Case No: Civil Appeal No.140-144 of 1983
Judge: F.K.M.A. Munim,
Court: Appellate Division ,,
Advocate: Mr. Habibul Islam Bhuyan,A.K.M. Mozammel Hoque Bhuiyan ,,
Citation: 37 DLR (AD) (1985) 96
Case Year: 1985
Appellant: M/s. House Building Finance Corporation
Respondent: Commissioner of Income Tax
Subject: Income Tax, Fiscal Law,
Delivery Date: 1984-7-6
FKMA Munim CJ
Shahabuddin Ahmed J
Chowdhury ATM Masud J
Syed Md. Mohsen Ali J
M/s. House Building Finance Corporation
………………Appellant all cases.
Commissioner of Income Tax, Dhaka North Zone, Dhaka
……………Respondent all cases.
July 16, 1984.
Cases Referred To-
Sarupchand vs. Commissioner of Income-tax, Bom. (1936) IV ITR. 420; Commissioner of Income-tax, East Pakistan Vs. Messer. Rathna Tea Estate (1967) 19 DLR 538 SC; Indo-Commercial Bank Ltd. vs. Commissioner of Income-tax, Madras (1962) 44 I.T.R. 22; Commissioner of Income-tax Vs. Shrimati Singari Bai, (1945) 13 I.T.R. 224; Sahu Jagmandar Das Vs. Commissioner of Income-tax, Central and United Provinces (1935) 3 ITR 140; M/s. Ram Kumar Kedar Nath V. Commissioner of Income-tax, Bombay (1937) 5 ITR, 361.
Income Tax Act (XI of 1922)
Income Tax Liability: There being two systems one known as the mercantile system and another as cash System. Change of computation from mercantile system to cash system at the assessee’s convenience, permissible.
The appellant Corporation like any other assessee cannot be charged to income-tax on any income, profits or gains which has not been actually received by it…………..(11)
Income, profits or gains that have actually accrued or been actually received by the assessee, is the cash method of accounting whereas the mercantile system of accounting shows the income, profit or gains that have accrued or arisen deemed to have accrued or arisen……….(35)
There is nothing in section 13 of the Income-Tax Act to show that an assessee has to follow a particular method of accounting or that it cannot change the method of accounting, that is method of accounting may be changed in course of assessment...…….(36)
Section 13 enjoins upon the assessee no requirement for keeping any portion or system of accountancy for computation of its income, profits or gains. There is no bar on changing over to a new system of accountancy what has not been laid down by the Act, cannot be prescribed by the Court………………(36)
Mozammel Haque Bhuiyan, Advocate instructed by M.R. Khan, Advocate-on-Record—For the Appellant (In all Appeals).
Habibul Islam Bhuiyan, Advocate instructed by Md. Sajjadul Huq, Advocate-on-Record-the Respondent (In all Appeals).
Civil Appeal No.140-144 of 1983
(From the Judgment and Order dated 8 July 1980 passed by the High Court Division, Dhaka in Reference Application Nos. 12-16 of 1977).
These five appeals arise from Reference Application Nos. 12 to 16 of 1977 under section 66(1) of the Income-tax Act. The Judgment of the High Court Division was passed on 8 July 1980.
2. Appellant, a statutory body constituted under House Building Corporation Act, 1952 was created for the purpose of providing financial facilities for construction of houses in cities and towns by granting loans on security by mortgaging land and the house to be constructed thereon. Accordingly, the appellant advanced loan to the members of the public on mortgage of properties and earned income from "Interest on Mortgage" along with some income derived from "interest on Government securities" and from "business" by selling of forms Appellant claimed that under section 6 of the Income-tax Act, assessment would be made under three specific heads under three different sections, namely,
(i) Income from "interest on Government securities" under section 8, (ii) Income from "business" under section 10 and (iii) income from "interest on Mortgage" under the head "other source" under section 12 of the Income-tax Act. Appellant's further contention was that the income-tax Officer had no justification in not accepting the charge of the 'basis' of the ''method of accounting" for computation of their income from mercantile to cash system, the difference between the two being that under the mercantile system the accrued interest, whether actually received or not, formed the part of the total income, whereas under the cash system only the income actually received constituted the income.
3. It was stated that before the assessment years 1964-65 the appellant had mistakenly shown their income under a single head "business" and was being so assessed under section 10 of the Act. Subsequently, this mistake was detected and the appellant submitted revised Returns for the assessment years 1964-1965 to 19674968 and showing three specific incomes under proper heads. Return for assessment years 1968-1969 which is the subject-matter of the present appeal was, however, correctly made showing the income under three proper heads.
