COURTNEY TERRELL, C.J. - The assessee has amongst other sources of income a money-lending business. He keeps books of account which show the business transacted with each debtor, the interest which has accrued and the amount actually realized in each year. In paragraph 4 of the order of the Assistant Commissioner of Income Tax following facts are set forth : The money-lending accounts of the assessee consist of personal accounts of his debtors in which the accrued interests from year to year are calculated and entered. The amount actually realised is also similarly entered, but neither the accrued interest not the realised is also similarly entered, but neither the accrued interest not the realised interest are totalled and accounted for in an interest account and no profit or loss is computed. There is also a cash book in which the actual realisations are shown, but there is no interest ledge. Clearly therefore the assessee has not computed his profit at all and no particular method of accounting can be said to be regularly employed by him. The Income Tax Officer might determine, and he decided to adopt the accrued basis which was also followed in previous year without objection on the part of the assessee." It appears that the assessee for the purposes of his return for Income Tax in previous years totalled the amount of interest which had accrued in the particular year in question and paid tax on the amount so found. He now contends that he should not have been assessed in the past on the sum entered in this books as accrued interest and for the current year he desires to correct this situation by demanding to be assessed not upon the interest which has accrued during the year but upon the sums actually received by him.

Now, there are two methods of accounting for the income, profits and gains of a business which are generally referred to as the cash basis and mercantile basis. According to the former a record is, as in this case, kept of actual receipts and actual payments, entries being made only when money is actually collected or disbursed and if the profits of the business are accounted for in this way the tax is payable on the difference between the receipts and payment for the period in question. There is, secondly, the mercantile system under which a profit and loss account is maintained. At the end of the financial year the assets and liabilities are valued and entered in the account and the difference between the two is the profit upon which the tax is paid. In most cases the debts would be valued as of their face value, that is to say, at the moment at which it is shown as having accrued. Nevertheless the accounting is on a valuation basis and the debts in so far as they are entered in the accounts are considered in the light only of an asset. In this case the finding of fact by the Assistant Commissioner is that the assessee did not compute his profit by either of these two methods or at all. He merely brought his accounts and submitted to be assessed upon the debts which had accrued. If he had adopted the mercantile method and had valued the debts which had accrued to him at the end of the year and had balanced upon the assets against the liabilities he would have been rightly liable to tax upon the profits shown in accordance with that method of accounting. The assessee has however done nothing of the kind. It is true that he has kept accounts and that he has shown debts realised and debts which had accrued but he has nowhere accounted for the profits of the money-lending business. The Commissioner of Income Tax Notwithstanding this finding on the part of the Assistant Commissioner which is set forth in his statement of the case has held that whereas the assessee has hitherto been taxed upon the debts which have accrued to him he cannot now be allowed to say that this system of taxation is erroneous. He attributes to the assessee a desire to change his method of accounting and sets forth a motive on the part of the assessee for desiring to change the method of accounting and sets forth a motive on the part of the assessee for desiring to change the method of assessment. This motive, even if the Commissioners opinion be will founded, is in my opinion, entirely irrelevant. The accounts which have been supplied for the current year are precisely like the furnished by him as a basis for assessment. The assessee has made Neither in this year not in past years has he computed the profit or loss on his business and therefore according to the proviso to Section 13 of the Income Tax Act it is open to the Income Tax Officer to make the computation of income, profits or gains upon such basis and in such manner as the Income Tax Officer may determine. This however does not mean that the Income Tax Officer with the assent of the assessee has taxed that which under the Act is not assessable this is no justification for continuing such a practice. An assessee may will discover that in past years he has paid his tax on an erroneous basis or has returned as profit that which was not profit at all. This fact will not prevent him in any given year from making a return on a correct basis. In this case the commissioner considers that the assessee wishes to change his method of accounting from the cash basis to the accrued basis. In my opinion this is not a correct view of the matter. The method of accounting now presented is precisely similar to that heretofore followed. What the assessee desires to change is not the method of accounting for profits and gains but the method of assessment which the Income Tax Officer should employ. The question therefore really is whether the assessee is right in his contention that in future the actual sums realised in any year should be taxed, or whether the method heretofore followed in his case of taxing the accruals is correct.

