1. The questions that were referred to this Court under Section 66 (2) of the Indian Income-tax Actwere :
'1. Whether on the facts and circumstances of the case having regard to the method of accounting adopted by the appellant, application of the proviso to Section 13 of the Income-tax Act was proper and justified in law and whether the assessment of Rs. 2,45,285 representing commission not received by the appellant was proper and legal; and
2. Whether on the facts and circumstances of the case, the commission of Rs. 85,287 payable on sales effected in the Indian States could be said to have accrued and arisen in British India and was assessable in British India.'
2. The principle laid down by the Supreme Court in Thiagaraja Chetti v. Commissioner of Income-tax : AIR1954SC263 under virtually similar circumstances, concludes the second question. We answer the second question in the affirmative and against the assessee.
3. The relevant facts with reference to which the first question has to be answered were not in dispute. The Meenakshi Mills entered into an agreement with the assessee company on 14-5-1942, under which the assessee was appointed the purchasing agent of the mills. A commission of one half per cent was payable to the assessee on the value of all the purchases and this commission was to be ascertained and paid every month.
In addition the assessee was entitled to be paid 5 per cent commission on the annual profits of the mills, that sum to be ascertained and paid once a year. The year of account of the mills ended on 31st March, while the assessee's year of account was from 1st July to the succeeding 30th June. The question we have to decide arose out of the proceedings for the assessment year 1944-45; the relevant accounting period was from 14-5-1942 to 30th June, 1943. The assessee claimed that it adopted the cash basis as its system of accounting.
It did not bring into its account a sum of Rs. 2,45,285, though the assessee had been credited with that amount in the accounts of the mills within the period of account ending with 30th June 1943. That sum was made up of Rs. 12968, which represented the half per cent commission payable on purchases for May and June 1943, and Rs. 2,32,317, which represented the 5 per cent commission on the annual profits of the mills. The later-sum included Rs. 85,287, the claim to which, according to the assessee, arose in the then Indian States; that formed the subject matter of the second question which we have already answered.
4. The departmental authorities applied the proviso to Section 13 of the Income tax Act and included the entire amount of Rs. 2.45,285, in the assessable income of the assessee for the year of assessment 1944-45, though the assessee had not treated that sum as amount received by it in cash duffing the relevant accounting period. The Assistant Commissioner recorded.
'There was no dispute or uncertainty about the amount payable and it was, therefore, available to be drawn at any time the appellant chose to do so.' The Tribunal upheld that assessment.
5. Apparently the Tribunal accepted the contention of the assessee, that, though the accounts related to the first accounting period of its activities, it was a system of accounting 'regularly employed' within the meaning of Section 13 of the Act, though there was no such express finding. In any event, considering it was the same system of accounting that the assessee adopted in the subsequent accounting periods also, the test of 'regularly employed' must be held to have been satisfied in this case.
That was the principle laid down in an unreported decision of a Division Bench of this court in Manickavasagam Ltd, Madura v. Commissioner of Incometax, Madras, Case Refd. No. 21 of 1954. As in case Refd. No. 21 of 1954, we called on the assessee to furnish in forma lion to show how the assessee and the mills treated in the subsequent years the amounts payable by the mills to the assessee. That was done.
6. In its appellate order the Tribunal recorded.
'After all, the only business of the assessee is to collect the purchasing commission from the mills for which no elaborate system of book-keeping is necessary and, as a matter of fact, the books maintained show hardly any income outside this source. Under these circumstances, the income of the assessee required to be deduced with a proper sense of proportion of realities instead of quibbling with Jaw. Cash basis is no proper basis at all for certain types of business sources. We, therefore, find that the system claimed in this case is not one from which profits could be reasonably deduced from year to year, which is essentially the test for the application of the proviso to Section 13, so that, in our opinion, the proviso must be necessarily invoked here.'
7. In our opinion, the circumstances established in this case justified the conclusion of the Tribunal, that the system of accounting adopted by the assessee was not one from which the true income of the assessee in the relevant year of account could be properly deduced; and that justified recourse to the proviso to Section 13 of the Act.
8. It is true that the cash basis is a well known system of commercial accounting. It is equally true that the assessee is entitled to adopt its own system of accounting. None the less, if in the circumstances of a given case that system failed to disclose the true income of the assessee in the relevant accounting period, it was open to the department to ignore the results of that system of accounting and to deduce the true income of the assessee.
The learned counsel for the assessee referred us to an unreported decision of the Bombay High Court in Dwarkadas Mathuradas and Bros. v. Commissioner of Income-tax Bombay, I. T. Ref. No. 5 of 1956 on the file of the Bombay High Court and contended that it was not open to the department to dictate what system of accounting the assessee should adopt.
As we said, the question still remains, whether with the cash system of accounting which it was open to an assessee to adopt, that system of accounting in the circumstances of a given case disclosed the true income of the assessee. We are unable to see any scone for extending to the facts of the present case what was laid down in the Bombay decision we have referred to,
9. In the case before us it should be obvious that when the mills credited the assessee in their accounts with the sums payable to the assessee under the agreement, there was nothing to prevent the assessee from crediting itself almost simultaneously with those amounts in its own books. It was not as if what was credited to the assessee in the books of the Wills had to be paid and was paid in cash over the counter. Adjustments in the books of the assessee, the mills, and the Bank of Madurai, an allied concern, by relevant entries, are all that was really necessary.
From an examination of the abstracts furnished to us, to show how the amounts payable to the assessee in the subsequent periods were dealt with by the assessee and the mills, it was apparent that, while tho time lag between the date of credit in the account books of the mills and that in the account books of the assessee with reference to the monthly payments of the half per cent, commission was comparatively small, there was a pronounced time lag in the assesses bringing to its books amounts or portions thereof which lay to its credit in the account books of the Mills and which represented the 5 per cent, commission of profits to be ascertained and paid on annual basis.
On 31-3-1949, a sum of over Rs. seven lakhs, which represented accumulations of previous years, stood to the credit of the assessee in the books of the mills. The assessee credited itself with amounts totalling Rs. 6,79,000 in 1950-51, inclusive of a sum of Rs. 4,50,000 which was credited on 17-2-1951. Virtually the position taken up by the assessee amounted to this :
'It is true that amounts lay to my credits with the Mills. It was virtually money payable at call, money which I could have taken by adjustments in the books at any time I liked after I had been credited with it in the books of the mills. But I choose to bring into my accounts such sums as I like, and whenever I like. That is the system of accounts I have adopted, and that is the system I call cash basis,'
Though, it would appear as if the department virtually adopted the accrual of income as the basis for computing the income of the assessee, in the circumstances of this case accrual by credit in the accounts of the mills really meant that that money was available immediately to the assessee, and it had only to be credited in its accounts to complete cash 'payment.' It should be remembered that what the Assistant Commissioner recorded, which we have already set out above, was substantially correct. It was never the contention that the Mill was not in a position to pay the money even on the very date on which the credit entry was made in the account books of the mills.
10. We have no hesitation in holding that the Tribunal was justified in confirming the assessment made by the department on an application of the proviso to Section 13 of the Act.
11. We answer the first question in the affirmative and against the assessee.
12. As the assessee has failed it will pay the costs of this reference. Counsel's fee Rs. 250/-.