Delhi H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in directing the ITO to allow the deduction of only such amounts in respect of commission payable to Miss Nellie Melson during the relevant year, as were allowed to be remitted by the Reserve Bank of India in the relevant year ?

High Court Of Delhi

Bhai Sunder Dass & Sons Co. (P) Ltd. vs. CIT

Sections 37(1), 145

Asst. Year 1972-73, 1973-74

D.K. Jain & Ms. Sharda Aggarwal, JJ.

IT Ref. Nos. 32 & 33 of 1981

11th September, 2002

Counsel Appeared

B.B. Ahuja with R.A. Dwivedi, for the Petitioner : Sanjiv Khanna with Subhash C. Sharma & Ajay Jha, for the Respondent


D.K. JAIN, J. :

At the instance of the assessee, the Income-tax Appellate Tribunal, Delhi Bench-D (for short the Tribunal) has referred under section 256(1) of the IT Act, 1961 (for short the Act) the following question arising out of cross- appeals, being ITA No. 691/Del/1976-77 and 434/Del/1977-78, for opinion of this Court.

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in directing the ITO to allow the deduction of only such amounts in respect of commission payable to Miss Nellie Melson during the relevant year, as were allowed to be remitted by the Reserve Bank of India in the relevant year ?”

The factual position, as delineated in the statement of the case is as under : During the relevant previous years, ending on the immediately preceding financial year for each of the asst. yrs. 1972-73 and 1973-74, the assessee, a private limited company, was engaged in the business of manufacture of concrete mixtures, concrete vibrators and other machinery used for construction of building, dams, etc. The issue relates to the disallowance of Rs. 1,72,462 claimed to have been paid by the assessee as commission to one Miss Nellie Melson of Copen Hagen, Denmark on the plea that she had rendered services as a technical consultant in Cairo for securing orders for the export of products of the assessee-company in that and other countries. According to the assessee an agreement dt. 5th May, 1970 was entered into with the lady. The stand of the assessee was that export order under LC 47/8342 worth Rs. 1,06,31,240 was secured through her and on the basis of the agreement she was entitled to a commission of Rs.5,31,580, worked out at 5 per cent of the total value of the order. Upto the end of the relevant accounting period the assessee had effected exports to the tune of Rs. 98,00,000. The Reserve Bank of India had granted permission to the assessee to remit 5 per cent of the commission to the lady on FOB value of the goods shipped/realised through LC to the extent of Rs. 3,14,333 by 31st Aug., 1973.

During the course of assessment proceedings for the relevant assessment years, the ITO required the assessee to produce documentary evidence to prove that orders for the aforenoted supplies were secured through the efforts of the said lady as also in respect of her rendering technical assistance to them. the assessee was also directed to produce the original agreement by virtue whereof the commission was claimed as business expenditure. Observing that the assessee had not produced the original agreement dt. 5th May, 1970, though they had obtained the agreement letter from the records of the Deputy Controller, Foreign Exchange Control Department and listing about twenty reasons, which included the question of genuineness of the agreement, the ITO held that the amount of Rs.,1,72,462, allegedly paid to Ms. Nellie Melson, could not be allowed as business expenditure under s. 37 of the Act. According to the ITO, the assessee had diverted its profits outside India by obtaining permission from the Reserve Bank of India without satisfying the Department about the antecedents of the lady.

Aggrieved, the assessee took the matter in appeal before the Appellate Assistant Commissioner (for short the AAC). Before the AAC, the assessee produced confirmatory letters from the lady as to the receipt of commission by her from the assessee. Although the AAC felt that the lady had probably done some work on behalf of the assessee but he held that since the exact nature and extent of the assistance rendered by her to the assessee- company could not be ascertained, the disallowance made by the ITO on this account was in order. However, insofar as the asst. yr. 1973-74 is concerned, the position is slightly different. For the said assessment year, the ITO had referred the matter to the Inspecting Assistant Commissioner (for short the IAC) under s. 144B of the Act, seeking his approval for the proposed disallowance in respect of the commission claimed as payable to the lady. Before the IAC, the assessee produced one Mr. Tarek Foda, who admitted that the payment shown to have been made to the lady was in fact received by him under an arrangement between both of them in respect of these payments. He, however, refused to divulge the details of his bank account on the plea that this being a foreign income in his hands, under the local laws of his country, it was not necessary to declare the foreign income in his return. The IAC was of the view that the assessee’s claim deserved to be allowed inasmuch as the expenditure in question had been incurred during the course of the assessee’s business. He, accordingly, directed the ITO to allow the said expenditure, subject to the payee producing copies of his bank accounts showing receipt of the payments in question. ‘Since the copies of the bank accounts were not produced before the ITO, he disallowed the assessee’s claim in respect of this assessment year as well. However, on assessee’s appeal, the AAC allowed the claim on the ground that the payee had been produced and had confirmed the receipt of the payment. The AAC also observed that under the mercantile system of accounting the liability in this regard had already accrued and the assessee-company was entitled to claim the same as deduction. In respect of the asst. yr. 1972-73, the assessee went in further appeal to the Tribunal, whereas in respect of the asst. yr. 1973-74, the Revenue was in appeal before the Tribunal.

