High Court Of Patna
Jaiswal Ceramic Industries vs. CIT
Sections 145, 9
Asst. Year 1972-73
Uday Sinha & B.N. Agrawal, JJ.
Taxation Case No. 117 of 1977
11th May, 1987
K.M. Jain, M. Nath & Vikash Jain, for the Assessee : B.P. Rajgarhia & S.K. Sharan, for the Revenue
UDAY SINHA, J.
This is a reference under s. 256(1) of the IR Act, 1961. The question referred to us in as follows : “Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the claim of the assessee to the extent of Rs. 1,63,160 by way of reduction in sales could not be allowed in the asst. yr. 1972-73 ?”
2. The answer to the question will depend upon whether the claim to money can bee said to be a mere claim. If it be a mere claim, it will not be liable to be treated as income accrued to an assessee maintaining his accounts on the mercantile system. If, however, the expression “mere claim” is different from claim, th value of the goods and services supplieed or rendered must be deemed to have accrued and thus added to the taxable income.
3.In this reference, we are concerned with the asst. yr. 1972-73. The assessee is a registered firm and follows the mercantile system of accounting. During the relevant accounting year, the assessee supplied fire-bricks to a firm by the name of Jeewan Lal & Co. (construction). According to the assessee, the value of the bricks sold was Rs.
8,80,945. The assessee, however, did not include the entire sum of Rs. 8,80,945 in the income side of his accounts, but deducted a sum of Rs. 1,63,160. This deduction was made on account of the fact that the purchaser of the bricks disputed his liability to pay this sum presumably on the basis of differences between the parties about the rate at which the bricks were to be sold. The assessee filed a money suit for realisation of Rs. 1,63,160. The suit was pending on the day the assessment was done by the ITO. The assessee claimed that the sum of Rs. 1,63,160 was an allowable deduction on the footing that it was a mere claim and not income. The ITO rejected the stand of the assessee for treating the said sum of Rs. 1,63,160 as a bad debt and he, therefore, added it to his total income. On appeal, the assessee once again pressed his claim for deduction of the said sum of Rs. 1,63,160 as a bad debt. According to the assessee he had billed the purchaser at the market rate of sale of the bricks, but the purchaser disputed the amount on the footing that it was not as per the agreed rate of sale. The assessee admitted before the AAC that there was no agreement at all between the assessee and the purchaser company. The AAC, therefore, confirmed the order of the ITO. The assessee made a vain attempt to press his claim for deduction of the claim in the suit. The Tribunal noted that on the one hand, the assessee wanted this aforesaid sum to be treated as bad debt and, on the other hand, he was pressing his claim in a suit filed in the civil court. In para 12 of its order, the Tribunal has noted that the purchaser had refused payment on the ground that the goods were sub standard or defective. The suit really was for realisation of Rs. 3,35,668 which was inclusive of other expenses besides the sum of Rs. 1,63,160. The Tribunal held that during the accounting year, the purchaser had not raised any dispute, observing that the refusal to pay the sum claimed by the assessee came in November, 1972. It, therefore, held that the sum sued for was a sum accrued to the assessee during the relevant assessment year. The Tribunal, at para.14 of its order, held that there was no material before it to show that there was any objection raised by the purchaser in the relevant accounting period. The assessee at no point of time expected any reduction. The Tribunal, therefore, rejected the claim of the assessee holding that the claim was not admissible in this assessment year at least. The assessee having failed before the Tribunal as well, claimed reference which the Tribunal has done. Hence, the present reference before us for our opinion.