4. Reasons for changing the "method of accounting" from ''mercantile to cash system" were that under 'mercantile system the "accrued" income from interest on mortgage' was included in total income, though the major portion of the 'accrued' interest remained unpaid because the unpaid interest was included in the income. The assessments were raised upon extra-ordinarily inflated sums and consequently exorbitant faxes were imposed and also penalties for not paying the demands so made.
5. In this financial predicament caused by heavy assessments the appellant’s funds were depleted and the purpose for which it was created was to be frustrated. Quite apparently, for the very existence and functioning of the appellant, the change of the 'basis' or 'method of accounting’ from mercantile to cash system became imperative.
6. The Income-tax Officer did neither accept the contention in making the assessment under different heads nor did accept, the change of the basis of the method of accounting for computation of the income. He made the assessment on the basis of mercantile system which was abandoned by the appellant, on an income of Tk. 59,04,307/- against the Returned loss of Tk. 4,22,667/-. This was done, according to the appellant, in disregard of the requirements of section 6 of the Act. The Income-tax Officer also charged an interest on Tk. 4, 63,817/- under section 18A of the Act which was also without lawful authority.
7. Appellant preferred an appeal before the Appellate Assistant Commissioner of Taxes who rejected the appeal upon holding inter alia, that ''no officer of the Corporation has any authority to convert profit from mercantile system to cash system or even to maintain books encase system in view of the above mentioned legal provisions", namely provisions of section 32 of the House Building Finance Corporation, 1952.
8. Thereupon the appellant preferred second appeal before the Income-tax Appellant Tribunal, Dhaka Bench, and Dhaka. By its judgment on 7 April 1976 in I.T.A. No.133 of 1972-73 the Tribunal dismissed the appeal. Its findings were: (1) There is no substance in the contention of the appellant that the assessment should be made under different sections of the Act; (2) That the appellant cannot change the method without making change in the provisions of the statute and the rules made there under. The Tribunal however, observed that: ''The income-tax department has got nothing to stand in the way of the assessed if they want to change their method of accounting from mercantile system to cash system".
9. Against this order of the Tribunal the appellant preferred Reference Application Nos.12 to 16 of J977 before the High Court Division. The learned Judges rejected the applications on finding that, as the appellant had employed the mercantile method of accounting regularly, the Income-tax department have no option and that the Income-tax department can charge an assessee to pay income tax under any of the heads mentioned in section 6 of the Income-tax Act in the context of the main source of such income.
10. Being aggrieved by the judgment of the High Court Division, appellant moved this Court and obtained, leave to consider whether the learned Judges were wrong in not allowing the appellant to change the method of accounting from the mercantile system of accountancy to cash system on a wrong interpretation of sections 3,6,10 and 13 of the Income-tax Act.
11. Mr. Mozammel Haque Bhuiyan, Advocate for the appellant Corporation, submitted that the learned Judges of the High Court Division had, not only failed to interpret correctly the provisions of the Income-tax Act but also did not consider that there was no bar in its provisions against changing the method of accounting from mercantile system to cash system. What the Act prescribes is not any system of accountancy but the method of accountancy and the only requirement in respect of the method of accountancy is that the method must be regularly employed, either from the beginning or from the time when, the method is changed. Section 13 speaks of method of accounting and did not speak of any particular system of accountancy. Further, the appellant Corporation like any other assessee cannot be charged to income-tax on any income, profits or gains which has not been actually received by it.
12. The conflicting stands taken by the appellant and the Income-tax department seem to veer round the question whether the appellant was entitled to maintain account in mercantile method but submit income-tax returns according to cash method. Appellant's answer, in short, is that there being no bar in the Income-tax Act against doing so, it is legally entitled to follow this course, on the other hand the department expressed its inability to permit such course. In respect of the assessment years 1964-65 1965-66, 1966-67 and 1967-68 appellant revised returns along with a forwarding letter explaining the reasons for departure from the position followed by it so long since its inception. Appellant used to submit all returns showing income only under one head, namely, income profits and gains from business under section 10 of the Act though its income fall, under different heads as mentioned above. But from then on it decided to classify its income under three heads and classify and apportion the expenses incurred in earning the income of a particular head under that head. Appellant followed the cash system of accounting for the income shown under three heads.
13. Since the major portion of the income of the Corporation which accrued from mortgages remained in arrears at the end of the year large part of which was not realised within the year, the consequence in following mercantile system of accounting is that the cash resources of the Corporation dwindled miserably by paying heavy income-tax from year to year.
