Calcutta High Court
Commissioner Of Income-Tax vs North West Coal Ltd. on 6 August, 1986
Equivalent citations: [1987]167ITR419(CAL)
JUDGMENT Dipak Kumar Sen, J.
1. North West Coal Co. Ltd., the assessee, owned and ran a colliery known as Ena Colliery. The assessee appointed M/s. B.P. Agarwalla & Sons (P) Ltd, as its contractors to raise coal and manufacture coke at the said colliery. At the material time, the contractors were working under the assessee under an agreement dated March 1, 1968, under which machinery, plant, tramways, coal tubs, etc., of the assessee at the colliery were placed at the disposal of the contractors for use during the period of the contract. The said agreement further provided that the contractors would pay the assessee for wear and tear of machinery, plant etc. The relevant Clause read as follows :
" To cover wear and tear you will pay us annually an amount equal to the amount allowed as ordinary depreciation on such recorded machinery, plant, buildings, tramways etc., on their respective written down values as shall be allowed to us by the income-tax authorities under Section 10(2)(vi) subject to such realisation as may be mutually agreed upon between us in future."
2. On December 31, 1970, the contractors wrote a letter to the assessee stating, inter alia, that the coal industry had been passing through an unprecedented depression on account of meagre allotment of wagons for coal loading. It was stated further that this has resulted in a fall in production with consequential increase in the cost of production and that prices of various commodities required for production of coal have been increasing, which again affected the cost of production. It was also stated that the raisings of and despatches from Ena Colliery had gone down during the year 1970 and the current price of coal was insufficient to meet the bare cost of production. The contractors stated that they could not afford to pay the full amount of depreciation in the year 1970 in terms of the contract, but agreed to pay up to 2/3rds of the ordinary depreciation on machinery, plant and buildings etc., of the colliery on their respective written down values.
3. The board of directors of the assessee considered the said letter of the contractors dated December 31, 1970, at a meeting held on April 1, 1971. The board resolved after due consideration that the request of the contractors should be accepted in respect of the year 1970.
4. The assessee was assessed to income-tax in the assessment year 1971-72, the accounting year ending on December 31, 1970. In making the assessment, the Income-tax Officer found that in its profit and loss account, the assessee had forgone 1/3rd of the amount payable by the contractors on account of depreciation of the assets of the colliery on the strength of the resolution passed in the board meeting of the assessee on April 1, 1971. He held that such forgoing of 1/3rd of the depreciation charges which fell due on December 31, 1971, was made after the income had become receivable in the accounting year. The Income-tax Officer called upon the assessee to adduce evidence to show that the said charges were forgone purely for business considerations or on grounds of commercial expediency. The assessee relied on the relevant Clause of the agreement between itself and its contractors, noted above, and contended that the said Clause allowed for variation of charges on the basis of mutual agreement. The Income-tax Officer held that no such agreement was reached on or before December 31, 1970. The Income-tax Officer held further that forgoing a part of the depreciation charges after the same became due was not shown to have furthered the business interest of the assessee and was not for purely business considerations nor on grounds of commercial expediency. He added the amount of depreciation charges forgone to the total income of the assessee.
5. Being aggrieved, the assessee preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner accepted the reasons recorded by the Income-tax Officer for adding the entire amount of depreciation forgone in the total income of the assessee and upheld the assessment.
6. Being aggrieved, the assessee filed a farther appeal before the Income-tax Appellate Tribunal. It was contended on behalf of the assessee before the Tribunal, inter alia, that the contentions of the assessee were established by the letter of the contractors dated December 31, 1970, and the resolution of the board of directors of the assessee in respect of the same.
7. It was contended on behalf of the Revenue before the Tribunal that the assessee maintained its books of account on mercantile basis. It was further contended that the assessee had not proved that forgoing a part of the depreciation charges was on account of business considerations or on grounds of commercial expediency but was gratuitous. The addition made by the Income-tax Officer to the total income of the assessee to the extent of the full amount of depreciation charges, it was contended, was justified.
