Income Tax Appellate Tribunal - Madras
Gupta Garments vs Assistant Commissioner Of Income-Tax on 20 February, 1995
Equivalent citations: [1995]53ITD362(MAD)
ORDER
S. Kannan, Accountant Member
1. ITA No. 493/Mds./1992 is the assessee's appeal directed against the order dated 18-12-1991 of the CIT(Appeals)-VI, Madras, relating to the assessment year 1989-90. Cross-objection No. 56/Mds/1991 filed by the assessee is related to the departmental appeal bearing ITA No. 1655/Mds/1991 (assessment year 1988-89). The cross-objection in question, however, raises no issue which is common to the issue raised in the said departmental appeal. On the contrary, the issues raised in the said cross-objection are common with the issues raised in the assessee's appeal relating to the assessment year 1989-90.
In the circumstances, therefore, the departmental appeal bearing ITA No. 1655/Mds/1991 (assessment year 1988-89) was delinked for being heard separately together with the departmental appeal relating to the assessment year 1987-88. Cross-objection No. 56/Mds/1991 was, however, heard along with the assessee's appeal bearing ITA No. 493/Mds/1992 (assessment year 1989-90).
2. The facts of the case are that the assessee, a firm of two partners, is engaged in the business of exporting garments. The issues arising for consideration in the case before us is better understood against the backdrop of a brief history of the assessee's assessment to income-tax and particularly in relation to (a) cash compensatory support and (b) duty drawback received by the assessee. It is not disputed that up to and including the assessment for the assessment year 1986-87, the assessee was accounting for cash compensatory support and duty drawback on receipt basis. This was accepted by the department.
For the assessment year 1987-88 the assessee initially filed a return of income in which cash compensatory support and duty drawback received by the assessee were disclosed on receipt basis. Subsequently, however, relying on the ITAT, Delhi Bench-A (Special Bench) order dated 25-3-1988 in the case of Gedore Tools (India) (P.) Ltd. v. IAC [1988] 25 ITD 193, the assessee filed a revised return claiming that tax was not exigible on the said two items of receipt. When the matter reached the CIT(A), he held that by virtue of the retrospective amendments made to Section 28 of the Income-tax Act, 1961, by the Finance Act, 1990, tax was exigible on the said two items of receipt. With the result, an aggregate of Rs. 13,63,895 received by the assessee as and by way of cash compensatory support and duty drawback (which, as pointed out earlier, had been accounted for by the assessee in its books of account on receipt basis) was brought to charge on receipt basis as before.
3. For the purposes of the assessment for the assessment year 1988-89, the assessee had, as before, accounted for cash compensatory support and duty drawback on receipt basis. The Assessing Officer found that in the statutory audit report (Form No. 3CD) sums of Rs. 20,84,969 and Rs. 15,52,979 had been shown as the amounts receivable respectively on account of cash compensatory support and duty drawback. According to him, the said sums should be brought to tax on "receivable basis". In this regard he was impelled by the consideration that Sections 28(iiib) and 28(iiic) inserted by the Finance Act, 1990 with retrospective effect talked respectively of "cash assistance (by whatever name called) received or receivable" and "any duties of customs or excise repaid or repayable as drawback".
As for the assessee's submission that it had all along been accounting for cash compensatory support and duty drawback on receipt basis, the Assessing Officer observed :
The submission that the assessee is following cash basis as regards these two items since beginning may be correct and also an accepted principle of accountancy. But this principle which can generally be followed is subject to the condition that if any specific condition or enactment is there, the general rule will have no effect.
And according to him Sections 28(iiib) and 28(iiic) laid down such a specific condition. He also drew support in this regard from the provisions of Section 43B of the Act, which contains provisions different from the general principles of accountancy. According to the Assessing Officer, therefore, "if the enactment specifies a particular thing, the question of following another method does not arise.
4. One of the contentions that was raised before the Assessing Officer was that the words "receivable" and "repayable" can also be interpreted to mean and include the benefits accruing to the exporter in relation to the goods belonging to third parties which had been exported by exporter. This argument too was rejected by the Assessing Officer.
5. It was also the assessee's case that if both the incentives received and the incentives receivable are brought to tax together, the scheme of the Act would be vitiated. This argument was also rejected by the Assessing Officer, because, according to him, the problem would not have arisen had the assessee been accounting for the incentives in question on receivable basis right from the beginning. In other words, according to the Assessing Officer, if the assessee had followed the correct method of accounting, this situation would not have arisen. And by the same token "double taxation is not existing".
