This is appeal by department pertaining to assessment year 1979-80. assessee is registered firm. facts of case in brief are that assessee is partnership firm consisting of two partners, namely, Mr. T. K. Kapoor and Dr. Man Mohan Nath. Mr. T. K. Kapoor is assessed in New Delhi with District VIII (9) and his permanent account No. was GIR No. K/175/DLI/VIII (9). As regards other partner, Dr. Man Mohan Nath, he is assessed at Ambala. business of assessee is to act as export house for export of garments. It books orders from buyers and gets these goods fabricated from manufacturers. In initial stages it was getting fabrications of garments done only from Omar Khayyam, firm situated at Delhi and is also assessed in New Delhi. firm is regularly assessed. Assessments up to 1979-80 have been completed. This firm has been held to be genuine by department all along. 2. assessee-firm, Indo Gulf, had originally entered into agreement on 13-4-1976 with firm Omar Khayyam in terms of which it was agreed that Indo Gulf, who is exporter, will get orders and then get material manufactured from Omar Khyayyam and price which they will pay to Omar Khayyam will be selling price at which they have booked orders less 4 per cent. It was also agreed that all drawbacks, licences, cash incentives, etc., i. e., whichever benefits which are attached with exports and received by Indo Gulf will be handed over to Omar Khayyam. On 23-9-1977 fresh agreement was again signed between Indo Gulf and Omar Khayyam and this agreement is valid for year under consideration also. In terms of this agreement it was agreed between parties as under: (i) That for all exports other than exports to Australia 5 per cent would be difference in price of purchase and sale as against 4 per cent as in earlier agreement. (ii) For exports to Australia difference in price would be 12 per cent. (iii) All benefits pertaining to drawback would be retained by export house but so far as cash incentives were concerned, they will be passed on to manufacturer, Omar Khayyam. (iv) effective date of this agreement would be from 16-4-1977 for period of five years ending on 15-4-1982. There was amendment to this agreement in terms of which only cash incentives of 80 per cent were to be given to manufacturers and balance 20 per cent was to be retained by export house. 3. In year of account incentive amount was received by assessee. 80 per cent of such amount was Rs. 4,46,501. said amount was given to Omar Khayyam. According to assessee, Omar Khayyam was to get this amount in pursuance of agreements which were entered into between parties. So said sum of Rs. 4,46,501 was not income of assessee. Thus, it was contended that said amount may be deducted from income of assessee. ITO was not satisfied with this contention. According to him, it was only application of income and as such claim of assessee cannot be accepted. Consequently, learned ITO held that sum of Rs. 4,46,501 was income of assessee. Accordingly, it was added in hands of assessee. 4. learned Commissioner (Appeals), after considering contentions of parties held as under: "1.4 I have carefully considered submissions of learned authorised representative as well as findings of lower authorities. I fully agree with contention of learned authorised representative that, on facts and in circumstances of case, there was obligation undertaken by assessee-firm as per agreements with manufacturers to part with 80 per cent of cash incentives, and that so much of amount in fact was part of purchase price of garments. It is fact that in earlier two years in which agreements dated 13-4-1976 and 23-9-1977 were in force, such agreements had been accepted by departments and assessee-firm had not been assessed with regard to benefits in form of cash incentives. In fact, for part of previous year relevant to assessment year, 1978-79, that is to say, for period from 1-10-1976 to 15-4-1977, when first agreement dated 13-4-1976 was in force, assessee-firm was passing on all export benefits, including import entitlements and duty drawbacks to Omar Khayyam. In first instance, by second agreement dated 23-9-1977, it not only increased its margin of profit from 4 to 6 per cent, but also retrieved for itself from manufacturers duty drawback and import entitlements. By further change as per agreement dated 22-3-1978, it further retrieved to itself 20 per cent of cash incentives. progress of three agreements would show that assessee-firm continued to gain and what was initially agreed to be passed on completely was retrieved in two stages substantially. If ITO could not find fault with initial agreement dated 13-4-1976 as also with second agreement dated 23-9-1977, I fail to understand as to why third agreement dated 22-3-1978 effective for relevant previous year, could not be accepted. In fact, from findings recorded by lower authorities, they have not specifically thrown overboard third agreement by branding it as sham or make believe. They, however, thought that on facts as they are, it may be held on authority of Supreme