The cardinal facts are that the assessee sold fire-bricks. The purchaser, Jeewan Lal & Co. (construction), purchased them. The delivery and acceptance of the goods were not ex gratia. We do not know whether the deliveries were made in one lot or in different consignments. According to the assessee, the goods sold were worth Rs. 8,80,945. According to the purchaser, they were not of the value claimed by the assessee. We do not know when the dispute erupted. There is nothing on the record to indicate that there was any dispute raised by Jeewan Lal & Co. in regard to the rates. All that is on the record is that in November, 1972, the assessee filed a money suit for realisation of a sum of Rs. 1,63,160 plus interest. The suit was pending on the date the assessment order was passed. The assessee, treating the said sum as contingent liability, deducted the said sum in his books. The question is, had the sum of Rs 1,63,160 also become due to the assessee? If it had become due, that income must be held to have accured to the assessee. If it had not become due, it would not be deemed to have accured.
The core question in this reference is whether the sum of Rs. 1,63,160 was income of the assessee available to be taxed. What is to be taxed under the IT Act is income. The profits and gains of business or profession constitute income. The profits and gains are those which have been received by the assessee or have accrued. What is taxable in any particular year depends materially upon the method of accounting adopted by the assessee. Income received or income accrued are both chargeable to tax under s. 28 of the IT Act, 1961. The computation of this income is provided for in s. 29 of the Act. Sec. 36 deals with the deductions admissible to an assessee. Sec. 145 of the Act provides for the method of accounting. Income has to be computed in accordance with the method of accounting regularly employed by the assessee. Generally speaking, the methods of accounting are two, namely, cash system of accounting and mercantile system of accounting. The difference between the two systems was highlighted by Sir Courtney Terrell C.J. in Dhakeshwar Prasad Narain Singh vs. CIT (1936) 4 ITR 71 (Pat) in the following words : ” Now, there are two methods of accounting for the income, profits and gains of a business which are generally referred to as the cash basis and the mercantile basis. According to the former, a record is, as in this case, kept of actual receipts and actual payments, entries being made only when money is actually collected or disbursed and if the profits of the business are accounted for in this way, the tax is payable on the difference between the receipts and the disbursements for the period in question. There is, secondly, the mercantile system under which a P & L a/c is maintained. At the end of the financial year, the assets and liabilities are valued and entered in the account and the difference between the two is the profit upon which the tax is paid.”
6. Iqbal Ahmad C.J. had the following to say in CIT vs. Smt. Singari Bai (1945) 13 ITR 224 (All) (FB) in regard to the mercantile system of accounting: “The distinguishing feature of this method of accountancy is that it brings into credit what is due immediately it becomes legally due and before it is actually received ; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. The âmercantile accountancy system ‘ is the opposite of the âcash system of book- keeping ‘ under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed.” It will be observed from the above that the mercantile system of accounting brings into credit what is due immediately it becomes legally due and before it is actually received. The matter was highlighted by Shah J. with great finesse in CIT vs. A. Krishnaswami Mudaliar (1964) 53 ITR 122 (SC), in the following words : “Among Indian businessmen, as elsewhere, there are current two principal systems of bookkeeping. There is, firstly, the cash system in which a record is maintained of actual receipts and actual disbursements, entries being posted when money or money’s worth is actually received, collected or disbursed. There is, secondly, the mercantile system, in which entries are posted in the books of account on the date of the transaction, i.e., on the date on which rights accrue or liabilities are incurred, irrespective of the date of payment. For example, when goods are sold on credit, a receipt entry is posted as of the date of sale, although no cash is received immediately in payment of such goods and a debit entry is similarly posted when a liability is incurred although payment on account of such liability is not made at the time. There may have to be appropriate variations when this system is adopted by an assessee who carries on a profession. Whereas, under the cash system, no account of what are called the outstandings of the business either at the commencement or at the close of the year is taken, according to the mercantile method, actual cash receipts during the year and the actual cash outlays during the year are treated in the same way as under the cash system, but to the balance thus arising, there is added the amount of the outstandings not collected at the end of the year and from this is deducted the liabilities incurred or accrued but not discharged at the end of the year. Both the methods are somewhat rough. In some cases, these methods may not give a clear picture of the true profits earned and certainly not of taxable profits. The quantum of allowances permitted to be deducted under diverse heads under s. 10(2) from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining in sub-s. (5), the word âpaid’ which is used in several clauses of sub-s. (2) as meaning actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under s. 10. Again, where the cash system is adopted, there is no question of bad debts or outstandings at all, in the case of mercantile system, against the book profits, some of the bad debts may have to be set off when they are found to be irrecoverable. Besides the cash system and the mercantile system, there are innumerable other systems of accounting which may be called hybrid or heterogeneous-in which certain elements and incidents of the cash and mercantile systems are combined. “
