Manohar Lall, J.:— This is a reference by the Commissioner of Income-tax of Bihar asking for the opinion of this Court on the questions which have been printed at p. 24. These questions are:

(i) Whether on a proper construction of S. 13, the sum of Rs. 90,000 being part of the interest in respect of the three loans to Raja Muhammad Yakub of Parsauni included in the amount realized under the decree executed in the accounting year 1340 Fasli could legally be assessed in 1934-1935.

(ii) Whether the interest of Rs. 90,000 referred to escaped assessment in 1934-1935 within the meaning of Sec. 34 and could be assessed under that Section.

2. The questions as framed are somewhat confused. The real question which arises in the present case is whether the sum of Rs. 90,000 or part thereof can be assessed as being the income of the previous year under the provisions of Section 34 of the Income-tax Act. The facts which have been stated by the Commissioner to determine these two questions are these: On 10th September 1915, the Raja of Parsauni executed a mortgage bond for Rs. 87,500 in favour of the assessee.

3. The annual interest payable under the terms of the bond was Rs. 8750. On 5th August 1919, the assessee took another mortgage from the Raja of Parsauni for a sum of Rs. 10,000. Finally on 14th April 1921, the assessee advanced a sum of Rs. 2500 on the security of a mortgage executed by the Raja of Parsauni, the rate of interest being the same. The assessee was being assessed on his money-lending transactions from some time before the year 1921-1922, but the records of these years are not available. It is however clear that the interests on these three loans, which I have just mentioned, were never included in any of the assessments made prior to 1924-1925. In the year 1924, the Income-tax Officer discovered for the first time the existence of the first loan of Rs. 87,500, that is, the loan on the mortgage bond of September 1915. Having come to know of the existence of that loan, he must have known that no interest on this loan had ever been received by the assessee as this is the common case of the parties before us.

4. The Income-tax Officer however from the year 1924 onwards proceeded to add to the assessable income of the assessee a sum of Rs. 8750 every year calculating this amount not on the basis of what the assessee actually received but on the basis of the amount of the interest accruing to the assessee from the year 1924 onwards. The assessment was persisted in this way for a period of eleven years, namely up to 1935, with the result that the assessee was actually taxed on a sum of Rs. 96,250 which was the calculation made on the accrued basis for the years 1924-1935. In the year 1935 a fresh discovery was made by the Income-tax Officer in this way: The assessee instituted a suit some time before 1929 to recover his does on all the three mortgages of 1915, 1919 and 1921. On 5th April 1929, a preliminary decree was passed in favour of the assessee for a reduced amount of Rs. 3,71,000 consolidating his aggregate does, i.e, principal and interest on all the three documents. The final decree was passed some time later for a sum of Rs. 4,00,000 odd. In execution of this decree, the property of the mortgagors was put to sale, the sale was confirmed on 16th December 1932, which falls within the previous years of the assessee, that is, 1340 Fasli. The assessee thus realized in the shape of property a sum of Rs. 3,06,590. It will be seen that even the amount due on the first bond which we are told had swelled up to Rs. 3,40,000 on the date of the suit was not realized in full. It may be open to argument whether the amount realized should be spread over the three bonds of 1915, 1919 and 1921 in the proportion of the liabilities under those bonds, but that question has not been agitated either before the Income-tax Officers or before us.

5. It is assumed, to answer the questions raised, that the amount realized in 1340 Fasli went to pay in part the amount due under the first bond of 1915. The Income-tax Officer had assessed the assessee for the previous year 1340 on the earlier basis adopted by him for 11 years, namely by including in the assessable income a sum of Rs. 8750 in entire ignorance of the fact that in that year the total amount due on the bond of 1915 had been realized almost in full. This assessment was made on 30th January 1935, in the financial year ending 31st March 1935. Within one year of the end of that year, namely on 10th June 1936, the Income-tax Officer started proceedings under Section 34 of the Income-tax Act to recover the income which had escaped assessment, namely the portion of the interest which in the view of the Income-tax Officer had escaped assessment on 30th January 1935. The Income-tax Officer over-ruled the contention of the assessee and held that he was liable to be taxed upon the total interest which had accrued due on the bond of 1915 and been realized in 1340 Fasli, namely Rs. 1,91,000 after subtracting from it the amount of Rs. 96,250 which had already suffered taxation during the 11 years. In other words, he assessed the assessee on this escaped income at a figure of Rs. 95,750. The matter was taken up in appeal before the Assistant Commissioner of Income-tax who by his order dated 21st December 1936, reduced the assessable income on this head by a sum of about Rs. 5000, which we are told was in the nature of additional law expenses which were allowed by the appellate authority, thereby fixing the assessable figure at a sum of Rs. 90,345. The questions formulated before us invite a decision of the contention raised that the assessee is not liable to be taxed upon this amount at all.

6. As I stated above, the questions have been framed in a somewhat confused manner. The real question which arises for decision is whether any income has escaped assessment so that the assessee can be caught by the provisions of Section 34 of the Income-tax Act; and if so, how much. It is agreed before us, and indeed it is obvious, that some income by way of interest has escaped assessment. The Income-tax Officer never knew of the existence of the situation that the assessee had realized interest by the sale of the properties on 16th December 1932 and that therefore the assessee was liable to be taxed upon a higher figure than that adopted by him on the old accrued basis, namely a sum of Rs. 8750. In the circumstances whether the view taken by the Lahore High Court in 8 ITC 413 1 or by the Rangoon High Court in 9 ITC 313 2 is correct, it is clear to my mind that some income has escaped assessment within the meaning of the language of S. 34.

