COMMISSIONER OF INCOME TAX Vs. JAYALAKSHMI TRADING CO

JUDGEMENT

(1.) THIS is a reference at the instance of the Revenue referring the following questions of law for decision of this court :

(2.) THE assessee carries on business of lending and receiving money. On the money lent, he charges interest but on the money which he borrows, he pays interest. In the month of account which he had been maintaining, he did not show the interest accrued to him on a sum of Rs. 3,02,168 admittedly loaned by him. He has, however, shown the interest payable by him in his account books even though he has actually not paid the same. His explanation for not showing interest on the amount of Rs. 3,02,168 was that the loan has become stagnant. No enquiry whether the claim was correct was made by the Income-tax Officer. THE Income-tax Officer, however, noticed that since the assessee has himself shown the accrued interest payable by him as expenditure he was not maintaining correct accounts. According to the Income-tax Officer, the assessee was following the cash method of accounting in so far as the receipts are concerned, but the mercantile system of accounting in so far as payments are concerned. This, according to the Income-tax Officer, is not permissible. He, therefore, calculated interest at the rate of 18 per cent. per annum on the aforesaid amount of Rs. 3,02,168 and added a sum of Rs. 54,390 as the income of the assessee during the relevant year. THE assessee felt aggrieved by the aforesaid addition and challenged the order of the Income-tax Officer in appeal before the Appellate Assistant Commissioner. THE Appellate Assistant Commissioner also held that the assessee is following two types of systems of accounting which was not permissible and, therefore, upheld the addition made by the Income-tax Officer. On a further appeal to the Tribunal, the Tribunal was of the opinion that even on a finding that the account was not properly maintained, it has not been held that the correct income cannot be assessed. According to the Tribunal, as long as the true profit of the assessee can be gathered on the basis of entries in the account books, the Income-tax Officer was under an obligation to reach the said true profit. Since this was not done, the Tribunal disallowed the addition and directed the Income-tax Officer to amend the assessment accordingly. THEreafter, the Revenue has requested for the reference which has been made.