7. Once again it was emphasized that the mercantile system of accounting is one in which entries are posted in the books of account on the date of the transaction and that is the date on which rights accrue or liabilities are incurred, irrespective of the date of payment. The other significant aspect is that apart from the cash system of accounting and the mercantile system of accounting, there is another deviation which may be called the hybrid or heterogeneous system of accounting. In this category, certain elements and incidents of the cash and mercantile systems are combined. It is easy to say that when income accrues although not paid, that income is liable to tax, but the question of questions is when is income said to have accrued ? I have stated earlier that s. 145 of the Act provides for the method of accounting and in terms thereof the assessee is free to maintain his accounts in whatever manner he considers appropriate, but that must be a method regularly employed. The methodology may differ from situation to situation that is where the mercantile system of accounting and the hybrid system of accounting overlap.
8. Once again in CIT vs. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC), Hidayatullah J. ruled that income-tax is a levy on income and the IT Act takes into account two points of time at which the liability to tax was attracted, viz., the accrual of the income or its receipt. If income did not result at all, there could not be any tax, even though in accordance with the principles of bookkeeping, an entry was made about a ” hypothetical income ” which did not materialise. In that connection, Hidayatullah J. observed as follows: ” It may be reiterated that in some limited fields where something which is the reality of the situation prevents the accrual of the income, then the notion of real income, i.e., making the income accrue in the real sense of the term can be brought into play but the notion of real income as it shall presently be indicated cannot be brought into play, where income has accrued according to the accounts of the assessee and there is no indication by the assessee to treat the amount as not having accrued. Suspended animation following inclusion of the amount in the suspense account does not negate accrual and after the event of accrual, corroborated by appropriate entry in the books of account, on the mere ipse dixit of the assessee, no reversal of the situation can be brought about. “
9. Thus, according to Hidayatullah J., suspended animation by inclusion of an amount in the suspense account does not negate accrual of income. In Morvi Industries Ltd. vs. CIT 1974 CTR (SC) 149:(1971) 82 ITR 835 (SC), it was reiterated that income accrued when it became due. The postponement of the date of payment did not affect the accrual of income and the fact that the amount of income was not subsequently received by the assessee would not detract from or affect the accrual of the income although non-receipt may in appropriate cases be a valid ground for deduction.
10. The latest enunciation of the law on the subject came from Sabyasachi Mukharji J. in State Bank of Travancore vs. CIT (1986) 50 CTR (SC) 290:(1986) 158 ITR 102 (SC). That was a case where certain sums of money representing interest on sticky advances were treated as income of the assessee for the respective assessment years. After reviewing all the cases on the subject of accrual of income it was observed as follows :
“The concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of the accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. Reference may be made to Calcutta Co. Ltd. v CIT (1959) 37 ITR 1 (SC).”
11. The central question in that case was whether receipts of interest from borrowers which were considered doubtful of recovery was income or not. Mukharji J. held that income in respect of sticky advances must be treated as having accrued to the assessee although it had been considered doubtful of recovery. The law on the subject was laid down on page 155 as follows: “As a result of the aforesaid discussion, the following propositions emerge : (1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation no income had resulted because the income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor’s account and not reversing that entry, but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee. (8) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well- recognised limits. “
12. It will be seen from the above that the conduct of the party in treating an income in a particular manner is material evidence of the fact whether income had accrued or not. His Lordship made it amply clear that although the conduct of the assessee is relevant or material in deciding whether income had accrued or not, yet the ipse dixit of the assessee cannot be the last word. Where the conduct of the assessee is unequivocal, mere improbability of recovery cannot be a pointer to the question whether income had not resulted or accrued to the assessee. What had accrued must be considered from the point of view of the probability and improbability of realisation in a realistic manner.
