Patna High Court
Commissioner Of Income-Tax, Bihar & ... vs Rohtas Industries Ltd. on 22 April, 1966
Equivalent citations: [1968]68ITR141(PATNA)
JUDGMENT
This is a reference under section 66(1) of the Indian Income-tax Act in respect of the assessment year 1951-52. The accounting year of the assessee was the period from the 1st November, 1949, to the 31st October, 1950.
Messrs. Dalmia Jain & Co. Ltd. are the managing agents of the assessee-company, and, according to the agreement between the two, they were entitled to Rs. 7,500 per month as office allowance from the assessee-company. The managing agents observe their accounting year from the 1st February of a year to the 31st January of the following year. In the course of the previous year of the assessee, with which we are concerned, they were informed by the managing agents that they would forgo the office allowance due to them from the assessee for the period from 1st February, 1948, to the 31st January, 1950. The amount thus remitted amounted to Rs. 1,80,000. The last three months of the period indicated by the managing agents were covered by the previous year of the assessee. The preceding twenty-one months of the period for which also the remission was granted by the managing agents appertained to two previous accounting years of the assessee during which the balance-sheets included as a trading liability the money due to the managing agents from the assessee. In the year under consideration, the assessee-company indicated the remission showing Rs. 1,57,500 as miscellaneous receipt. In regard to Rs. 22,500 as money due to the managing agents for the first three months of the accounting year under consideration, that was not included within the trading liability, and only Rs. 67,500 out of Rs. 90,000 (which would have been ordinarily due to the managing agents) was shown as one of the permissible trading liabilities. The assessee maintain their accounts in the mercantile system. Receipts and liabilities as accrued are entered in the annual balance-sheet and the profit and loss statement.
The Income-tax Officer included in the total assessable income of the assessee the sum of Rs. 1,57,500 that was shown as miscellanous receipt in the profits and loss account of the year. The assessee went in appeal against that, and succeeded in getting that out by the judgment given by the Income-tax Appellate Tribunal. Against that, the department asked for a reference, and got the statement of case from the Appellate Tribunal. The two questions for consideration are as follows :
"1. Whether, on the facts and circumstances of the case, the Tribunal was correct in holding that the actual amount of damages payable to Messrs. Urquhat Lindsey and liable to be treated as loss on capital account was Rs. 42,150, and not Rs. 61,535 ? and
2. Whether, in the circumstances of the case, the sum of Rs. 1,57,500 being the amount forgone by the managing agents was chargeable as the assessees income for the assessment year 1951-52 ?"
We have not refereed to the facts relating to the first question as, during hearing of the case, learned counsel for the revenue conceded that the loss on capital was rightly calculated at Rs. 42,150 by the Tribunal. The first question is, therefore, answered accordingly.
The real controversy between the parties is in regard to the second question. It was contended for the revenue that the sum of Rs. 1,57,500 shall have to be treated as a refund made by the managing agents who had received the entire office allowance due to them at the rate of Rs. 7,500 per month during the two previous accounting years. In an account which is maintained on accrual basis or, as otherwise said, on the mercantile system, all receipts and liabilities as and when they accrue, come into the profit and loss account, and the trading result is arrived at on that basis. The office allowance due to the managing agents had already been shown as a trading liability in those two previous accounting year. That liability could have been discharged either by actual payment or adjustment at any time or by remission granted wholly or partly by the managing agents. In the accounting year under consideration, when the remission was allowed, the assessee company had to bring that to the profit and loss account in order to set off the trading liability in that respect which they had shown in the two previous accounting years; otherwise the profit and loss accounts would not have been reconciled. For that reason, they showed, in their profits and loss account, this amount as a miscellaneous receipt. No doubt, they mentioned as follows :
"Miscellaneous receipts including Rs. 1,57,500 forgone and refunded this year by the managing agents their allowance already charged in the prior years accounts in respect of the period from 1st February, 1947, to 31st October, 1949."
