Bombay H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the liability to pay the entire amount of DM 1.40 millions did not arise on the execution of the agreement and that it arose only in the account period?

High Court Of Bombay

CIT vs. Kirloskar Tractors Ltd.

Section 37(1)

Asst. Year 1974-75, 1975-76

Dr. B.P. Saraf & Mrs. Ranjana Desai, JJ.

IT Ref. No. 315 of 1983

3rd February, 1998

Counsel Appeared

Dr. V. Balasubramanian with J.P. Deodhar & P.S. Jetly, for the Applicant : K.B. Bhujle with S.N. Inamdar, for the Respondent

JUDGMENT

DR. B.P. SARAF, J. :

1. By this reference under s. 256(1) of the IT Act, 1961, the Tribunal has referred the following three questions of law to this Court for opinion at the instance of the Revenue :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the liability to pay the entire amount of DM 1.40 millions did not arise on the execution of the agreement and that it arose only in the account period?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the liability for the payment of technical know-how fees accrued at the stated intervals as per cl. (i) of the agreement and arose only when the permission of RBI was received?

3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the payment made by the assessee-company to Deutz in consideration of the use of the know-how was revenue in nature?” 2. The controversy in this reference pertains to two assessment years viz., asst. yrs. 1974-75 and 1975-76. The material facts of the case giving rise to this reference, briefly stated, are as follows: The assessee, M/s Kirloskar Tractors Ltd., was incorporated as a public limited company under the Companies Act, 1956 on 27th April, 1970, and granted certificate of commencement of business on 16th May, 1970. The business of the assessee consisted of the manufacture and sale of tractors and engines. The accounting year was the year ending 30th June. The holding company of the assessee-company was M/s Kirloskar Oil Engines Ltd. The promoters of the assessee-company were in correspondence with Klockner Humboldt Deutz of West Germany (hereinafter referred to as “Deutz”), a company engaged in the manufacture of tractors, for technical collaboration agreement under the approval of the Government of India. Pursuant thereto, an agreement for technical collaboration was executed between the assessee-company and the West Germany company “Deutz” on 29th June, 1970. According to the said agreement, manufacturing programme of the assessee was to be in a phased manner. To its first phase, 500 SKD tractors were to be supplied by “Deutz” to the assessee-company for assembling in India. Deutz was also to supply the assesseecompany requisite designs, drawings and informations to enable it to manufacture tractors and engines specified in the schedule to the agreement (also referred to as “machines”) and to assist the assessee in the manufacture of the same on a commercial scale. It was also to supply to the assessee for use in India technical and other confidential information and know-how for and in connection with manufacture of the said machines and to furnish all other confidential advice (collectively called “know-how”). In the assessment of the assessee for the asst. yr. 1974-75, the relevant previous year being the year ended 30th June, 1973, the ITO disallowed deduction of a sum of Rs. 5,19,630 paid by the assessee to their foreign collaborator, Deutz, in pursuance of the aforesaid agreement as, according to him, the said payment was an expenditure of capital nature. The assessee appealed to the CIT(A), who allowed the appeal. The CIT(A) held that the expenditure in question was a revenue expenditure and allowable as a deduction under s. 37 of the IT Act, 1961 (“the Act”). Aggrieved by the order of the CIT(A), revenue appealed to the Tribunal. However, in the next assessment year, viz., asst. yr. 1975-76, the ITO, by his order of assessment dt. 17th Feb., 1978, allowed deduction of Rs. 16,99,346 being the amount paid by the assessee in that year to its foreign collaborator “Deutz” in terms of the collaboration agreement dt. 29th June, 1970. But the CIT, in exercise of his suo moto power of revision under s. 263 of the Act, revised this order of the ITO and directed the ITO to withdraw the deduction allowed by him and recompute the loss in that year accordingly. Against the above revisional order of the CIT for the asst. yr. 1975-76, the assessee appealed to the Tribunal.

