LexTHE COMMISSIONER OF INCOME-TAX, MADRAS. versus A. KRISHNASWAMI MUDALIAR AND OTHERS
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1961 .April 16 776 SUPREME COURT REPORTS [1964] . THE COMMISSIONER OF INCOME-TAX, MADRAS. v. A. KRISHNASW AMI MUD ALI AR AND OTHERS [K. SUBBA RAO, J. C. SHAH AND S. M. SIKRI. JJ.J Income-tax-Trading adventure-Profits of business Com- putation-Value of stock-in-trade-Inclusion of Value at the end of year of account-Necessity-Assessee's method of accoun- tancy-Powers in Income-tax Officer in computing profits-In- dian Income-tax Act, 1922 (11 of 1922) s. 13 proviso. The assessee firm acquired for Rs. 1,00,000/- the exploitation rights of a cinematograph film which were to enu're for four years. For the period, December 25, 1947 to August 2, 1948, which was the previous year corresponding to the assessment year 1949-50 the firm filed a voluntary return declaring that Rs. 28,643/- were earned by the exploitation of the film. In the statement submitted by the firm the total receipts credited in the firm's books were Rs. 1,46,849/- and against that amount were debited Rs. 18,206/- as expenditure and Rs. 1,00,000/- as the amount disbursed for acquiring the exploitation rights. The Income-tax Officer was of the view that from the statement of account which omitted to include at the close of the account year the value of the right in the film for the unexpired period, the profits of the firm could not properly be deduced. Accord- ingly, he estimated the value of the rights for the unexpired period of exploitation to which the firm was entitled on August 2, 1948, at Rs. 65,000/- and computed the net profits of the firm .as an unregistered firm at Rs. 93.642/- and assessed income-tax and super-tax payable by the firm on that footing. In the ap- peals filed against the order or assessment, only the correctness of the estimated value of the rights of the film at Rs. 65,000/- was challenged. and the Appellate Tribunal reduced the valua- tion to Rs. 40,000/-. On reference, the High Court of Madras took the view that it was the cash system that the assessee had adopted, that valuation of the closing stock was not an incident of that system for ascertaining the profits and that the Income- tax Officer had no power under the proviso to s. 13 of the Indian Income-tax Act, 1922, to force a different system on the assessee either the mercantile system or a hybrid system of cash plus valuation of closing stock. Held: In a trading venture, for computing the true profits of the year, the stock-in-trade must be taken into account, what- ever method of book-keeping was adopted; and the High Court was in error in holding that because the assessee had maintai.ned his accounts in the cash system it was not open to the Income- tax Officer to add to the receipts from the business the value of the stock-in-trad• at the end of the year for the purpose of properly deducing the profits of the business for the year in question. There was not warrant in the case of assuming that the Income·tnx Officer sought to displace the method of accountancy adopted by the assessee; it was only by applying the proviso to s. 13 of the Indian IncomHax Act, 1922, that the Income-tax Officet made the computation upon the basis and in the manner in which in his opinion profits rould be properly deduced. - 7 S.C.R. SUPREME COURT REPORTS 777 CIVIL A'PPEALLATE JURISDICTION: Civil Appeal No. 1'64 250 of 1963. Appeal by special leave from the judgment and The Comm.......,. Qfder dated February 2, 1960 of the Madras High Court in °1 i:;;a"• Case Referred No. 1 of 1955. v. A. Krilh.......,,.. R. Ganapathy Iyer and R. N. Sachthey, for the appel- Mudaliar and OtA.,, lant. - S. Narayanaswamy and R. Gopalakrislman, for respon- dent nos. 1 and 3-6. April 16, 1964. The Judgment of the Court was deliver- ed by. SHAH, J.-Respondents to this appeal are a firm con- stituted under a deed dated December 12, 1947. The firm originally consisted. of three partners: K. N. Damodara Mudaliar. A. Krishnaswami Mudaliar and v. Thangaraja Mudaliar. K.N. Damodara Mudaliar acquired for the firm for Rs. 1,00,000 /- the exploitation rights which were to ensure for four years in a cinematograph film "Apoorva Chinthamani" for the North Arco!, the South Arcot and the Chingleput districts and for Pondicherry. For the period, December 25, 1947 to August 2, 1948--which was "the pre- vious year" corresponding to the assessment year 1949-50- the firm filed a voluntary return declaring that Rs. 28,643 /- were earned by the exploitation o
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