Though the word "refund" has been used in this item, actually it was not a cash refund; it was only a remission of a liability charged to the profit and loss account. If the accounting was maintained on cash system and if the amount would have been paid already as office allowance due to the managing agents and then a part of it or the whole was returned by way of a refund to the assessee-company during the current accounting year, that would have been a trading receipt or a revenue receipt, and would have been included in the total income; but, the accounting system being mercantile and the amount shown thus under the head "miscellaneous receipt", being only a remission of a previous liability, the Tribunal was right, in our view, not to include it as a revenue receipt for the purpose of total assessable income.
Learned counsel for the revenue contended that there is not difference in principle between an account maintained on cash system and another on mercantile system in respect of the remission or a refund made by a creditor. When a debit entry is made in a mercantile account, it is taken as paid, as is done in a cash basis account. This is not correct. The basic difference between the two systems of accounting is well known. In the mercantile system, actual receipt or payment is immaterial. As they accrue, they are taken into account. Though a credit entry may not materialise in an actual receipt, that amount is still included in the total income of that year; so also the liability is disposed of finally in the trading account of the year.
Learned counsel relied upon the case of Commissioner of Income-tax v. Lakshmamma. There, the assessee maintained his account on cash system. He was an excise contractor, and he had paid one kist (instalment) of the licence fee; but on account of the Razakar movement and other political disturbances, he was not able, for no fault of his to tap all the trees for which he had taken the licence. He asked for the return of the corresponding amount from the instalment paid. The Government granted the refund which was held to be a revenue receipt, and was included in the total income of the assessee. The assessee, however, in that case urged that that amount should not be treated as a receipt for the purpose of assessable income, and relied upon several decisions. The learned judges distinguished them on the ground that, in those cases, the assessee maintained their accounts in the mercantile system and received remissions of their liability (which they had already shown in their previous trading accounts) from their creditors. One of those cases, which will be very apt for our reference, is Mohsin Rehman Penkar v. Commissioner of Income-tax. There, the mortgagor assessee maintained his account on accrual basis. Every year, he debited to his profit and loss account the amount of interest due to the mortgagee for the mortgage loan. At a time when the total dues of the mortgagee by way of interest came to over Rs. 29,000, he paid only Rs. 15,000 in full discharge of instalment due to that time. The question arose whether the balance of Rs. 14,000 and odd, which was remitted by the mortgagee creditor, should be included in the assessees income as a receipt. It was held by their Lordships of the Bombay High Court (Chagla C.J. delivered the judgment of the court) that the income-tax department was not concerned in which manner a trading liability of an assessee is discharged. When the discharge, either wholly or in part, is by way of remission, that is only a manner of discharge, and the amount so remitted will not become a receipt in the hands of the assessee for purpose of assessable income. In that case, the dictum of Lord Thankerton in the leading case of the British Mexican Petroleum Co. Ltd. v. Jackson (H. M. Inspector of Taxes), to the effect that the release from a liability which has been finally dealt with in the preceding account cannot form a trading receipt in the account for the year in which it is granted, was very much relied upon. Their Lordships of the Mysore High Court also did not see any flaw either in the dictum laid down in the leading case of British Mexican Petroleum Co. Ltd., or in the case of Mohsin Rehman Penkar of the Bombay High Court. They only distinguished that case from the facts involved in the case before them by saying that, in the other case, the account was on mercantile system, whereas, in the case before their Lordships, it was on cash basis, and the amount that was in question was actually refunded by the Government to the assessee out of the money which he had paid as an instalment of his excise licence and which he had shown on the debit side as an outgoing in the previous accounting year. In our view, the facts of the Bombay case are very much similar to the facts in the instant case. There, it was a trading liability on account of mortgage. Here, it was a trading liability of account of the office allowance payable to the managing agents. There, a part of the liability was remitted; in our case, the whole of it was forgone. In that view, that decision will apply on all fours to the present case.
The result, therefore, is that the second question will be answered in the negative and in favour of the assessee. In order words, the sum of Rs. 1,57,500, which had been forgone by the managing agents, was not chargeable as the assessees income for the assessment year 1951-52. The reference is disposed of accordingly. The assessee will be entitled to a sum of Rs. 100 from the Commissioner of Income-tax, Bihar and Orissa, as costs for this reference.