14. Advisedly, therefore, the Corporation grouped its income under three heads as stated above and the returns were prepared accordingly. It, therefore, opted for the cash system of accounting in place of the mercantile system in submitting returns of its income, etc. The reason for exercising such option as given in its letter is that in following the mercantile system of accounting the accrued income, if realised or unrealized, is to be shown in the profit and loss account for the purpose of Income-tax return then no relief could be obtained on the unrealised interest before its realisation was barred by time which is the abnormally long period of 60 years. Appellant, therefore, requested the Department allow it to subunit returns regarding interest and mortgages on cash method. If this request was conceded then the appellant will not run into any arrears as to the demands of the department. Department will be further saved from indefinitely carrying forward the arrears from year to year.
15. The Income-tax Officer, however, made assessments on the basis of audited accounts of the appellant, thus rejecting the revised returns submitted by it. Appellate Assistant Commissioner of Income-tax to whom the appellant preferred appeals from the orders of the Income-tax Officer passed a consolidated order dismissing the appeals. Appellant preferred appeals to the Income tax Appellate Tribunal against his orders.
16. Before the Tribunal the appellant Corporation reiterated the correctness of its conduct in submitting returns showing income other than those reflected in its audited accounts by saying that since the major portion of its income accruing from mortgages remained in arrear at the end of the accounting year no relief on the unrealised interest could be obtained by it and the Corporation should be allowed to submit returns accruing according to the cash method.
17. As already mentioned above, the Tribunal held that the Income-tax Department has got nothing to stand in the way of the assessee if they want to change their method of accounting from mercantile system to cash system. But, as it appears from the statutory provisions by which the assessee Corporation has been brought about, they cannot change the method without making changes in the provisions of the statute and the Rules made thereunder".
The additional reason, as given by the Tribunal was that—
18. According to the Tribunal case of Sarupchand vs. Commissioner of Income-tax, Bom (1936) IV ITR 420 did not support the principle justifying maintenance of one method of accounting for appellant's own purpose and submit returns under another method of accounting. What the decision lays down is that an assessee is entitled to change the method of accounting regularly employed by him by reverting to a new regular method, not merely a new method for a particular period.
19. So far as the arguments regarding the implications of section 13 of the Income-tax Act they sought to establish that the section contemplated two kinds of accounting, one for the purpose of ascertaining the actual financial state of affairs of the assessee and the other for the purpose of assessment of income-tax. After referring to section 13 of the Income-tax Act which provides that "profits and gains shall be computed in accordance with the method of accounting regularly employed by the assessee unless, those cannot properly be deduced from that method".
20. The Tribunal's observation is that:
The tribunal therefore, held that "the authorities below have been right to compute the income, profits and gains of the assessee in accordance with the method of accounting regularly employed by them.”
21. Being aggrieved by the order of the Appellate Tribunal the appellant filed an application under section 66(1) of the Income-tax Act before the High Court Division, being Reference application Nos. 12 to 16 of 1977. By their judgment and order passed on 8 July 1980 the learned Judges of the High Court Division rejected the Reference Applications on finding that since the assessee had employed the mercantile method of accounting regularly the Income-tax Department had no option but, to charge the assessee upon such method to pay income-tax-under any of the heads mentioned in section 6 of the Income-tax Act. Appellant moved this Court and obtained special leave to appeal to consider, inter alia, the provisions of sections 3, 6, 10 and 13 of the Income-tax Act, and whether the contention of the appellant that the judgment of the High Court Division was wrong insofar as it interpreted those provisions.
22. As during the bearing of the appeal the main contention centered round the scope of exercise of power by the Income-tax Officer under section 13 of the Income-tax Act, only a brief reference may be made to the provisions of section 3, 6 and 10, before passing on to consider the arguments advanced by the Counsel on the interpretation of section 13.
23. Section 3 of the Act of 1922 enacts that "where any Act of Parliament enacts that income-tax shall be charged for any year at any rate, or rates … tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of this Act in respect of the total income, of the previous year or the previous years as the case may be, of every person.” There is proviso to this section which is not relevant to decide the point at controversy.
24. Provisions of this section impose liability for the payment of income-tax. It provides for a rate of tax which may be varied from time to time. It enacts that, subject to and in accordance, with the provisions of the Act, tax shall be charged on total income of the assessee. This is the general charge of tax. The income of the year previous to the year of assessment is made the basis for ascertaining the income. The term 'person' who is liable to pay income-tax under this section includes among others an association of persons or a body of individuals, whether incorporated or not, a Company and every other artificial juridical person.