13. Applying the aforesaid principles laid down in the decisions referred to above, it will be observed that in the instant case, the assessee supplied sold fire-bricks. There was no objection in any matter till the goods had been delivered. Later, objection was taken by the purchaser. On the basis of the authority of law laid down in the cases of CIT vs. A. Krishnaswami Mudaliar (1964) 53 ITR 122 (SC) and Morvi Industries Ltd. vs. CIT (supra), it is patent that the assessee became legally entitled to receive the consideration for the sale of firebricks. The attitude of the assessee was that at all times, he treated that sum as his income on account of sale of fire-bricks.On that very footing, he instituted a suit for recovery of the aforesaid sum. His pleadings must have been that he was entitled to receive that sum. The moment it is said that there was entitlement in the assessee to receive the sum, it has to be held that the sum claimed had accrued as income to the assessee the moment the goods had been supplied. The fact that the purchaser disputed the assertion of the assessee in regard to the price of the fire-bricks is not conclusive of the matter. The matter had to be judged from the viewpoint of the assessee. The institution of the suit shows that the assessee considered that the sum not paid was due to him. The situation is akin to the one existing in the case of State Bank of Travancore vs. CIT (supra). The interest on advances, though not received by the assessee and although they were considered doubtful of recovery, they were held as having accrued to the assessee. After approving the decision of the Bombay High Court in CIT vs. Confinance Ltd. 1973 89 ITR 292,, Sabyasachi Mukharji J. observed that in the case of State of Bank of Travancore vs. CIT (supra), the facts were much worse. His Lordship emphasised upon the circumstance that the assessee had not only not written off the loans, but it was still treating the loans as alive by keeping them in its suspense account. His Lordship, affirming the decision of the Calcutta High Court in James Finlay & Co. vs. CIT (1982) 137 ITR 698, observed as follows : “In the instant appeals before us, the position is still worse for the assessee. There is no claim that there was any change in the method of accounting. The High Court further held in James Finlay’s case (supra), that though there was difficulty in realising the interest in the year of account, there was no material to show that there was any agreement with debtors to waive the interest or to keep these in suspense account. Hence, the claim for interest had not been given up. The amounts accrued and continued to remain accrued and were, therefore, income assessable to tax.”
14. The situation in the instant case is similar to that of the cases of the Bombay and Calcutta High Courts and of State Bank of Travancore vs. CIT (supra). In the instant case as well, the assessee had not given up his claim. He had instituted a suit for its realisation. The conduct of the assessee is the actuality of the situation. In the light of the commercial and business reality of the situation, it must be held that income had accrued to the assessee. The pronouncement of the Supreme Court in State Bank of Travancore vs. CIT (supra) should set matters at rest so far as the present case is concerned. I am clearly of the view that the sum claimed by the assessee in the suit had accrued to it during the assessment year in question.