In my opinion amounts which have accrued but which have not been paid do not furnish a basis for taxation unless they appear in a properly balanced profits and loss account as assets in the shape of outstanding debts and this method cannot be employed unless a regular profit and loss account of the business for the year is supplied. The finding of fact is that this has not been done although possibly it might have been done. It is not obligatory upon the assessee to present his account of profit and loss in this manner. He may elect as he has done in this case, to be taxed upon the actual receipts less the actual receipts less the actual expenses. In my opinion the first paragraph of section 13 of the Income Tax Act has little or no application to the facts of the case. This section applies only to cases in which the assessee has not merely kept true and accurate accounts of his dealings but has also according to a proper system of book-keeping set forth according to some consistent method his statement of income, profits and gains.

The cases decided before 1922 when the present Income Tax Act came into force have little application. It is now possible for any form he chooses provided that the profits and gains are thereby properly displayed according to a consistent system.

Therefore debts which have accrued but have not been paid may be set forth in the accounts and the principles which were relied upon by the Full Bench of the High Court of Madras in Secretary to the Board of Revenue, Income Tax, Madras v. Arunachalam Chettiar are no longer applicable but such debts must be shown as an asset and having been valued they must be shown in a profit and loss account. The finding of the Income Tax Commissioner is that the assessee has never properly accounted for the profits and gains of his business. Accordingly the profits and gains cannot be computed "in accordance with the method of accounting regularly employed by the assessee." There is furthermore no question of the assessee changing his method of accounting; for the accounts now supplied are precisely similar to those supplied heretofore. The matter of assessment must be approached therefore as though the year of assessment in question were the first in which the business had been carried on and the merits of the basis of assessment must be considered de novo. The nature of the word "profits" was discussed by the Court of Appeal in England in In re : The Spanish Prospecting Company, Limited and LORD JUSTICE MOULTON at page 98 said :

"The word "profits" has in my opinion a well-defined legal meaning, and this meaning coincides with the fundamental conception of profits in general parlance, although in mercantile phraseology the word may at times bear meanings indicated by the special context which deviate in some respects from this fundamental signification. "Profits" implies a comparison between the state of business at two specific dates usually separated by an interval of a year. This can only be ascertained by a comparison of the assets of the business at the two dates.

For practical purposes these assets in calculating profits must be valued and not merely enumerated. An enumeration might be of little value. Even if the assets were identical at the two periods it would by no means follow that there had been neither gain nor loss, because the market value - the value in exchange - of these assets might have altered greatly in the meanwhile. A stock of fashionable goods is worth much more than the same stock when the fashion has changed. And to a less degree but less certainly the same considerations must apply to buildings, plant and other fixed assets used in the business, because one form of business risk against which business gains must protect the trader is the varying value of the fixed assets used in the business. A depreciation in value, whether from physical or commercial causes, which affects their realizable value is in truth a business loss.

We start therefore with this fundamental definition of profits, namely, if the total assets of the business at the two dates be compared, the increase which they show at the later date as compared with the earlier date (due allowance, of course, being made for any capital introduced into or taken out of the business in the meanwhile) represents in strictness the profits of the business during the period in question.... To render the ascertainment of the profit of a business of practical use it is evident that the assets, of whatever nature they may be, must be represented by their money value. But as a rule these assets exist in the shape of things or right and not in the shape of money. The debts owed to the company may be good, bad or doubtful. The figure inserted to represented stock in trade must be arrived at by a valuation of the actual articles. Property of whatever nature it be, acquired in the course of the business has a value varying with the condition of the market. It will be seen, therefore, that in almost every item of the account a question of valuation must come in."