The Tribunal took up both the appeals together for hearing. The Tribunal considered the terms and conditions of the collaboration agreement between the assessee and its foreign collaborator “Deutz” and the decisions of various High Courts and the Supreme Court on the point, including the decision of this Court in CIT vs. Tata Engineering & Locomotive Co. Ltd. (1979) 13 CTR (Bom) 209 : (1980) 123 ITR 538 (Bom) : TC 16R.1202, and held that the payment made by the assessee to the West German company “Deutz” in consideration of the use of the “know- how” was revenue in nature. The Tribunal observed that in the present case there was no sale of “know-how”. The information supplied to the assessee was confidential and there were restrictions on the assessee divulging the same. The Tribunal found that the assessee had made the payment for the use of the know-how for manufacturing tractors and, therefore, the payment was an integral part of profit making process. The Tribunal, therefore, held that the CIT(A) was right in holding that the expenditure of Rs. 5,19,630 incurred by the assessee in the previous year relevant to the asst. yr. 1974-75 was an expenditure of revenue nature. The Tribunal also held that in the asst. yr. 197576, the CIT erred in holding in his revisional order under s. 263 of the Act that such payment was of capital nature. Accordingly, the Tribunal confirmed the order of the CIT(A) for the asst. yr. 197475 and set aside the revisional order of the CIT under s. 263 of the Act for the asst. yr. 1975-76. As a result, the appeal of the Revenue for the asst. yr. 1974-75 against the order of the CIT(A) was dismissed and the appeal of the assessee for the asst. yr. 1975-76 against the revisional order of the CIT under s. 263 of the Act was allowed. Hence this reference for both the assessment years at the instance of the Revenue.

6. The controversy in this case is about the nature of the payments made by the assessee to the West German Company Deutz. The question that arises for consideration is whether those payments are revenue expenditure or expenditure of capital nature? We have heard Dr. V. Balasubramanian, learned counsel for the Revenue, who submits that the payment made by the assessee to the West German company is an expenditure in the nature of capital expenditure. He relies in support of his contention on the decision of the Supreme Court in Jonas Woodhead & Sons (India) Ltd. vs. CIT (1997) 138 CTR (SC) 283 : (1997) 224 ITR 342 (SC). Mr. K.B. Bhujle, learned counsel for the assessee, on the other hand, submits that the payment made by the assessee is a revenue expenditure. According to him, the controversy in this case is squarely covered by the decisions of this Court in CIT vs. Tata Engineering & Locomotive Co. (supra) and Kirloskar Pneumatic Co. Ltd. vs. CIT (1982) 23 CTR (Bom) 92 : (1982) 136 ITR 746 (Bom) : TC 16R.1309, and the decision of the Supreme Court in Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC) : TC 16R.1277. He also relied upon the recent decisions of this Court in CIT vs. Kirloskar Cummins Ltd. (1993) 114 CTR (Bom) 47 : (1993) 202 ITR 36 (Bom), CIT vs. Kirloskar Pneumatic Co. Ltd. (1994) 119 CTR (Bom) 213 : (1993) 202 ITR

309 (Bom) : TC 15R.407, CIT vs. Abbott Laboratories (I) Pvt. Ltd. (1993) 202 ITR 818 (Bom), CIT vs. Tata Engineering & Locomotive Co. Ltd. (1993) 112 CTR (Bom) 328 : (1993) 201 ITR 1036 (Bom) : TC 16R.1220 and Bajaj Tempo Ltd. vs. CIT (1993) 112 CTR (Bom) 131 : (1994) 207 ITR 1017 (Bom) : TC 16R.1276. The ratio of the decision of the Supreme Court in Jonas Woodhead & Sons (supra), according to the learned counsel, has no application to the facts of the present case. It was pointed out to us that in the above judgment, the Supreme Court itself has relied upon its earlier decision in Alembic Chemical Works Co. Ltd. vs. CIT (supra). It was contended that in the above case, the decision of the High Court holding 25 per cent of the expenditure as capital expenditure was upheld by the Supreme Court in view of the specific finding of the High Court in that case to theffect that the services rendered by the foreign company, for which the expenditure had been incurred, included valuable services in the setting up of the factory itself.

