Income Tax Appellate Tribunal - Delhi
Kishan Dass vs Income-Tax Officer on 20 June, 1986
Equivalent citations: [1986]18ITD468(DELHI)
ORDER
S. Narayanan, Accountant Member
1. These are cross appeals relating to the same assessment year. They are disposed of by this consolidated order.
IT Appeal No. 1571 (Delhi) of 1984 (Assessment year 1978-79) :
2. This appeal is by the assessee. The assessee is an individual. Assessment was completed for this year on a total income of Rs. 3,69,500 under Section 143(3)/144B of the Income-tax Act, 1961 ('the Act'). Included in this was an item of Rs. 3,50,154. The reasons for which the ITO made this addition were as follows :
1. The assessee received Rs. 3,50,154 from the Delhi Electric Supply Undertaking ('DESU'). It was paid to the assessee during the relevant accounting year (which ended on 31-3-1978) following 'a decree'passed by the Delhi High Court. The facts which led to the above payment were as under.
2. During the financial year 1972-73, the assessee supplied coal to DESU in the name of Universal Traders. There was no written contract with DESU on this supply. Total value of the coal supplied was Rs. 16,00,525.25. Against this, the assessee was paid Rs. 10,64,192.10. There was thus a balance of Rs. 5,35,375.15.
3. The above amount of Rs. 5,35,375.15 was withheld by DESU. This was on the plea that the coal supplied was of inferior quality and did not conform to specifications. The assessee filed a suit for recovery and also got 'a decree which was passed for Rs. 3,50,154 by order dated 1-2-1978'.
4. Since Rs. 5,35,375.15 was withheld by DESU, the assessee also reduced the purchase price payable by him for the coal purchased and supplied to DESU. In other words, the assessee did not claim as deduction in the trading account for the year concerned, the full purchase price billed by his suppliers. He claimed only the purchase amount so billed less the amount withheld by DESU. Assessment was also completed for that year (1973-74) on that basis.
5. But the above method adopted by the assessee and the reduced claim made in the trading account for purchases was against accounting procedure. The method of accounting followed by the assessee was mercantile. The trading account should not, therefore, have been manipulated in the above manner. (It is not clear what the ITO means when he records in this context as under :
It is not the assessee's case that after filing the trading account, he filed a revised trading account in the manner explained and was accepted by the ITO.
6. The amount of Rs. 3,50,154 received this year was taxable under Section 41(1) of the Act. This was because liability to pay the full amount to DESU had already accrued under the mercantile system of accounting. The fact that certain payments were withheld by DESU was irrelevant. The assessee should not have readjusted the trading account in the manner he did. (In other words, a deduction though not claimed and allowed but which ought to have been allowed would also be the subject of consideration for taxability under Section 41(1) in the subsequent year in which the corresponding remission occurs.
The assessee appealed.
3. The Commissioner (Appeals) sustained the addition made by the ITO, partially. He gave a relief of Rs. 1,45,000 in this regard. Hence, both the assessee as well as the revenue are in appeal. The Commissioner's reasoning behind the partial relief order was as follows :
1. Out of the coal supplied of the value of Rs. 16,00,568 to DESU, Rs. 5,36,376 represented the amount withheld by DESU. Out of this Rs. 49,415 represented increase in the value of the coal during the period of supply and Rs. 4,86,963 represented deduction on account of inferior quality of coal supplied. The assessee in turn reduced his purchase price by making deductions from the amounts due to the collieries from whom he had purchased the coal to the extent of Rs. 4,86,863 (collierywise deductions were also made available by the assessee).
2. But obviously the above deduction made by the assessee was not correct because the assessee could not pass on the deductions made by DESU in any case insofar as they related to the increase in the price of coal due to delay in the supply made by the assessee to DESU, to the extent of Rs. 49,415.
3. For the assessment year 1973-74, the assessee 'did reduce the purchase price from the debit side' (of the trading account) to the above extent and similarly 'excluded from the sales the amount deducted' against the supplies made by him to DESU. The Delhi High Court, vide its judgment dated 1-2-1978, ordered that the following amounts be paid by DESU in respect of quality of coal and other claims of the assessee :
Rs.
