[Citation -1986-LL-0620-2]

Citation 1986-LL-0620-2
Appellant Name KISHAN DASS
Court ITAT
Relevant Act Income-tax
Date of Order 20/06/1986
Assessment Year 1978-79
Judgment View Judgment
Keyword Tags mercantile system of accounting • outstanding liabilities • method of accounting • alternative claim • trading liability • interest accrued • trading account • purchase price • accrual basis • bus service • sale price • sales tax • desu
Bot Summary: The assessee in turn reduced his purchase price by making deductions from the amounts due to the collieries from whom he had purchased the coal to the extent of Rs. 4,86,863. Obviously the above deduction made by the assessee was not correct because the assessee could not pass on the deductions made by DESU in any case insofar as they related to the increase in the price of coal due to delay in the supply made by the assessee to DESU, to the extent of Rs. 49,415. 1st Feb., 1978, ordered that the following amounts be paid by DESU in respect of quality of coal and other claims of the assessee : Rs. Being deduction out of bills 1,69,855. During the succeeding previous year, the assessee received Rs. 1,45,000 as compensation out of above amount of Rs. 3,50,154 ordered by the High Court. 'After persistent questioning' the assessee filed five letters from out of the 10 collieries in whose bills deductions were said to have been made by the assessee. 15.2 The main point of distinction one sees here is that unlike in A. Gajapathy Naidu's case the impugned amount relates back to the contract of the assessee with DESU for the earlier assessment year, i.e., 1973- 74. The matter is restored to the file of the CIT. He will dispose of this issue after hearing the assessee as well as the ITO. To this extent the assessee's appeal succeeds.

DR. S. NARAYANAN, A.M. ORDER These are cross appeals relating to same assessment year. They are disposed of by this consolidt. order. IT Appeal No. 1571 (Delhi) of 1984 (Asst. yr. 1978-79) : 2 . This appeal is by assessee. assessee is individual Assessment was completed for this year on total income of Rs. 3,69,500 under s. 143(3) /144B of IT Act, 1961 ('the Act'). Included in this was item of Rs. 3,50,154. reasons for which ITO made this addition were as follows : 1. assessee received Rs. 3,50,154 from Delhi Electric Supply Undertaking ('DESU'). It was paid to assessee during relevant accounting year (which ended on 31st March, 1978) following 'a decree' passed by Delhi High Court. facts which led to above payment were as under. 2. During financial year 1972-73, assessee supplied coal to DESU in name of Universal Traders. There was no written contract with DESU on this supply. Total value of coal supplied was Rs. 16,00,525.25. Against this, t h e assessee was paid Rs. 10,64,192.10. There was thus balance of Rs. 5,35,375.15. 3. above amount of Rs. 5,35,375.15 was withheld by DESU. This was no plea that coal supplied was of inferior quality and did not conform to specifications. assessee filed suit for recovery and also got 'a decree which was passed for Rs. 3,50,154 by order dt. 1st Feb., 1978'. 4. Since Rs. 5,35,375.15 was withheld by DESU, assessee also reduced purchased and supplied to DESU. In other words, assessee did not claim as deduction in trading account for year concerned, full purchase price billed by his suppliers. He claimed only purchase amount so billed less amount withheld by DESU. Assessment was also completed for that year (1973-74) on that basis. 5. But above method adopted by assessee and reduced claim made in trading account for purchases was against accounting procedure. method of accounting following by assessee was mercantile. trading account should not, therefore, have been manipulated in above manner. (It is not clear what ITO means when he records in this context as under : "It is not assessee's case that after filing trading account, he filed revised trading account in manner explained and was accepted by ITO.") 6. amount of Rs. 3,50,154 received this year was taxable under s. 41(1) of Act. This was because liability to pay full amount to DESU had already accrued under mercantile system of accounting. fact that certain payments were withheld by DESU was irrelevant. assessee should not have readjusted trading account in manner he did. (In other words, deduction though not claimed and allowed but which ought to have been allowed would also be subject of consideration for taxability under s. 41(1) in subsequent year in which corresponding remission occurs. assessee appealed. 