7. We have carefully considered the rival submissions. Law is well-settled that the question whether an expenditure is on account of revenue or capital has to be decided by looking at the facts and circumstances of the case and from the point of view of a practical and prudent businessman rather than from the point of view of a tax gatherer upon strict juristic classification of the legal right secured in the process. In order to arrive at just and proper conclusion, one must look at the true nature and character of the advantage in a commercial sense (without giving undue emphasis to the form thereof or the terminology used) in the light of the surrounding circumstances. If the expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit making process and not for acquisition of an asset of a right of permanent character, the expenditure may be regarded as revenue expenditure even though the advantage may endure for an indefinite future. What is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way, having regard to the business realities. However, despite various tests evolved by the Courts in a long string of cases to determine what is attributable to capital and what to revenue, the controversy has to be decided afresh in each case applying one test or the other. None of the tests, as observed by Hidayatulla, J. (as his Lordship then was), is either exhaustive or universal. Each case depends on its own facts and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. The following note of caution given by Hidayatulla, J. in K.T.M.T.M. Abdul Kayoom vs. CIT (1962) 44 ITR 689, 703 (SC) : TC 16R.1006 is pertinent: “In deciding such cases, one should avoid the temptation to decide cases (as said by Cardozo) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases”.

8. As observed by the Supreme Court in Alembic Chemical Works Co. Ltd. vs. CIT (supra) there is no single definitive criterion which, by itself, is determinative as to whether a particular outlay is capital or revenue. The “once for all” payment test is inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to the business realities. In a given case, as observed by the Supreme Court in Empire Jute Co. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) : TC16R.953, the test of “enduring benefit” might break down. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test.

9. Reference may also be made in this connection to the decision of this Court in CIT vs. Kirloskar Cummins Ltd. (supra). In that case, the assessee-company was engaged in the manufacture and sale of oil engines etc. It entered into a collaboration agreement with a foreign company and in pursuance of the agreement paid to the foreign company a sum of Rs. 20,79,513 as consideration for supply of (i) technical assistance for products to be manufactured and assembly thereof and (ii) supply of drawings, specification or procedures and operation maintenance manuals for the foreign company’s engines. The assessee claimed the amount paid as a deduction in computing its income. The ITO took the view that one-half of the amount paid by it was in the nature of royalty and hence partook the character of capital expenditure. With regard to the remaining half, the ITO took the view that 50 per cent thereof related to the technical assistance for the products to be manufactured and assembled and the remaining 50 per cent related to supply of manufacturing, drawings, specification etc. and that the consideration relatable to the technical assistance received from day-to-day in respect of the products manufactured was revenue expenditure and the remaining 50 per cent was capital expenditure. The AAC concurred with the view of the ITO. The Tribunal held that the entire expenditure constituted revenue expenditure. On a reference to this Court at the instance of the Revenue, this Court held that the expenditure incurred by the assessee related to the carrying on of its business and, under the facts and circumstances of the case, it was an integral part of its profit-making process. On perusal of the facts of the case, the aim and object of the expenditure, the services rendered, the nature and character of the advantage obtained by the assessee, commercial expediency and the nature of the payment, it was held that the assessee did not derive any enduring benefit at all. It was observed that the expenditure incurred by the assessee related to the carrying on of its business and, undfacts and circumstances, it was an integral part of its profit-making process. The aim and object of the expenditure was to run the business more profitably. The various services under the collaboration agreement were for improvement in the operation of the existing business and its efficiency and profitability. The Court also took note of the fact that there was no once-for-all payment.

10. In CIT vs. Tata Engineering & Locomotive Co. Ltd. (supra), this Court referred to the decision of the Supreme Court in Alembic Chemical Works Co. Ltd. vs. CIT (supra), and observed: “This judgment has thus given a new dimension to the concept of ‘enduring benefit’. The approach now is more realistic and practical. The purpose of the outlay, its intended object and effect, are more relevant factors for determining whether a particular outlay is capital or revenue. In a given case, if the situation so requires, the test of ‘enduring benefit’ might even break down under the weight of these considerations”.