7. Observing that the IAC had found an arrangement between the assessee and the lady and there being some evidence to show that some assistance had been rendered by the technical consultants retained in UAR and that the payments through the drafts had been acknowledged by Mr. Foda, Supported by the confirmatory letters issued by the lady the Tribunal held that the assessee was entitled to claim the sum as business expenditure. However, while holding so the Tribunal gave the following directions : “We, however, consider that the assessee- company could not have acted against the laws of the country and only such payment as were allowed by the Reserve Bank of India to be remitted, shall be allowed as a deduction in the two years under consideration. Subject to the same the assessee’s claim in regard to the payment of commission to the lady shall stand allowed as a deduction. The ITO shall verify the amounts of the drafts transmitted by the assessee-company in the name of Miss Melson in this regard and the amount of the drafts in respect of which the assessee-company had obtained the permission of the Reserve Bank of India.” [Emphasis, italicised in print, added by us]

It is against the direction to allow as business expenditure only the actually remitted amount that the assessee, is aggrieved of and, therefore, on their moving application under s. 256(1) of the Act the Tribunal has referred the aforenoted question. The Revenue seems to have accepted the decision of the Tribunal.

We have heard Mr. B.B. Ahuja, learned senior counsel for the assessee and Mr. Sanjiv Khanna, learned senior standing counsel for the Revenue.

From the aforenoted factual matrix it is evident that presently there is no dispute with regard to the existence and the genuineness of the agreement dt. 5th May, 1970, stated to have been entered into between the assessee and Miss Nellie Melson. As noticed above, the Revenue is not in reference against the order of the Tribunal and, therefore, it has no objection to the commission being allowed as business expenditure but limited to the amount actually remitted to the lady after obtaining permission of the RBI, therefore, the sole question which survives for consideration is whether assessee’s liability to pay commission under the afore-mentioned agreement and consequently to claim the same as business expenditure while computing profits and gains of the business for the relevant previous year is to be determined as per the agreement between the parties or it is dependent on the permission of the RBI to remit a particular amount. Whether the assessee is entitled to a particular deduction or not depends on the provisions of law relating thereto and not on his own ipse dixit by making entries in his books of accounts, depending on his own convenience. Sec. 145 of the Act, as it existed prior to its substitution by the Finance Act, 1995, w.e.f. 1st April, 1977, provides that income under the head “Profits and gains of business or profession”, where the assessee maintains books of accounts, shall be computed in accordance with the method of accounting regularly employed by the assessee. It is a mandatory provision. Therefore, where an assessee regularly employs a particular method of accounting, his income has to be computed in accordance with such regular method unless by that method it is not possible to arrive at true profits. The assessee is free to adopt either cash or mercantile or hybrid system of accounting. But once of particular method of accounting is adopted for a source of income, assessee cannot be permitted to employ a different method of accounting for part of the transactions or events relating to one source of income. Once a particular method is adopted and accepted as a regular system of accounting, both the assessee and the Revenue are bound to accept the same for ascertaining the true and correct profits and gains of business for the relevant previous year.

In the instant case, there is no dispute that the assessee followed mercantile system of accounting and, therefore, any expenditure incurred by it is allowable as a deduction in the year in which the liability accrued for the first time. However, the question for consideration is whether the accrual of liability on account of payment of commission under agreement dt. 5th May, 1970, got deferred because permission to remit the full amount of commission accrued in terms of the agreement to the lady had not been received during the previous year ? The stand of the Revenue is that since no amount could be remitted abroad without the approval of the RBI, liability to pay commission would arise only after Reserve Bank of India had granted the permission to remit the amount, and therefore, the assessee could not claim deduction for the entire amount, determined to be payable to the lady, in the relevant assessment years.