3. CIT (A) sustained addition made by ITO, partially. He gave relief of Rs. 1,45,000 in this regard. Hence, both assessee as well as Revenue are in appeal. CIT's reasoning behind partial relief order was as follows : 1. Out of coal supplied of value of Rs. 16,00,568 to DESU, Rs. 5,36,376 represented amount withheld by DESU. Out of this Rs. 49,415 represented increase in value of coal during period of supply and Rs. 4,86,963 represented deduction on account of inferior quality of coal supplied. assessee in turn reduced his purchase price by making deductions from amounts due to collieries from whom he had purchased coal to extent of Rs. 4,86,863 (collierywise deductions were also made available by assessee). 2. But obviously above deduction made by assessee was not correct because assessee could not pass on deductions made by DESU in any case insofar as they related to increase in price of coal due to delay in supply made by assessee to DESU, to extent of Rs. 49,415. 3. For asst. yr. 1973-74, assessee 'did reduce purchase price from debit side' (of trading account) to above extent and similarly 'excluded from sales amount deducted' against supplies made by him to DESU. Delhi High Court, vide its judgment dt. 1st Feb., 1978, ordered that following amounts be paid by DESU in respect of quality of coal and other claims of assessee : Rs. (a) Being deduction out of bills 1,69,855.91 (b) Due to increase in coal price 90,461.97 (c) Being cost of one wagon coal 3,135.15 2,53,453.03 Interest at rate of 14 per cent from 1st March, 43,580.03 1973 to 5th Aug., 1974 Interest at rate of 6 per cent from period 53,120.97 said suit has been pending 3,50,154.03 4. During succeeding previous year (asst. yr. 1979-80), assessee received Rs. 1,45,000 as compensation out of above amount of Rs. 3,50,154 ordered by High Court. Rs. 2,05,154 was received during relevant previous year itself (year ended on 31st March, 1978). entire amount was, however, brought to tax by ITO as protective measure disregarding assessee's affidavit of 17th June, 1982 which stated that DESU had filed appeal against judgment of learned single Judge of Delhi High Court dt. 1st Feb., 1978 challenging payment of Rs. 1,45,000 out of total amount of Rs. 3,50,154. This appeal of DESU was admitted vide order dt. 27th Sept., 1978 in RFA (OS) No. 16 of 1978. Hence, to extent of Rs. 1,45,000, it could be said that issue has not become final. But balance of Rs. 2.05,154 was clearly taxable for this assessment year. 5. Following decision of Supreme Court in CIT vs. A. Gajapathy Naidu (1964) 53 ITR 114 it had to held that assessee had acquired right to receive amount of Rs. 2,50,154 in this year following judgment of Delhi High Court delivered on 1st Feb., 1978. 6. Also, ITO rightly applied s. 41(1) with regard to above. assessee departed from its regular method of accounting, viz., mercantile in reducing its purchase price by amount equal to deductions made from its sale price by DESU. Under mercantile system, assessee was obliged to show full purchase price on debit side and full sale price as per bills submitted to DESU on credit side. amounts not paid on account of purchase would have been shown as outstanding liabilities in balance sheet. amount payable by DESU should then have been shown by way of outstanding debts on assets side of balance sheet. If these correct entries had been passed, full purchase price would have been allowed and in subsequent year applicability of s. 41(1) could not, therefore, have been questioned Motilal Ambaidas vs. CIT 1977 CTR (Guj) 165 : (1977) 108 ITR 136 (Guj) i.e., s. 41(1) was applicable here. 4 . CIT (A) then considered assessee's alternate contention, i.e., that he had in any case to pay up amount in question to various collieries from whom coal was purchased. According to CIT (A), there was no evidence at all brought on record before ITO in support of this point. 