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TMI Blog2018 (1) TMI 1028X X X X Extracts X X X X X X X X Extracts X X X X ..... Scheme that the subscribers were required to pay full amount of 2500 in one go and they were to be given NSC worth 1000 each simultaneously. Prizes were to be distributed to the subscribers throughout the tenure of Scheme of 12 years. Such subscribers, who could not get any prize, were to receive gifts in the form of articles worth 2500 at the end of the Scheme. Therefore, it is apparent that under the mercantile system of accounting, the entire amount of 2500 per subscriber for the subscriptions - whether fully or partly paid during the year - accrues as income at the time of subscribing to the scheme. It also entails liability running throughout the period of 12 years in the form of prizes The position which will follow is that from the second year onwards up to 12th year, there will be deduction for expenses without there being any corresponding income. This divulges that if cash system of accounting is followed, it will result in an artificial higher income in the hands of the assessee in the first year, on which it will be liable to pay tax; and in all succeeding years there will be expenses only which will not get adjusted against any income. Following cash system of accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Members and hence cannot be answered in the capacity of a Third member. Taxability of notional interest - Sahara India was acting as assessee’s agent for collection of subscriptions under the Scheme - Held that:- We cannot concur with the view taken by learned Judicial Member that the invocation of section 211 of the Contract Act amounted to setting up of a new case by the Revenue and would have the effect of enlarging the controversy. The issue of notional interest was very much before the tribunal. The ld. DR simply supported his point of view of charging notional interest on the strength of section 211 of the Contract Act as well. No new case, much less the enlargement of the controversy, was set up by this argument, as has been opined by the ld. JM. In fact, this argument was on the same subject matter, which was there before the tribunal for adjudication On merits, it is noticed that the assessee entered into an Agreement with Sahara India for collecting subscriptions from its Members and remitting the same to the assessee at the end of the each month. There is nothing in the Agreement that if the amount collected is retained beyond a period of 30 days, Sahara India would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 1,500/- directly from the Post Office/Bank subject to the rules, regulation and directions of the post office/bank. In case of any increase in the interest rate of post office/bank of the increase interest earning amount shall obviously go to the accountholder. Accountholders shall directly get the maturity payment from post office/bank. The reason for not getting the full interest on the total deposit of the accountholder with the company is due to the deduction of the portion of interest. The accountholders shall not be entitled to claim for the same deducted portion because of expenses of the company and prize/interest free loan etc. and to cover the overheads and the profit of the company however, in case of prematurity payment taken by the accountholder from the post office/bank, the company shall have the power to cease the right of the accountholder to participate in the remaining draws and to disallow all other benefits. 6. PRIZES: Monthly draws shall be held by the company together with a Bumper draw in each quarter. During total tenure each accountholder shall be entitled to get chances in 144 monthly draws and 48 bumper draws for winning the prizes as per the list ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oice of accountholder) after joining the account by depositing of ₹ 2,500/- to the company till the draws starts @ ₹ 11/- per month as per rules of the company or company shall hold mini draw every month with this amount i.e. on over ₹ 1,000/- accounts ₹ 11,000/- worth items shall be given. (13) Death Help- In the event of death of any accountholder the nominee of that accountholder shall be eligible to take death loan either ₹ 50,000/- lump sum or ₹ 1,200/- per month for sixty months, from the company against personal guarantee to sixty months, from the company against personal guarantee to the satisfaction of the company. The death should not occur due to suicide or death punishment by court of law. The privilege of the death loan shall be given to nominees of only those accountholders who are only between 10-50 years of age at the time of joining the account and have not suffered from any chronic/fatal disease within three years at the time of becoming accountholder". 3. In essence, the members of the scheme contributed ₹ 2,500/- in cash in a lump sum along with application form. The tenure of the scheme was 144 months i.e. 12 years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1995, which is before us, enhancing the income and computing total income at ₹ 26,19,774/-. This resulted in an enhancement of ₹ 27,50,340/- 8. The net loss as per audited profit and loss account was ₹ 1,46,298/-. However, in the course of assessment proceedings, the assessee recast the same and claimed a net loss of ₹ 26,05,125/-. The Assessing Officer rejected the accounts under proviso to section 145(1) and computed the net loss at ₹ 1,30,586/-. The C.I.T (A) confirmed the applicability of proviso to section 145(1) but ascertained a net profit of ₹ 36,19,774/ The comparative figures of the four profits and loss accounts may be seen below at a glance, the salient features will be highlighted thereafter:- PROFIT AND LOSS ACCOUNTS PARTICULARS AUDITED ACCOUNT REVISED COMPUTATION A.O.'S COMPU-TATION C.I.T (A)'S COMPU-TATION AUDITED ACCOUNIT REVISED COMPUTATION A.O.'S COMPUTATION C.I.T. (A) COMPUTATION To Salary to staff 3,600 3,600 - 3,600 By Interest on F.D. 22,718 22,715 22,715 22,715 To Staff Welfare 180 180 - 180 By Interest on Loan to Sahara IndiaHousing 5,918 5,918 5,918 5,918 To Estt. & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the balance amount of N.S.C.s to be issued. Of the balance 60%, 16% has been credited to Profit & Loss Account remaining 44% is to be credited in P/L a/c over the eleven years. Hence this has been shown under "Current Liability & Provision in the balance sheet" 11. The same was elaborated by the assessee in one of the letters to the Assessing Officer as under:- "As per accounting policy consistently followed by the company 16% of the gross collection is transferred to the P/L A/C of the first year of collection, N.S.C. for 40% of gross collection is obtained in the name of subscribers and balance 44% transferred to the Reserve A/c. This reserve is adjusted by credit to the Profit & Loss Account in following 11 years @ 4% each year. Since the tenure of the scheme is of 12 years and prizes are distributed every year which are charged to the P/L A/C of the year, 4% of collection of every year is credited to the P/L A/C of every following year. Detailed working of the amount collected and transferred to Reserve A/C is being filed herewith". 12. The manner, in which collection received in the scheme, were worked out, was explained further numerically as under:- LIABILITY TOWARD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly paid ₹ 82,135/- (adopted by CIT (A) and outstanding prizes payable ₹ 71,855/- (shown as current liability in the balance sheet. 16. In the course of assessment proceedings, the assessee urged that the credit to the Profit and Loss account of administrative and process charges ₹ 9,57,540/- had been erroneously given and should be withdrawn. It was claimed that the subscription received under the scheme was capital in nature and no part thereof was liable to tax. This is one of the major disputes before us. 17. It was further urged that the expenditure under the head "commission" and development expenses. Advertisement expenses and 'stationery and printing expenses' should be claimed on actual basis instead of them being amortised as claimed in the profit and loss account. There was no other significant change. The result of the above changes was that the net loss increased to ₹ 26,05,125/- as against ₹ 1,46,297/- disclosed in the audited profit and loss account. 