7. The question, which really falls to be determined, is whether the income which escaped assessment was Rs. 90,345 as taken finally by the Income-tax Officers or a lesser sum and also when did it or a part thereof escape assessment. Sir Sultan Ahmed appearing on behalf of the assessee strongly contends that no income escaped assessment in the year in which it was sought to be assessed by the Income-tax authorities, but that whatever income escaped, escaped assessment earlier than 1924. Mr. Gupta on behalf of the Income-tax Department on the other hand contends that as the assessee has not adopted any system whatsoever which may be said to be a system regularly employed in respect of his accounts, it was open to the Income-tax Department to consider the whole amount, which was admittedly received by the assessee, as being assessable on the cash basis because he argues that under Section 13 of the Income-tax Act, it is open to the Income-tax authorities to adopt any basis which they may choose finder the proviso to that Section in order so determine the assessable income. In my opinion S. 13 has no application whatsoever to the facts of the present case. The Income-tax Department has agreed that so far as the loan of 1915 is concerned, the assessee will be taxed always on the accrued system.

8. In 1924 when the assessable income was computed by making an addition of Rs. 8750 on the accrued basis income escaped assessment for the years prior to 1924. It was open to the department in that year either to adopt the cash system by which they could not have been able to tax any portion of the income from 1924 to 1935 or to have adopted, as they did, the accrual basis; but having adopted the first system or the second, they cannot be allowed to change their ground whenever it suits them to do so. It seems to me, therefore, that upon the facts which have been sent up by the Commissioner of Income-tax the conclusion which follows in law is that the assessee is liable to be taxed upon the sum of Rs. 90,345 Sifter deducting from it the amount upon which he ought to have paid the tax for the years anterior to 1924 either in 1924 or within one year of the end of that financial year. This statement of the case has not worked out the figures on the accrual basis for the period from September to 1924, the year when the Income-tax Department first assessed the assessee for the sum of Rs. 8750. That figure will be worked out by the Commissioner on receiving a copy of our order and the assessment will be reduced accordingly. The Commissioner will give a refund to the assessee of that overpaid amount so determined together with interest at such rate as he may think fit to allow under the proviso to S. 66(7). I wish to say a few words as to the argument of the learned standing counsel that no system has been regularly employed by the assessee. The Commissioner of Income-tax in para. 5 says at one place that it is clear that no method of accounting was employed by the assessee in respect of the three loans referred to. At page 25 he again says that when the Income-tax Officer went to make the reassessment for 1934-1935, he brand that no method of accounting had been regularly employed by the assessee in respect of the interest on the three loans referred to.

9. In my opinion the learned Commissioner was entirely in error in approaching the case in the way he did. What the law requires the Income-tax Officer to see is not a system of account to be kept by the assessee in respect of a particular loan which may have been omitted in that account, but the system of accounting which the assessee regularly employs for his own purposes with respect to all the loans which he discloses. If any loans are deliberately left out from the account kept regularly by the assessee, then it is open to the Income-tax Department to disbelieve the accounts and to proceed in any way they choose by acting under the proviso but on exercising a judicial discretion. This matter has been recently dealt with by their Lordships of the Judicial Committee of the Privy Council in 65 IA 1 3 which now authoritatively decides how the terms of S. 13 are to be employed by the Income-tax Department. For these reasons I answer the questions proposed in the following way: The first question does not arise for our decision as I have held that S. 13 has no application whatsoever to the facts of the present case. The second question is answered thus — Such portion only of the interest of Rupees 90,345 can be assessed now as escaped assessment within the meaning of S. 34 as remains after making a deduction for the amount of interest calculated on accrued basis from September 1915 to 1924, as has been pointed out in the course of the observations made by me above. In the circumstances, there will be no order for costs in this Court.

Fazl Ali, J.:— It is common ground that though in the year 1924-1925 the assessee did not receive any interest on the mortgage bond for Rs. 87,500, yet the Income-tax authorities proceeded to tax them as if they had actually received a sum of Rs. 8750, that being the yearly interest payable by the mortgagor under the bond. The question is whether the Income-tax authorities having once elected to adopt this mode of taxation, which was undoubtedly open to them, can now turn round and adopt a totally different mode. In my opinion, they cannot do so and the whole matter can be tested in this way. Let as assume that the assessee's suit on the basis of the mortgage bond had not succeeded but failed either on the ground that the mortgage bond had not been duly executed or on the ground that it had not been properly attested, or that a decree had been passed for a smaller sum than that for which it was actually passed. The Income-tax authorities could not then bp made to refund either the whole or any part of the amount which they had realized during the last eleven years. Can they now, in spite of the fact that they have taxed the assessee so far, on what they call mercantile basis, turn round and tax him now on the basis of the income actually accrued especially as the interest which the assessees have now recovered includes interest prior to 1924-1925. The Income-tax authorities have already recovered taxed interest which was payable to the assessees between 1924-1925 and the date of the decree. What they are now taxing is the interest which was due to them prior to 1924-1925. In my opinion the clear implication of the step taken by them when they taxed for the year 1924-1925 in that the so-called escaped income had already escaped prior to 1924-1925. As their case is that the assessees had concealed their mortgage bond until they discovered it at the time of assessing them for 1924-1925, they might have proceeded under S. 34 at that time and recovered from them whatever they could recover. S. 34 is quite clear and does not enable the department to tax escaped income more than a year after it ought to have been taxed. For these reasons I am of the same opinion as my learned brother and concur in the answer proposed by him to the reference.

G.N/R.K

10. Reference answered.