COMMISSIONER OF INCOME TAX Vs. MODEST ENTERPRISES LTD

JUDGEMENT

(1.) In this reference under Section 256(2) of the Income-tax Act, 1961, for the assessment year 1984-85, the following question of law has been referred to this court :

(2.) Briefly stated, the facts leading to this reference are that Messrs. Modest Enterprises Ltd. is the assessee and the assessment year involved is 1984-85. The Assessing Officer found that the paid up capital of the assessee-company was Rs. 24,50,000 and almost the entire capital was invested on loans bearing interest. However, no interest receipt had been accounted for on certain advances to parties. The auditor's note showed that the assessee followed the cash system of accounting. The Assessing Officer further found that, during the year, the assessee received back a sum of Rs. 12,60,894 from Messrs. Ramnarayan Kayan and Co., to whom a sum of Rs. 23,84,400 was advanced last year and the assessee advanced fresh loans during the year to the following parties : <FRM>M.618.htm</FRM>

(3.) The Assessing Officer further found that Messrs. Ramnarayan Kayan and Co. was a proprietorship concern of Shri Sushil Kumar Kayan, one of the directors of the assessee-company. Therefore, the Assessing Officer held that the complete omission of interest income from the accounts even when a substantial portion of the loan had been repaid showed that the income of the assessee could not be properly deduced from the method of accounting followed by the assessee. Accordingly, interest estimated at 15 per cent. on the outstanding loan, i.e., Rs. 3,56,025, was included, in the assessment.