18. The Assessing Officer enquired in the course of assessment proceedings why 16% of gross collection had been credited to the Profit and loss account but the percentage could not be exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egistrar of firms and societies and chits to look into the scheme and ensure that the interest of the depositors or subscribers got safeguarded. The entire money might be refunded to the subscribers. It was urged that the appeal may be kept in abeyance. The CIT (A) did not accept the objection. He observed that the scheme was floated after 8 years from the passing of the Act and had run about 8 years. The consequent of the judgment of the Supreme Court were very contingent. There was no adverse effect on the working of the company in relation to past years. He, therefore, proceeded to dispose of the appeal. 21. On merits, a reference was made to the decision of the Supreme Court in the case of Peerless General Finance and investment Co. Ltd. v. R.B.I. [1922] 2 SCC 343 as under:- ". . . The learned counsel further referred to the observation of the court to the effect that, 'a deposit is by definition a sum of money received with a corresponding obligation to repay the same. Thus, the repayment of the deposit is an integral part of the transaction of a receipt or deposit'. The court had further observed that the 'deposit or loan is a capital receipt and its full value shall be sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure which is towards a liability actually existing at the time but the putting aside of money, which became expenditure on the happening of an event was not expenditure. 25. On the other hand, the Assessing Officer, who was present in the appeal proceedings, submitted that minimum guarantee prize was actually a contingent liability whose amount was unasertainable and was not the return of principal. Attention was invited to remarks of the auditors saving that "no provision has been made for minimum guarantee prizes as it is a contingent liability and the amount is unascertainable". The prize was contingent on the subscribers renewing his NSC after six years which was not very likey. It was further submitted that the decision of the Supreme Court given in a different context would not apply. 26. The CIT (A) passed a remand order after considering rival submission for computation of income with reference to particular mentod of accounting, either mercantile or cash. However, the report could not do so. The C.I.T. (A) therafter recomputed the profit and loss account entirely on cash system of accounting, which we have noted above. It resulted in a net profit of ₹ 26,19,770/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the collections had been excluded. He took a view that all the collections, excluding the amount desired as capital receipts to the extent of 40% of the fully subscribed deposits were of revenue nature. He upheld the finding of the Assessing Officer, treating 60% of the receipts as of revenue nature. The decision of the Supreme Court in the case of M/s. Peerless General Finance and Investment Limited (supra) was found to be distinguishable inasmuch as the scheme was such that the deposits were not returnable along with accrued interest thereon. He also found the facts in the case of M/s. Sahara India Investment Limited to be distinguishable since the nature of scheme was differenct in that case. 30. The CIT (A) finally held that since the credit item of income was on cash basis, the debit items also have to be in accordance with cash system. He adopted the computation reproduced above and finally enhanced the income, computing it at ₹ 26,19,774/-. 31. The learned counsel for the assessee Shri S.E. Dastur Sr. Advocate giving the background of the scheme stated that the Golden Key Scheme had been commenced with effect from June, 1986. The accounting year ended on 30th Septemb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere claimed as capital receipts and not revenue receipts. There was, therefore no accounting system applicable to it. Earlier, the assessee had credited 16% of the collections in the Profit and Loss account and the Bench could draw its own conclusion regarding the system of accounting followed. Regarding expenditure, it was stated that it was on deferred revenue basis and the quantum which had been deferred, had been arrived on mercantile system. 35. The salient features of prize money were then highlighted. It was stated that the basis of amount claimed as deduction was the prize declared. In this regard, he submitted very fairly that if the assessee's stand was accepted that the deposits were capital receipts and not revenue receipts, then only excess of prize money over ₹ 1,500/- per subscriber should be allowed as a deduction. This was so since prize money up to ₹ 1,500/- was not deductible. 36. It was thereafter submitted that in the assessment order deduction had been allowed for the prize money payable, calculated in a certain manner. The total prize money over 12 years was computed by mixing-up the actual draws and estimates of prizes. The Assessing Officer sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on 24.9.1995 (copy given according to which the assessee was asked to wind up the Golden Key Scheme within the stipulated time in accordance with certain terms. These terms, inter alia, stated that the assessee will pledge in favour of the Registrar of Co. s of ₹ 24 Crores as security till winding up of the scheme. The company had to liquidate all the liabilities under Golden Key Scheme within a period of one year. For this purpose, the company was required to draw all the balance monthly and bumper prizes under the scheme during the one year preiod. The assessee had made a representation that the huge sum of ₹ 24 crores was not available and even otherwise after pledging the same no funds could possibly remain for paying the prizes. A Writ petition had been filed before the High Court. 39. In response to a query from the bench certain clarifications were given followed by an affidavit dated 1.5.1996 by Shri O.P. Srivastava, Director of the Company. It was stated that the company had commenced giving prizes after January, 1987 even though 99,999 members were not enrolled. The company had enrolled in all 96,423 members till date out of which 28,488 members had not con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been held that an admission cannot be the foundation for an assessment. Where the income is returned under an erroneous impression or misconception of law, it is always open to an assessee to demonstrate and satisfy the authority concerned that a particular income was not taxable in his hands and that it was returned under an erroneous impression of law. Each assessment year is an independent year and it is always open to taxpayer to contend that he had been wrongly assessed in the past. 42. It had been mentioned page 5 of the order of the Tribunal referred to above that the Assessing Officer had relied on the assessee's reply dated 21.2.1991 where the words "actual cost analysis" have been adopted to explain the phenomenon of 20% of collections as administrative and process charges. The tribunal had stated subsequently in para 5 of its order that it was not necessary to be well on this aspect. The bench wanted to see a copy of the letter dated 21.2.1991 which was supplied subsequently. Relevant extract is given below:- "As regards the basis of transfer of 20% of collections as administrative and process charges, we have already explained to you that the basis has been adop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vited to a decision of the Bombay High Court in the case of K.N. Mody, In re [1938] 6 ITR 179. In that case, the assessee purchased large area of land with borrowed capital and resold the same in plots for building purposes. The resale went on for several years. It was held that there is single venture in the nature of trade. The question of assessing profits arises only when the venture comes to an end. 48. The above decision had been followed by the Allahabad High Court in Addl. CIT v. Madan Lal Ahuja [1982] 10 Taxman 85/136 ITR 640. In that case land was purchased in different lots during the period 1942 to 1947. The entire land was combined into one unit and developed under one scheme. Expenses were incurred on development for the whole unit and no part of expenditure was attributable to a particular plots. There was sale of some lots in 1968. It was held that profit or loss in the venture was not ascertainable unless entire transaction was complete. Working out of proportionate cost of plots sold in each year and determining capital gains was not justified. 