(a) Being deduction out of bills 1,69,855.91
(b) Due to increase in coal price 90,461.97
(c) Being the cost of one wagon coal 3,135.15
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Interest at the rate of 14 2,53,453.03
per cent from 1-3-1973 to 5-8-1974 43,580.03
Interest at the rate of 6 per cent
from the period the said suit has been
pending 53,120.97
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3,50,154.03
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4. During the succeeding previous year (assessment year 1979-80), the assessee received Rs. 1,45,000 as compensation out of above amount of Rs. 3,50,154 ordered by the High Court. Rs. 2,05,154 was received during the relevant previous year itself (year ended on 31-3-1978). The entire amount was, however, brought to tax by the ITO as a protective measure disregarding the assessee's affidavit of 17-6-1982 which stated that DESU had filed an appeal against the judgment of the learned single Judge of the Delhi High Court dated 1-2-1978 challenging the payment of Rs. 1,45,000 out of the total amount of Rs. 3,50,154. This appeal of DESU was admitted vide order dated 27-9-1978 in RFA(OS) No. 16 of 1978. Hence, to the extent of Rs. 1,45,000, it could be said that the issue had not become final. But the balance of Rs. 2,05,154 was clearly taxable for this assessment year.
5. Following the decision of the Supreme Court in CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 it had to be held that the assessee had acquired a right to receive the amount of Rs. 2,50,154 in this year following the judgment of the Delhi High Court delivered on 1-2-1978.
6. Also, the ITO rightly applied Section 41(1) with regard to the above' The assessee departed from its regular method of accounting, viz., mercantile, in reducing its purchase price by an amount equal to the deductions made from its sale price by DESU. Under the mercantile system, the assessee was obliged to show the full purchase price on the debit side and full sale price as per bills submitted to DESU on the credit side. The amounts not paid on account of purchase would have been shown as outstanding liabilities in the balance sheet. The amount payable by DESU should then have been shown by way of outstanding debts on the assets side of the balance sheet. If these correct entries had been passed, the full purchase price would have been allowed and in a subsequent year applicability of Section 41(1) could not, therefore, have been questioned- Motilal Ambaidas v. CIT [1977] 108 ITR 136 (Guj.)-i.e., Section 41(1) was applicable here.
4. The Commissioner (Appeals) then considered the assessee's alternate contention, i.e., that he had in any case to pay up the amount in question to the various collieries from whom coal was purchased. According to the Commissioner (Appeals), there was no evidence at all brought on record before the ITO in support of this point. 'After persistent questioning' the assessee filed five letters from out of the 10 collieries in whose bills deductions were said to have been made by the assessee. These five letters were said to have been written in 1977-79. Registered letters were sent to the addresses shown therein asking for confirmation of the assessee's version. All the letters came back unserved with the remark that the parties were not known. The assessee was informed of this.
5. The assessee's explanation with regard to the above was that the parties did exist in 1977-79 and their non-availability in 1983-84 did not show that they were not genuine parties. For the assessment year 1973-74 (relating to the financial year 1972-73) the parties were not looked upon as not genuine. There were also acknowledgements of some other letters of 1972-73 from these parties. This showed that they were genuine parties. Sham Sunder Kedia of Associated Trading Corpn. was one of these parties. His address was furnished (but then no request was made for his being summoned under Section 131). According to the Commissioner (Appeals) the real question was whether there was any liability to the collieries due from the assessee in respect of the deductions made.
6. To find out the above, the Commissioner (Appeals) records, the assessee was requested again and again to produce the correspondence file with those collieries which had been pressing their claims. No such evidence was made available. The assessee had to be examined ultimately on solemn affirmation. This was on 7-1-1984. In this statement, the assessee categorically stated that he had no papers or records with him to show that the collieries in question had been pressing for the payment of the amounts withheld by him. No suit was filed by any of those parties. None of them referred the matter for arbitration. The assessee also expressed inability to get the copies of his accounts in the books of those parties. The reason given was that he was not on good terms with them.