6. In view of the foregoing, therefore, the Assessing Officer added an aggregate sum of Rs. 36,37,948 (Rs. 20,84,969 + Rs. 15,52,979).
7. Predictably, the said addition was one of the subject-matters of the appeal by the assessee before the CIT(A) who declined to interfere in the following words :
In the report under Section 44AB, it was stated that the appellant followed, 'Generally mercantile method of accounting, excepting accounting of bonus, sales, commission, cash incentive, etc., on cash basis as followed hitherto'. In column 9(a) of Form 3CD and the appellant's letter dated 12-11-1990, duty drawback and cash incentive receivable were specified at Rs. 36,37,948. The appellant claimed as expenditure exempt in its statement accompanying its return, cash incentive of Rs. 17,70,338, which was credited to its Profit and Loss account the year ending on 31-3-1988. But, in its statement filed with its letter dated 19 12-1990, it offered it for assessment.
Though the appellant objects to this addition, its representative did not furnish any argument regarding what, according to the appellant, was the actual amount of cash compensatory support, which was assessable in 1988-89 assessment year. Further, as per Section 28(iiib), cash incentives receivable is to be assessed. Therefore, I confirm its assessment and I dismiss Ground No. 7.
8. In the cross-objection No. 56/Mds/91 filed by the assessee the said issue is one of the subject matters for consideration.
9. In the assessment for the assessment year 1989-90 also the Assessing Officer took an identical line and brought to charge, on receivable basis, an aggregate sum of Rs. 30,95,213 comprising cash compensatory support of Rs. 21,62,949 and duty drawback of Rs. 9,32,264. The CIT(A) declined to interfere in the matter.
10. It is in these circumstances that the assessee is now before us with the appeal No. 493/Mds/1992 (assessment year 1989-90).
11. Both the cross-objection and the appeal were heard together.
12. Shri Philip George, the learned counsel for the assessee, took us through the facts and circumstances of the case and contended that if regard be had to the significant fact that the assessee had all along been accounting for cash compensatory support or duty drawback on receipt basis, it will be readily seen that the lower authorities were not justified in bringing into charge the incentives in question on "receivable basis". There is also the further significant consideration that in both the assessment years in question the incentives have been brought to charge both on receipt basis (as returned by the assessee) and on receivable basis (as has been held by the lower authorities). The scheme of the Act does not envisage such an unfair result.
13. Shri Philip George finally contended that if the Tribunal were to uphold the decision of the lower authorities on this issue, then in the assessment for the assessment year 1989-90 the incentives actually received during the relevant previous year and attributable to the aggregate addition of Rs. 36,37,948 made on 'receivable' basis in the assessment for the assessment year 1988-89 must be deleted. He, however, made it clear that his main contention was that the sums in question could have been brought to tax only on receipt basis, because that was the method of accounting regularly followed by the assessee.
14. The learned departmental representative on his part strongly supported the impugned orders of the lower authorities on this common issue.
15. In the course of the hearing, certain queries from the Bench elicited the following data :
(a) The amounts claimed by the assessee in relation to cash compensatory support and duty drawback were treated by the Assessing Officer as amounts "receivable" by the assessee.
(b) The amounts claimed by the assessee were exhibited against item No. 9(a) of the "Statement of particulars in the case of a person carrying on business" in Form 3CD filed along with the assessee's return.
(c) The amount actually received by the assessee as incentive was less than the amount claimed by the assessee.
