Messrs. Calcutta Company Ltd vs The Commissioner Of Income-Tax,West ... on 12 May, 1959
9. The general conspectus of the main plank of the learned Counsel's argument was that the amount received was deferred income as certain obligations were attached with such receipts. The treatment given to such receipt was in accordance with the fundamental accounting concept for matching the revenue of each year with the expenses incurred to earn such revenue. The entire amount received towards advance subscription cannot be debited to the P&L account as it tantamount to provision of agreed amenities and facilities towards which customer made the payment in the previous year. Reliance was placed on the decision of the apex court rendered in the case of Calcutta Co. Ltd. v. CIT (37 ITR 1) (SC). In this case assessee bought lands and sold them in plots fit for building purposes undertaking to develop them by laying out roads, providing a drainage. system and installing lights, etc. When the plots were sold the purchaser paid only a portion of the purchase price and undertook to pay the balance in instalment. The assessee in its turn undertook to carry out the developments within six months but time was not of the essence of the contract. During the relevant accounting period assessee actually received in cash only a sum of Rs. 29.392/- towards sale price of lands, but in accordance with the mercantile system of accounts adopted by it. it credited in its accounts the sum of Rs. 43,692/- representing the full sale price of lands. At the same time it also debited an estimated sum of Rs. 24,809/- as expenditure for the developments it had undertaken to carry out. even though no part of that amount was actually spent. The department disallowed the expenditure. On appeal it was held that the undertaking to carry out the developments within six months from the dates of the deeds of sale was unconditional, the assessee binding itself absolutely to carry out the same. The undertaking imported a liability on the assessee which accrued on the dates of the deeds of sale, though that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of the business, and the amount to be expended could be debited in accounts maintained in the mercantile system of accounting before it was actually disbursed. The difficulty in the estimation thereof did not convert the accrued liability into a conditional one: because it was always open to the Income-tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case.