11. In Jonas Woodhead & Sons (India) Ltd. vs. CIT (supra), the Supreme Court referred to and relied upon their earlier decisions on this point including the decisions in Empire Jute Co. Ltd. (supra) and Alembic Chemical Works Co. Ltd. (supra). The Supreme Court also referred to the decision of this Court in CIT vs. Tata Engineering & Locomotive Co. Pvt. Ltd. (supra). This decision of the Supreme Court has in no way changed or varied the ratio of the earlier decisions on the point. On the other hand, most of the decisions including Empire Jute Co. Ltd. (supra) and Alembic Chemical Works (supra) have been referred to and relevant observation therein quoted with approval. The legal position has been summed up by the Supreme Court in Jonas Woodhead & Sons (India) Ltd. vs. CIT (supra) as follows: “It would thus appear that the Courts have applied different tests like starting of a new business on the basis of technical know-how received from the foreign firm, the exclusive right of the company to use the patent or trade marks which it receives from the foreign firm, the payment made by the company to the foreign firm whether a definite one-or dependent upon certain contingencies, the right to use the technical know- how of production or the activity even after the completion of the agreement, obtaining enduring benefit for a considerable part on account of the technical informations received from a foreign firm, payment whether made ‘once for all’ or in different instalments corelatable to the percentage of gross turnover of the product to ultimately find out whether the expenditure or payment thus made makes an accretion to the capital asset and after the Court comes to the conclusion that it does so, then it has to be held to be a capital expenditure”. In the above case, 25 per cent of the payment was held to be capital expenditure in view of the finding of the High Court that under the agreement with the foreign firm what was set up by the assessee was a new business and the foreign firm had not only furnished information and the technical know-how “but rendered valuable services in setting up of the factory itself”, and even after the expiry of the agreement the assessee was free to continue to manufacture the product in question.

12. In the case before us, the agreement between the assessee and the West German Company “Deutz” was to assist the assessee in the manner set out therein in carrying on in India, the manufacture of tractors and diesel engines on a commercial scale in the most economic and efficient way known to it and for that purpose to supply to the assessee for use in India full and correct technical and other confidential information and know-how, one set of printing of works-drawings of each machine and of components, patterns, forgings etc. and all confidential advice as might be necessary in connection with the manufacture of the tractors and diesel engines. It was provided that all documents and materials containing information relating to the know-how would be given by Deutz to the representative of the assessee in the Federal Republic of Germany and that they would continue to be the property of “Deutz”. In addition, the assessee was also granted sole and exclusive licence to manufacture the said machines during the continuance of the agreement and to sell the same. Deutz also guaranteed, for the period of the agreement, to supply the latest technical developments in connection with the tractors and diesel engines known to them or which may be known to them during the period of the agreement. It was provided that the rights conferred by the agreement were not capable of assignment, encumbrance, letting on sub-licence by the assessee and they were always to be treated as confidential. It was also provided that the know-how, documents, materials etc. provided by Deutz could be used by the assessee solely for the purpose of the agreement and were not to be communicated to any another person, firm or company. The assessee was also obliged under cl. 15 of the agreement to keep the technical documents secret. In consideration of the use of the know-how to be furnished by Deutz to the assessee in West Germany, the assessee was to pay to Deutz, free of tax, the following : (a) Within sixty days of the signing of the agreement : DM 125,000 (b) At the end of twelve months of the signing of the agreement, but . before fourteen months : DM 225,000 (c) At the end of twenty-four months of the signing of greement, . but before twenty-six months : DM 520,000 (d) At the end of thirty-six months of the signing of the agreement, . but before thirty-eight months : DM 530,000 The assessee was also required to pay to Deutz in consideration of the rights granted by them to the assessee at all times during the continuance of the agreement, royalty @ 3 per cent of the net sales value of each type of the machine and spare parts manufactured by the assessee and 5 per cent of the sale value of the machines and spare parts thereof exported by the assessee out of India. The agreement was for a period of five years from the date of starting of the commercial production. In cl. 21 of the agreement it was provided that the agreement might be terminated forthwith by the party not in default giving to the party in default a notice in writing terminating the agreement in any of the events set out therein. One of the events was the assessee being in arrears in payment of any of the sums payable by it to “Deutz” under the provision of the agreement and the same remaining unpaid for a period of 30 days from the date on which it fell due under cl. 9 of the agreement. In the assessment for the asst. yrs. 1974-75 and 1975-76, the assessee claimed deduction of the amount paid by it in term of cl. 9 of the agreement and also the amount of royalty. There was no dispute about the allowability of deduction of the amount of royalty. It was accepted by the ITO as a revenue expenditure. The dispute was about the deductibility of the amount payable under cl. 9 of the agreement as a revenue expenditure. A sum of Rs. 5,19,630 was payable by the assessee in the previous year relevant to the asst. yr. 1974-75 and Rs. 16,99,346 in the previous year relevant to the asst. yr. 1975-76. The expenditure represented by these amounts, according to the Revenue, was of capital nature. The Tribunal held the same to be revenue expenditure allowable as deduction in computing the income of the assessee. The question is whether the Tribunal was right in its conclusion.