7. The Commissioner (Appeals) observed that the material on record clearly showed that the collieries made no claims at all against the assessee at any time. It was unthinkable that collieries which had to get Rs. 5 lakhs with interest at 12 per cent would sit idle and would neither file any suit nor refer the matter for arbitration. It was also unthinkable that the assessee would not have had any correspondence with regard to such claims. Obviously, the assessee's explanation was a made-up story. In any case, the assessee failed to discharge the burden that lay squarely on him to prove the claim of outstanding liabilities to the collieries. Section 41(1) was clearly applicable as regards the deductions made from the bills of collieries or with regard to the interest thereon.
8. The Commissioner (Appeals) then recorded that, even if Section 41(1) was not applicable, the amount was clearly taxable in view of the decisions in CITv. Motilal Padampat Sugar Mills Co. (P.) Ltd. [1979] 118 ITR 825 (All.) and CJT v. Jai Parkash Om ParkashCo. Ltd. [1964] 52 ITR 23 (SC). The business of the assessee has been continuing in the relevant previous year also. He has been maintaining the same books of account for his other activities of export of cloth, etc. There has been the same funds, the same management for the activity and payments received from the DESU have been shown in the same books kept for other activities. The Commissioner (Appeals), hence, held that Rs. 2,05,154 was taxable this year on accrual basis ; and that Rs. 1,45,000, the balance, was not taxable this year because the matter was in appeal and was pending before the Division Bench of the Delhi High Court as also in the light of Lakshman Prakash v. CIT [1973] 92 ITR 492 (All.).
9. The question of taxability of the interest portion was then considered by the Commissioner (Appeals). He noted that the contention for the assessee was that the entire interest could not be brought to tax in this year following the decision of the Delhi High Court in Fazilka Electric Supply Co. Ltd. v. CIT [1983] 143 ITR 551. But then this contention was not correct. In the case before the Court, accrual of interest was under the Indian Electricity Act, 1910, read with the Punjab Electricity Act. It did not arise from the award given by the umpire. It was for that reason, the Court held that the interest had to be assessed on accrual basis. In the present case, interest was not under any statute. It was awarded by the Court as a part of an implied contract and to compensate the assessee for not having been in possession of his legitimate moneys for several years. Thus, the right to receive the interest in question along with the right to receive the difference in the coal supplied, accrued or arose to the assessee only from the decision of the Delhi High Court. Prior to that, it was only a claim and, hence, the entire interest and not merely that pertaining to the period '1-4-1977 to 1-2-1978' was liable to tax on accrual basis for this assessment year. The assessee is hence in appeal.
10. Shri C.S. Aggarwal, the learned counsel for the assessee, as well as Shri P.K. Sridharan, the departmental representative, were heard. We were taken through the material on record and the parties also addressed us at length. The prayer of the assessee's learned counsel was that there was no case for taxing the sum of Rs. 2,05,154. The department's case was that the entire sum of Rs. 3,50,154 was rightly taxable this year. Arguments were also addressed specifically on the taxability of the interest component in the amount of Rs. 2,05,154. The assessee's case was that if at all only such interest as could be said to have accrued for the period 1-4-1977 to 31-3-1978 was to be taxed. An additional argument taken for the assessee was that, in any case, the interest attributable to the sum of Rs. 1,45.000 excluded by the Commissioner (Appeals) should not have been brought to tax this year.
11. We have considered the position. The most important point is whether Section 41(1) is attracted at all. The assessee's basic case is that he did not claim the expenditure relating to the purchases, hence, there was no question of assessing him now when he got back or was likely to get back from DESU the amounts that could be related to part of his purchase cost. The decision in Motilal Ambaidas's case (supra) applied by the Commissioner (Appeals) is no doubt there but there are conflicting decisions also. We shall consider them presently.