8. The Tribunal held that it was established from the letter of the contractors and the resolution passed at the meeting of the board of directors of the assessee that the assessee had agreed to the reduction in charges covering depreciation on account of business considerations and on grounds of commercial expediency. The object of forgoing a part of the depreciation charges was to retain the services of the contractors. The Tribunal noted that the facts stated in the letter of the contractors in respect of the prevailing situation in the coal industry had not been disputed by the Revenue. The Tribunal held that the board of directors of the assessee had acted in a manner in which a businessman would have acted in the same position. The Tribunal held further that the forgoing of 1/3rd of the depreciation charges by the assessee was on business considerations and commercial expediency. The Tribunal directed the deletion of the addition of the depreciation charges forgone from the total income of the assessee.
9. On an application of the Revenue under Section 256(2) of the Income-tax Act, 1961, the Tribunal, as directed, has referred the following questions, as questions of law arising out of its order, for the opinion of this court:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal had evidence to hold that the assessee had agreed to the reduction in hire charges on account of business considerations and on grounds of commercial expediency ?
(2) If the answer to question No. 1 is in the affirmative, then, whether, on the facts and in the circumstances of the case and in view of the fact that the assessee followed mercantile system of accounting, the Tribunal was justified in holding that the hire charges forgone by the assessee-company by the resolution of its board of directors passed on April 1, 1971, was an admissible deduction in the assessment year 1971-72 ? "
10. At the hearing, learned advocate for the Revenue contended that from the evidence on record it was not established that the assessee had forgone a part of the depreciation charges on the ground of commercial expediency or business considerations. The contractor was not concerned with the business of the assessee in any manner. The forgoing of a part of the depreciation charges was really for the benefit of the contractor and not for the benefit of the assessee. The charges were forgone gratuitously and only for one year.
11. The learned advocate contended further that, admittedly, the assessee followed the mercantile system of accounting and maintained its books on that basis. Accordingly, the depreciation charges payable by the contractors to the assessee became payable and had accrued in the relevant assessment year. It was not necessary to consider whether the assessee had actually received the said amount from the contractor or had incurred an expenditure by forgoing a part thereof. The request for forgoing a part of the depreciation charges came from the contractors in December, 1970, and the board of directors of the assessee accepted the request of the contractors after the end of the accounting year. Therefore, forgoing of the charges, if any, was not in the accounting year involved, but in the subsequent accounting year.
12. In support of its contentions, the learned advocate for the Revenue drew our attention to Section 145 of the Income-tax Act, 1961, which deals with the method of accounting by an assessee. He also cited the following decisions :
(a) CIT v. K.R.M.T.T. Thiagaraja Chetty & Company [1953] 24 ITR 525 (SC); In this case, the assessee was the managing agent of a limited company. Under the managing agency agreement, the assessee was entitled to a monthly remuneration and a commission of 10 per cent. on the net profits of the managed company as also a small percentage on sales and purchases. In the accounting year ending on March 31, 1942, the assessee became entitled to certain commission. On March 30, 1942, the assessee wrote to the managed company requesting that a certain debt, which the assessee owed to the managed company, should be written off. The directors of the managed company passed a resolution on March 30, 1942, refusing to write off the amount without consulting the shareholders and pending the settlement of the dispute resolved to keep the amount of commission due in a suspense account without paying it. The said amount, however, was debited as revenue expenditure in the accounts of the managed company and was allowed as a deduction. The question arose whether in the said assessment year, the assessee was liable to pay tax on the said amount of commission. The Income-tax Officer and the Appellate Assistant Commissioner held that as the assessee followed the mercantile system of accounting and not cash basis, the income having accrued, was assessable whether actually received or not. The Appellate Tribunal held that as the assessee was being assessed on cash basis in previous years, the income had not accrued to the assessee. On a reference, the Madras High Court held that there was no material before the Tribunal to hold that the assessee had been assessed on cash basis in previous years, but confirmed the decision of the Tribunal holding that the amount of commission was not liable to tax, inasmuch as it was not the income of the assessee which had accrued or arisen in the accounting year. On further appeal, the Supreme Court held that the amount of commission was taxable income which had accrued to the assessee in the accounting year and the said amount did not cease to be income by reason of the fact that it was carried to a suspense account by a resolution of the directors of the managed company.