16. In the course of the hearing the Bench wondered aloud whether the true legislative intent behind the relevant provisions of Section 28 was to equate the claim made by the assessee with "cash assistance receivable" or as the case may "duty repayable as drawback" within the meaning of Sections 28(iiib) and 28(iiic) of the Act. The Bench pointed out that, in law. an amount could be said to be "receivable" by a person only when a legal right to receive the sum had accrued to him; and not at any earlier point of time. Particularly, in cases in which the assessee's claim for certain incentives in certain sums are naturally subjected to verification by the authorities concerned, can it be said that a legal right to receive a particular sum has accrued to the assessee for the only reason that he had made a claim for a certain amount? In such cases, clearly, it is only when the authority concerned, on a verification of the claim made by the assessee, decides that the assessee is entitled to receive a particular sum as and by way of incentive and communicates the said decision to the assessee that a legal right to receive the amount decided by the authority could be said to have accrued to the assessee. In such cases it does not matter that the assessee actually receives the amount approved by the authority at a later point of time. To illustrate, let us take the assessee's own case. Here the financial year is the accounting year. Suppose the assessee had made a claim for, say, duty drawback of Rs. 5,00,000 in June 1988 and on 15-3-1989 had received a communication from the authorities concerned to the effect that the assessee had been sanctioned duty drawback of Rs. 3,75,000, the assessee can be regarded as having acquired a right to receive a sum of Rs. 3,75,000 on 15-3-1989 and not before; and certainly not the sum of Rs. 5,00,000 claimed by it. Even here, the sum of Rs. 3,75,000 could be brought to tax on accrual basis only if the assessee was following the mercantile system of accounting, particularly as respects the incentives of the type under consideration. Such being the position in law, how could one possibly say that the assessee acquired a right to receive the sum the moment it made a claim?
17. In response, Shri M. Narayanan, the learned departmental representative, fairly drew our attention to the fact that item 9(a) of Form 3CD in terms talks of particulars, inter alia, of duty drawback where such drawbacks "are admitted as due by the concerned authorities, but are not credited to profit and loss account". As we see it, the underlined portion brings into bold relief to the fact that when Sections 28(iiib) and 28(iiic) talk respectively of cash assistance receivable and any duty repayable as drawback, they obviously refer to cases where the person concerned had acquired a legal right to receive the cash assistance or, as the may be, duty drawback on account of the admission by the concerned authorities that the person was entitled to cash assistance or duty drawback in sums determined by the concerned authorities. Thus, as we see it, the true legislative intent behind the said Sections conforms to the well-settled principles of law relating to accrual of rights and does not seek to make any departure therefrom.
18. At this stage, we may mention that the learned counsel for the assessee stated that the amount actually claimed by the assessee inadvertently came to be exhibited against item 9(a) of Form 3CD. According to him, this will be clear from the fact that the assessee did not receive the full amount claimed and that the authorities concerned had disallowed the assessee's claim to some extent.
19. We abstract below the details of the claims made by the assessee, the figures, incorporated against item 9(a) of Form 3CD and the amounts received by the assessee :
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Items Assessee's Figures shown Actual
claim in item 9(a receipt
of Form 3CD
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Rs. Rs. Rs.
Asst. year
1988-89 :
(a) Cash
compensatory
support 20,84,969 20,84,969 20,44,385
(b) Duty
Drawback 15,52,979 15,52,979 15,44,524
Asst. year
1989-90 :
(a) Cash
compensatory
support 21,62,949 21,62,949 21,37,298
(b) Duty
Drawback 9,32,264 9,32,264 9,23,932
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The said figures lead to two important conclusions, namely :
(a) The amounts claimed by the assessee have been exhibited against item 9(a) of the report, which is clearly wrong;
(b) The authorities concerned have not allowed the assessee's claims in full but have imposed some cuts.
It should, therefore, follow that it would be bad in law to equate the claim made by the assessee with assessee's right to receive certain amounts as a result of the orders passed by the concerned authorities.
20. In view of the foregoing, therefore, the lower authorities misdirected themselves in law when they equated the claim made by the assessee with the assessee's right to receive incentives under the schemes concerned.
21. There is also the further consideration that they completely ignored the method of accounting regularly followed by the assessee, obviously going on the wrong basis that Sections 28(iiib) and 28(iiic) made a departure from the general legal principles governing the accrual of the right to receive a particular sum. As demonstrated earlier, the Legislature has not intended any such departure.
22. In view of the foregoing, therefore, we delete the additions of Rs. 36,37,948 and Rs. 30,95,213 made on receivable basis respectively in the assessments for the assessment years 1988-89 and 1989-90. We also direct the Assessing Officer to bring to charge the incentives in question only on receipt basis.
23. In the result, the related grounds are allowed.
24. That leaves for consideration the issues covered by ground Nos. 1 to 10 of the cross-objection relating to the assessment year 1988-89 and ground Nos. 8 to 11 of the grounds of appeal relating to the assessment year 1989-90.
25. On hearing both the sides, we decline to interfere in the matter and dismiss the related grounds.
26. In the result, both the cross-objection and the appeal filed by the assessee are partly allowed.