SARUPCHAND Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) APPLICATION No. 1074 of 1935 is an application to the Commissioner of Income-tax, Bombay, to state a case raising a point of law under S. 66 (3), of the Income Tax Act. The point involved is a very short one. The assessee in partnership with his cousin carries on the business of money-lending, and until the accounting period, which is Samvat year 1988, ending in November 1932, the assessees firm adopted what is known as the mercantile basis of accounting, that is to say, they showed the income accruing in any year as being the income on which assessment was to be based, and not the income received during that year. Shortly before the accounting period in question the assessee and his cousin quarrelled. Litigation is going on for the partition of their estate and business, and the debtors of the firm refuse to pay interest, because they do not know which of the partners will ultimately be entitled to it. Consequently the actual amount received for interest is very much less than the amount shown in the books as accrued interest, and that being so, the assessee desires to change his method of accounting from the mercantile method to the cash method. The learned Commissioner has refused to accept that. I desire to say that I am not altogether in agreement with the reasoning on which the learned Income Tax Commissioner bases his order. Section 13 of the Act provides that income, profits and gains shall be computed in accordance with the method of accounting regularly employed by the assessee. The Commissioner says that the regular method is the mercantile method, and he must adopt that. That may be so, but, at the same time, it seems to me impossible to contend that an assessee is never at libery to alter the regular method which he has once employed. What he must alter however is his regular method, that is to say, he must abandon what, up to that time, has been his regular method, and start a new regular method and not merely a new method for a casual period.

(2.) IT seems to me plain that there must be a power to change, because supposing that an assessee were to keep his accounts on the mercantile basis down to the year 1930, and then for five years he were to keep his accounts on the cash basis, it could hardly be suggested that at the end of the five years his regular method of accounting was still the mercantile method. But if a change has been made, it must have been made at some definite moment of time. The learned Commissioner is however entitled to require proper evidence that the regular method of accounting has been charged. If the Commissioner is satisfied that at a particular moment the assessee has changed his regular method of accounting, he is not likely to be satisfied in the following year or a few years later, that the regular method has been changed again back to the old method. The assessee is not entitled to change his method of accounting from year to year as suits him best; the reference in Section 13 to the regular method of keeping accounts precludes any practice of that sort. But although I think that the reasoning of the learned commissioner is in some respects wrong, because he certainly seem to suggest that a method once regularly adopted can never be changed, I think the question of law which the assessee desires us to direct the Commissioner to raise does not really arise.