25. Section 6 enumerates six heads of 'income, profits and gains’ that are chargeable to income-tax. Section 10 deals with the source or head comprising business. Section 10(1) provides that:
26. Section 10 does not curtail or modify the scope of sections 3 and 4 or alter the charge of income-tax. Sub-section (2) of section 10 makes exhaustive provisions for giving allowances to the assessee in the computation or calculation of the profits or gains from his business.
27. Section 13 of the Income-tax Act along with proviso is quoted below for determining the extent of the power of the Income-tax Officer:
Provided that, if no method of accounting has been regularly employed or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced there from, then the computation shall be made upon each basis and in such manner as the Income-tax Officer may determine."
28. The main question in interpreting the provisions of this section relates to freedom of an assessee to follow any particular method of accounting and the nature of restrictions if any, on such freedom. Analysing the terms of the provisions of section 13 it appears that two limitations have been imposed on the freedom to maintain the method of accounting. The first is whatever be the method of accounting employed by an assessee it must be regularly employed, the next registration appears from the proviso to the section which says in case the method employed by an assessee is such that the Income-tax Officer cannot properly deduce the income, profits and gains of an assessee from the method employed by him, he can compute the same upon such basis and in such manner as he may determine. In other words what it means is that if the method of accounting does not clearly depict the true state of affairs as to the income, profits and gains of an assessee, the Income-tax Officer can exercise discretion to find them out by using materials in any way he likes the main concern being the correct computation of income, profits and gains of the assesses Freedom to employ any method of accounting has been given to the, assessee but the option not to accept it has been conferred on the Income-tax Officer under the above-mentioned two conditions limiting the freedom of an assessee. An assessee must maintain regularly what ever method of accounting he would prefer and secondly, it must be clear so that the Income-tax Officer does not find any difficulty in computing the correct income, profits and gains. Proper assessment of income is necessary for the purpose of imposing income tax. In support of these views reference may be made to the following observations by Cornelius, C.J. of the Pakistan Supreme Court in Commissioner of Income-tax, East Pakistan Vs. Messer. Rathna Tea Estate (1967) 19 DLR 538 SC:
29. Further, the learned Chief Justice mentioned that it was not the function of the Income-tax Officer to supervise the accounting system, his sole object being "to assess tax upon income, profits and gains duly ascertained under the law which he operates". What has been laid down in the section itself including the proviso is that the Income-tax Officer is under obligation to accept the assessee's system of accounting, the only exception is when it does not correctly reveal his income, profits and gains.
30. From the provisions of section 13 of the Income-tax Act it appears that the choice of the method of accounting is that of the assessee and not the department. Once the assessee adopts a certain method of accounting the Department cannot expect him to change it except in a case covered by the proviso to section 13 of the Income-tax Act. When the case is so covered the Department is not bound to accept the accounts calculated on the basis of the method of accounting adopted by the assessee though regularly employed by him, if it appears to the Income-tax Officer that the assessee's income, profits and gains cannot be computed on such basis. Also, the Income-tax Officer cannot refuse to accept the assessee’s accounts if he has changed the method of accounting. Such change in the method of accounting by the assessee must not, however, be arbitrarily done merely to suit his purposes or for a casual period. In one of the cases cited by the appellant's Counsel, namely, Indo-Commercial Bank Ltd. vs. Commissioner of Income-tax, Madras (1962) 44 I.T.R. 22, it has been observed as follows:
31. A bonafide change of the method accounting is permissible, the assessee's choice in this respect does not merit rejection the ground of the principle contained in proviso to section 13. Thus, in the case just cited, the learned Judges observed as follows:
"When an assessee bonafide changes his method of accounting and satisfied the department that he intends to adopt the changed method of accounting thereafter or that he has in fact adopted it thereafter, that satisfies the requirement of section 13. Unless the books tained on the basis of the method accounting so changed bonafide within the mischief of the proviso section 13, the assessee is entitled have his changed method of account accepted by the department under mandatory provisions of section Neither principle nor authority bars assessee from substituting one method of accounting for another at his choice. The effect of section 13 is not that the choice of the method of accounting can be made only once by an assessee."