The question formulated by the Income Tax Commissioner is as follows :- "Whether in the circumstances of this case the assessee is liable to be taxed on his income from money lending on the mixed cash and accrued basis, which has been followed in his assessments of previous years." The statement of the question is followed by the following observation : "As a matter of fact the assessee has been assessed neither on a strictly cash basis not on accrual basis" and then follows a statement of the way in which the assessee submitted his accounts as found by the Assistant Commissioner and it is clear that there has been no proper accounting for profits. The answer to the question in my opinion is that the method of assessment heretofore followed was in any case erroneous. It is open to the Income Tax Officer to assess the assessee either upon a cash basis or upon a mercantile basis but in the latter case the accrued interest can only be dealt with if a profit and loss account is drawn up and the accrued but unpaid interest is brought in as a valued asset and it is not open to the Income Tax Officer to take accrued interest into the assessment on any other basis.

AGARWALA, J. - The assessee, who is a large landowner also carries on the business of a money-lender. For the year 1931-32 he was assessed at Rs. 50,987 in respect of the profits of this business. The figure was arrived at by adding together (i) the interest on loans which accrued during the year but was not received and (ii) the interest received, less the amount taxed in the previous years. The assessee objects to the assessment and claims that in respect of the money-lending business he is assessable only on the sum of Rs. 222, which is the amount actually realised in the year in question less deductions on account of sums assessed in previous years. The Commissioner of Income Tax, in stating the case, has said that the sum assessed has been arrived at in accordance with the method of accounting regularly employed by the assessee for a number of years previous to 1931-32.

It appears from the statement of the case that for a number of years the assessee, in his return of income to the Income Tax Officer, has filled in a certain sum as being his profits from business (the sum varying each year) and with his return has filed two statements showing, respectively : (a) the interest accrued during the year but not received and (b) the interest received less the portions of it assessed in previous years. The amount entered in the return of income tax has in each year been the total of (a) and (b).

Section 10(i) of the Income Tax Act provides : "The tax shall be payable by an assessee under the head "business in respect of the profits or gains of any business carried on by him." Section 13 is as follows : "Income, profits and gains shall be computed, for the purposes of sections 10, 11 and 12, in accordance with the method of accounting regularly employed by the assessee". There is a proviso to the section which enabled the Income tax Officer to calculate the profits in cases where no method of accounting has been regularly employed or where, from the method employed, the profits cannot properly be deduced.

Prima facie the reference is concluded by the finding of fact that the sum assessed has been ascertained by the method of accounting regularly employed by the assessees. The assessment, however, is challenged on two grounds. In the first place it is argued that no method of accounting has been regularly employed by the assessee. It is contended that the two statements filed each year with the return did not amount to a method of accounting inasmuch as they did not purport to show what profit had been made by the assessee. As I understood this argument it went to this length, that as there was no addition of the items in the two statements, no profit or loss account and no balance sheet, there was no method of accounting at all. I am unable to agree. It may be said that the assessees method of keeping the accounts of his money-lending business is not scientific but it is the method adopted by himself and it is the method by which he has regularly ascertained the sum of which he considered himself to be assessable in respect of the profits of his business.