49. Reliance was also placed on a decision of the Bombay High Court in Gustad Dinshaw Irani v. CIT [1957] 31 ITR 92. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment for assessment year 1978-79 was completed by applying net profit rate of 30%. The CIT (A) upheld the assessment for assessment year 1977-78, and cancelled the order of the Income Tax Officer for assessment year 1978-79. 53. The tribunal held that the proposition that profits of the assessee firm a single venture/project in the nature of trade cannot be ascertained unit the venture/project has come to an end is not absolute, Under the Act each year is a self constrained unit and unless it was impossible to compute the profits or losses of each year reasonably, the profit should be computed year-wise and taxed. During the assessment year 1977-78 neither the construction was complete, nor even half portion of the building was sold. The net sale proceeds received were much less than the expenditure total/cost incurred by the assessee up to that date. Therefore, it would be correct if no profit or losses were estimated during the year. However, for the assessment year 1978-79, the construction had been completed and 80 per cent of the area was sold and therefore, it was possible to estimate the income of the assessee from the project. 54. Coming to the conclusion, the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod of calculating profits accruing in the accounting year which is set out at page 971 Batliboi's advanced accounting mathemetical certainty is not demanded in a matter of description (p.618)". (ii) P.M. Mohammed Meerkhan (supra) ". . . In our opinion, there is no justification for this argument. It is not a correct proposition to say that the profits of the assessee cannot be ascertained even on the assumption that the transaction of the adventure of trade was not completed. Under the Income Tax Act for the purpose of assessment each year is self contained unit and in the case of a trading adventure and profits have to be computed in the manner provided by the statute. It is true that the Income Tax Act makes no expenses provision with record to the value of stock. It charges for payment of tax the income, profits and gains which have to be computed in the manner provided by the Income Tax Act. In the case of trading adventure the profits have to be calculated and adjusted in the light of the provisions of the income Tax Act permitting allowances prescribed thereby. For that purpose. It was the duty of the Income Tax Officer to find out what profit the business has made acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould only be proper to first compute the profits of the venture as a whole for 12 years and then apportion the same to different years on time basis. According to him, no other basis was possible. The collections were heavy in the beginning and ended in 1990, whereas the prizes were few in the beginning and heavy at the end. 61. The learned counsel for the assessee thereafter made a second alternative submisison without prejudice to the earlier contentions. 62. It was submitted that if the entire collection were treated as income but if expenditure on prizes was spread over 12 years, it was very iniquitous. It had been held by the Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Mfgrs. Association [1979] 2 Taxman 501/[1978] 121 ITR 1 that consequences of interpretation must be kept in view. Further the Supreme Court had observed in the case of CIT v. J.N. Gotla[1985] 136 ITR 323/23 Taxman 14J. that in interpretation of taxing statutes, where strict literal construction leads to injustice or absurd result, equitable construction should be adopted. 63. In this connection, it was first submitted that the Assessing Officer had adopted discounting method for deduction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e bought lands and sold them in plots fit for building purposes undertaking to develop them by laying out roads, providing a drainage system and installing lights, etc, then the plots were sold the purchaser paid only a portion of the purchase price and undertook to pay the balance in instalments. The assessee in its turn undertook to carry out the development within six months but time was not of the essence of the contract. During the relevant accounting year, the assessee actually received in cash only a sum of ₹ 29,392/- towards sale price of lands, but in accordance with the mercantiles system of accounts adopted by it, it credited in its accounts the sum of ₹ 43,592/- representing the full sale price of lands. At the same time it also debited an estimated sum of ₹ 24,809/- as expenditure for the developments it had undertaken to carry cut, even though no part of that amount was actually spent. The department disallowed the expenditure. However, the Supreme Court held that the undertaking by the assessee to carry out the development was unconditional and it imported a liablity on the assessee which secured on the dates of the deeds of sale, though the liablit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... based on the directions of the Tribunal in the case of Secured Investment Co. (supra). Ground No.3 related to deleting disallowance of expenses, but such a dispute did not exist in assessment year 1987-88 Ground No.4 was general. 72. Our attentions was also invited to the assessee's cross objection for assessment year 1987-88. The only ground related to deduction for prize liablity and it was claimed that entire liability for prize money ought to have been allowed as a deduction as against only proportionate deduction for discounted value of liability as had been done by the Assessing Officer. Submissions in this regard had already been given. 73. The learned counsel further, submitted that proviso to sec. 145(1) was not applicable to the assessee's case. Even if it was held that it was applicable, then the alternative method of accounting should be such that income could be properly deduced therefrom. The cash system adopted by the CIT (A) was not suitable since it loaded everything in the first year. Both the department and the assessee had submitted that it was not a proper system. 74. Our attention was invited to a decision of the Madras High Court in the case of Gemini Pict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re revenue receipts, whether full amount should be taken or only 16% thereof as per accounts lastly, liability for prizes had to be computed in full without discounting as an alternative submission. 77. Shri P. Mehrotra Advocate learned special counsel for the department opposed the above contentions. Me first dealt with the nature of collections and invited our attention to para 5 of the terms and conditions of the Golden Key scheme, it was stated therein that the accountholder shall get back his "principal amount ₹ 2,500/- along with minimum interest earning of ₹ 1,500/- directly from the post office we submitte that it was quite clear that the principal of ₹ 2,500/- was returned to the subscribers by giving NSC of ₹ 1,000/-. The capital liablity of the assessee of ₹ 2,500/- stood liquidated when the post office paid maturity sum of ₹ 4,000/- in the manner agreed upon in case there was premature encashment before completion of 12 years, the subscribers lost part of interest or interest along with the part of capital. There was no obligation on the assessee-company to compensate the subscribers for this loss. 78. A reference was thereafter mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had the power to cease the right of the account to participate in the nine draws, but this power had not been organised in practice. The affidavit. 