Calcutta High Court
Commissioner Of Income-Tax vs Birla Cotton Spg. And Wvg. Mills Ltd. on 31 July, 1991
Equivalent citations: [1993]200ITR92(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. This reference under Section 256(2) of the Income-tax Act, 1961, relates to the assessment year 1980-81. Shortly stated, the facts are that, during the accounting year relevant to the assessment year 1980-81, the assessee-company was to receive Rs. 2,59,516 being professional fees from India Malaysia Textiles, Berhad (a foreign company). By a resolution dated April 18, 1978, the assessee had purportedly forgone the said fees from the said foreign company due to continuous financial crisis of the company and at the instance of IMTB and foreign financial institutions. The amount as such was not taken as profit by the assessee for the year. In the Notes appearing at Schedule 'F' in item No. 40(a) submitted by the assessee, it showed that such action of writing off the claim required the permission of the Reserve Bank of India. The assessee in this case did not obtain any such permission from the Reserve Bank of India. In view of this fact, the Income-tax Officer did not entertain the assessee's claim and added the sum to the income of the assessee.
2. Against such addition, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) who held that the question of taking permission from the Reserve Bank of India for writing off the professional fees receivable from the foreign company could not be a bar against allowance of the assessce's claim. He, therefore, directed the Income-tax Officer not to include the above-mentioned amount in the total income for the year under reference.
3. On appeal by the Department, the Tribunal upheld the finding of the Commissioner of Income-tax (Appeals) following the decision of the Tribunal in the assessee's own case in I. T. A. Nos. 1841 to 1844/(Cal) of 1983.
4. On these facts, the following question of law has been referred to this court :
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in deleting the addition of Rs. 2,59,516 being professional fees from India Malaysia Textiles, Berhad, even though while writing off the professional fees necessary permission from the Reserve Bank of India was not obtained by the assessee?"
5. Before we proceed to deal with this reference on merits, it is necessary to set out a few more facts. The Tribunal, in this case, has followed the order for the assessment years 1976-77 to 1979-80 in I. T. A. Nos. 1841 to 1844/(Cal) of 1983. In these years, the Tribunal held that the fees given up by the assessee-company could not be considered to be its real income. Therefore, the amount of Rs. 2,59,516 was not includible in the total income of the assessee in each of the assessment years 1978-79 and 1979-80. An identical question came up for consideration for the assessment year 1976-77.
6. It appears that, being aggrieved, the Department filed a reference application under Section 256(1) of the Act and that application was rejected by the Tribunal. Thereupon, the Department came before this court for the assessment year 1978-79 in Matter No. 246 of 1986 where the rule was made absolute under Section 256(2) of the Income-tax Act, 1961, on February 9, 1987, but the statement of case, we are told, has not yet been drafted presumably because the rule has not yet been served upon the Tribunal. Similar is the case for the assessment year 1979-80, where the rule was made absolute in Matter No. 245 of 1986 on February 9, 1987. For the assessment year 1981-82, the rule was made absolute under Section 256(2) of the Act on November 19, 1990. Hearing was concluded on the draft statement on May 3, 1991, but the statement of case, we are told, has not yet been filed before this court.
7. At the hearing before us, Mr. Bajoria has very fairly submitted that, since the Reserve Bank of India did not allow the assessee to forgo the receipt of Rs. 2,59,516, it cannot be contended that the said sum cannot be included in the income of the assessee. He has further pointed out that the assessee has been maintaining its books of account on cash basis and, accordingly, the amount receivable can be included in the assessment when it is actually received. But there is no such finding by the Tribunal as to whether, as a matter of fact, the assessee maintained the books of account on cash basis. Mr. Bajoria has drawn our attention to the order of the Tribunal for the subsequent year being the assessment year 1983 84 where this contention was specifically raised and the matter was remanded to the Assessing Officer for determination of the question.
8. Our attention has also been drawn to the order dated June 20, 1989, of the Commissioner of Income-tax (Appeals) for the assessment year 1982 83. There, the Commissioner of Income tax (Appeals ) remanded the matter to the Assessing Officer with the following observations ;
"In ground No. 5, the appellant claims that the Income-tax Officer erred in including in the income of the appellant-company, a sum of Rs. 10,29,072 as remuneration due from India Malaysia Textiles, Berhad.
The appellant-company argues in this connection that on account of the poor financial position of the Malaysian company, the appellant-company treats the remuneration receivable from such company as the income of the appellant-company on cash basis only, as and when the said remuneration is actually received. It is contended that the appellant-company did not account for the said remuneration in its books during this year.
It is found that the claim of the appellant relating to the treatment of the remuneration from the Malaysian company on cash basis, was allowed finally by the Income-tax Appellate Tribunal for all the years from the assessment years 1970-77 to 1981-82. In respect of the assessment year 1983-84, however, the Commissioner of Income-tax (Appeals) disallowed the claim of the appellant mainly on the ground that the Reserve Bank had refused the request of the appellant-company to forgo the remuneration. In its appellate order dated October 7, 1988, in I. T. A. No. 820/(Cal) of 1987 for the assessment year 1983-84, the Income-tax Appellate Tribunal, A-Bench, Calcutta, examined this issue for the assessment year 1983-84 and commented that the facts of the case had taken a completely reverse stand as compared to the earlier decisions of the Tribunal in view of the refusal of the Reserve Bank of India to accede to the request of the appellant-company to forgo the remuneration. The Income-tax Appellate Tribunal, however, discussed in the said order that the facts relating to the method of accounting for recording the remuneration from the Malaysian company were not very clear. The Income-tax Appellate Tribunal, therefore, restored the matter for the assessment year 1983-84 back to the file of the Income-tax Officer for the purpose of allowing an opportunity to the Income-tax Officer to meet the objection of the appellant. So far as the present year is also concerned, the matter is being restored to the file of the Assessing Officer for the purpose of redeciding the same in accordance with the line as directed by the Income-tax Appellate Tribunal in its aforesaid appellate order for the assessment year 1983-84."