Court decision (supra), that income in shape of receipt from cash incentives had already reached in hands of assessee as its income, and that by passing on same to Omar Khayyam it was merely application thereof on discharge of obligation. I am unable to contribute to this finding. Once no fault could be found with agreement dated 22-3-1978, it would necessarily be accepted that obligation undertaken by appellant to part with 80 per cent of cash incentives was in consideration of manufacturers supplying garments for exports to assessee-firm, as per terms and conditions as laid down in initial agreement as well as in subsequent agreements by way of amendment would show that such arrangement had been arrived at between two parties in course of business of export of readymade garments and for purpose of getting garments of required type, quality, etc., manufactured from Omar Khayyam. It is not department's cash that agreements were sham or make believe or that other firm Omar Khayyam constituted by Mrs. Renu Kapoor wife of Shri T. K. Kapoor and Mrs. Asha Dabar was benami concern. On other hand, I find that other firm has been granted registration and has been separately assessed to tax. This conduct of department shows that other firm was accepted to be genuine firm. It is not known whether ITO went into enquiry regarding genuine status of Mrs. Renu Kapoor as partner therein or whether she was merely benamidar of her husband. Be that as it may, other firm entered into agreement with assessee-firm and said agreement with subsequent amendments were accepted i earlier two years. I do not find any reason for non-acceptance of such agreement in year, under appeal. As already stated, there is no case either of department that agreement effective for this year was not valid or genuine. 1.5 I also do not find any basis for observation in IAC's order that in earlier year, i. e., assessment year 1978-79 also no deduction had been allowed because assessee was held to be legally entitled to cash incentives and could not have parted with same to other firm. What ITO purported to do was to raise some doubt regarding payment of duty drawback and replenishment entitlements to partner, Shri T. K. Kapoor. Thereafter, he added back amounts so paid by ways of remuneration to partner to income of firm on protective basis. merits of such finding in that order will be gone into appeal for that assessment year. Suffice it to say that whatever ITO found in preceding assessment year has no bearing on issue involved in this year. 1.6 In view of above, I hold that appellant had rightly claimed deduction of 80 per cent of cash incentives which did not constitute part of its total income by virtue of obligation it undertook as per agreement with Omar Khayyam. I, therefore, delete addition of Rs. 4,46,501." 5. Before Tribunal on behalf of revenue only contention raised was that disputed amount was received by assessee. After receiving it, it was handed over to Omar Khayyam. So it was case of application of income only. Reliance was placed on ratio of decision in case of CIT v. Sitaldas Tirathdas (1961) 41 ITR 367 (SC). 6. On behalf of respondent it was contended that finding of learned Commissioner (Appeals) is quite correct. According to learned counsel for assessee, assessee is partnership firm carrying on business of export of readymade garments which they got manufactured from other manufacturers. They have also small manufacturer of their own. arrangement which they are following with their supplier is that they pay them cost of garments, export price less 6 per cent plus 80 per cent of cash incentive which they receive from Government for exports. Therefore, purchase price is partly credited to supplier on receipt of garments and balance payment which is definite figure, i. e., 80 per cent of cash incentive received is credited to them on receipt of incentive. According to counsel, this being price consideration for purchase, it is incorrect for assessing authorities to come to conclusion that it was case of application of income. According to learned counsel, amount received was part of sale price. In pursuance of agreements entered into between parties part of commission was to be given under contract before it accrued. So income, if any, was diverted before it is accrued to assessee. Reliance was placed on ratio of decision in case of CIT v. Harivallabhadas Kalidas & Co. (1960) 39 ITR 1 (SC) and CIT v. Shoorji Vallabhadas & Co. (1962) 46 ITR 144 (SC). learned counsel contended that it cannot be said that word 'income' has been deployed in abstract and all notional income earned would also come within its mischief. If word 'income' is interpreted in its natural and proper sense, tax is eligible on income earned in reality. assessee may undertake or be bound by obligation of overriding nature to others which might compel him to make payments to earn profits. If, as result of such overriding obligation, profits earned in books are to be shared with third party, then notional income earned cannot form