15. Learned counsel for the assessee contended that where the claim is refuted by another party, the claim is a ” mere claim ” and cannot be regarded as income which has accrued to the assessee. In short, the contention of the assessee was that wherever and whenever a claim is disputed, income does not accrue. The proposition is too wide to be accepted. It was contended that a ” mere claim ” to certain sums of moneys is no income and, therefore, not taxable. Reliance was placed in this connection upon CIT vs. Nadiad Electric Supply Co. Ltd. (1971) 80 ITR 650 (Bom). This decision must be appreciated in the light of its peculiar facts. The Nadiad Electric Supply Co. had an agreement with Nadiad Municipality in terms of which electricity was to be supplied to the Municipality at the rate of 19 paise per unit. The agreement was for a period of ten years. The Electric Supply Co. was charging 30 paise per unit from other consumers. After the expiry of the agreement, the company started billing the municipality also at the rate of which it was billing its other consumers. The municipality instituted a suit restraining the company from billing at the rate of 30 paise per unit. In the suit it was finally held by the High Court that the assessee, the Electric Supply Co., was bound to continue to supply electricity to the municipality on the same terms as those contained in the agreement which had expired. The company maintaining its books on the mercantile system had credited certain sums of money calculated at the rate of 19 paise per unit and the balance sum of Rs. 35,251,02 had been shown in its balancesheet as asset under the head ” Sundry creditors ; considered doubtful.” The Revenue sought to bring to tax the said amount of Rs. 35,251.02. This sum was held as ” mere claim ” and not liable to tax. It will be seen that this sum of Rs. 35,251.02 had become unrealisable for the reason that the High Court had laid down that the company was entitled to bill only at the rate of 19 paise per unit. In that situation, the matter having been settled by the High Court, the claim to realise Rs. 35,251.02 would be a ” mere claim “. If the final verdict of the High Court had not been there, things may have been different. The company was under no obligation to credit that sum in its books of account. The matter having been settled finally, the sum representing supply of energy at the rate of 11 paise per unit could not have accrued to the assessee. The case of Nadiad Electric Supply Co. Ltd. (supra) is thus, in my view, distinguishable on facts. At this stage, I should only recall the dictum of Sabyasachi Mukharji J. in the case of State Bank of Travancore vs. CIT (supra), and the actuality of the situation cannot be lost sight of. On the record of the case, there was nothing to show that Nadiad Electric Supply Co. Ltd., had any legal right. That was the actuality of the situation. The decision in that case rested upon its peculiar facts and can be of no avail to the assessee.
16. Strong reliance was placed by learned counsel for the assessee on a Division Bench decision of this Court to which I also was a party in CIT vs. Chanchani Bros. (contractors) (P) Ltd. (1986) 53 CTR (Pat) 84:(1986) 161 ITR 418 (Pat). In my view, the reliance placed upon it is misplaced. That case was decided on its special facts and should not be mixed up with the facts of the instant case. In order to appreciate this decision of this Court, one must always bear in mind the dictum laid down by Sabyasachi Mukharji J. in the case of State Bank of Travancore vs. CIT (supra), that the actuality of the situation may make a difference in accrual of income. If the actuality of the situation is not accepted, the conclusion may not be well-founded. In this case as well, the assessee was maintaining accounts on the mercantile system. The assessee pleaded that the authorities, that is, the Irrigation Department of the State Government did not admit the bills though the bills were prepared for the works done. It is worthy of note that in that case the Tribunal had clearly pointed out that the assessee had made bills, yet, in respect of such bills, it was the system of the assessee that the assessee used to show only when the bill was accepted in Principle by the Government or authorities concerned. On that footing, the Tribunal held that the right to realise the sum could not be said to have accrued to the assessee and that the submission of the bills was merely a claim by the assessee. Again at p. 433 in the last paragraph, N. Ahmad J. took note of the fact that in that case the assessee had clearly asserted before the ITO relating to the amount of Rs. 1,64,428 that the amount was withheld by the Irrigation Department pending decision of the satisfactory conclusion of the work pertaining to these amounts and, therefore, he held that the said amount had not accrued to the assessee and it could accrue only when, after the verification of the satisfactory conclusion of the work by the Department, the Department admitted the claim. In regard to extra work done by the contractor, the assessee, it was found that the company had filed a bill for Rs. 1,32,21,569. That sum