32. On behalf of the Department Habibur Islam Bhuiyan contended that sir the assessee had so long adopted the mercantile accountancy system its income, proof and gains are to be computed according that system of accountancy. It is not permissible for the assessee to adopt any other system or method of accountancy. Actual 'receipt' is not the criterion to determine taxability. Income, profits or gains of the assessee have been made chargeable to tax under the Income Tax Act. Section 13 provides statutory means for the calculation of income, profits of gains that have 'arisen' or 'accrued' or must be 'deemed' to have 'arisen' or 'accrued' to the assessee, and not what has been actually received by him. In support of his contention the learned Counsel cited the case of Commissioner of Income-tax Vs. Shrimati Singari Bai, (1945) 13 I.T.R. 224. This decision, as I understand, lays down the principle that the Income-tax Officer is to accept the method of accounting regularly employed by the assessee himself as the basis for computing his profits and gains but when his accounts do not show the true income, profits or gains according to that method the Income-tax Officer is free to adjust the method for ascertaining his true profits and, gains.
33. The learned Counsel further mentioned that this decision supports the view that the actual or deemed receipt of income, profits or gains is not the sole test for the levy of tax but income, profits or gains that have accrued or arisen or are deemed to have accrued or arisen are also liable to the charge of income-tax. In interpreting the provisions of sections 3, 4, 6, 10 and 13 of the Income-tax Act the Court observed:
34. As to whether receipt, either actual or deemed as such, in a condition precedent to tax, the Court observed as follows:
"Under the head of source "business" what are charged are the profits and gains of the business, and that profit and those gains do not escape tax by reason only of the fact that they are not received in the accounting year in money or the equivalent of money, or are not 'deemed' to be so received. They are taxable, if they have arisen or accrued, or are under the Act 'deemed' to have 'arisen' or 'accrued' to the assessee in the accounting year, just as much as if they had been 'received' or were 'deemed' to have been 'received' in that year."
35. Long arguments ensued between the appellant's Counsel and the Counsel for the Department as to the advisability of adopting the manner of calculation of tax with reference to the contention as to what is taxable, either actual or accrued income, profits and gains or income profits or gains that are deemed to have accrued or arisen. According to Mr. Habibul Islam Bhuiyan, department's Counsel, the latter is liable to the charge of income-tax, but the appellant’s Counsel insisted that what has actually been the income of a particular year or has actually accrued in that year is only chargeable. Appellant Corporation cannot be taxed for something which it has never received or may never receive. So far as the cash method of accounting is concerned it shows income, profits or gains that have actually accrued or been actually received by the assessee, whereas the mercantile system of accounting shows the income, profits or gains that have accrued or arisen and an deemed to have accrued or arisen. Appellant's Counsel submitted that the appellant corporation does not receive in full the installment including interest that are payable by the loanee who are none else than private owners of houses constructed in the city of Dhaka or any town in Bangladesh with the loan advanced by the Corporation, though the installments including interest payable by them for repayment of the loans are shown annually. If, therefore, the appellant Corporation is to pay the income-tax on the unpaid installments including interest payable by the loanee of the Corporation, the Corporation's fund will be depleted so that quite a good number of the intending loanee will not get any loan from the Corporation. On the other hand, as according to the cash method of accounting, only the installments including interest which are actually received by the appellant Corporation in a particular year are shown if the Corporation pays income-tax on the actual receipt of such installments it will have more funds at its disposal for granting loans to a larger number of intending loanee. The income-tax department has nothing to lose' from this method of accounting. Nothing is also concealed in the cash method of accounting. The appellant Corporation also maintains the accounts of all of its income, profits or gains that have accrued or arisen in a particular year though not actually received by it.
36. As the Appellant Corporation was established by the legislature to provide financial facilities for the construction of houses in the towns and cities and is required under the Act to pay income-tax on its income, profits and gains like any other company within the meaning of the Income-tax Act, 1922, it has to comply with the requirements of that Act, one of which as contained in section 13 of the Income-tax Act, has been under our consideration. So far there is no controversy whatsoever as to the taxability of the Corporation's income, profits or gains or the need for maintaining its accounts regarding them for each assessment year. The only dispute that has arisen relates to the method of maintaining the accounts. Apart from the submissions that the Corporation's fund will be depleted if it is required to pay income-tax on its income, profits or gains that have accrued or are deemed to have accrued in a particular year, though not actually received by it in that year, and that for this reason the Corporation will not be in a position to advance as much loans to intending build of houses either in Dhaka or any other to in Bangladesh as it could otherwise have been able to advance, no other reason was advance by the Corporation's Counsel for changing the method of accounting from the mercantile system to cash method system of accounting which the Corporation will regularly employ from the years in question. The und for switching over to cash method tern of accounting seems to have been well taken. The appellant Corporation cannot other banking institutions; do all kind; business as the Act has in this respect imposed prohibitions on it. By providing loans to tending owners of houses in the cities towns of Bangladesh it helps to one of the most urgent problems city dwellers, that is, accommodation living and carrying on various occupations and activities. Whether tax is made payable on income, profits or gains that have accrued or arisen or deemed to have accrued arisen whether it is payable on inc profits or gains that have been act received by the assessee makes no difference so far as the income-tax departed concerned there being no scope or possibility of escaping from taxation if method of accountancy is resorted to but there would-be certainly a great difference so far as the citizens who intend to houses are concerned if one or the method of accounting is to be chose the Corporation. It would also be well to remember that it is a Government a we are dealing with which has been set up and functioning under a well-defined statute and the reasons advanced for adopting cash method of accounting being commendable, the Corporation's case on these grounds alone is distinguishable from those of other banking institutions.