'After persistent questioning' assessee filed five letters from out of 10 collieries in whose bills deductions were said to have been made by assessee. These five letters were said to have been written in 1977-79. Registered letters were sent to addresses shown therein asking for confirmation of assessee's version. All letters came back unserved with remark that parties were not known. assessee was informed of this. 5 . assessee's explanation with regard to above was that parties did exist in 1977-79 and their non-availability in 1983-84 did not show that they were not genuine parties. For asst. yr. 1973-74 (relating to financial year 1972-73) parties were not looked upon as not genuine. There were also acknowledgments of some other letters of 1972-73 from these parties. This showed that they were genuine parties. Sham Sunder Kedia of Associated Trading Corpn. was one of these parties. His address was furnished (but then no request was made for his been summoned under s. 131). According to CIT (A) real question was whether there was any liability to collieries due from assessee in respect of deductions made. 6. To find out above, CIT (A) records, assessee was requested again and again to produce correspondence file with those collieries which had been pressing their claims. No such evidence was made available. assessee had to be examined ultimately on solemn affirmation. This was on 7th Jan., 1984. In this statement, assessee categorically stated that he had no papers or records with him to show that collieries in question had been pressing for payment of amounts withheld by him. No suit was filed by any of those parties. None of them referred matter for arbitration. assessee also expressed inability to get copies of his arbitration. assessee also expressed inability to get copies of his accounts in books of those parties. reason given was that he was to on good terms with them. 7. CIT (A) observed that material on record clearly showed that collieries made no claims at all against assessee at any time. It was unthinkable that collieries which had to get Rs. 5 lakhs with interest at 12 per cent would sit idle and would neither file any suit nor refer matter for arbitration. It was also unthinkable that assessee would not have had any correspondence with regard to such claims. Obviously, assessee's explanation was made-up story. In any case, assessee failed to discharge burden that lay squarely on him to prove claim of outstanding liabilities to collieries. Sec. 41(1) was clearly applicable as regards deductions made from bills of collieries or with regard to interest thereon. 8. CIT (A) then recorded that, even if s. 41(1) was not applicable, amount was clearly taxable in view of decisions in CIT vs. Motilal Padmapat Sugar Mills Co. (P) Ltd. (1979) 1 18 ITR 825 (All) and CIT vs. Jai Prakash Om Prakash Co. Ltd. (1964) 52 ITR 23 (SC). business of assessee has been continuing in relevant previous year also. He has been maintaining same books of account for his other activities of export of cloth, etc. There has been same funds, same management for activity and payments received from DESU have been shown in same books kept for other activities. CIT (A), hence, held that Rs. 2,05,154 was taxable this year on accrual basis; and that Rs. 1,45,000, balance, was not taxable this year because matter was in appeal and was pending before Division Bench of Delhi High Court as also in light of Lakshman Prakash vs. CIT (1973) 92 ITR 492 (All). 9. question of taxability of interest portion was then considered by CIT (A). He noted that contention for assessee was that entire interest could not be brought to tax in this year following decision of Delhi High Court in Fazilka Electric Supply Co. Ltd. vs. CIT (1983) 36 CTR (Cal) 355 : (1983) 143 ITR 551. But then this contention was not correct. In case before Court, accrual of interest was under Indian Electricity Act, 1910, r/w Punjab Electricity Act. It did not arise from award given by umpire. It was for that reason, Court held that interest has to be assessed on accrual basis. In present case, interest was not under any statute. It was awarded by Court as part of implied contract and to compensate assessee for not having been in possession of his legitimate moneys for several years. Thus, right to receive interest in question along with right to received different in coal supplied, accrued or arose to assessee only from decision of Delhi High Court. Prior to that, it was only claim and, hence, entire interest and not merely that pertaining to period '1st April, 1977 to 1st Feb., 1978 ' was liable to tax on accrual basis for this assessment year. assessee is hence in appeal. 