The next ground on which the assessee challenges the assessment is this; he contends that interest not actually received is not assessable and that if he has previously included in his profits sums which are not taxable that circumstance does not prevent him from raising the point now. It may be conceded at once that an assessee is not liable to be assessed in respect of an amount which is not subject to Income Tax even though he has permitted himself to be taxed in respect of similar sums in previous years. But is this the case in the present instance It is contended that interest unrealised in fact, and not treated by the assessee as realised, is not "income". That much may be conceded but what the assessee is to be assessed on u/s 10 of the Act is not the "income" from his business but the "profits or gains" of the business. The receipts from the business obviously do not constitute the profits and gains of the business, for against the receipts have to be set off the expenditure, or at least so much of the expenditure as is permitted. The actual profits of a business are not ascertainable until the business is closed down, for a trader may, for a long period of time, receive in the aggregate large sums of money, but if an unforeseen calamity results in the destruction of his premises an stocks the loss may be greater that all his previous receipts. In a commercial sense, however, it is possible to ascertain from time to time whether the turnover of a business is resulting in a profit or not. It is in this sense that the phrase "profit and gains" is used in the Act and in this sense a money-lending business does not differ from any other class of business. What has to be ascertained for the purposes of the Act is neither the receipts of the proprietor of the business nor the profit on each isolated transaction, but the profits and gains of the business as whole. As was observed by LORD MACMILLAN in the case of Commissioner of Income Tax, Bihar and Orissa v. Maharajadhiraj of Darbhanya "what the officer is directed to computed is not the assessees receipts but the assessees income and in dubio what the assessee himself chooses to treat as income may well be taken to be income and to arise when he so chooses to treat it." In the case of a business substitute the word "profit" for the word "income" and this extract concludes the present reference.

Much reliance was placed by the assessee on the decision of the privy Council in the case of St. Lucia Usines and Estates Company, limited v. Colonial Treasurer of St. Lucia for the contention that "profit and gains", like "income" must be received, or treated as receive, before the liability to tax arises. That decision, however, in my view, clearly negatives the contention. In that case a company which had ceased to carry on business in the island of St. Lucia sold it properties. The vendee of one of the properties who had not paid the purchase price, agreed to pay interest on the amount due, on a certain date. The company was assessed in respect of this interest although it was not paid on the due date, or at all, during the year for which the assessment was made. The privy council held that the amount was not assessable in that year. It will be observed that the assessment was in respect of what was considered by the assessing authority to be income, and not in respect of the profits and gains of the company, business, for the company had ceased to carry on business before the year in question. The distinction was clearly indicated by Lord WRENBURY, who delivered the judgment of the Judicial committee where his Lordship said : "It is said and truly, that a commercial company in preparing its balance sheet and profit and loss account does not confine itself to its actual receipts -does not prepare a mere cash account but values its books debts and its stock in trade and so on and calculates its profits accordingly. From the practice of commerce and of accountants and form the necessity of the case this is so. But this is far from establishment which fails to pay the interest due." This extract from the judgment clearly shows the recognised distinction between the basis for calculating income and basis for present case did not value the debts due to him and, therefore, did not purport to show what his profits were but only what was due to him. In a commercial balance sheet debts are taken at their face value unless there is reason to suppose they will not be paid in full or at all. The assessee had not claimed that any part of the accrued interest will not be paid.

A number of cases were cited in which it has been held that interest accrued but not realised is not assessable. They are Commissioner of Income Tax, Bengal v. Shaw Wallace and Company; The secretary to the Board of revenue v. Ar. Ar. Rm. Arunachalam Chettiar and Brothers; Messrs Anglo Persian oil company Ltd. v. Commissioner of Income Tax, Bengal; Narain Das Bhagwan Das v. Commissioner of Income Tax Punjab; The Board of revenue v. Pydah Venkatachalapathy Guru and Lala Puran Mal v. The Commissioner of Income Tax Punjab. Some of these cases were under the former Income Tax Act and some under the present Act, but none of them go to the length of deciding that unrealised interest may never be taken into account in computing the profits of a business. It would, I apprehend, be difficult to fine a commercial balance sheet in this or any other country where such interest is not taken into account in ascertaining profits. It is the established practice of commercial houses and accountants to do so and the very nature of commercial profits necessitates it. It is no more true to say, in a commercial sense, that profits never include unrealised interest than it is to say that a cash receipt is necessarily a profit. In my view, therefore there is no substance in the contention that unrealised interest is in no circumstances assessable to income tax, and, that being the case, the assessor was entitled to take such interest into account in ascertaining the assessees profits unless the method of accounting regularly employed by the assessee is a method which ignores such interest.