basis of taxation: it is only real income earned by him that has to be taxed. In such case sharing cannot be deemed to be payment made our of profits; on other hand, it is made to earn profits. learned counsel contended that concept of real income was discussed by their Lordships of Supreme Court in case of Poona Electric Supply Co. Ltd. v. CIT (1965) 57 ITR 521 (SC). Thus, it was contended that it is by now well settled that income which is susceptible to tax is real income as is commercially understood. learned counsel further contended that Income-tax Act, 1961 ('the Act') intends to tax only real income of taxpayer and not to tax what is charge upon assessee's income. Reliance was placed on ratio of decision in case of Raja Bejoy Singh Dudhuria v. CIT (1933) 1 ITR 135 (PC). learned counsel vehemently contended that it is not case of application of income. As matter of fact, it was submitted that original agreement dated 13-4-1976, copy of which is in paper book, would clearly disclose intention of parties under which such arrangement was made. Such arrangement was made before any amount of incentive was received by assessee. Under agreement, assessee was only going to get 4 per cent as its profit. goods when delivered by manufacturers would be completely ready for despatch, i. e., they would have been checked with regard to quality, quantity, sizes and any other thing connected with inspection of goods. manufacturers shall also get goods packed in manner and in bulk quantities as would be required by importer which would be intimated by exporters Indo Gulf to manufacturers from time to time and no separate cost will be given for any special packing. In other words, all costs connected with manufacture of items, its packing, its checking, etc., would be that of manufacture of and, they would be totally responsible if any goods were received back or are not to specifications. Any rejections whatsoever in any form would be liability of manufacturers and not of exporters. According to learned counsel, when entire responsibility was of exporters, it was in fitness of things that assessee was to get its profit in accordance with terms and conditions agreed to between parties. It was further contended that such arrangement was in interest of business. If in terms of agreement goods were not manufactured by manufacturers, namely, Omar Khayyam, assessee was not to get anything. Thus, it is clear that as result of arrangement entered into between parties, sum of Rs. 4,46,501 could not form part of income of assessee but it was actually profit of manufacturers, Omar Khayyam. So from very source income stood diverted in favour of manufacturers in pursuance of valid agreements entered into between parties. learned counsel further contended that all these agreements were held to be genuine by department. In assessment years 1976-77 and 1977-78 such agreements were found to be valid and in those years assessments of assessee and manufacturers were completed. In those years assessee was only taxed to extent of amount which was agreed to between parties. remaining amount was taxed in hands of manufacturers, namely, Omar Khayyam. Those assessment orders were final. Even in assessment year 1979-80 firm Omar Khayyam has been held to be genuine. ITO has granted registration to firm. Even for this year income-tax authorities did not say that agreements entered into were bogus and they were not genuine. Thus, learned counsel further contended that in this year to fresh material was brought on record by revenue to take different view than view taken by them in earlier assessment years. Thus, it was contended that there was no justification on part of assessing authority to tax this income in hands of assessee. learned Commissioner (Appeals) rightly deleted addition. 7. We have heard parties and perused entire material on record. T h e facts of case have already been given in detail by learned Commissioner (Appeals) in his order. same has been reproduced in preceding paragraphs. Apart from it, before learned Commissioner (Appeals) assessee has filed statement of case, copy of which is in paper book. facts stated in letter were as under: "The appellant is partnership firm carrying on business of exports of readymade garments which they get them manufactured from other manufacturers. They have also small manufacture of their own. arrangement which they are following with supplier is that they pay him cost of garments, export price less 6 per cent plus 80 per cent of cash incentive which they receive from Government for 'exports'. Therefore, purchase price is partly credited to supplier on receipt of garments and balance payment which is definite figure, i. e., 80 per cent of cash incentive received is credited to them on receipt of incentive. This being price consideration for purchase, it is incorrect for learned IAC and also learned ITO to come to conclusion that income once received by appellant is being passed on to suppliers of garments, Omar Khayyam. amount received is not income but part to sale