12. We may state here that the assessee showed from the papers filed in his paper book' that, as a matter of fact, he had not claimed any deduction on account of amounts shown as payable by him to his suppliers for the coal purchased in his books. Certainly the liability accrued during the financial year 1972-73 on mercantile basis. It was emphasised by the assessee's counsel that the assessment order for 1973-74 (page 29 of the paper book) would show that the assessment for that year was completed with the ITO's full knowledge of the adjustment made by the assessee in the trading account for that year noted above, i.e., the amounts due from but deducted by DESU were not shown on the credit side and the corresponding amounts payable to the coal suppliers were not shown on the debit side. This is indeed a relevant circumstance. This shows that the assessee departed from the strictly mercantile method but after full disclosure and acceptance by the ITO. So much for the facts.
13. In Motilal Ambaidas's case (supra) the assessee did not claim any deduction for sales tax payable by him. Nor did he shot on the credit side of the trading account sales tax collected from the customers as part of the trading receipts. Method of accounting was mercantile. There was a refund of sales tax paid, ordered in a subsequent year following a decision of the Supreme Court holding the levy of sales tax there to be unconstitutional. The Gujarat High Court upheld the taxing of the said refund under Section 41(1). It held that the expression'where an allowance or deduction has been made....'in Section 41(1) should be actually read as 'where an allowance or deduction ought to have been made'. With respect, we are reluctant to follow this decision as it apparently results in rewriting the statute. The position in law has, however, been made quite clear by the Supreme Court as also by other High Courts. We would notice here some of the relevant decisions briefly.
14.1 Tiruneheli Motor Bus Service Co. (P.) Ltd. v. CIT [1970] 78 ITR 55 (SC) : The provision interpreted was Section 10(2A) of the Indian Income-tax Act, 1922 ('the 1922 Act'), in pari materia with Section 41(1) of the 1961 Act. The Court held that Section 10(2A) "applies only when an allowance for deduction has been made in the assessment of any year in respect of any loss, expenditure or trading liability incurred by the assessee" [Emphasis supplied] and subsequently there is a remission or receipt of money. The Commissioner (Appeals) has apparently considered this decision but preferred the chaff (difference in facts) to the grain-the ratio decidendi-of the decision. A trading liability may be said to have accrued under the system of accounting but Section 41(1) cannot be applied unless a deduction or allowance has been made. This decision of the Supreme Court still holds the field. It is indeed surprising that this decision was not brought to the notice of the Gujarat High Court in Motiram Ambaidas's case (supra). The assessee's case before us falls squarely within the ratio of Tiruneheli Motor Bus Service's case (supra) and Section 41(1) cannot be invoked here.
14.2 We may note here some decisions of High Courts which are wholly in line with Tiruneheli Motor Bus Service Co. (P.) Ltd.'s case (supra). These are Karamat Khan v. CIT [1965] 58 ITR 642 (AH.), Steel & General Mills Co. Ltd. v. CIT [1974] 96 ITR 438 (Delhi), Naubatram Nandram v. CIT [1972] 86 ITR 805 (MP), CIT v. Thirumalaiswamy Naidu & Sons [1984] 147 ITR 657 (Mad.) and CIT v. A. V.M. Ltd. [1985] 21 Taxman 232 (Mad.).
15.1 Having held that Section 41(1) is not applicable here we have to see whether the impugned amount is taxable even otherwise on the analogy of A. Gajapathy Naidu's case (supra). The Commissioner (Appeals) holds so but we are unable to agree with him. In Gajapathi Naidu's case (supra) the assessee who supplied bread to a Government hospital in the previous year from 1-4-1948 to 31-3-1949 and who was following the mercantile system of accounting made a representation to the Government after 31-3-1949, that he had incurred a loss. The Government directed payment of Rs. 12,447 to the assessee by way of compensation for the loss by order dated 24-11-1950. The assessee received this amount in the accounting year 1950-51, i.e., the assessment year 1951-52. The assessee claimed this was not taxable for 1951-52 as it related to his contract entered into with the Government, during the accounting year 1948-49. The Supreme Court rejected this contention holding that-
(i) The only right that the assessee had, was to claim money payable under the contract entered into in 1948-49.