MACPHERSON, J. :- The assessee, besides being leading landholder conducts a money-lending business upon which he has been assessed to Income Tax (as a Hindu undivided family). He made as application on the 28th November, 1931, requiring the commissioner of Income Tax to refer to the High Court the question of law "Whether it is open to the Income Tax Officer to regard interest unrealised as taxable I come" alleged to arise out of the appellate decision u/s 31 of the Income Tax Act, 1922, of the Assistant Commissioner, dated the 7th November 1931, and the Commissioner has made the present reference of 13th October, 1933 (not within sixty days but after nearly two years), proportion to be u/s 66(2) of the Act formulation the question for opinion as : "Whether in the Circumstances of this case, the assessee is liable to be taxed on his income from money-lending on the mixed cash and accrued basis which has been followed in his assessments of previous years " (partly perhaps because their Lordships of the Judicial Committee deprecate the statement of a question of law in an abstract form and divorced from the facts of the particular case and partly for other reasons which will later appear) and expressing his own opinion that the answer is in the affirmative.

2. As is well-known, Section 66(2) is indifferently framed (see also Shiva Prasad Gupta v. Commissioner of Income Tax, United Provinces). The Commissioners statement of the case (which is to be read with the decision of the Income Tax Officer and of the Assistant Commissioner which are his Annexures A & B) also is obscure. A rather full exposition of the position is thus required as to ascertain what "the circumstances of the case" are.

3. In the years previous to the year of assessment which is 1931-32, the assessee submitted with his return of income two statements in support or explanation which are designated A and B. Statement A purported to show the interest which had accrued during the year on loans to borrowers from whom no realisation had been filed, and statement B purported to show the realisations from those borrowers from whom full or part realisation had been made during the year. From the aggregate realisation shown in statement B the assessee deducted so much as had been shown as accrued interest in statement A furnished in previous years and so had then been taxed, and the aggregate of the balance so arrived at and of the accrued interest in statement A furnished in previous years and so had then been taxed, and the aggregate of the balance so arrived at and of the accrued interest shown in the statement A for the year was the sum which he showed in his return as his profit for the year liable to Income Tax. The profit so shown was accepted as a correct computation u/s 13 after scrutiny of his books of account and other documents, the alterations being usually unimportant (except apparently in respect of 1930-31) where the interest accruing during the year on a debt under suit, was, as will appear later, also assessed); the method of accounting employed by the assessee during some fifteen years for computation of his profits is thus a combination of the cash (actual realisation) basis, and the accrued (otherwise called the mercantile or commercial) basis, or as it is expressed in the question propounded, the "mixed cash and accrued basis."

4. For the year 1931-32 however, the assessee filed only statement B and made the claim that he should be assessed on the cash basis only, the same deduction being made as in previous years, (that is to say, of interest realised in the year under assessment on which tax had in previous years been realised on the accrual basis as being included in the statement A of those years). The income from interest which he showed was Rs 222-15-9 as against over Rs. 11,000 shown in 1930-31 (apart from Rs. 15,669-8-0 mentioned below) and over Rs. 30,000 shown in 1929-30.

5. The Income Tax Officer thereupon took action u/s 23(2) and Section 22(4) and the assessee caused to be produced the evidence and documents on which he relied in support of his return, and upon an examination of the assessees accounts which admittedly exhibited no change of system from previous years, and his documents, the Income Tax officer calculated therefrom "the assessable income" (or profits, as defined In re Spanish Prospecting Company of the year by taking the state of the business at the end of 1336 F. 1929-30 and at the end of 1337 F. 1930-31, and comparing the assets of the business at the two dates. Finding from Exhibit A the total investment up to the end of 1337 F. he deducted therefrom the aggregate of the total in vestment up to the end of 1336 F. and held as follows :- "In the income return the assessee showed only Rs. 222-15-9 as income from interest on the basis of actual realisation (cash basis). The assessees own accounts show that he calculates accrued interest in all cases in accordance with the stipulation in the bond and goes on raising the principal from year to year by the addition of accrued interest in the Lanna Bahi. So his method of accountancy is clearly mercantile which has been rightly followed in the past and there is no justification to change the method of accountancy in the current year." There is thus a definite finding that the assessee follows the mercantile system of accounting and the last sentence is reminiscent of Foster v. The Commissioner of Income Tax, Burma. The assessees petition of appeal has been printed but the order in appeal is only intelligible in the light of a further petition filed on the day before judgment was delivered. It is there pointed out that the argument on his behalf was that he did not keep his accounts on the commercial basis, his cash book showing only his cash receipts, and alternatively that if he was assessed on the accrued basis, he was at least entitled to deduction of Rs. 15,888-14-0 which Rs. 15,669-8-0 was accrued interest of 1929-30 taxed in 1930-31 in the account of Ramprasad Singh while under suit in civil Court.