9. Pursuant to the aforesaid order, the Assessing Officer re-examined the issue for the assessment years 1982-83 and 1983-84 and held as follows :
"On going through all the facts of the case, I am of the view that, although the assessee is maintaining accounts on cash basis, so far as income from India Malaysia Textiles is concerned, there is no denial of the fact that that income has accrued to the assessee and, once income accrues, it is the duty of the Department to assess it to tax."
10. The Commissioner of Income-tax (Appeals), by his order dated June 24, 1991, disposed of the said matter with the following observations and allowed the appeal of the assessee :
"On going through all the facts and order of the Income-tax Appellate Tribunal, it is clear that the Income-tax Appellate Tribunal was inclined to accept the fact that, in case it is found that the assessee was following the cash system of accounting of such income, the amount cannot be included in the total income on due basis. From the facts brought on record and admitted by the Assessing Officer it is absolutely clear that the assessee has not credited in its accounts any income due from the Malaysian company and maintaining accounts on cash basis.
The only ground given by the Assessing Officer to tax is that, once income accrues, it is his duty to tax it. The assessee is entitled to show any income on cash basis and specially in case of foreign income, if the assessee is showing the same on cash basis which, in the instant case, is admitted, there is no ground for inclusion of the said income on mercantile basis. I, therefore, direct the Assessing Officer that since the assessee is maintaining the accounts in respect of such income on cash basis, there is no basis or justification for including the same in the total income for the assessment years 1982-83 and 1983-84."
11. Before the Tribunal, for the assessment year 1983-84, two grounds were taken : firstly, that the Reserve Bank of India did not allow the assessee to forgo the remuneration and the second ground is that the assessee's claim that the assessee followed the cash system of accounting should not be accepted as similar remuneration had been included in the total income of the assessee in the past.
12. The Tribunal held as follows :
"The Tribunal considered the issue for the assessment years 1976-77 to 1981-82 (supra). The Tribunal accepted the view of the assessee that the income did not accrue because it had forgone its claim in view of the bad financial position of IMTB. The factual position during the year under appeal was different from the earlier years. The assessee moved, in the earlier years, the Reserve Bank of India for permission to forgo the remuneration. The Reserve Bank of India, by its letter dated May 7, 1985, did not accept the request of the assessee. Therefore, it is clear that the assessee could not get permission to forgo the remuneration and hence, according to the terms of the agreement, the remuneration accrued to the assessee. Therefore, the assessee does not get any help from the previous orders of the Tribunal. The other objection taken by Shri Bajoria, counsel for the assessee, is that the asscssee was following the cash method of accounting for remuneration and, therefore, the inclusion thereof was not proper. This objection has been overruled by the Commissioner of Income tax (Appeals) on the ground that the plea of the assessee was not correct because the remuneration had been included in the total income of tbe assessee even in the earlier years. This indicates that the assessee was following the mercantile system of accounting for remuneration. Shri Bajoria, in the course of his argument, pointed out that the remuneration was never entered in the books of account of the assessee. The Income-tax Officer, on the basis of the agreement, desired to include the same in the total income of the assessee which was objected to by the assessee indicating that it had forgone the remuneration in view of the bad financial position of IMTB. Therefore, the assessee did not make any entry for the remuneration in the past and the plea of the Commissioner of Income-tax (Appeals) may not be accepted.
The facts relating to this issue are not very clear from the previous orders of the Tribunal. However, if it is found that the assessee did not make any entry for remuneration even in the past and the remuneration was included by the Income-tax Officer on the basis of the agreement, then it cannot be said that the assessee was following a particular system of accounting for entering the remuneration in its books of account. Further, a note has been given in the balance sheet wherein it has been indicated that remuneration receivable from IMTB would be entered as and when received. This favours the view that the assessee wanted to make an entry for the remuneration as and when it receives the same."
13. Having regard to the facts and circumstances of the case as mentioned hereinbefore, we are of the view that the question whether the assessee has changed the method of accounting and has been following the cash system so far as the technical fees receivable from the Malaysian company are concerned has to be decided by the Tribunal in the light of the relevant facts and circumstances of the case. We, therefore, answer the question in the negative but remand the matter to the Tribunal to decide afresh the method of accounting followed by the assessee for recording the remuneration receivable from IMTB and, on that basis, redetermine the issue as regards the taxability. The Tribunal will either dispose of the matter or remand the matter to the concerned Income-tax Officer. Let the order be passed by allowing a reasonable opportunity of hearing to the parties and if necessary allowing them to adduce fresh evidence.
14. By consent of the parties, the papers which have been placed by Mr. Bajoria will form part of the records.
15. There will be no order as to costs.
Shyamal Kumar Sen, J.
16. I agree.