to the Income-tax Officer to make an assessment in the manner provided in Section 144 where the Income-tax Officer is not satisfied about the correctness or the completeness of the accounts of the assessee or where no method of account-keeping has been regularly employed by the assessee. It is significant that in this case the Income-tax Officer did not proceed under Section 144. He merely changed the method of accounting which, according to him, was more suitable to the revenue. We are of the view that this could not be done in view of the principle laid down in Jug Sah Muni Lal Sah's case.

11. Before parting with the judgment we may also refer to the decision of the Tribunal wherein it has been observed that there is the unwritten law of taxation that no income can be doubly taxed. We may draw the attention of the Tribunal to Section 5, Explanation 2, of the 1961 Act, which is in the following terms :

' For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.'

12. The Tribunal was wrong in thinking that there is no provision in the Act for avoiding double taxation.

13. For the reasons recorded above, we answer the question referred to us in the negative, that is, in favour of the assessee and against the department. In view of the difficult nature of the question involved, there will be no order as to costs.


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