Moreover, as already seen, there is nothing in section 13 of the Income-tax Act to show that an assessee has to follow a particular method of accounting or that it cannot change the method of accounting so far followed by him. Whatever be the method of accounting either from the start or from the date of changing over, what is that needed is that it must be regularly employed by the assessee reflecting his correct income. Section 13 enjoins upon him no requirement for keeping any portion or system of accountancy for computation of its income, profits or gains. There is no bar on changing over to a new system, of accountancy what has not been, laid down by the Act cannot be prescribed by us.
37. For the reasons stated above, the appeals are allowed. Judgment of the High Court Division is set aside and the cases, are, remanded to Income-tax Appellate Tribunal; for computation of the income, profits and gains of the appellant Corporation for the assessment years in question on the cash method of accountancy. There will be no order as to costs.
Shahabuddin Ahmed J.
I have gone through the judgment proposed to be delivered by my Lord the Chief Justice; as I find myself unable to agree with the views taken in the judgment. I am constrained to give my dissenting "views in the following judgment.
39. As it has already been stated in the judgment of my Lord the Chief Justice, these five appeals have arisen from an order of the High Court Division dated 8 July 1980 passed in Reference Application No. 12 of 1977, under section 66 (1) of the Income-tax Act, Disposing of the five Assessment cases relating to the years 1964-65, 1965-1966-67, 1967-68 and 1968-69. Assessee is House Building Finance Corporation, established under the Central Act No. XVIII 1954, for the purpose of providing finance facilities for construction of houses. Main function of the Corporation is to advance loan to different persons and Organizations for construction of houses against security by way of mortgage or hypothecation of land along with the houses to be construct thereon. Under section 31 of the said Act the assessee, Corporation, is deemed to be a bank to earn profit and declare dividend and under section 39 of the Act the assessee though a statutory corporation, is to be deemed to be a company liable to pay income tax on income, profits and gains. Main source of its income is interest of loan fully secured by mortgage or hypothecation and this source constitutes over 80% of its income, profits and gains. The other two sources of income are interest o government securities and proceeds of sale of Application Forms.
40. Since its inception the assessee-corporation has been maintaining its account on 'Mercantile' method of accounting and it, income, profits and gains have been computed hereunder as profits and gains from 'business' within the meaning of section 10 of the Income-tax Act till the assessee raised the present dispute in "the Returns in respect of the five Assessment years as mentioned above. The main dispute is whether in the five Assessment years, the accounts of the assessee have been maintained according to the mercantile method or cash method of accounting, as referred to in section 13 of the Income-tax Act. Under the Mercantile method of accounting, interest from loan which arises or accrues or is deemed to accrue, is an income liable to tax under section 3, read with section 4 of the Income-tax Act, even if the whole or any part thereof has not been actually realised or received by the assesses in his hand; whereas under the Cash system of accounting, only that part of the interest which bas been actually realised is liable to tax. Section 13 of the Income-tax Act has given an option to the assessee to maintain his accounts of business in either of the two methods of accounting in the following words “Income, profits and gains shall be computed......in accordance with the method of accounting regularly employed by the assessee” (Italic is mine). From its inception the assessee has been maintaining its accounts regularly and consistently in the Mercantile system, and even in the relevant five years, the assessee maintained the accounts according to this system, but submitted the corresponding Returns claiming the benefit of the Cash system of accounting. The assessee, as its functions and affairs show, has been carrying on business in the form of giving loan and earning profit from interest of the loan, and in keeping with the universally accepted principle of maintaining its accounts relating to business concerns it has been maintaining its accounts according to the Mercantile method. The assessee computed its income, profits and gains in respect of the years 1964-65 to 1967-68 according to Mercantile system and also submitted its Returns accordingly, showing its total income at Tk. 32,75,542/-. Tk. 43, 89.310/-, Tk. 44,28,498/- and Tk. 58, 12,417/- respectively. Subsequently, the assessee submitted the revised Return in each case showing the income at Tk. 4,82,084/-, Tk. 7,81,603/-, Tk. 10,66,936/- and Tk. 4, 20,716/- respectively and sent a letter explaining the reason for the revised Returns. In that letter the assessee stated that it had committed mistakes in the past years from the very beginning, in keeping its account and submitting returns according to the mercantile system of accounting and that the assessee now corrected the mistake in respect of the assessment years under reference by submitting the revised Returns "according to cash method of accounting". The assessee in support of its claim referred to section 13 of the Income-tax Act which has given the assessee an option to compute income profits and gains according to either of the two methods of accounting "when regularly employed". Further explanation given in that letter is that by maintaining its accounts in the mercantile system so long, the assessee paid income tax on the unrealised portion of the interest of loan and thereby depleted its resources which resulted in serious financial difficulties. For the following year namely, 1968-69, the assessee submitted a Return showing its income only from the unrealised interest though the account submitted shows the total income comprising both realised and unrealised interest. The assessee then made a prayer to the Income-tax Officer to approve of this altered method of submitting Returns according to cash method in respect of these five assessment years.