6. The decision in appeal sets out, first, that it was admitted that the computation of profits, if it was to be made on accrued basis, was correct, subject to the deduction of the said sum of Rs. 15,669-3-0 on which tax had actually been deducted in the previous year, and subject to another deduction which is here immaterial. It then gone on to say that the assessee next claimed that he ought not be assessed on the accrual basis at all. On this plea the Assistant Commissioner sets out that the assessees money-lending accounts consist of the personal accounts of his debtors wherein entry is made of the accrued interest from year to year and of the amount actually realised in each case, but neither the accrued nor the realised interest are totalled or accounted for in an interest account and no profit and loss is computed, and though there is a cash book in which the actual realisations are shown, there is no interest ledger, and he then states his conclusion thus :- "Clearly therefore the assessee has not computed his profit at all, and no particular method of accounting can be said to be regularly employed by him. The Income Tax Officer had therefore to make the computation of profit upon such basis and I such manner as the Income Tax Officer may determine and he decided to adopt the accrued basis which was also followed in previous year without objection on the part of the assessee". The Assistant Commissioner then negatived the contention on behalf of the assessee that the proviso to Section 13 of the Act did not entitle the Income Tax Officer to compute the profits on the accrual basis, the basis of which contention was that the accrued interest not actually received is not "income, profits or gains" within the meaning of the Income Tax Act. What he failed to observe was that the Income Tax Officer had not proceeded under the proviso. In the result he maintained the computation of income and held it assessable subject to the deductions mentioned.

7. It was in consequence of the rejection of the contention mentioned that the application was, as already stated, made u/s 66(2) to refer the question whether the Income Tax Officer was entitled to regard interest unrealised as taxable income. The argument on behalf of the assessee was that as the assessee does not, as the Assistant Commissioner found, employ any regular method of accountancy that can be accepted by the Department (and the accrual basis is such a method) for computation the profits of his money-lending for purposes of income tax (this is a paraphrase of "no particular method of accounting can be said to be regularly employed by him") the substantive provision of Section 13 which is "income, profits and gains shall be computed, for the purposes of Sections 10, 11 and 12 in accordance with the method of accounting regularly employed by the assessee," does not apply and so the proviso to that section which is "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 therefrom, then the computation shall be made upon such basis and in such manner as the Income Tax Officer may determine" must apply if anything does, and the assessees profits cannot under the terms of the proviso itself, be computed on the accrual basis.

8. The point is now stated as being that even though in an assessment under the substantive portion of Section 13 the accrued basis may be adopted where the assessee has himself treated the accrued interest as income of the year under assessment, still as accrued interest is only notional income, the computation under the proviso to Section 13 must be of actual and not of notional income. In short the Income Tax Officer, it is contended, took the accrued (and unrealised) interest to be income, profits and gains of the year, whereas it is contended, it is not so in law unless the assessee has so treated it in his accounts.

9. The Commissioner of Income Tax (as it happened, the same officer who was the Assistant Commissioner had become the Commissioner) being of opinion that the question of law as formulated by the assessee, did not cover all the facts of the case, substituted the question quoted above and referred it for decision purporting to do so u/s 66(2).