included a sum of Rs. 23,06,079 for work done beyond the provisions of the contract. Since these works had been executed beyond the agreement, the same would become due only when the Department had verified the claim of having done extra work. The AAC accepted the claim of the assessee that the said sum of Rs. 23,06,079 had not accrued to the assessee, as it had not been accepted by the Department. Ahmad J., while considering the stand of the Revenue, emphasised the actuality of the situation in the following words at : “On behalf of the assessee, it was pointed out that there was certain confusion regarding the system of accountancy followed by the assessee and that the assessee’s system of accountancy with regard to the claims was not cash system but mercantile system, and that the amounts were shown by the assessee only after the acceptance of these claims by the Government and only then it could be stated that the assessee’s right to receive the claim had accrued. It was pointed out on behalf of the assessee that the assessee had followed the same system in the immediately preceding year also when the company was floated. “
The Patna case was decided on the basis quoted above. If the assessee had not followed a special pattern in maintenance of accounts, that is, in entering the sum only when Government accepted the bills, things would have been different, but as the assessee was following a particular pattern of accounting, his claim had to be judged in that background. That was the actuality of the situation. In the words of Hidayatullah J. in the case of CIT vs. A. Krishnaswami Mudaliar (1964) 53 ITR 122 (SC), this was one of the examples of maintenance of accounts on a hybrid or a heterogeneous system. The pattern of execution of works and payment therefor by the Irrigation Department is that the bills are not prepared by the contractor himself, but they are prepared by the Departmental Officers themselves which is signed by the assessee. Thus, until any item has been approved, no bill is prepared for the contractor. Not having lodged the bill the assessee may very well contend that the value of the work done had not accrued to him as his income. In the case of Chanchani Bros. (supra), the assessee had made a large number of claims and most of the claims were not admitted by the Government. In fact, most of the claims were either withdrawn by the assessee himself or were rejected by appropriate authorities. In that situation, the mere lodging of bills itself would certainly amount to a mere claim. The preparation of the bills amounts to lodging of the claims as well as accepting them. Thus, the Patna decision proceeded upon its own special facts which were entirely different from the present one. It can, therefore, be of no assistance to the assessee.
Before concluding this judgment, I must take note of another submission urged on behalf of the assessee that there being no agreement between the parties in regard to the rate, the sum claimed by the assessee was a ” mere claim “. This submission is fallacious. Supplies are ordinarily made after agreement of the rates. They may not be in writing, but certainly they are not meant to be gratis, but they are always sent on certain principle on which the parties agree. The plaint of the money suit is not on the record. We are, therefore, precluded from conjecturing what the contents were, but if we are permitted to apply a little common sense, I am of the view that the plaint must be containing the averments that the fire-bricks had been sold at a particular rate as agreed upon between the parties. The ITO has stated that there was no agreement between the parties. It only means that there was no written agreement. That is not necessary in every case.
Learned counsel for the Revenue placed reliance upon New Victoria Mills Co. Ltd. vs. CIT (1966) 61 ITR 395 (All) and CIT vs. Godhra Electricity Co. Ltd. (1983) 32 CTR (Guj) 141: (1983) 140 ITR 657 (Guj). It is not necessary to refer to them, in view of the decisions of the Supreme Court to which I have referred earlier. In this case, the basic facts are that the assessee sold firebricks. It was not gratis at all. The assessee claimed the sums.
The assessee did not give up its claim, but pursued it by filing a money suit and making an entry in respect of the sum of Rs. 1,63,160. In my view, therefore, that sum did accrue to the assessee during the assessment year especially when the purchaser had not raised any objection to the payments during the assessment year.
For all the reasons stated above and considering the fact that the assessee was following the mercantile system of accounting, I am of the view that the sum of Rs. 1,63,160 had accrued as the income of the assessee. The question referred to us for our opinion must, therefore, be answered in the affirmative, in favour of the Revenue and against the assessee. The Tribunal was correct in holding that the claim of the assessee to the extent of Rs. 1,63,160 by way of reduction in sales could not be allowed in the asst. yr. 1972-73. The reference is discharged with costs of Rs. 500 payable by the assessee to the Revenue.
B. N. AGRAWAL, J.:
[Citation : 169 ITR 454]