We have carefully considered the terms and conditions of the collaboration agreement in the light of the decisions of the Supreme Court and of this Court referred to above. On a perusal of the facts of the case, the aim and object of the expenditure, the services rendered, the nature and character of the advantage obtained by the assessee and commercial expediency, it is clear to our mind that the expenditure in question related to the carrying on of the business of the assessee and was an integral part of its profit-making process. The aim and object of the expenditure was to run the business more profitably. There was a secrecy clause in the agreement which precluded the assessee from giving any of the information supplied to it to any third party. All these factors clearly indicate that the various services under the agreement were for the efficient running of the business of the assessee and better profitability. The conditions in the agreement as to nonpartibility, confidentiality and the secrecy of the know-how also indicate that the right obtained by the assessee was the right to use the know-how. There was no acquisition of the know-how by the assessee. Considering all these relevant factors, we are of the clear opinion that the expenditure incurred by the assessee for getting the technical know-how and other assistance from Deutz represented revenue expenditure which was allowable as a deduction in the computation of the income of the assessee.

The next controversy is in regard to the year in which the amounts in question can be claimed as a deduction. The assessee followed mercantile system of accounting. That being so, the expenditure incurred by it would be allowable as a deduction in the year in which the liability accrued for the first time. However, in the instant case, it is contended that the accrual of the liability was dependent upon the approval and/or sanction of RBI and in that view of the matter, the liability did not accrue and/or arise till the receipt of the sanction. Our attention was drawn to the finding of the Tribunal that no remittance to a person resident outside India or to the credit of such person could be made without the approval of the RBI. That being so, it was contended that the liability would arise only on receipt of the approval of the RBI. There is no dispute in this case that the approval of Reserve Bank was received by the assessee in the previous years in which the deductions have been claimed. It is also stated that the amounts were also remitted by the assessee in the previous years relevant to the assessment years under consideration. It was also submitted, in the alternative, that having regard to the mandatory requirement of approval of the RBI for remittance, the assessee did not follow mercantile system of accounting in respect of amounts payable under the agreement in question. The method of accounting followed in respect thereof was cash system and in that view of the matter, the assessee would be entitled to claim deduction of the amounts remitted by it in the assessment years under consideration in which the payments were made by the assessee to Deutz.

We have carefully considered the above submissions. So far as the controversy in respect of the year of accrual in view of the statutory requirement of approval of RBI is concerned, the law is well settled by the decision of the Supreme Court in Nonsuch Tea Estate Ltd. vs. CIT 1975 CTR (SC) 20 : (1975) 98 ITR 189 (SC) : TC 16R.703 that where accrual of liability is dependent upon some approval and/or sanction of the statutory authority, it will accrue and/or arise only on such approval. In the above case, the assessee-company followed mercantile system of accounting. For the period 1st April, 1956 to 6th June, 1956, the assessee-company credited a sum of Rs. 9,320 to the account of managing agents as their remuneration in accordance with the terms of the proposed new agreement. This was disclosed in the published accounts of the company for the year 1st July, 1955 to 30th June,1956, relevant to the asst. yr. 1957-58. For the purpose of assessment of income-tax, however, the company added back the said sum of Rs. 9,320 to its taxable income. In the next accounting year ending 30th June, 1957, relevant to the asst. yr. 1958-59, the same process was followed with regard to the remuneration payable to the managing agents. For the asst. yr. 1959-60 for which the previous year was 1st July, 1957 to 30th June, 1958, a total sum of Rs. 93,188 was shown as managing agents’ remuneration payable during the year. This amount comprised proportionate remuneration for three months for the period ending 30th June, 1956 amounting to Rs. 9,320, remuneration for the year ending on 30th June, 1957 and managing agents’ expenses for the year 30th June, 1957 and managing agents’ expenses for the year ending 30th June, 1956 paid/recouped during the year ending on 30th June, 1958, relevant to the asst. yr. 1959-60. Though the above sums did not pertain to the previous year relevant to asst. yr. 1959-60, the company claimed it as deductible expenditure for that year on the ground that the same became payable only during that year when the Government accorded its approval to the new agreement. The ITO rejected this claim on the view that the approval of the Central Government was necessary only for actualpayment and “the assessee should have ascertained the liability for each year and claimed it on the mercantile basis which was the system adopted by the assessee-company”. The AAC and the Tribunal also took the same view. On reference, the High Court was of the opinion that though at the time the debit entries were made in the accounts, approval of the Central Government had not come but when it came later, it gave legal effect to the debit entries not from the date of the approval but from 1st April, 1956. On appeal of the assessee, the Supreme Court held that the High Court was in error in answering the question referred to it against the assessee. The Supreme Court observed that even an assessee following the mercantile system of accounting is not entitled to claim a deduction until liability for the same for which deduction is claimed is approved. The Supreme Court took note of s. 356 of the Companies Act, 1956 which prohibits appointment or reappointment of a managing agent unless the Central Government approves such appointment or reappointment and observed that it was only when the Central Government conveyed its approval to the appointment of the persons concerned as managing agents, by its letter dt. 2nd Sept., 1957, that appointment became effective and the Company’s liability to pay the remuneration of the managing agents was approved. It was observed: “The position here is not that the liability had arisen earlier and its quantification only depended on the approval of the Central Government. It is true that the liability became effective from 1st April, 1956, a date anterior to the relevant previous year, but that is because the Central Government chose to give its approval retrospective operation. The liability in these circumstances cannot be said to have arisen from any date prior to 2nd Sept., 1957, when the approval was given as s. 326 contains an absolute prohibition against the appointment or reappointment of a managing agent before the approval of the Central Government was obtained”.

