COMMISSIONER OF INCOME TAX Vs. SHRIMATI SINGARI BAI

JUDGEMENT

(1.) This is a reference by the Commissioner of Income-tax, Central and United Provinces, under Section 66 (2) of the Indian Income-tax Act (XI of 1922) and the question referred to this Court is :-

(2.) The facts that led to the reference, and as they appear from the statement of the case submitted by the Income-tax Commissioner, are very simple. Shrimati Singari Bai, the assessee, a professional money-lender, regularly kept her accounts according to what is known as the "mercantile accountancy system" or the "book profits system of accountancy" or the "complete double entry book-keeping." Under this system the net profit or loss is calculated after taking into account all the income and all the expenditure relating to the period, whether such income has been actually received or not and, whether such expenditure has been actually paid or not. That is to say, the profit computed under this system is the profits actually earned, though not necessarily realised in cash, or the loss computed under this system is the loss actually sustained, though not necessarily paid in cash. The distinguishing feature of this method of accountancy is that it brings into credit what is due immediately it becomes legally amount for which a legal liability has been incurred before it is actually disbursed. The "mercantile accountancy system" is the opposite of the "cash system of book-keeping" under which a record is kept of actual cash receipts and actual cash payments, entires being made only when money is actually collected or disbursed. In actual business practice, however, the system of book-keeping followed in many cases are such that they can be called neither the full "mercantile accountancy system" nor the cash basis of book-keeping. They are simply mixtures of the two systems and styled as "hybrid systems of book-keeping" (vide Book-keeping and Accounts by Rup Ram Gupta, pp. 269 and 270).

(3.) In the case before us, for the accounting year 1933-34 the assessee submitted a return showing her income from money-lending to be Rs. 1,499. For the purpose of this return she chose a cash method of accounting. Her accounts were then called for by the Income-tax Officer, and it was found that they were and had been regularly kept, according to the mercantile system, and that the interest account showed a credit of Rs. 31,081. Even though this amount had not been actually realised, the assessee had debited it in her books to the accounts of the debtors, credited it to the interest account and then transferred it to her own personal account. The Income-tax Officer held that, in view of the provisions of Section 13 of the Income-tax Act, he was not only entitled, but bound, to treat this sum of Rs. 31,081 as the assessees gross money-lending income and, after allowing certain permissible deductions, he assessed her on Rs. 23,400 on account of profits from money-lending business. The assessee appealed to the Assistant Commissioner who dismissed the appeal. On an application being then made by the assessee the present reference was made by the Commissioner of Income-tax.