(ii) The additional amount (Rs. 12,447) became payable not by virtue of the aforesaid contract but under the order dated 24-11-1950.
15.2 The main point of distinction one sees here is that unlike in A. Gajapathy Naidu's case (supra) the impugned amount relates back to the contract of the assessee with DESU for the earlier assessment year, i.e., 1973-74. No doubt, the Court passed its order on 1-2-1978 but that was to settle the contractual rights of the litigants, inter se, in dispute before it. The assessee's method of accounting being mercantile it would relate back to the year of contract. Specially so when there was no upward revision of the contractual rates for the assessment year 1973-74 in financial year 1977-78. We, therefore, hold that the impugned amount cannot be taxed this year on the analogy of A. Gajapathy Naidu's case (supra) either.
16. This takes us to the finding of the Commissioner (Appeals) to the effect that quite apart from Section 41(1) of the ratio decidendi of A. Gajapathy Naidu's case (supra) the impugned amount was taxable this year (on the basis of accrual) in the light of the decisions in Jaiprakash Om Prakash Co. Ltd.'s case (supra) and Motilal Padampat Sugar Mills Co. (P.) Ltd.'s case (supra). We have considered the facts and the ratio decidendi of these decisions. In the first case, apart from a totally different factual position, all that the Supreme Court did there was to hold that a question of law arose in the matter. In the second case, the Court's decision in the context of the peculiar facts of the case, took note of the fact that the assessee's method of accounting was mercantile. The method of accounting is mercantile in the instant case but then as regards the impugned amount the accrual of the amount has to be related back to the assessment year 1973-74-para 15 supra. Hence, this decision does not support the Cornniissioner (Appeals)'s conclusion.
17. There was some argument before us on holding the impugned amount to be taxable this year on receipt basis. But then the assessee's method of accounting undoubtedly, has been mercantile all along including this year. The ITO has also recorded this fact in his order. And neither the ITO nor the Commissioner (Appeals) has said that there had been any change at any time in the method of accounting followed by the assessee. No doubt, the assessee did not include in his accounts for the assessment year 1973-74 the amount deducted by DESU (revenue) and the equivalent amount withheld by him from payment to his suppliers (expenditure). But from the absence of such entries alone, it is not possible to say that the assessee had changed his method of accounting to cash and that too only with regard to a portion of the receipts due from DESU and similarly with regard to a portion of the expenditure connected therewith. In fact the law is quite clear on this aspect. In CIT v. Chunnilal V. Mehta & Sons (P.) Ltd. [1971] 82 ITR 54 (SC) the assessee, a company carrying on business as managing agents, maintained its accounts on the mercantile system. In April 1951, the managing agency of the assessee was terminated by the managed company. This managed company was prepared to pay Rs. 2,34,000 as compensation following the termination of the agency in terms of the managing agency agreement of June 1953. The assessee refused to accept the compensation offered and filed a suit claiming Rs. 28 lakhs as compensation. The suit was decreed only in the sum of Rs. 2,34,000 in November 1955 in terms of Clause 14 of the agreement of June 1953 supra. The assessee received the amount in December 1955 and credited it to its profit and loss account for the calendar year 1955 (assessment year 1956-57). The ITO taxed it for that year under Section 10(5A). The Supreme Court held it was not taxable for the assessment year 1956-57 because :
1. The method of accounting adopted by the assessee would be the basis on which he should be assessed.
2. The right to receive the compensation arose in April 1951. It made no difference that the assessee disputed the quantum of compensation. The method of accounting being mercantile, the compensation became 'due' to the assessee in April 1951 and, hence, it was not taxable for the assessment year 1956-57.
3. That the assessee credited its profit and loss account with the compensation amounts for the calendar year 1955 was of no consequence. From this fact it cannot be argued that for this particular receipt the assessee adopted a different system of accounting. Method of maintaining accounts is one thing and the actual entries in accounts maintained is a different thing. What is relevant is the actual method of accounting and not the actual entries.