41. The Income-tax Officer while accepting the contention that the assessee got option to alter the method of his accounting from mercantile to cash system, rejected his Returns on a finding that the assessee did .not in fact change the method of accounting and that the assessee maintained the accounts under the Mercantile system but submitted the Returns showing the realised or received income and thereby claimed benefit of section 13. The Income-tax Officer therefore made the assessments on the total income as accrued and shown as such in the audited accounts of the assessee. This finding of the Income-tax Officer has been maintained by the Appellate Assistant Commissioner, the Income-tax Appellate Tribunal and finally by the High Court Division in the Reference.
42. Mr. Mozammel Huq Bhuiyan, learned Advocate for the assessee-appellant has made strenuous efforts to show that the unrealised interest is not liable to tax and in support of this argument has referred to a number of cases including the case of Sahu Jagmandar Das Vs. Commissioner of Income-tax, Central and United Provinces (1935) 3 ITR 140; while Mr. Habibul Islam Bhuiyan, learned Advocate appearing for the respondent (Department) cited a number of cases including the ''Commissioner of Income-tax Vs Shrimati Singari Bai (1945) 13 ITR, 234 which, shows that the views taken in the earlier cases including the case of Jagmandar Das were overruled -and it was held that under the Mercantile system of accounting "actual receipt'' of income, profit or gain is not the test for levy of the tax, but the unrealised interest "when accrued" is taxable and that in the matter of computation of income, gains and profits in business the question which is material is whether the interest has accrued or arisen or is deemed to be accrued and that the fact that the interest has not been actually realised is totally irrelevant:
43. I need not enter into any discussion of the question whether unrealised interest' is taxable or not, for the statute is very clear and unambiguous on this point. It is section 4 of the Income-tax Act and it reads thus (relevant portion):
(i) accrue or arise or are deemed to accrue or arise to him in taxable territories during such year, or
(ii) accrue or arise to him without taxable territories during such year, or
It is thus clear that the appellant's unrealised part of the interest from loan, secured by mortgage or hypothecation of lard and building thereon, is an income, profit or gain which is taxable under law if it has accrued. The fact that the unrealised interest, if taxed, is likely to cause financial difficulty to the assessee may appeal to a casual observer, but the statute is otherwise, specifically making it liable to tax. Moreover, in the case of the asses-see there should not be any anxiety over the unrealised interest on the loan since the loan is fully secured by mortgage, besides there being a provision for declaring it 'bad debt' on the expiry of certain period when tin amount of unrealised interest will be exempted from tax. The assessee has submitted its Re turns showing the unrealised part of the interest as its income, though its accounts, duly audited by two chartered Accountants, show the entire interest as income whether realise or not, but all having "accrued'.
44. The assessee has relied upon section I which gives’ him option to maintain his account in either of the two methods; and though it has been maintaining the accounts in the mercantile system but undisputedly the assessee is at liberty to switch over to the mercantile method of accounting. But in that case the assessee shall have to keep the accounts in such a way as to show only the realised interest as income and shall not enter into the account the unrealised interest. In the instant case, in each of five Assessments, the assessee showed the entire amount of interest as income, but the Returns, specified only the unrealised part of the interest showing it to be the income for the purpose of assessment. This is not permissible under law. Return must agree with the audited account-statement. If the assess had wanted to pay income-tax only on the realised income, the account should have been maintained in such a way as to exclude from total income the unrealised portion. As for instance, for the Assessment of 1964-65, the total income as per the audited account is Tk. 32,75,842/-. But in the Return income has been shown at Tk. 4, 82,084/-. This cannot be done so long the audited Account stands at Tk. 32,75,842/-.
