1. The assessee in this case in a firm and the relevant assessment year is 1959-60. The assessee-firm started business on June 19, 1958, and according to clause 7 of the deed of partnership, the accounts of the partnership firm were to be kept according to Samvat year. According to that clause, the accounts of the partnership were to be settled on Aso Vad 30 of every year but if net profit loss of the works done in this partnership could be determined on completion of the works undertaken, whatever profits or loss remained after deducting the expenses incidental to the business of the partnership was to be distributed amongst the partners according to the shares set out in the partnership deed. The only work carried out by this firm of building-contractors was construction of certain residential bungalows at Surendranagar and the work was completed by Aso Vad 30 of the Samvat year 2015 (October 31, 1959). The assessee contended before the Income-tax Officer that 'previous year' for assessment year 1959-60 should be taken to be Samvat year 2014, and thus accounts for the period from June 19, 1958, to November 11, 1958, should be taken as the 'previous year' for the assessment year 1959-60. This contention of the assessee was negatived by the Income-tax Officer and he held that the account books of the assessee firm were closed only at the end of Samvat year 2015 after completion of the business and it was at that time that the accounts were made up; and he, therefore, took the financial year 1958-59 as the previous year and completed the assessment on a certain basis. Against the order of the Income-tax Officer there was an appeal and the Appellate Assistant Commissioner agreed with the view taken by the Income-tax Officer as regards the 'previous year' and he dismissed the appeal. There was a further appeal to the Appellate Tribunal and the same contentions which were urged before the Income-tax Officer and the Appellate Assistant Commissioner were again urged before the Tribunal. The Tribunal held that 'previous year' as defined in section 2(11) meant, on the facts and circumstances of the case, in the case of the assessee the financial year 1958-59 and, therefore, the appeal was dismissed by the Tribunal. Thereafter, at the instance of the assessee, the following question has been referred to the High Court :
'Whether, on the facts and in the circumstances of the case, the assessee was rightly assessed for assessment year 1959-60 on its income for the financial year 1958-59 ?'
2. The Tribunal has found in its order that no balance-sheet was drawn up at the end of Samvat year 2014; only the ledger accounts were closed and the balance were carried forward. The Tribunal observed in its order that there was no significant break between the two periods, viz., Samvat year 2014 and Samvat year 2015. The Tribunal further found that even after ascertaining the profits for the whole periods between June 19, 1958, and October 31, 1959, i.e., for the two Samvat years 2014 and 2015, no attempt was made by the assessee to ascertain the profits for the two years. The entire profits was credited to the partners in their respective share in the account for Samvat year 2015 and in the returns for the assessment years 1959-60 and 1960-61, half of the profit ascertained as at the end of the Samvat year 2015 was shown in each year and this was done without any basis because the receipts in the two periods were not equal. The Tribunal further held that, on the facts and in the circumstances of the case, the option available to any assessee under section 2(11) (c) was not open to this assessee because this particular assessee had not made up his accounts at the end of Samvat year 2014 and, therefore, the financial year 1958-59 must be taken to be the previous year under section 2(11) (c) for the purposes of the assessment year 1959-60.
3. Section 2(11) of the Act defines 'previous year' as follows :
'2. (11) 'previous year' means -
(i) in respect of any separate source of income, profits and gains -. . .
(c) Where a business, profession or vocation has been newly set up in the financial year preceding the year for which assessment is to be made, the period from the date of the setting up of the business, profession or vocation to the 31st day of March next following or to the last day of the period determined under sub-clause (b), or, if the accounts of the assessee are made up in respect of a period not exceeding twelve months from the date of the setting up of the business, profession or vocation and the case is not one for which a period has been determined under sub clause (b), then, at the option of the assessee, the period from the date of the setting up of the business, profession or vocation to the date on which his accounts have been so made up :
Provided that when the date to which the accounts have been so made up does not fall between the setting up of the business, profession or vocation and the next following 31st day of March inclusive, it shall be deemed that there is no previous year for the said assessment year and the previous year which would otherwise have been determined according to the option exercised by the assessee shall be deemed to be the previous year for the next succeeding assessment year.'
4. In the instant case, the business of this particular assessee firm started from June 19, 1958. Therefore, the previous year for the assessment year 1959-60 would ordinarily be from June 19, 1958, to 31st March, 1959, unless option to choose any other previous year was available to the assessee and such option was exercised by the assessee. Since there was no determination of the previous year under section 2(11) (b) by the Central Board of Revenue, the provisions of sub-section (b) need not be considered in the course of this judgment. Now, option is available to an assessee if the accounts of the assessee are made up in respect of a period not exceeding 12 months from the date of setting up of the business, profession or vocation. If in the instant case the accounts of the assessee had been made up at any point of time prior to June 19, 1959, then the assessee would have the option to treat the period from June 19, 1958, up to the date of the making up of the accounts as the previous year. It was therefore contended on behalf of the assessee before us that closing of the books of account of Samvat year 2014 and carrying forward of the balances in the different accounts from Samvat year 2014 to Samvat year 2015 amounted to making up of the accounts as at the end of Samvat year 2014 and, therefore, the option under section 2(11) (c) was available to the present assessee. Now, making up of accounts in the ordinary commercial sense means ascertaining the profits or loss accruing in that particular business as of a particular date. Unless profit earned or loss suffered by the persons running the business as of a particular date can be ascertained, it cannot be said in the commercial sense that the accounts are made up upto that date. According to the Shorter Oxford English Dictionary : 'making up of an account' means 'to set out the items of (an account) in order; to add up and balance (an account). ' It is therefore clear that unless the firm has balanced its accounts in the sense of drawing up a balance-sheet and ascertaining the profits as of a particular date, the option under section 2(11) (c) cannot be availed of by the assessee and since the assessee in the instant case had merely carried forward the balances from Samvat year 2014 to Samvat year 2015, it cannot be said that as at the end of Samvat year 2014, the assessee had made up its accounts.
5. Mr. Gandhi, on behalf of the assessee, relied on the decision in Sukhdeodas Jalan v. Commissioner of Income-tax. In that case the assessee was a contractor and he had taken a contract from the defence department on April 14, 1943. The assessee's accounting year was from 1st April, 1943, to 31st March, 1944. The assessee did not show in his return any income from the contract business in the accounting period 1943-44 on the ground that the accounts in respect of his contract were closed only on 3rd December, 1944, and, therefore, the profit from that contract could be ascertained only on that date. The main question before the Patna High Court in that case was about the applicability of the proviso to section 13 of the Act. The question with which we have to deal in the instant case, viz., the question of the 'previous year' did not arise for consideration before the Patna High Court. It seems to have been taken for granted in the Patna case that the previous year was the financial year and the accounting year of the assessee before the Patna High Court happened to be also the financial year. So, the question of the 'previous year' with which we have to deal in the instant case did not arise for consideration before the Patna High Court.
6. In our view, since the assessee had not made up it accounting in the sense in which we have explained above, as at the end of Samvat year 2014, the option under section 2(11) (c) was not available to it and for the first year of assessment, i.e., for the assessment year 1959-60, the income-tax authorities were right in treating the period June 19, 1958, to March 31, 1959, as the previous year for the assessment year 1959-60.
7. Under these circumstances, the question must be answered in the affirmative. The assessee will pay the costs of this reference to the Commissioner.
8. Question answered in the affirmative.