(b) Seth Pushalal Mansinghka (P.) Ltd. v. CIT [1967] 66 ITR 159. This decision of the Supreme Court was cited for the proposition that the expressions " accrue " or " arise " did not mean actual receipt of the profits or gains. The said expressions were used in contradistinction to the expression, " receive " and indicated a right to receive. If the assessee acquired a right to receive the income, the income could be said to accrue to him, though it may be received later, on its being ascertained. The basic concept was that the assessee must have acquired a right to receive the income.
(c) Morvi Industries Ltd. v. CIT . In this case, the assessee, the managing agent of its subsidiary company maintained its accounts on mercantile basis. It was entitled to receive from the managed company an office allowance, commission on net profits as also additional commission on purchases. In the accounting years involved, he managed company suffered losses and the assessee earned commission only on sale of cloth and yarn for two years. Under the managing agency agreement the commission became due to the assessee on the last day of the accounting year and was payable immediately after the annual accounts of the managed company were passed in general meeting. By a resolution of its board of directors passed after the commission had become due and payable, the assessee relinquished its commission as well as office allowance as the managed company had been suffering heavy losses in the pasty ears. The Tribunal held that the relinquishment by the assessee of its remuneration after it had become due was of no effect and the claim of the assessee that the amounts relinquished were allowable as deduction under Section 10 of the Indian Income-tax Act, 1922, was rejected. The Tribunal held that as a result of the relinquishment, the financial position of the managed company did not become stronger but the position of the assessee had become weaker and, therefore, the relinquishment was not for the benefit of the assessee. The High Court affirmed the view of the Tribunal. On further appeal, the Supreme Court held that as the amount had been even up unilaterally by the assessee after the same had accrued, the assess, could not escape the liability to tax on that ground. The fact that the payment had been deferred till after the passing of the accounts did not affect the accrual of the income. It was further held that there was nothing to show that the amount has been relinquished for the purpose of the assessee business.
(d) Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1. This decision of the Supreme Court was cited for the proposition that the entries in the books of accounts of the assessee were not determinative of the question whether the assessee had earned any profit or suffered any loss. The assessee could make entries which were not in conformity with the proper principles of accountancy thereby concealing profits or showing loss. What was necessary to be considered was the true nature of the transaction and whether the same resulted in profit or loss to the assessee.
(e) State Bank of Travancore v. CIT . The assessee in this case, a subsidiary of the State Bank of India, maintained its accounts on the mercantile system. The assessee used to charge interest on advances, and in respect of advances recovery of which had become extremely doubtful, the interest charged was not carried to the profit and loss account of the assessee but was credited in a separate account called the interest suspense account. The assessee claimed that the financial condition of the parties involved was such that recovery of even the principal amount of the debts had become improbable and doubtful and therefore, the interest charged on such amount was shown in the interest suspense account to avoid showing inflated profits by including hypothetical and unreal income. The assessee contended that interest entered in the suspense account was not the real income of the assessee and was not taxable in its hands. The Tribunal rejected the claim of the assessee. On a reference, the High Court affirmed the decision of the Tribunal, On a further appeal before the Supreme Court the majority upheld the decision of the High Court. The Supreme Court held that inasmuch as the assessee had not treated the interest kept in the suspense account either as a bad debt or irrecoverable, the same could not escape taxation. The amounts may be shown in the suspense account for accounting purposes but the same would not affect its taxability. It was observed that the concept of real income could not be read in a manner so as to defeat the object of the provision in the statutory enactment. The concept of the reality of income and actuality of the situation may be reliant to determine the actuality of the income but once such accrual the place, the same could not be defeated by the theory of real income.