10. Shri C. S. Aggarwal, learned counsel for assessee, as well as Shri P. K. Sridharan, Departmental representative, were heard. We were take through material on record and parties also addressed us at length. prayer of assessee's learned counsel was that there was no case for taxing sum of Rs. 2,05,154. Department's case was that entire sum o f Rs. 3,50,154 was rightly taxable this year. Arguments were also addressed specifically on taxability of interest component in amount of Rs. 2,05,154. assessee's case was that if at all only such interest as could be 2,05,154. assessee's case was that if at all only such interest as could be said to have accrued for period 1st April, 1977 to 31st March, 1978 was to be taxed. additional argument taken for assessee was that, in any case, interest attributable to sum of Rs. 1,45,000 excluded by CIT (A) should not have been brought to tax this year. 11. We have considered position. most important point is whether s. 41(1) is attracted at all. assessee's basic case is that he did not claim expenditure relating to purchases, hence, there was no question of assessing him now when he got back or was likely to get back from DESU amounts that could be related to part of his purchase cost. decision in Motilal Ambaidas's case (supra) applied by CIT (A) is no doubt there but there are conflicting decisions also. We shall consider them presently. 12. We may state here that assessee showed from papers filed in his paper book that, as matter of fact, he had not claimed any deductions on account of amounts shown as payable by him to his suppliers for coal purchased in his books. Certainly liability accrued during financial year 1972-73 on mercantile basis. It was emphasised by assessee's counsel that assessment order for 1973-74 (page 29 of paper book) would show that assessment for that year was completed with ITO's full knowledge of adjustment made by assessee in trading account for that year noted above, i.e., amounts due from but deducted by DESU were not shown on credit side and corresponding amounts payable to coal suppliers were not shown on debit side. This is indeed relevant circumstance. This shown that assessee departed from strictly mercantile method but after full disclosure and acceptance by ITO. So much for facts. 1 3 . In Motilal Ambaidas's case (supra) assessee did not claim any deduction for sales tax payable by him. Nor did not shot on credit side of trading accounts sales tax collected from customers as part of trading receipt. Method of accounting was mercantile. There was refund of sales tax paid, ordered in subsequent year following decision of Supreme Court holding levy of sales tax there to be unconstitutional. Gujarat High Court upheld taxing of said refund under s. 41(1). It held that expression 'where allowance or deduction has been made ......' in s. 41(1) should be actually read as 'where allowance or deduction ought to have been made'. With respect, we are reluctant to follow this decision as it apparently results in rewriting statute. position in law has, however, been made quite clear by Supreme Court as also by other High Courts. We would notice here some of relevant decisions briefly. 14.1 Tirunelveli Motor Bus Service Co. (P) Ltd. vs. CIT (1970) 78 ITR 55 (SC) : provisions interpreted was s. 10(2A) of Indian IT Act, 1922 ('the 1922 Act'), in pari materia with s. 41(1) of 1961 Act. Court held that s. 10(2A) "applies only when allowance for deduction has been made in assessment of any year in respect of any loss, expenditure or trading liability incurred by assessee" and subsequently there is are mission or receipt of money. This CIT (A) has apparently considered this decision but preferred chaff (difference in facts) to grain-the ratio disdained-of decision. trading liability may be said to have accrued under system of accounting but s. 41(1) cannot be applied unless deduction or allowance has been made. This decision of Supreme Court still holds field. It is indeed surprising that this decision was not brought to notice of Gujarat High Court in Motiram Ambaidas's case (supra). assessee's case before us falls squarely within ratio of Tirunelevli Motor Bus Service's case (supra) and s. 41(1) cannot be invoked here. 14.2 We may note here some decisions of High Courts which are wholly in line with Tirunelevli Motor Bus Service Co. (P) Ltd's case (supra). These are Karamant Khan vs. CIT (1965) 58 ITR 642 (All), Steel & General Mills Co. Ltd. vs. CIT (1974) 96 ITR 438 (Delhi), Naubatram Nandram vs. CIT (1972) 86 ITR 805 (MP), CIT vs. Thirumalaiswamy Naidu & Sons (1984) 147 ITR 657 (Mad) and CIT vs. A. V. M. Ltd. (1985) 21 Taxman 232 (Mad). 