10. Actually the question referred may be expanded as follows :- "Whether in the circumstances of the case the assessee is liable to income tax for 1931-32 on profits and gains from money lending of 1930-31 on the aggregate of (a) the amount of interest accrued in 1930-31, when no interest has been realised an (b) the amount of interest realised in 1930-31 less the amount thereof previously assessed to Income Tax."

11. The above statement of the facts expands what the Commissioner of Income Tax has said by the application of his Annexures A and B and the other papers.

12. In the statement of the case he then goes on to affirm that "as a matter of fact the assessee has been assessed neither on strictly cash basis nor on accrual basis." Computation of income in the year under assessment had he points out, been made on the same lines as had been adopted at the instance of the assessee himself in previous years; for certain reasons (which are set out but which are irrelevant) he had in 1931-32 claimed assessment on the cash basis under deduction of interest included in the cash realisation of the year where that interest had already been taxed on the accrual basis in the previous years. The Commissioner had in fact come to realise the inapplicability of some of the observations in the appellate judgment in which the computation of profit by the Income Tax Officer had been affirmed on a ground different from that on which it had been made. What he means appears to be that whatever theory applied, in fact computation had been on the same lines as in previous years as is indicated above to with, on method of accounting (not a pure mercantile or a pure cash method of accounting but a mixture of these methods) which the assessee himself regularly employed and not under the proviso to Section 13 : such are "the circumstances of the case", and the observations obiter, or even erroneous in the course of the appellate decision do not, it is implied, alter the fact that the assessment is under the substantive part of Section 13.

13. Then comes paragraph 6 in which apart from the affirmation above mentioned, he gives his own opinion on the case in which the High Court is consulted. It is that in fact the computation of the assessees profits and gains has, as always hitherto, been made under the substantive portions of Sections 13, that is, in accordance with the method of accounting regularly employed by him. He bases this opinion on the following : the assessee had shown no ground for discarding his previous method of accounting; no doubt the appellate finding that no regular (particular) system of accounting has been followed by the assessee is right in the sense that the assessees bulks do not furnish a basis for an inference that either of the two well-known methods is followed, but it is not necessary that the method of accounting regularly followed be purely cash or purely mercantile, that is to say, it may be a mixture of the two systems and in fact the system which the assessee has actually adopted for computation of profits (to wit, the mixed system shown in the returns and B) is a method of accountancy within the meaning of Section 13, and it is on that method that the computation of profit was made in previous years and in the year in controversy. His point is that in spite of observations in the appellate decision the computation has actually been made under the substantive part of Section 13. Finally he argues that even if (contrary to his view on the facts as stated by him) it is the proviso that is applicable in the case the assessment is nevertheless valid as being made on a basis and in a manner such as the Income Tax Officer is authorised to determine which it is implied, may be the accrual basis (with necessary modification). There is apparently no question that in the circumstances of this assessee, as disclosed by himself and his accountant the profit of the year may safely be computed as it has always been by himself as equal to the full interest (less remission shown) which has accrued within the year.

14. Thus the assessees contention is that the legitimacy of the principles of computation applied by the assessee is a question of law and that the accrued interest debt due to him cannot be taxed as profits unless he treats it as such while the case for the Commissioner is that what has been held liable to Income Tax is not the unrealised accrued interest but the profit of the business computed on the assessees own method of computation though it happens to be of the same amount (subject to the assessees remissions and deductions mentioned) as the accrued interest. But the case stated implies that the assessee has treated the accrued interest as received by him (so that in the eye of the law it is a receipt) and (subject to deductions which are not in controversy) as profits of his business during the year. It would thus appear that the assessees point is not here in controversy since in spite of the requisition of the assessee u/s 66(2) the reference of the commissioner cannot be said to include it; the reference definitely states the case as one in which a method of accounting though perhaps not a normal one, has been regularly employed by the assessee himself from which moreover the profit of the business can properly be and has been deduced, and in such circumstances the proviso to Section 13 does not come in at all. The function of the High Court is to decide not the question set out in the application u/s 66(2) but the question of law raised by the case stated, of which the question whether under the proviso to Section 13 the computation of profit can legally be on the basis of the accrued interest (with or without modification) is here not one.