17. The ratio of the above decision squarely applies to the facts of the present case. Here also, under s. 9 of the Foreign Exchange Regulation Act, 1973, there was a restriction on payments to any person resident outside India, save and except as may be provided in accordance with the general or special exemption. Sec. 9 so far as relevant, reads as follows: 9. Restriction on payments.—Save as may be provided in and in accordance with any general or special exemption from the provisions of this sub-section which may be granted conditionally or unconditionally by the Reserve Bank, no person in or resident in India shall (a) make any payment to or for the credit of any person resident outside India; (c) draw, issue or negotiate any bill of exchange or promissory note or acknowledge any debt, so that a right (whether actual or contingent) to receive a payment is created or transferred in favour of any person resident outside India; (d) make any payment to, or for the credit of, any person by order or on behalf of any person resident outside India; (e) place any sum to the credit of any person resident outside India;” In the instant case, the RBI granted approval to the assessee in the previous years relevant to the assessment year under consideration and the remittances were also made in the same years. That being so, the liability to pay the amount pertaining to the earlier assessment years can be said to have accrued or arisen only in the years under consideration and the same was, therefore, allowable as deduction in computation of income of that year.

18. We may now turn to the alternate submission of the learned counsel for the assessee that in view of the provisions of Foreign Exchange Regulation Act, the assessee did not follow the mercantile system of accounting in respect of the above expenditure but followed cash system of accounting in respect thereof and in that view of the matter, it is entitled to deduction in the assessment of its income for the years under consideration because the payments were made in the previous years relevant to the assessment years under consideration. Our attention was drawn by the learned counsel to the following passage from the decision of this Court in CIT vs. Citibank N.A. (1994) 119 CTR (Bom) 383 : (1994) 208 ITR 930 (Bom) : 39R.844. “Though the cash system and mercantile system of accounting are the two most common systems of accounting prevalent in the country, there can be no dispute about the fact that there are also innumerable other systems of accounting besides these two systems. Such systems are commonly known as ‘hybrid system of accounting’. In such a system, there is certain element of both cash and mercantile systems. An assessee following such a system may employ one method of accounting for one class of business or one class of customers or transactions and a different method for another class. If an assessee follows such a hybrid system and in respect of certain loan transactions does not follow the mercantile system of accounting for debiting interest to the accounts of the parties and crediting the same to the P&L a/c, no fault as such can be found with the system followed by the assessee”. We have carefully considered the above submissions. However, in view of our finding that the liability accrued in this case on the date of the receipt of the approval of the RBI in the years under consideration, it is not necessary for us to examine this alternate submission. In view of the foregoing discussion, we answer all the three questions referred to us in the affirmative and in favour of the assessee. This reference is disposed of accordingly with no order as to costs.

[Citation : 231 ITR 849]

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