price. ITO, thus, added Rs. 4,46,501 while computing taxable income and this is subject matter of appeal." facts of case were also stated by ITO in assessment order. relevant portion of assessment order in which facts were stated by ITO are as under: "In firm, Omar Khayyam goods manufactured are sold entirely to Indo Gulf who export same to foreign countries. As per agreement dated 13-4-1976 it was agreed between two firms that all expenses on manufacturing operation would be incurred by Omar Khayyam and goods when delivered to Indo Gulf be such as to be immediately exported without incurring any further expenses, i. e., they would have been checked with regard t o quality, quantity, size and any other thing connected with goods. goods should also be checked in manner required by importer. In other words, all costs connected with manufacturer, packing, checking, would be that of Omar Khayyam and they would be totally responsible for goods rejected. Indo Gulf was to charge only 4 per cent for procuring orders from abroad and passing them to Omar Khayyam. As per clause (6) of agreement Indo Gulf also undertook to give entire facilities of advance payments in form of letter of credit to manufacturers for its day to day working. In addition to this, as per clause (3) all benefits in form and drawbacks, cash incentives, etc. were also agreed to be passed to Omar Khayyam. This agreement was to be there for period of two years. It appears that in next year this agreement was revised on 25-9-1977 with effect from 1-4-1977 under which Indo Gulf increased their profits to remain in force for five years. It appears again on 22-3- 1978 agreement was revised under which cash incentive up to 80 per cent were to be passed on to Omar Khayyam and Indo Gulf retain 20 per cent. This agreement although entered into on 28-3-1978 was made effective from 1-10- 1977, i. e., just after seven days of revising of second agreement." 8. These facts as stated in assessment order were more or less on same lines which were given before income-tax authorities. Even learned Commissioner (Appeals) has stated those facts in his order. 9. We may point out that learned departmental representative was not disputing those facts. 10. At this stage we would make it clear that it is well settled that income which is susceptible to tax is real income as is commercially understood. In support of this proposition we are fortified by ratio of decisions in case of Poona Electric Supply Co. Ltd. (supra), H. M. Kashiparekh & Co. Ltd. v. CIT (1960) 39 ITR 709 (Bom.), CIT v. Arumugham Pillai (1969) 73 ITR 382 (Mad.). We may also state here that in determining real income question is not of any physical receipt of income but of concept of receipt in law. Reference may be made to ratio of decision in case of Udayan Chinubhai v. CIT (1978) 111 ITR 584 (Guj.). We may also point out that word 'income' has not been deployed in abstract and all notional income earned would also become income. While interpreting 'income' in its natural and proper sense tax is exigible on income earned in reality. assessee may undertake or be bound by obligation of overriding nature to others which might compel him to make payments to earn profits. If as result of such overriding obligation, profits earned in books are to be shared with third party, then notional income earned cannot form basis of taxation; it is only real income earned by him that has to be taxed. For this proposition we are fortified by ratio of decision in case of Poona Electric Supply Co. Ltd. (supra). 11. At this stage we would like to point out that decision of Hon'ble Bombay High Court in case of H. M. Kashiparekh & Co. Ltd. (supra) was approved by their Lordships of Supreme Court in case of Poona Electric Supply Co. Ltd. (supra), Hon'ble Bombay High Court observed as under: 'The principle of real income is not to be so subordinated as to amount virtually to negation of it when surrender or concession or rebate in respect of managing agency commission is made, agreed to or given on grounds of commercial expediency, simply because it takes place some time after close of accounting year. In examining any transaction and situation of this nature Court would have more regard to reality and speciality of situation rather than purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on business aspect of matter viewed as whole when that can be done without disregarding statutory language." (p. 707) main contention of revenue was that i view of decision in case of Sitaldas Tirathdas (supra) assessee was not able to get any relief. In our opinion, finding of learned assessing authority on this point is not correct. This decision on facts of present case helps assessee. Hon'ble Bombay High Court in case of CIT v. C. N. Patuck (1969) 71 ITR 713 made following observations. These observations were made after interpreting said decision of Supreme Court and other decision of Court in other High Courts. Hon'ble High Court made following observations: ".... In deciding question, nature of obligation