15.1 Having held that s. 41(1) is not applicable here we have to see whether impugned amount is taxable even otherwise on analogy of A. Gajapathy Naidu's case (supra). CIT (A) holds so but we are unable to agree with him. In Gajapathi Naidu's case (supra) assessee who supplied bread to Government hospital in previous year from 1st April, 1948 to 31st March, 1949 and who was following mercantile system of accounting made representation to Government after 31st March, 1949, that he had incurred loss. Government directed payment of Rs. 12,447 to assessee by ways o f compensation for loss by order dt. 24th Nov., 1950. assessee received this amount in accounting year 1950-51, i.e., asst. yr. 1951-52 as it related to his contract entered into with Government, during accounting year 1948-49. Supreme Court rejected this contention holding that - (i) only right that assessee had, was to claim money payable under contract entered into in 1948-49. (ii) additional amount (Rs. 12,447) became payable not by virtue of aforesaid contract but under order dt. 24th Nov., 1950. 15.2 main point of distinction one sees here is that unlike in A. Gajapathy Naidu's case (supra) impugned amount relates back to contract of assessee with DESU for earlier assessment year, i.e., 1973- 74. No doubt, Court passed its order on 1st Feb., 1978 but that was to settle contractual rights of litigants, inter se, in dispute before it. assessee's method of accounting being mercantile it would relate back to year of contract. Specially so when there was no upward revision of contractual rates for asst. yr. 1973-74 in financial year 1977-78. We, therefore, hold that impugned amount cannot be taxed this year on analogy of A. Gajapathy Naidu's case (supra) either. 16. This takes us to finding of CIT (A) to effect that quite apart from s. 41(1) of ratio decidendi A. Gajapathy Naidu's case (supra) impugned amount was taxable this year (on basis of accrual) in light of decisions in Jaiprakash Om Prakash Co. Ltd.'s case (supra) and Motilal Padampat Sugar Mills Co. (P) Ltd.'s case (supra). We have considered facts and ratio decidendi of these decisions. In first case, apart from totally different factual position, all that Supreme Court did there was to hold that question of law arose in matter. In second case, Court's decision in context of peculiar facts of case, took note of fact that assessee's method of accounting was mercantile. method of accounting is mercantile in instant case but then as regards impugned amount accrual of amounts has to be related back to asst. yr. 1973-74-para 15 supra. Hence, this decision does not support CIT (A)'s conclusion. 17. There was some argument before us on holding impugned amount to be taxable this year on receipt basis. But then assessee's method of accounting undoubtedly, has been mercantile all along including this year. ITO has also recorded this fact in his order. And neither ITO nor CIT (A) has said that there had been any change at any time in method of accounting followed by assessee. No doubt, assessee did not include in his accounts for asst. yr. 1973-74 amount deducted by DESU (revenue) n d equivalent amount withheld by him from payment to his suppliers (expenditure). But from absence of such entries alone, it is not possible to say that assessee had changed his method of accounting to case and that too only with regard to portion of receipts due from DESU and similarly with regard to portion of expenditure connected therewith. In fact law is quite clear on this aspect. In CIT vs. Chunnilal V. Mehta & Sons (P) Ltd. 1973 CTR (SC) 470 : (1971) 82 ITR 54 (SC) assessee, company carrying on business as managing agents, maintained its accounts on mercantile system. In April, 1951, managing agency of assessee was terminated by t h e managed company. managed company was prepared to pay Rs. 2,34,000 as compensation following termination of agency in terms of managing agency agreement of June, 1953. assessee refused to accept to accept compensation offered and filed suit claiming Rs. 28 lakhs as compensation. suit was decreed only in sum of Rs. 2,34,000 in November, 1955 in terms of cl. 14 of agreement of June, 1953 supra. assessee received amount in December, 1955 and credited it to its P&L a/c for calendar year 1955 (asst. yr. 1956-57). ITO taxed it for that year under s. 10(5A). Supreme Court held it was not taxable for asst. yr. 1956-57 because : 1. method of accounting adopted by assessee would be basis on which he should be assessed. 2. right to receive compensation arose in April, 1951. It made no difference that assessee disputed quantum of compensation. method of accounting being mercantile, compensation because 'due' to assessee in April, 1951 and, hence, it was not taxable for asst. yr. 1956-57. 