Hence, we hold that there is no case for bringing to tax the amount in question for the assessment year in appeal before us (1978-79),
18. We then come to the taxability of the interest component. We have seen the decision in Fazilka Electricity Supply Co. Ltd.'s case (supra). The Court was concerned with interest awarded under the Indian Electricity Act, 1910, read with the Punjab Electricity Supply Act, 1939. As rightly noted by the Commissioner (Appeals) in that case interest was awarded by the umpire on 30-7-1961. The award was made a rule of the Court on 28-9-1962. Interest of Rs. 1,55,620 was paid to the assessee on 13-2-1963. The Tribunal had held that the source of interest was the umpire's award itself and, hence, the entire interest accrued only on the date of the award and, therefore, it was taxable for the assessment year 1963-64 only. The Court, however, held that interest awarded was not de hors the statute ; and that the right to receive interest arose under the Indian Electricity Act read with the Punjab Electricity Act and did not emanate from the umpire's award. The above decision, we find, is not applicable here. As rightly pointed out by the Commissioner (Appeals) the award of interest arose in the instant case from the order of the Court dated 1-2-1978. It is, therefore, fully taxable this year. There is, however, an alternative claim made by the assessee in his grounds of appeal. This is ground No. 5, which reads as under :
5. That the learned Commissioner (Appeals) in any case erred in not even excluding the amount of interest attributable to the sum of Rs. 1,45,000 (the amount which has been excluded by Commissioner (Appeals).
Certainly the interest receivable [see para 3(iii) supra] relates to the total compensation amount of Rs. 2,53,453 out of the total award of Rs. 3,50,154. It was common ground that Rs. 1,45,000 was in dispute this year. The matter was pending in the Delhi High Court. The assessee's claim is that the entire interest of Rs. 96,700 could not be said to have accrued this year as a part of this represents the amount disputed by the DESU before the Delhi High Court. There is, however, no material in the orders of the authorities below to determine the quantum of such disputed portion. The matter is, therefore, restored to the file of the Commissioner (Appeals). He will dispose of this issue after hearing the assessee as well as the ITO. To this extent the assessee's appeal succeeds.
Income-tax Appeal No. 2326 (Delhi) of 1984 (Assessment year 1978-79) :
19. In this appeal by the department, the only contention is as under :
On the facts and in the circumstances of the case, the learned Commissioner (Appeals) erred in excluding a sum of Rs. 1,45,000 out of the total sum of Rs. 3,50,154 received as a result of High Court judgment which was assessed to tax under Section 41(1) of the Income-tax Act in the assessment year 1978-79.
20. However, we find the Commissioner (Appeals) has excluded Rs. 1,45,000 following the decision in Lakshman Prakasli's case (supra). In that case, the assessee was a contractor, He followed the mercantile system of accounting. He closed his accounts on 31st of March each year. During the financial year 1943-44, the assessee entered into a contract for the supply of some materials to the Government of India. In April 1944, the Government suspended the contract. There were meetings between the assessee and the authorities for payment for the materials taken over by it. In February 1945, the basis for the payment was fixed. The amount payable was determined at Rs. 1,77,000. A part payment was also made. The balance was not paid and in January 1946 compensation payable was finally fixed at Rs. 1,73,767. The ITO determined the profit of the assessee at Rs. 4,385 for the assessment year 1945-46 on the ground that the compensation was fixed in February 1945. The Court rejected this approach. It held that though the basis for the payment of compensation was fixed in February 1945, the authorities at Delhi did not approve of the amount of compensation and that this led to a second meeting in January 1946. In this meeting the amount was finally fixed at Rs. 1,73,767. Thus, the amount became ascertained only on that date and that date was relevant for the assessment year 1946-47 and not 1945-46. This decision does have relevance.
21. After hearing the parties we would confirm the Commissioner (Appeals)'s action as correct. The amount was still to be 'ascertained' at the close of the relevant previous year. Following our decision recorded in paragraph 17 supra, the amount in question not having been received during the relevant previous year, the question of taxing it does not arise.
22. In the result, the assessee's appeal is deemed to be allowed in part for statistical purposes and the department's appeal is dismissed.