82. Shri P. Mehrotra, Advocate, Learned special counsel for the department submitted that in the above circumstances, the contractual obligation had been altered and the payment would be for extra commercial considerations. This required a scrutiny by the Assessing Officer. 83. Our attention was invited to the decision of the Supreme Court in Secured Investment Co. (supra), a copy of which was supplied. The unhealthy features of exploitation in the case of Chit Funds had been graphically described in para B of the judgment as below:- "The quite essential aspects of a prize chit are that the organiser collects moneys in lump sum or instalments, pursuant to a scheme or arrangement, and he utilises such moneys as his fancies primarily for his private appetite and for (I) awarding periodically or otherwise to a specified number of subscribers, prizes in cash or kind and (2) refunding to the subscribers the whole or part of the money collected on the terminination of the scheme or otherwise. The apparent tenure may not fully bring out th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s." 85. The learned special counsel submitted that if the scheme had been altered, then in light of the above observations of the Supreme Court, it was abundantly clear that it was not for altruistic reasons but for hard business consideration. The business consideration involved in such a charge had not been examined at any stage and required examination. 86. It was next submitted that the scheme of deposits in the case of Sahara Investment India Ltd. on which the learned counsel for the assessee had relied was altogether different from the golden key scheme in the present case. Giving of N.S.Cs. to the subscriber was not involved in that case, and that made all the difference. In the present case, the capital amount was repaid initially itself by issue of N.S.Cs. of ₹ 1,000/- each. The balance collection of ₹ 1,500/- was neither capital nor refundable. 87. The learned special counsel thereafter invited our attention to the copy of statement of facts filed before the C.I.T. (A) where it had been mentioned that collections of fully paid amounts during the year were ₹ 19,70,000/- whereas the collections of partly paid sums were ₹ 40,14,631/-. He submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and had resorted to the cash system of accounting. When none was satisfied with the method of accounting, it was quite clear that the proviso to section 145(1) was applicable. He submitted that the cases cited on behalf of the assessee did not involved the Golden Key Scheme and were, therefore, distinguishable on facts. 90. The learned counsel for the department thereafter supported the concept of discounting, According to him, the concept of discounting had been adopted for discharge of a debt of ₹ 2,500/- by issue of N.S.C. of ₹ 1,000/- only Accounting principle was applicable under the Income Tax Act also. A reference was made to a decision of the Supreme Court in Metal Box Co. of India Ltd. v. Workmen [1969] 73 I.T.R. 53. It was stated therein that contingent liabilities discounted and valued as necessary can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration. An estimated liability under the scheme of gratuity, if properly, ascertainable and if present value is discounted, is deductible from the gross receipts while preparing the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a refundable deposit. In other words, the test was whether the amount was received with an obligation to return. Such an obligation was there in terms of Minimum Guarantee Prize of ₹ 2,500/-. Thus, the nature of deposits in both the cases was stated to be similar. 96. Referring to the argument that the balance sum in respect of partly paid amounts had accrued as income, the learned counsel submitted that this is not what the Assessing Officer had done and there was no such ground of appeal. In the circumstances, the matter could not be raised at this stage. Even otherwise, such an action would require several other adjustments, such as deduction for N.S.C. The prize money pro rata amount would also change. It was not a simple legal issue which could be raised at this stage. 97. Regarding applicability of proviso to section 145(1), he submitted that in order to invoke it the method of accounting must be such that profit cannot be correctly deducted and not the reverse. The method of Accounting may be correct and adjustment may be necessary for ascertaining, the income as per Income Tax Act. For example, if capital expenditure of ₹ 10,000/- was written off, only an adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the golden key scheme amounting to ₹ 2,500/- from each accountholder may be accepted in instalments also. According to the circular the privilege was given under the following conditions : "(1) The payment may be accepted by way of daily collection as in any manner which the field worker feel beneficial to the company. (2) The application form shall be filled-up at the time of accepting the payment by way of instalment. (3) The company will notify very shortly the rights to be given to the instalment accountholders for the information of all the good workers." 103. The Notification referred to above in para was finally issued on 2.1.1987 and a copy of the same was also filed. It was staled that it was decided to allow even partly paid subscribers to participation in the first draw of 26.1.1987 under the following conditions :- "(a) Before the 2nd draw he/she should complete ₹ 1,000/- in his/her account and similarly before the third draw he/she should complete ₹ 1,500/- deposit and so on. However, the prizes to such accountholder shall be given only on his/her depositing full subscription. (b) These instalments accountholders shall not be allowed fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total deposit is stated to be the accountholder's entitlement for prize, interest free loan etc and expenses of the company overheads and profits of the company. 109. A table has been given by the learned Special Counsel for the department reproduced above, according to which the interest for 12 years on the principal amount of ₹ 2.500/- would be ₹ 7,500/- whereas the accountholder actually gets interest of ₹ 1,500/- only. The balance amount of ₹ 6.000/- is not available to him because of his right to participate in prize money etc. and because of the assessee and profits. This gives, in our opinion, a fairly true picture of the scheme as contained in paras 4 and 5 of the terms and conditions. We would, however, make one adjustment. Out of the sum of ₹ 6,000/- the accountholder gets a guaranteed prize of ₹ 2,500/- worth of articles at least, according to para 9 of the terms and conditions. Thus, the amount which he forgoes, gets reduced to ₹ 3,500/- 110. Such a view of the scheme finds support from the judgment of the Supreme Court in Secured Investment Co. (supra). In para 12 thereof, it is stated that in the Scheme the subscribers a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Terms and Conditions placed before us do not contain any mention of partly paid accounts. Some information has been placed before us as our instance, as mentioned above. In cases, the mercantile system of accounting is adopted, a proper enquiry is considered necessary how the terms and conditions could be modified. According to 'General Rules' in the terms and conditions, they could be altered as under:- "The company may at any time alter, vary, add or delete in these terms and conditions on account of government policy in this regard or otherwise notifying on companies notice board or by publication in Newspaper." 