3. That assessee credited its P&L a/c with compensation amounts for calendar year 1955 was of no consequence. From this fact it cannot be argued that for this particular receipt assessee adopted different system of accounting. Method of maintaining accounts it one thing and actual entries in accounts maintained is different thing. What is relevant is actual method of accounting and not actual entries. Hence, we hold that there is no case for bringing to tax amount in question for assessment year in appeal before us (1978-79). 1 8 . We then come to taxability of interest component. We have seen decision in Fazilka Electricity Supply Co. Ltd.'s case (supra). Court was Concerned with interest awarded under Indian Electricity Act, 1910, r/w Punjab Electricity Supply Act, 1939. As rightly noted by CIT (A) in that case interest was awarded by umpire on 30th July, 1961. award was made rule of Court on 28th Sept., 1962. Interest of Rs. 1,55,620 was paid to assessee on 13th Feb., 1963. Tribunal had held that source of interest was umpire's aware itself and, hence, entire interest accrued of interest was umpire's award and, therefore, it was taxable for asst. yr. 1963-64 only. Court, however, held that interest awarded was not de hors statue; and that right to receive interest arose under Indian Electricity Act r/w Punjab Electricity Act and did not emanate from umpire's award. above decisions, we find, is not applicable here. As rightly pointed out by CIT (A) award of interest arose in instant case from order of Court dt. 1st Feb., 1978. It is, therefore, fully taxable this year. There is, however, alternative claim made by assessee in his grounds of appeal. This is ground No. 5, which reads as under : "5. That learned CIT (A) in any case erred in not even excluding amount of interest attributable to sum of Rs. 1,45,000 (the amount which has been excluded by CIT (A)." Certainly interest receivable [(see para 3 (iii) supra)] relates to total compensation amount of Rs. 2,53,453 out of total award of Rs. 3,50,154. It was common ground that Rs. 1,45,000 was in dispute this year. matter was pending in Delhi High Court. assessee's claim is that entire interest of Rs. 96,700 could not be said to have accrued this year as part of this represents amount disputed by DESU before Delhi High Court. There is, however, no material in orders of authorities below to determine quantum of such disputed portion. matter is, therefore, restored to file of CIT (A). He will dispose of this issue after hearing assessee as well as ITO. To this extent assessee's appeal succeeds. Income-tax Appeal No. 2326 (Delhi) of 1984 (Asst. yr. 1978-79) : 19. In this appeal by Department, only contention is as under : "On facts and in circumstances of case, learned CIT (A) erred in excluding sum of Rs. 1,45,000 out of total sum of Rs. 3,50,154 received as result of High Court judgment which was assessed to tax under s. 41(1) of IT Act in asst. yr. 1978-79." 20. However, we find CIT (A) has excluded Rs. 1,45,000 following decisions in Lakshman Prakash's case (supra). In that case, assessee was contractor. He followed mercantile system of accounting. He closed his accounts on 31st of March each year. During financial year 1943-44, assessee entered into contract for supply of some materials to Government of India. In April, 1944, Government suspended contract. There were meetings between assessee and authorities for payment for materials taken over by it. In February, 1945, basis for payment was fixed. amount payable was determined at Rs. 1,77,000. part payment was also made. balance was not paid and in January, 1946 compensation payable was finally fixed at Rs. 1,73,767. ITO determined profit of assessee at Rs. 4,385 for asst. yr. 1945-46 on ground that compensation was fixed in February, 1945. Court rejected this approach. It held that though basis for payment of compensation was fixed in February, 1945, authorities at Delhi did not approve of amount of compensation and that this led to second meeting in January, 1946. In this meeting amount was finally fixed at Rs. 1,73,767. Thus, amount became ascertained only on that date and that date was relevant for asst. yr. 1946-47 and not 1945-46. This decision does have relevance. 2 1 . After hearing parties we would confirm CIT (A)'s action as correct. amount was still to be 'ascertained ' at close of relevant previous year. Following our decision recorded in paragraph 17 supra, amount in question not having been received during relevant previous year, question of taxing it does not arise. 22. In result, assessee's appeals is deemed to be allowed in part for statistical purposes and Department's appeals is dismissed. *** KISHAN DASS v. INCOME TAX OFFICER
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