15. Manifestly what happened is this. On considering the assessees application u/s 66(2) the Commissioner found himself as already indicated, in disagreement with the order of Assistant commissioner where he had held in error of fact that the Income Tax Officer had applied the proviso to Section 13; two courses must have seemed open, either to review that order u/s 33 or to refer the larger question so that there might be tested the validity of the assessment whether under the substantive part of Section 13 or under the proviso thereto; if however he passed an order u/s 33, substituting reasons of his own for those of the Assistant Commissioner there was, until the first proviso to Section 66(2) was inserted by Act XVIII of 1933, no provision for a reference u/s 66(2) against his order; (though that proviso come into operation on the 11th September, the correction slip did not arrive until after the requisition had been considered); and thus the reference made on the 13th October, 1933, though nominally u/s 66(2) is actually one which would be more appropriately be made u/s 66(1) since though the case stated accepts the order u/s 31 in so far as that order dismissed the appeal, it rejects the grounds on which that order is made, and accepts the basis on which the Income Tax Officer computed the profit assessable (with modification in detail bringing it within the previous mixed cash and accrual basis); in fact the case stated is that the resultant computation of profit for the purpose of Section 10 is made on the method of accounting regularly employed by the assessee which though no doubt a mixed system, is one from which his profits can properly be and have been deduced.

16. I am accordingly constrained to the view that on the statement of the case referred for opinion it must be held that the computation of profit for assessment to Income Tax has has as it stands, been genuinely made under the substantive part of Section 13 that is to say, on the method of accounting regularly employed by the assessee and that accordingly no point of law arises thereon for decision u/s 66(5). A reference back to the Commissioner u/s 66(4) has not been suggested and it would probably not be helpful at this stage.

17. I may deal briefly with two incidental contentions for the assessee.

18. The first of these is that "in the circumstances of the case" the assessee in fact employs no method of accounting with in the meaning of Section 13 so that a computation of profit thereon is not possible. But though it may be unscientific, a method of accounting is certainly regularly employed by him, which moreover he has himself utilised for over fifteen years to ascertain from it the sums on which he was in his own view liable to income tax as profit of his business.

19. The second contention is that the mere fact that hitherto the assessee has permitted himself to be assessed on sums, to wit, unrealised interest, which are really debts due to him and not profits of his business, does not involve a continuance of the method of accounting under which that was done with a consequent continuance of unwarranted taxation. That would be so but it is not the position here. What has to be ascertained is the profits and gains of his business as a whole, how much it has improved in his view the accrued interest is a good asset at its face value and the computation of improvement has here been made on his own method of accounting in which he takes his unrealised interest as profit of the business. I agree with the view of AGARWALA, J., in this regard and particularly that the decision in St. Lucia Usines and Estates Company Ltd. v. Colonial Treasurer of St. Lucia and the arguments founded thereon are by no means favourable to the assessee in the circumstances of this case.

20. It is not necessary to express an opinion on the argument of Mr. Manohar Lal as to the proviso to Section 13 though it is attractive. His first claim which, as indicated, is that it does not apply, is good on the case stated, but as a last line of defence he was prepared to maintain that if the substantive part of Section 13 is held inapplicable and there is no method of accounting regularly employed by the assessee on which computation can be made or from which profits and gains can properly be deduced, the assessing authority is nevertheless entitled to utilise as the best rough and ready way available the method of accounting employed even though ex hypothesis the "profits and gains cannot properly be deduced therefrom".

21. The reference in the form in which it has been made, I would answer in the affirmative. It is not implied that a reference is not possible on future materials in which the question originally submitted by the assessee might not properly arise for decision u/s 66(5).

22. As the reference has not been made in a satisfactory manner, with resultant trouble to all concerned I would direct the parties to bear their own costs.