Case Note & Summary
The assessee, ordinarily resident in British India, carried on business at Khurja and Aligarh in India and at Chistian in the Indian State of Bahawalpur. He maintained a central set of accounts at Khurja on the mercantile system, under which credit entries are made for amounts due immediately they become legally due, even before actual receipt. In his account books, the interest account showed credit entries of amounts received as interest on capital invested in the shop at Chistian. The assessee conceded that as creditor he had the right to enforce payment of interest in British India and that the liability of the Chistian shop had been extinguished to the extent of interest paid to the head office. The Income Tax Authorities included these interest amounts in the assessee’s taxable income in India and levied tax. The assessee contended that the entries were mere book entries and that the authorities had wrongly treated these amounts as having been actually received. The main legal issue was whether such credit entries, under the mercantile system, constituted income received for tax purposes under Section 4(1)(a) of the Indian Income-tax Act, 1922. The assessee argued that the entries were not actual receipt, while the Revenue relied on the mercantile method and the assessee’s right to enforce payment in taxable territory. The Supreme Court held that the relevant entries in the books of account justified the inference that the assessee had actually received the amounts by way of interest. Where an assessee keeps accounts according to the mercantile method, making a credit entry in the interest account would treat that amount as income or profits received or treated as received for tax purposes. The Court approved Commissioner of Income-tax v. A.T.K.P.L.S.P. Subramaniam Chettiar, (1927) I.L.R. 50 Mad. 765, and dismissed the assessee’s appeal. The decision affirmed that under the mercantile system, credit entries for interest are effectively treated as income received when the assessee has the right to enforce payment, making them liable to tax.
Headnote
A) Income Tax - Mercantile System of Accounting - Credit entries of interest in mercantile accounts deemed as income received - Indian Income-tax Act, 1922, Section 4(1)(a) - Assessee carried on business in British India and a native state, kept accounts on mercantile system showing credit entries of interest from the native state shop; assessee conceded right to enforce payment in British India and that liability of the native state shop had been extinguished to the extent of interest paid to head office. Income Tax Authorities treated these amounts as taxable income. Held, that the relevant entries justified inference of actual receipt and under mercantile system, the effect of making a credit entry in the interest account is to treat that amount as income or profits received or treated as received for the purposes of tax, approving Commissioner of Income-tax v. A.T.K.P.L.S.P. Subramaniam Chettiar (Paras Not mentioned).
Issue of Consideration
Whether interest amounts credited in the account books of an assessee maintaining mercantile system of accounting, being interest from capital invested in a business in a non-British Indian State, are taxable under the Indian Income-tax Act, 1922 when the assessee has the right to enforce payment in British India and the accounts reflect credit entries as income received?
Final Decision
Appeal dismissed. Held that the relevant entries in the books of account justified inference that assessee had actually received the amounts by way of interest. Where an assessee keeps accounts according to the mercantile method, making a credit entry in the interest account would treat that amount as income or profits received by the assessee or treated by him as received for the purposes of tax.
Law Points
- Where accounts are maintained on mercantile system
- interest credited becomes taxable as income deemed received under Section 4(1)(a) of the Income-tax Act
- 1922
- when assessee has right to enforce payment in taxable territory
- approving Commissioner of Income-tax v. A.T.K.P.L.S.P. Subramaniam Chettiar
- (1927) I.L.R. 50 Mad. 765