created in each case is decisive test. Where, however, coupled with obligation terms of document give rise to overriding charge, then there can be no doubt that there would be created in favour of charge-holder such overriding or superior title as would make amount due under charge cease to be income of assessee altogether.... " (p. 725) Court further observed as under: ".... where charge is created or, upon facts and circumstances, charge can be found, it would not be case of mere application of portion of his income by assessee to discharge obligation but case in which overriding charge is created by assessee and he become only collector of another's income: In other words, whenever charge is created or exists, overriding title is created in charge-holder and, to extent of charge, income of assessee ceases to be his income, because charge-holder has paramount right by virtue of his overriding title to recover that income before it reaches hands of assessee.... " (p. 721) In decision of CIT v. Nariman B. Bharucha & Sons (1980) 4 TAXMAN 76 (Bom.) it was held that where assessee was firm effective and valid charge enforceable in court of law was created to extent of 25 per cent of its income in favour of mother and its partners, it was held that said 25 per cent must be treated as diverted at source and, hence, not part of income of firm at all. To same effect is ratio of decision in case of C. N. Patuck (supra). 12. Now on facts of case whether present case is merely application of income or it is case where charge is created before income reaches assessee. assessee is export house and it has been business of firm to export garments. These garments were manufactured by Omar Khayyam. procedure followed by assessee was that it books orders and then gets garments manufactured mainly from Omar Khayyam. purchase price was fixed with them. According to agreement, 80 per cent of cash incentive received from Government will be profits of Omar Khayyam. Government assists exporters and decides percentage of cash incentives to be given to exporters based on exports made by them. This cash incentive is in form of percentage of exports. During year under consideration assessee received cash incentive of Rs. 5,75,239 and as per agreement 80 per cent was given to manufacturer Omar Khayyam. appellant firm, Indo Gulf had originally entered into agreement on 13-4-1976 with firm Omar Khayyam in terms of which it was agreed that Indo Gulf who is exporter will get orders and then get material manufactured from Omar Khayyam and price which they will pay to Omar Khayyam will selling price at which they had booked orders less 4 per cent. It was also agreed that some benefits attached with exports and received by Indo Gulf will be handed over to Omar Khayyam. On 23-9-1977 fresh agreement was again signed between Indo Gulf and Omar Khayyam and this agreement was valid for year in question also. Inter alia, it was agreed that cash incentives of 80 per cent were to be given to manufacturers and that balance 20 per cent was to be retained by export house. In original agreement it was clearly provided in paragraph 5 which is very material for purpose of deciding present controversy. substance of said paragraph was stated by learned Commissioner (Appeals) and even in assessment order reference was made. We would like to reproduce this paragraph here. It is under: "(5) That since exporter is only going to retain around 4 per cent of his profit, goods when delivered by manufacturers would be completely for despatch, i. e., they would have been checked with regard to quality, quantity, sizes and any other thing connected with inspection of goods. manufacturers shall also get goods packed in manner and in bulk quantities as would be required by importer which would be intimated by exporters Indo Gulf to manufacturers from time to time and no separate cost will be given for any special packing. In other words, it means that all costs connected with manufacture of items, its packing, its checking, etc., would be that of manufacturers and, therefore, they would be totally responsible if any goods are received back or are not to specifications. Any rejection whatsoever in any form would be liability of manufacturer and not of exporter." To same effects with slight modifications are agreement dated 23- 9-1977 and 22-3-1978. paragraph 3 of agreement dated 22-3-1978 runs as follows: "1. (3) That exporters would continue to retain replenishment licence and drawbacks which they would receive against these exports in respect of articles manufactured by Omar Khayyam but as far as cash incentives are concerned they would retain 20 per cent of same and would pass on balance 80 per cent to manufacturers Omar Khayyam." All these agreements are found to be valid by department. In assessment years 1976-77 and 1977-78 on basis of such agreements only income was added in hands of assessee which was agreed to between assessee and Omar Khayyam, manufacturers. It is also significant to note that firm Omar Khayyam has been granted registration by department up to assessment year 1979-80. All assessment orders for 1976-77 to 1978-79 are final and they still hold good. In year of account also it is not stand of department that firms are not genuine. Moreover, when firms were granted registration by department it shall be presumed that firms are genuine and they have been carrying on business as provided in partnership deed. When such agreements were interpreted by department, and they were found to be genuine in past, there is no reason why same agreements should not have been accepted by department. 