13. After the conclusion of the arguments, learned advocate for the Revenue also relied on CIT v. Scindia Steam Navigation Co, Ltd. on the authority of which he sought to argue that the question involved in the present proceedings was the assessability of the said amount of depreciation charges claimed to have been for one by the assessee and a necessary aspect of the said question was whether the said amount was assessable in the assessment year involved and could be argued in the reference though it may not have been specially argued in the proceedings earlier.
14. Learned advocate for the assessee contended, on the other hand, that there was sufficient evidence before the Tribunal to hold that a part of the depreciation charges was forgone for business considerations and on grounds of commercial expediency. The said evidence was contained in the letter of the contractors dated December 31, 1970 and the resolution of the board of directors of the assessee dated April 1, 1971. The Tribunal has found that the facts as recorded in the said letter of the contractors were not disputed by the Revenue. It was submitted that it was in the business interest of the assessee to see that the colliery would work. The expenditure in question, namely, forgoing a part of the depreciation charges was incurred by the assessee for the continued working of the colliery which was obviously in the business interest of the assessee.
15. Learned advocate for the assessee also submitted that the contention of the Revenue that a part of the depreciation charges had been forgone only for one year and not for all future years was of no relevance. This point had not weighed with the Revenue in any of the proceedings earlier. In any event, there was no finding whether any part of the depreciation charges was forgone or not in future years. The circumstances relevant to the accounting year in question necessitated the forgoing of a part of the depreciation charges and the same was done.
16. Learned advocate for the assessee submitted further that question No. 2 did not arise out of the order of the Tribunal. None of the authorities below had found or held that the expenditure concerned was not relatable to the accounting year involved and, therefore, the same could not be allowed as a deduction. The income-tax authorities below throughout dealt only with the controversy whether the forgoing of the part of the depreciation charges was for business considerations or on grounds of commercial expediency. The controversy as to the allowability of the deduction in the relevant accounting year was never mooted by the Revenue in any of the proceedings below.
17. In this connection, learned advocate for the assessee drew our attention to the relevant portions of the order of the Tribunal recording the contentions of the Revenue. He submitted that if any contention of the Revenue raised before the Tribunal was not considered or decided, the Revenue should have filed a miscellaneous application calling upon the Tribunal to decide the issue. This was not done in the instant case.
18. Learned advocate contended further that, in any event, the expenditure in question was allowable in the relevant year. He contended that under the agreement, the charges payable by the contractors to the assessee were subject to such realisation as may be mutually agreed upon in future. It was plainly indicated that the amount payable by the contractors under the said agreement was subject to further negotiations. Before the end of the relevant accounting year on December 31, 1970, the contractors clearly indicated to the assessee their inability to pay the depreciation charges as provided for and offered to pay only 2/3rds of the amount. The stand of the contractors was unequivocal. The assessee by the resolution of its board of directors passed on April 1, 1971, accepted the proposal of the contractor and the same must relate back to the accounting year involved.
19. It was contended further that there was no dispute that the system of accounting followed by the assessee was mercantile and there was also no dispute as to the accrual of the income. The question involved was whether the forgoing of a part of the depreciation charges amounted to an expenditure on the ground of business considerations or commercial expediency and also whether the assessee was entitled to a deduction of the same. It was submitted that the assessee having forgone a part of the depreciation charges, the amount forgone did not become a part of the real income of the assessee and could not be included in the income of the assessee.