45. In the case of M/s. Ram Kumar Kedar Nath V. Commissioner of Income-tax, Bombay (1937) 5 ITR, 361. the Bombay High Court dealt with a case- in which certain selling agents kept their accounts on mercantile or earning basis as opposed to cash basis, but for the purpose of returning their taxable profits and gains, they showed only the actual commission earned and paid; it was held that the assessee was unjustified in showing the actual commission only as income and that they departed from their own regular method of accounting and further that they were bound to return their profits and gains for the purpose of income-tax in accordance with their own Mercantile system. In the instant case the accounts were maintained as usual in the Mercantile method, but for the purpose of taking advantage of the Cash system, the Returns were submitted in a way in which the realised amount of interest only has been shown as income by making some adjustment in the audited account. Law does’ not permit an assessee to show two kinds of incomes, one for the purpose of depicting the correct picture of the business and the other for payment of tax. The concurrent finding of the Income-tax Authorities as well as the High Court Division to this effect is found to have been based on facts as stated by the assessee itself in accounts which were regularly maintained in this way. In the circumstance the Income-tax authorities are not only entitled, but are also bound under section 13 to tax the total income as accrued irrespective of the question whether any part of the income has remained unrealised.
46. There are two provisions to section 13 in the following words:
Provided further that the Board of Revenue may, in of any person, or class of persons, require such person or class of persons to maintain accounts, or prescribe the method of accounting to be employed by such person, or class of persons, or the manner in which payments or commercial transactions should be made or recorded, and in such an event, the income, profits and gains of the assessee shall be computed on the basis of the books, accounts, or records maintained accordingly."
Under the first proviso, if from the account submitted by an assessee it is not clear which is the nature of the method of accounting that has been adopted, or the income, profits or gains cannot be properly deduced, then the Income-tax Officer (Deputy Commissioner of Taxes) shall determine the issue at his discretion. As to the other provision, it is not the case of either of the parties that here that the Board of Revenue order or gave any direction in this case.
47. The other ground taken in the appeals and also agitated all-through by the appellant is as to the classification of its income, profits and gains under three heads, such as interest on securities, under section 8, proceeds from sale of Application Forms meeting 'business' under section 10, and interest on loan against mortgages sought to be brought under the head ''other sources" under section 12. It has been contended that prior to the disputed Returns income, profits and gains under all these heads were classified into a single head 'Business' but in the Returns submitted they have been separately shown and computed under three different heads. The claim for such classification has been rejected all-through and finally by the High Court Division on the ground that from the nature of affairs and business of the assessee-Corporation it is found clearly that income, profit and gains of the assessee, which carries on business, fall under the head 'business'. But the fundamental point is in whichever way income, profits and gains of the assessee are classified, so far as the chargeability thereof to tax is concerned, it makes hardly any difference. A section, which is the charging section, provides that "tax shall be charged in respect of the total income of every person." Section 4 provides that the total income of any person includes all income, profits and gains from whatever source derived which accrue or arise or are deemed to accrue or arise. The nature of the function and business of the assessee clearly shows that it is engaged in 'business’ and as such its income, profits and gains fall well within the ambit of section 10. The impugned order of the Income-tax Authorities rejecting the claim for grouping the appellant's income, profits and gains into three different “heads" as enumerated in section 6 is well within the four corner of law; moreover any such classification hardly makes any difference,
48. In the result, the assessments in question, as made by the Income-tax Officer and upheld all-through, are found to have been made according to law. I will, therefore, dismiss all the appeals with costs.
Chowdhury ATM Masud J.
I have gone through the judgments written by the learned Chief Justice and my learned brother Shahabuddin Ahmed J. I concur with the judgment of the learned Chief Justice.
Syed Md. Mohsen Ali J.
I have gone through the judgments written by the learned Chief Justice and my learned brother Shahabuddin Ahmed J. I concur with the decision of he learned Chief Justice.
ORDER OF THE COURT
By the majority decision, the appeals are allowed. Judgment of the High Court Division is set aside and the cases are remanded to Income tax Appellate Tribunal for computation of the income, profits and gains of the appellant-Corporation for the assessment years in question on the cash method of accountancy. There will be no order as to costs.