115. However, we have not been informed whether Notification on company's notice board or publication in newspaper was there. An oral reply has been given before us that the terms were explained to the accountholders by the agents. However, it is still not known whether any written contract was there as in the case of fully paid amounts. It is not known if the accountholder bound himself to pay the entire sum of ₹ 2.500/- but was allowed a facility of instalments. The stage at which N.S.C. was issued requires verification. It also requires verification as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us to go into that as part of the matter. 121. We will now take up the contention of the learned Counsel for the assessee that the single venture system should be adopted. Before going into the particulars, we may mention that no such claim was made either at the assessment stage or at the first appellate stage. There is not even a ground of appeal from the assessee's side before us to that effect. It was only mentioned at one stage that ground No. 2 would support such a view. This ground relates to a preliminary objection raised before the C.I.T. (A) and was dealt with the para 8 and 9 of his order. A reference was made to the decision of the Supreme Court against the assessee company with reference to prize, chits circulation scheme (Banning) Act 1978 which had put an embargo for running such scheme, and a consequent direction to the Registrar of Firms, Societies and Chits to look into the scheme and ensure the interest of the depositors or subscribers to the scheme. It was submitted that till the matter was decided the appeal should be kept in abeyance. The C.I.T. (A) observed that the scheme was floated after 8 years from the passing of the Act and had already run almost abou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Champion Construction Co. (supra) that the proposition that profits of the assessee from a single venture/project in the nature of trade cannot be ascertained until the Venture/project has come to an end, is not absolute. If it was possible to compute the profits or losses of each year reasonably, the profit should be computed year-wise and taxed. In that case, the test applied was that when the net sale proceeds received were much less than the total expenditure incurred by the assessee up to that date, no profits or losses could be estimated. That was a case of construction of buildings, when the expenditure came first in point of time whereas the sale price of the flats came later. In the present case, the situation is just the reverse. The collections came first and expenditure in the form of prize money came later. According to the Learned Counsel for the assessee. The above test cannot be made applicable on these facts. However, we are unable to accept this contention. The test is quite appropriate in this case also. In case receipts are not there, it must be appropriate to estimate income. However, if receipts are there and expenditure is not there, we sec no o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits for the first four years comes to ₹ 7,64,03,730/- After deducting losses for the next two years, the profits for the six years comes to ₹ 6,82,07,846/-. By the above system, only about ₹ 6.82 crores would be taxable for six years, whereas on actual basis about ₹ 7.64 crores would be taxable. In effect, instead of carry forward of losses, there would be a carry backward of losses of the last two years to the earlier four years. This is against the entire scheme of the Income Tax Act. The single venture system as proposed by the learned counsel is therefore, not acceptable for this additional reason. 131. We will now take up the question whether proviso to section 145(1) can be invoked. There is a specific ground in the assessee's appeal in ground No. 3 according to which the C.I.T.(A) erred in accepting to proviso to section 145(1) has been rightly invoked by the Assessing Officer. 132. We have to see what was the method of accounting followed by the assessee. A letter dated 22.1.1990 was filed by the assessee before the C.I.T.(A) (see para 27 ante) according to which the mercantile system of accounting was being followed with the exception that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from it. The Assessing Officer is not satisfied. The C.I.T. (A) is not satisfied. We can now add that we are also not satisfied. We therefore, held that the method of accounting employed by assessee is such that the income cannot be properly deduced therefrom and proviso to section 145(1) is applicable. 136. The next question to be taken up is whether the cash system of accounting is to be followed or the mercantile system after applying proviso to sec. 145(1). The assessee has taken up ground No. 4 before us according to which the C.I.T. (A) has erred in adopting cash system. At the same time, the department has taken up ground No.1 before us in its appeal according to which the C.I.T.(A) has erred in rejecting the method of computation of income as applied by the Assessing Officer and changing the entire method of accounting from mercantile system to cash. 137. We will first take up a preliminary objection raised by the learned counsel for the assessee saying that both the assessee and the department were objecting to cash system of accounting adopted by the C.I.T.(A) and saying that therefore, mercantile system should be adopted. Reliance has been placed on the decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or cash system of accounting and not even hybrid system (as explained by him) of accounting. The credits of the collections were stated to be on receipt basis and debits partly on cash and partly on mercantile system. He took a view that the assessee cannot adopt mercantile system of accounting to claim deduction of amounts payable by it and cash system in respect of amounts due to it. Reliance was placed on a decision of the Madras High Court in G.Padmanabha Chettiar & Sons (supra). We have looked into the case. In that case, it was held that the same basis has to be adopted for reciept and payment of interest. Having regard to the mercantile system of accounting adopted by the assessee during the assessment year in question, the assessee could not be permitted to adopt the mercantile system basis for payment of interest by it and claim the benefit of cash system in respect of interest receivable by it. No contrary decision has been placed before us. 141. We have tried to ascertain the system of accounting being followed by the assessee but as discussed above in connection with applicability of proviso to section 145(1), no clear answer has been forthcoming. As for as collections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 12 years, discounting them and adopting pro rata value. Discounting is disputed by the assessee. An alter-native submission has also been made according to which the entire amount of prizes without discounting should be deducted in the first year itself. Such disputes will not arise if cash system of accounting is applied. There is certainty about figures, which are actual we may also add that the total Profit/loss for the 12 years will be same whether mercantile system is adopted or cash system is adopted, unless some liabilities remained outstanding when the scheme is wound up. These are some additional reaadopting the cash system of accounting. 144. In the result, both the assessee's grounds and the departments ground relating to this matter are rejected. 145. We now come to the question as to what should be the deduction for prize money. The learned counsel for the assessee has submitted that in case collections are treated as capital receipts, prize money in excess of ₹ 1,500/- per subscribers only should be allowed as a deduction. However, we have held that fully paid subscription of ₹ 2,500/- are revenue receipts. There is dispute about discounting, as noted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is separately in dispute. The contention for deduction of entire prize money liability, therefore, cannot be accepted even under the mercantile system of accounting. 