20. In support of his contentions, learned advocate for the assessee cited the following decisions :
(a) H.M. Kashiparekh & Co. Ltd. v. CIT [1960] 39 ITR 706 (Bom). In this case, the assessee was the managing agent of a paper mill company. Under the managing agency agreement, the assessee was under a duty to forgo up to one-third of its commission when the profits of the managed company were not sufficient to pay a dividend of 6%. In the accounting year involved, the assessee earned certain commission but under resolutions passed by both the managed company and the assessee, the assessee gave up a part of the commission, exceeding one-third. It was held by the Tribunal on these facts that though an excess amount has been given up by the assessee for reasons of commercial expediency, as the assessee was bound to forgo only an agreed amount, the said balance should be included in the taxable income of the assessee. On a reference, a Division Bench of the Bombay High Court held that it was the real income of the assessee which was liable to tax and such real income could not be determined without taking into account the amount forgone by the assessee. It was held further that the accrual of the commission, making of the accounts, the legal obligation to give up a part of the commission and forgoing of the commission at the time of finalising the accounts were not disjointed facts ; there was a dovetailing which could not be ignored.
It was held further that when a surrender or concession or rebate in respect of a commission or income was made, agreed to or given on grounds of commercial expediency simply because it took place sometime after the close of an accounting year would not affect the principle of taxability of real income. If the year in which the income was earned was chosen as the year of taxability, the subsequent settlement of liability must relate back to the year in which the income was earned.
(b) CIT v. Smt. Anusuya Devi . This decision of the Supreme Court was cited for the proposition that the High Court was not bound to advise the Tribunal on a question which did not arise out of the order of the Tribunal merely because the High Court had called upon the Tribunal to state a case on that question. The High Court might decline to answer the question if it did not arise out of the order of the Tribunal.
(c) CIT v. Birla Gwalior (P) Ltd. . In this case, the assessee was the managing agent of two companies and maintained its accounts on mercantile basis. Under the agency agreements, the assessee was entitled to a commission as also an office allowance from each of the managed companies. No date for payment of the commission was stipulated in the managing agency agreements. The assessee gave up the managing agency commission from both the managed companies for three successive assessment years after the end of each of the relevant financial years but before the accounts were made up by the managed companies. It also gave up before the end of the relevant financial years its office allowance from one of the managed companies in respect of two of the said assessment years. On these facts, it was held by the Supreme Court that the office allowance forgone by the assessee was allowable as a revenue expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922. It was held further that as the managing agency commission receivable could have been ascertained only after the managed companies had made up their accounts and as the assessee had given up the commission even before the managed companies had made up their accounts and as no date had been fixed in the agreement for payment of the commission, the mere fact that the assessee was maintaining its accounts on the mercantile system did not lead to the conclusion that any commission had accrued to it by the end of the relevant accounting year and the commission given up by the assessee could not be considered to be its real income.
(d) CIT v. S.K.G. Sugar Ltd. [1974] 96 ITR 194 (Pat). In this case, the assessee, a manufacturer of sugar and distillery products, appointed a marketing company as its selling agent under an agreement. The agent was entitled to a commission of 1% on sale of sugar and 21/4% on sale of distillery products. After the end of the relevant accounting year, the assessee wrote to its agent that in view of the poor working result, it was difficult to make payment of the commission at the stipulated rates. Thereupon a resolution was passed by the agents recording that for the period commencing from September 1, 1953, commission payable would be remitted except the portion of commission or brokerage actually expended. In August, 1954, after the end of the accounting year, the assessee made journal entries in its accounts reversing the original entries crediting the commission and in its final profit and loss account no commission was shown as charged.
On these facts, it was held by a Division Bench of the Patna High Court that the liability incurred under the original agreement was obliterated later by the mutual consent of the parties for the purposes of commercial expediency. The remission of liability by the assessee and the forgoing of commission by the agent were part of the same transaction. On the variation of the terms of the original agreement, the liability of the assessee to pay the commission became non-existent. The assessee, therefore, could not claim deduction of the same as business expenditure in the assessment year subsequent to the accounting period involved.