The controversy with regard to the year of accrual of liability in view of some statutory restrictions came up for consideration before the Supreme Court in Nonsuch Tea Estate Ltd. vs. CIT 1975 CTR (SC) 20 : (1975) 98 ITR 189 (SC) and it was held that where accrual of liability is dependent upon some approval and/or sanction of a statutory authority, it will accrue and/or arise on such approval. The apex Court said that even an assessee following mercantile system of accounting is not entitled to claim a deduction until the liability for the sum for which deduction is claimed is accrued. In that case it was held that in view of s. 326 of the Companies Act, 1956, which contained an absolute prohibition against the appointment or reappointment of the managing agent before the approval of the Central Government was obtained the appellant company’s liability to pay the remuneration of the managing agent arises only when Government conveys its approval and not prior to that date. Placing strong reliance on the decision in Nonsuch Tea Estate (supra) and a decision of the Bombay High Court in Dorr-Oliver (India) Ltd. vs. CIT (1999) 154 CTR (Bom) 341 : (1998) 234 ITR 723 (Bom), it is vehemently submitted by Mr. Khanna, learned counsel for the Revenue, that since in the instant case, under s. 9 of the Foreign Exchange Regulation Act, 1973 (for short the FERA), there was a restriction on payments to any person resident outside India and no amount could be remitted abroad without permission of RBI, no liability to pay commission could arise till such permission was granted and, therefore, the Tribunal was fully justified in restricting the claim of the assessee to the actual amount remitted in terms of the approval.

We are unable to persuade ourselves to agree with learned counsel for the Revenue. It is common ground that the agreement under which the commission was sought to be paid did not require approval of the RBI. There was no restriction in entering into such agreement either. Thus, the accrual of liability to pay commission was not dependent on RBI’s permission to remit the sum abroad. The liability arises in terms of an independent agreement between the parties, which admittedly was not governed by the provisions of FERA. In CIT vs. Shri Goverdhan Ltd. (1968) 69 ITR 675 (SC) at p. 681, the apex Court had observed that “the legal position is that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happens. But if it is a debt the fact that the amount has to be ascertained does not make it any less a debt if the liability is certain and what remains is only a quantification of the amount : debitum in praesenti, solvendum in futuro”. As already noticed, in the present case, the restriction under s. 9 of the FERA was only on the payment abroad, for which permission was required to be obtained from the RBI. Therefore, what was deferred was the discharge of the liability and not the accrual of the liability. At this stage, we may usefully refer to the observations of their Lordships of the Supreme Court is Cocacola Export Corporation vs. ITO & Anr. (1998) 146 CTR (SC) 250 : (1998) 231 ITR 200 (SC) to the effect that FERA contains stringent provisions for conservation of foreign exchange reserves of the country and for that purpose regulates certain payments and dealings in foreign exchange, etc., but the embargo placed in these provisions regarding remittances to be made abroad has nothing to do with the amount of disallowance under the Act.

In our opinion, therefore, since the liability of the assessee to pay commission to the lady accrued underagreement dt. 5th May, 1970, and the assessee was maintaining its account on mercantile system of accounting, it was entitled to deduct such liability which had accrued during the period for which profits and gains were being computed and, therefore, the Tribunal was not right in law in restricting the deduction in respect of the commission to the amount actually remitted during the relevant year. Support to this view is lent by a decision of the Gujarat High Court in CIT vs. Super Scientific Clock Co. (1999) 154 CTR (Guj) 424 : (1999) 238 ITR 731 (Guj), wherein rejecting the stand of the assessee that it was entitled to claim deduction on the basis of actual payment on receipt of RBI’s approval, it was held that under mercantile system of accounting liability accrues and is deductible in the year in which the same is payable and not in the year in which the assessee actually pays it and, further, the procedure for obtaining permission of RBI to make payment does not postpone accrual of liability or make it contingent.

The decision of the apex Court in Nonsuch Tea Estate (supra) does not advance the case of the Revenue. As noticed above, in that case there was an absolute restriction against the appointment or reappointment of a managing agent without the approval of the Central Government and, therefore, till such approval had been obtained and granted, there was no question of any liability to pay the remuneration accruing, which is not the case here. Again, there was absolutely no restriction on the assessee entering into agreement with any person resident outside India for rendering of services. The restriction was only limited to the remittances of money abroad without the permission of the RBI.

It was also urged by Mr. Khanna, learned counsel for the Revenue, that if ultimately the RBI was not to grant permission to the assessee to remit the entire amount claimed as liability, while computing profits and gains of the business, the assessee would be getting undue benefit. We do not find any substance in the contention. It is difficult to comprehend how an accrued liability would either cease to be one or get effaced or even deferred merely because the Revenue holds an apprehension that a liability claimed as an expenditure may not be discharged wholly or partly. There is no gainsaying that the Act, a self-contained code, contains sufficient provisions to take care of such an eventuality. Any remission or cessation of a trading liability is deemed to be profits and gains of business and accordingly chargeable to income-tax as the income of the previous year.

For the foregoing discussion, we answer the question referred in the negative i.e., in favour of the assessee and against the Revenue. The references stand disposed of accordingly with no order as to costs.

[Citation : 259 ITR 33]

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