147. The claim for deduction of entire amount of prize money liability will require further review in terms of para 6 of the terms and conditions, according to which the company shall start monthly and bumper draws after enrolling 99,999 accountholders. However, in practice, the assessee company started prize draws after January, 1987 the number of subscribers on 1.5.1996 according to the affidavit of Shri O. P. Srivastava, Director was 96,423 only. It requires to be examined whether in these circumstances, there was at all a liability for the remaining prize draws. However we do not propose to go further in the matter since we have held that cash system of accounting is applicable where these disputes do not subsist. 148. We have dealt with all the Grounds of appeal of the assessee, except interest under section 215/217, which was stated to be consequential and does not require separate consideration. The computation of income by the C.I.T.(A) has been upheld except for inclusion of collections of partly paid accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecial counsel for the department saying that since the payments were made in cash in contravention of the provisions of section 40A(3) and the conditions of rule 6DD(J) were not fulfilled, the disallowance should be sustained. 158. We have already held that the collections, insofar as full amounts of ₹ 2,500/- were paid as reduced by N.S.Cs. issued, were not capital reciepts. There is no question of prize money on part payments. The entire amount, therefore, relates to full payments, consequently, the first ₹ 1,500/- per prize cannot be deducted from, the disallowance, as submitted by the learned counsel for the assessee. 159. It has been held by the Supreme Court in Attar Singh Govind Singh v. I.T.O.[1991] 191 I.T.R 667/59 Taxman 11 the genuine and bona fide transactions are not taken out of the sweep of section 43A(3) of the Act. This case was mentioned by the Bench in the court. Further, we find that no unavailable or exceptional circumstances have been shown. In the circumstances, the disallowance is confirmed. 160. In the result, the appeal for the Assessment Year 1988-89 is partly allowed. 161. There is no other ground in the assessee's appeal for Assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also contains some further grounds. Ground Nos. 7 and 8 relate to disallowance of interest payment of ₹ 21,685/-. Here again, the C.I.T.(A) recast the Profit and Loss account on cash system of accounting. It contained a debit of ₹ 21,785/- being payment of interest. The same was disallowed by the C.I.T.(A) along with a remark that borrowed funds were diverted to the sister concerns. 168. After hearing the rival submissions here also we find that the interest was not paid on borrowed funds. A sum of ₹ 19,993/- was interest on late payment of prizes and a sum of ₹ 16,917/- was interest on security deposit. There was no paucity of funds. The balance sheet as on 31.3.1991 shows cash and bank balances of ₹ 2,05,09,410/-. We therefore, delete this disallowance for the same reasons as for the Assessment Year 1990-91. 169. Ground No.9 relates to two disallowances. The first is excess payment under section 40A(12) of the Act amounting to ₹ 16,500/-. The C.I.T.(A) observed that the objection to the disallowence was not substantiated before him and, therefore, the disallowance was confirmed. The position remains the same before us. We therefore, decline ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,49,428/- mentioned in the audit report under section 44AB of the Act. The payments had been paid to prize winners. The same was disallowed and the disallowance was confirmed by the C.I.T.(A). 177. The facts and submissions are similar to those in the Assessment Years 1988-89 and 1991-92. We accordingly confirm the disallowance for the same reasons. 178. In the result, the assessee's appeal for Assessment Year 1992-93 is partly allowed. DEPARTMENTAL APPEALS : 179. The departmental appeals will now be taken up. Ground Nos. 1 and 2 for Assessment Years 1988-89 to 1992-93 are the same as for Assessment Year 1987-88, which we have already dealt with. 180. However, there were some further submissions with regard to ground No.2 during the hearing. This ground relates to computation of prize liability, which was done by the C.I.T.(A) on cash system. The department has objected to it saying that it should be worked out on mercantile system by first ascertaining the total liability for 12 years discounting it and taking pro rata value. It is mentioned in the grounds that the Tribunal had given similar directions in the case of M/s. Secured Investment Co. (supra). 181. The learned spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve placed on record the further agruments of both sides on the issue of discounting, we have already observed in the appeal for assessment year 1987-88 that there is no need to decide this issue any more since under the cash system of accounting only the actual payments have to be taken. There is no concept of discounting involved in actual payment. We, therefore, decline to consider the matter further Ground No.2 is rejected for statistical purpose. 186. Ground Nos. 1 and 2 for all the years, are therefore rejected. 187. Grounds No. 3 in the departmental appeals for all the years is common. The department objects to deletion by the C.I.T.(A) of the disallowance of expenses made by the Assessing Officer shown as paid to sister concern without stating any reasons. We observe that similar ground has been taken in the departmental appeal for Assessment year 1987-88 erroneously, since the issue did not arise in that year. However, the issue arised in the remianing five years now under consideration. 188. In order to have a proper perception, these grounds will be considered along with ground no. 4 for assessment years 1989-90 to 1992-93, which are common. Here, the department object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the assessee. Similarly, the sum of ₹ 23,74,993/- representing interest on advance to M/s. Sahara India Housing was also added to the income of the assessee. 194. Similar calculations were done for assessment years 1989-90, 1991-92 and 1992-93, the only difference being that credit balances were there only in receipt of M/s Sahara India but not M/s Sahara India Housing. The expenditure claimed as due to M/s Sahara India was disallowed, whereas the notional accrued interest on interest free credit, as reduced by disallowance for expenses, was added to the income. 195. In respect of assessment year 1988-89, the interest free credit were there, both in respect of M/s Sahara India and M/s Sahara India Housing. However, notional interest at the rate of 18% on them was less than the expenses accrued in respect of M/s Sahara India. Thus, there was no question of adding any notional interest in this year. However, deduction for expenses relating to M/s. Sahara India was reduced by the amount of notional interest. 196 . The above position may be tabulated as below:- A.Y. Interest @ 18% on credited balances Payment to M/s. Sahara India Difference (2)-(1) Differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... personal expense of the assessee. There was no such allegation. Further it should be laid out or expended wholly and exclusively for the purposes of the business or profession. There was no material placed on record by the department to show that the expenditure was not wholly and exclusively for the purposes of the business. He therefore, submitted that Ground No. 3 of the departments appeal could not be upheld. 201. The Learned Counsel further submitted in respect of Ground No.4 for Assessment Year 1989-90 and 1992-93 that there was no provision of law under which income which had not been earned, could be added. Reliance was placed on the following decisions :- (1) CIT v. Calcutta Discount Co. Ltd.[1973] 91 ITR 8 (SC) It was held that where a trader transfer his goods to another trader at a price less than the market price and the transaction is a bona fide one, the taxing authority cannot take into account the market price of those goods ignoring the real price fatched to ascertain the profit from the transactions. (2) Highways Construction Co. (P.) Ltd. v. CIT[1993] 199 ITR 702 (Gauhati) The finding if the I.T.O. was that the assessee ought to have collected interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of operations alongwith statement of accounts, further, the receipts shall be issued to the members in the name of the company." 