(e) State Bank of Travancore v. CIT . This decision has been considered earlier. Learned advocate for the assessee cited this decision for the following observations contained in the judgment of Sabyasachi Mukharji, J. (head note):
"The following propositions emerge in relation to the theory of real income: (1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation.
(2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue.
(3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry--but taking the interest merely to a suspense account cannot be such evidence to show that no real income has accrued to the assessee or has been treated as such by the assessee. (8) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well-recognised limits."
21. On a consideration of the facts and circumstances of this case and the respective submissions of the parties it appears to us that there was evidence before the Tribunal to hold that the assessee had agreed to reduction of the depreciation charges on account of business considerations and on the ground of commercial expediency. The forgoing by the assessee of a part of the depreciation charges receivable from the contractor was neither unilateral nor fortuitous. The contractor brought to the notice of the assessee during the accounting year the condition prevailing in the market and applied for reduction of depreciation charges. The board of directors of the assessee duly considered and accepted the same. The Tribunal has held that it was in the interest of the assessee that the colliery should continue to be run and managed by the contractor. Sitting in reference jurisdiction, it is not open to us to appreciate or weigh the evidence on the basis of which the Tribunal has decided. On the same evidence, no doubt, a different conclusion is possible, but it cannot be said that the Tribunal acted on no evidence or that the conclusion reached by the Tribunal on the evidence before it was such that no reasonable person could reach such a conclusion and as such the same was perverse.
22. For the reasons as aforesaid, we answer question No. 1 in the affirmative and in favour of the assessee.
23. So far as question No. 2 is concerned, we note that it has been found as a fact that before the end of the accounting year involved, the contractor called upon the assessee to forgo a part of the depreciation charges. The proposal of the contractor was accepted by the board of directors of the assessee on the day immediately after the close of the previous accounting year. It is assumed and, in fact, it is not disputed by the assessee that under the agreement the depreciation charges might have accrued to the assessee. But the question of surrender or forgoing the accrued income has also to be considered. The proposal for surrender of the part of the depreciation charges was mooted before the end of the accounting year and immediately, after the end of the previous accounting year, the proposal was finally accepted by the assessee. Following the decision of the Supreme Court in Morvi Industries Ltd. [1971] 82 ITR 835, the forgoing of a part of the depreciation charges could be considered to be revenue expenditure and as such, an admissible deduction. As laid down by the Bombay High Court in H.M. Kashi Parekh & Co. Ltd. [1960] 39 ITR 706, accrual of an income, making of the accounts, legal obligation to give up a part thereof and the forgoing of the same are not disjointed facts and they dovetail. The same view has been taken by the Patna High Court in S.K.G. Sugar Ltd. [1974] 96 ITR 194, where it was held that the expenditure deemed to have been incurred by surrendering or forgoing a part of depreciation charges must be held to relate back to the accounting year in question and not to the subsequent accounting year. We note the observations of the Supreme Court in the case of State Bank of Travancore [1986] 158 ITR 102, that the concept of real income would apply where there has been a surrender of income.
24. The other contention of the assessee on question No. 2 that the same does not arise out of the order of the Tribunal and should not be answered, is also not entirely without substance. There is no specific finding by any of the authorities below that the forgoing of a part of the depreciation charges and the resultant deemed expenditure did not arise in the relevant accounting year. The controversy before the authorities below was confined to the only question viz., whether in forgoing part of the depreciation charges the assessee was activated by motives of business consideration or commercial expediency or not. However, inasmuch as the matter has been argued on merits before us at some length and as also it was emphasised by the Revenue at all stages that the assessee was keeping its accounts on mercantile basis, the controversy raised in question No. 2 may be said to arise out of the order of the Tribunal though in an indirect manner.
25. For the reasons as above, we answer question No. 2 also in the affirmative and in favour of the assessee.
26. In the facts and circumstances of this case, there will be no order as to costs.
Monjula Bose, J.
27. I agree.