13. It is also clear from record that for this year department did not bring on record fresh material to show that manufacturers Omar Khayyam should not be given 80 per cent of incentives. On behalf of revenue nothing was pointed out that in past why income was not added in hands of assessee. 14. Ordinarily in absence of such facts department should have accepted stand of assessee. In any view of matter, in this year on behalf of department no fresh material was brought on record to show that stand of assessee is not correct. stand of department is only that it was case of application of income. In our opinion this contention is not correct, and is not supported by facts on record. 15. At this stage for sake of clarity we may point out that assessee was only agency for exporting goods. entire manufacturing of garments was done by Omar Khayyam and entire responsibility was his, as is clear from agreement. Omar Khayyam was to bear all costs connected with manufacture of items, its packing, its checking, etc. Under agreement, they would be totally responsible if any goods were received back or were not to specifications. If any rejection was there of goods exported, it would be responsibility of manufacturers, namely, Omar Khayyam, and not of exporter. If all these facts are taken into consideration in their entirety, only conclusion which could be drawn is that such agreement was out of commercial expediency and but for such arrangement assessee could not get any profit out of export of garments. On aforesaid facts, assessee was only collector of another's income. In present case, on basis of agreements charge was created and was existing in relevant accounting year and as result of such charge overriding title is created in chargeholder, namely, Omar Khayyam, manufacturers, and to extent of charge, income of assessee, namely, 80 per cent incentives ceases to be its income because chargeholder, namely, Omar Khayyam, manufacturers, has paramount right by virtue of its overriding title to recover that income before it reaches in hands of assessee. Such agreement is also enforceable in law. 16. Looking to aforesaid facts and entirety of circumstances, we are of view that finding of learned Commissioner (Appeals) on this point is quite correct. 17. other contention of revenue was that learned Commissioner (Appeals) erred in directing assessing authority to allow weighted deduction under section 35B of Act to assessee in respect of expenses incurred up to 31-3-1978. contention of learned counsel for assessee was that in accordance with provisions of Act all expenses incurred prior to 1-4-1978 have to be considered for weighted deduction under section 35B in certain manner and thereafter as per changed provision. assessee has filed revised return on 19-3-1982 and in revised return revised claim was made. total claim was Rs. 38,296. One-third of it comes to Rs. 13,776. learned Commissioner (Appeals) rightly allowed it. After considering aforesaid facts and evidence on record, in our opinion, finding of Commissioner (Appeals) is correct. It is supported by material on record. IT Appeal No. 1845 (Delhi) of 1984 (by assessee): 18. In appeal filed by assessee first ground was whether ITO and learned Commissioner (Appeals) were correct in disallowing Rs. 1,000 out of postage telegram and telephone expenses. At time of argument this ground was not pressed. So this point is decided against assessee. 19. other contention of learned counsel for assessee was that income-tax authorities erred in disallowing fabrication charge of Rs. 9,235 paid to Taj Enterprises. This amount was paid as tailoring charges in normal course of business of assessee. payment was made by account payee cheque. Thus, entire expenses were incurred wholly and exclusively for purposes of business. 20. learned departmental representative contended that in absences of proper accounts these expenses were rightly confirmed by Commissioner (Appeals). assessee has furnished all details of expenses. From record and nature of business carried on by assessee, it is clear that some tailoring charges must have been paid by assessee. In absence of detailed account entire expenses cannot be disallowed. Looking to aforesaid facts and circumstances of case, in our opinion, disallowance is only sustained at Rs. 5,000. 21. In result, IT Appeal No. 2313 (Delhi) of 1984 is dismissed and IT Appeal No. 1845 (Delhi) of 1984 is allowed in part. *** INCOME TAX OFFICER v. INDO GULF