203. The Learned Counsel submitted that the balance to the credit of M/s Sahara India was only unremitted amount of the collections from the subscribers. It was not a loan from the assessee company to the firm and therefore, there was no question of interest. 204. Similarly, it was submitted that the monies advanced to M/s Sahara India Housing were for construction of houses to be distributed as prizes by the assessee company. Hence, there was no question of charging interest here also as it was a business transaction. 205. Shri P. Mehrotra, Advocate, The Learned Special Counsel for the department opposed the above contention. He also invited our attention to the agreement appointing M/s Sahara India as agent of the assessee company and submitted that the agreement constituted a contract under section 10 of the Indian Contract Act, 1872. Our attention was also invited to a decision of the Supreme Court in CIT v. Bagyelaxmi & Co. [1965] 55 ITR 660, where it was held that except where therein a specific provision of the Income Tax Act, which derograted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 of the Indian Contract Act. 209. Regarding M/s Sahara India Housing, the Learned Special Counsel submitted that the plea of having advanced the amount for construction of houses for being distributed as prizes could at most be partly correct. He referred to the amounts advanced and submitted that the assessee's explanation did not cover the full amount. It was a new explanation and required verification. 210. Therefore, The Learned Special Counsel made an alternative submission. Our attention was invited to the direction of Supreme Court in the case of Juggilal Kamiaps v. CIT[1969] 73 ITR 702 it was held that in case such as that the Income tax authorities were entitled to pierce the veil of corporate personality and look at the reality of the transaction; Thereafter it was submitted that the assessee company was a closely held company and the directors were partners in the registered firm, M/s Sahara India. The transactions were, therefore, not itself and that interest earned by M/s Sahara India should be the interest earned by the assessee company. 211. The Learned Special Counsel did not make any submissions regarding disallowance of expenses made in the assessment orders. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submission, the Learned Counsel for the assessee submitted that in case there was any corporate veil to be pierced, it was for the Assessing Officer to do so and it could not be attempted at the second appeal stage. Such a contention could not be allowed to be raised now. 217. The Learned Counsel further submitted that no income to the assessee company accrued unless the agreement said so and the agreement did not say so. 218. In reply, Shri P. Mehrotra, Advocate, the learned special counsel for the Department submitted that even in the case of Sahara India Housing, there was contract for constructions of houses for distributions as prizes. This contract was also akin to a principal and agent since M/s Sahara India Housing was not constructing houses for itself but for the assessee company. The assessee had given much more money than warranted for this purpose and, therefore, section 211 of the Indian Contract Act was applicable. 219. It was further submitted that the cases relied upon by the Learned Counsel for the assessee were distinguishable since the plea for invoking section 211 of the Indian Contract Act was a purely legal one and did not raise any new matter. The matte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication for assessment year 1988-89 also, since the payment to M/s Sahara India of ₹ 56,67,234/- was reduced by notional interest of ₹ 51,22,195/-. 222. Before proceeding further, it is necessary to take a look at the system of accounting i.e. cash system or mercantile system to be adopted in respect of expenses which were disallowed by the Assessing Officer and interest, which was added. As far as the expenses are concerned, they are part of the business of the assessee and were debited to profit and Loss Account. We have already held that cash system is applicable to this business income, accordingly, cash system will be applicable to the expenses also. However, the facts are not similar with respect to interest income. The Assessing Officer taxed it on mercantile system of accounting, but the C.I.T.(A) did not give any specific finding about the system of accounting applicable to it. However, he deleted the addition on merits, which could be considered only under mercantile system. Moreover both sides have taken grounds before us that mercantile system is the appropriate method. After careful consideration, we are of the opinion that, interest is a seperate source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract Act. We agree with the contention of the Learned Special Counsel that it was the obligation of M/s Sahara India to invest the excess at interest. If it invested, the interest income would belong to the assessee. If it was not invested, the firm must make good to the assessee company the interest to be so obtained by such investments. Interest income to that extent accrues to the assessee, and addition to the income to that extent is confined in principle. 226. We accordingly set aside the matter to the Assessing Officer to the above extent with the direction to allow the assessee an opportunity to supply the above information of bifurcation of the credit balances. The quantum of notional interest in respect of M/s Sahara India should be recomputed accordingly. In case bifurcation is not made available by the assessee company despite reasonable opportunity, the Assessing Officer will make an estimate on the available facts. An addition will be made accordingly. 227. Regarding M/s Sahara India Housing, we are unable to accept the contention of the Learned Special Counsel for the department that they were also agent of the assessee company within meaning of section 10 of the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee through their "Golden Key Scheme" (terms and conditions available at paras 3-14 of the assessee's paper book). The dispute has been dealt with by the Learned Accountant Member in great details. 5. I agree with my Learned Brother that the Liability of the assessee company for payment of the principal amount of ₹ 2,500/- stood dischared, according to the terms of the scheme, by issue of N.S.Cs, worth ₹ 1,000/-. The collection of ₹ 2,500/- each from the account holders as reduced by the amount of ₹ 1,000/- spent on the purchase of N.S.Cs. became revenue receipt as against the assessee's claim of capital receipt. Similarly I also agree that cases of premature payments i.e. where the whole of the amount of ₹ 2,500/- has not been paid, the matter is to be set aside to the Assessing Officer for re-adjudication by him with a direction to ascertain full facts, as held by the Learned Accountant Member in para 99 of his order. There is no disagreement to the treatment accorded by the Learned Accountant Member to the single venture system in paragraphs 101 to 110 of his order, which plea of the assessee fails. 6. However, there is a difference of perception ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed, has to be accepted. 