Beaumont, C.J:— This is a reference made by the Commissioner of Income-Tax under S. 66(2) of the Indian Income Tax Act, XI of 1922, and the question he raises is:— “Whether in view of the provisions of S. 13 of the Indian Income Tax Act, the Income Tax Officer has correctly included, in the computation of income of the calendar year ended 31st December, 1933, the sum of Rs. 38,965 on account of commission for the six months ended 31st December 1933.”
2. The assessee was a firm, which was acting as selling agents for a company known as Morarji Goculdas Spinning and Weaving Co. Ltd. under an agreement dated the 13th of January 1930, which is Ex. A.
3. Under that agreement the firm got commission on goods which it sold on behalf of the company, and also on goods which the company sold directly to upcountry dealers. The system of accounting adopted by the firm was the method which is known as the mercantile method, that is to say, it accounted on the basis of commission earned, and not on the basis of commission actually paid. The system prevailed down to the accounting period ended the 31st December, 1932. For the accounting period ended 31st December 1933, which is the accounting period in question in this case, the assessee showed the commission earned down to the 30th of June 1933, that commission having been paid-during the accounting period but showed no commission earned for the half year ended 31st of December 1933, because the Company had got into financial difficulties, and the assessee thought it very possible that the commission would not in fact be received. Subsequently the company was reinstated and the commission earned was in fact paid after the 31st December 1933. The Commissioner says that having regard to section 13 of the Income Tax Act which directs that income, profits and gains shall be computed for the purpose of, among other sections, S. 10, which is the section dealing with business, in accordance with the method of accounting regularly employed by the assessed, the assessee was bound to include the income from commission earned during the half year ended 31st December, 1933. The assessee, on the other hand, says that he was not bound to include that commission in the accounting year because he had not received it, although he admits that he was bound to include it in the year in which he did receive it.
4. The assessee relies on a decision of the Privy Council in the case of St. Lucia Usines and Estates Co. v. St. Lucia Colonial Treasurer, (1924 A.C 508). That case establishes that money earned, which constitutes a debt, is not income, and that a debt accrued is not income accrued, but there is nothing in the case to show that the Income Tax Ordinance, which fell to be construed by the Board, contained the words “income profits and gains.” At any rate, the only word with which the Privy Council were concerned in that case was the word income. They were dealing with an assessee who had not a business but was entitled to interest on a single sum, so that the only question was whether interest which had been earned but was not paid amounted to income, and the Privy Council held that it did not. Although an unpaid debt is not an income, it may be—as it seems to me—profits or gains, if it is treated as profits or gains in the system of accounting adopted by the assessee.
5. On the whole, I think the contention of the Income Tax Commissioner is right. The assessee had undoubtedly kept his accounts regularly on the mercantile basis. He could consistently with that basis have shown the commission earned for the half year ended the 31st of December 1933, and as against that shown as a debit item, the same amount as a bad debt, and if the Commissioner had been satisfied that in fact the debt was bad, he would have allowed the debt; if he had not been satisfied and has charged income tax on the debt, and such debt was ultimately never received, I think the assessee would have been entitled to claim a refund under S. 48 A. Here undoubtedly the assessee was trying to alter the basis of accounting from the mercantile basis to a cash basis for this particular half year, and in my view no case is established which justified him in doing that. Although I think it is open to an assesses to change the regular basis on which he keeps accounts, still if he seeks to do that he must satisfy the Commissioner on proper evidence that he has in fact changed the regular basis of accounting. I do not think here he did in fact change the regular basis of accounting except for this particular half year, and if the company had been reinstated again and had continued the agency agreement as before, there is nothing to show that the basis on which the accounts had been kept, in the past would not have been continued in future.
6. In my view, therefore, we ought to answer the question in the affirmative. Costs to be paid by the assessee on the Original Side scale.
7. With regard to the costs, we held yesterday (judgment reported as Gopal Vajinat Manohar v. Commissioner of Income-Tax, Bombay, 4 I.T.R 417) that the deposit paid under S. 66(2) is part of the assessee's costs of the reference. In the present case the assessee is ordered to pay the costs on the Original Side scale, in accordance with the ordinary practice. But now that the position of the deposit of Rs. 100 has been brought to our attention, I think the proper order to make, where the assessee is directed to pay costs and there is nothing to suggest that the application was improper or frivolous, is that the assessee should pay the costs on the Original Side scale, less Rs. 100.
Rangnekar, J.:— I agree.
Reference answered accordingly.