9. In this connection, according to the Learned Accountant Member there was no procedure of out of Court settlement under the Income tax Act as applicable to appeals before the Tribunal. Respectfully disagreeing with this observation, I would say that no out of Court settlement has been claimed by either side. 9.1. Appeals to the appellate Tribunal are governed by part B of Chapter xx of the I.T. Act, 1961. Section 252 of this chapter defines "Appellate Tribunal". Section 253 vests in the assessee as well as the department a right to appeal to the Appellate Tribunal against such orders as are specified therein. Dealing with the powers of the appellate tribunal, sub-section (1) of section 254 of the I.T. Act, 1961, reads as under :- "254(1) The appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit". The words "thereon" appearing above, restict the jurisdiction of the Tribunal to the subject matter of an appeal which could be stated to be contained in the original grounds of appeal and additional grounds, if any, raised by the parties with the leave of the Tribunal bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the word "thereon" restricted the jurisdiction of the Tribunal to the subject matter of the appeal as stated in the original grounds of appeal and such additional grounds as may be raised by leave of the Tribunal. The court has clearly drawn a line by holding that "it is not open to the Tribunal to adjudicate or give a finding on a question which is not in dispute and which does not form the subject matter of appeal." Such being the legal position, I am clearly of the view that since there is no dispute whatsoever on the stand taken by the assessee and the department about the method of accounting to be followed, both sides claiming that it should be the mercantile system adopted by the assessee and accepted by the Assessing Officer, inter alia, manifest from column 8 of the format to the assessment order (Page 1) showing method of accounting as 'mercantile' by no stretch of logic it could be said that there existed any dispute on which an adjudication was required. A fortiori it is the choice/privilege of the assessee to choose one of the recognised system of accounting, the only rider being that the same should be consistently followed by him, as has been held in legion number o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rahmachary v. CIT [1992] 104 CTR (Cal) 209. Chnnilal v. Mehta & Sons (P.) Ltd. (supra), McMillan & Co. (supra), S.N. Namasivayam Chettiar v. C.I.T.[1960] 38 ITR 579 (SC). 12a. In this connection, a reference is also called for to the letter dated 22nd January, 1990 from the assessee referred to by the Learned Accountant member in para 27 of his order, the contents of which are being repeated here for facility of proximate reference :- "The assessee firm is following mercantile system of accounting, however, a portion of expenses which crystalised from time to time are being paid as and when they crystilised and to this extent the system of accounting was mixed." 13. This categorical assertion made by the assessee and also accepted by the Assessing Officer, in my considered opinion goes a long way to strengthen the assessee's stand that they have been following mercantile system about which their does not appear to be any dispute from various other circumstances described in the foregoing paragraphs. 14. What should be the system of accounting to be followed by an assessee under the Income-tax Act is the choice of the assessee. Further reference may be made in this connection t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Assessing Officer may determine: Provided further that where no method of accounting is regularly employed by the assessee, any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee: Provided also that nothing contained in this sub-section shall preclude an assessee from being charged to income tax in respect of any interest on securities received by him in a previous year if such interest had not been charged to income tax for any earlier previous year. (2) Where the Assessing Officer is not satisfied about the correctness or the compeletness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144". 17. The question which, therefore, arises before the Tribunal is to see as to whether the system adopted by the assessee is such scrutinising which the Assessing Officer could have come to the conclusion in law that the income of the assessee could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrued or arisen. Such liability should be ascertained and capable of being enforced by the person in whose favour the credit has been raised. As held in various decisions, such as New Victoria Mills Co. Ltd. v. CIT [1966] 61 ITR 395 (All.). Kanpur Tannery Ltd. v. CIT[1958] 34 ITR 863 (All.), the jurisdictional High Court has held that mercantile system can never be stretched to embrace all sort of provisional, notional or contingent payments which the assessee considers that he might ultimately be called upon to pay. 21. In this connection, it may be stated that it is nobody's case that the accounts of the assessee were incorrect or incomplete. Learned Accountant Member has also upheld the invokation of proviso (1) to section 145 only and not proviso (2) or sub-section (2) of section 145. It would be useful to recall the language of the proviso I appended to sub-section (1) of section 145, reproduced hereinbefore. With reference to this provision it may stated that it is not a case where the assessee was found not regularly employing any method of accounting (referred to proviso (2) to section 145(1)) or that the revenue authorities were not satisfied about the correctness or th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer for re-adjudication on which there is no disagreement between the 2 members. The possibility of such payments or a part thereof being roped in and treated as receipt under the mercantile system cannot altogether be ruled out, which subject to all just exceptions, the Assessing Officer after hearing the assessee would decide. Such being the position, the income could very well be deduced (rather better) from the method followed and employed by the assessee. Similarly expenses relating to such receipts and the "Golden Key Scheme" whether in the form of prizes or other incentive etc. if they fit in the bill and legally partake the character of an enforceable liability and have accrued or arisen and are not either provisional or notional or contingent, have to be allowed to the assessee. Such would be the situation which is both legal and equitable, besides being practical. There is no reason, therefore, as to why as per the method employed by the assessee it could not be said that income cannot properly be deduced therefrom. In so far as the assessee's submission in their letter dated 22nd January, 1990 reproduced above that despite following mercantile system of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of sub-sections (1) and (2), proper books of account shall not be deemed to be kept with respect to the matters specified therein, if there are not kept such books as are necessary to give a ture and fair view of the state of the affairs of the company or branch office, as the case may be, and to explain its transactions." 27. As is evident, if such books are not kept on mercantile basis and according to the double entry system of accounting it would be deemed that the assessee did not maintain proper books of account. This would mean that under the Companies Act, a company has to maintain books of account on accrual basis i.e. on mercantile system. No doubt this sub-section was substituted by the Companies (Amendment) Act, 1988 w.e.f. 15.6.1988 and the first year of assessment for which these appeals are being disposed of by the Tribunal is the Assessment Year 1987-88 the amended provision had not come into force, it is pertinent to point out that even under the earlier sub-section (3) of section 209 which read as under :- "(3) for the purpose of sub-sections 1& 2, proper books of account shall not be deemed to be kept with respect to the matters specified therein, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... complete and ; (b) there is no material or legal basis on the strength of which it could be said that the Assessing Officer could reasonable form an opinion that the income could not be properly deduced therefrom; there is no case for invokation of the first proviso to section 145(1) and to this extent I also disagree with my Learned brother. 31. This view taken by me would give rise to a consequence following therefrom. 32. The duration of the "Golden Key Scheme" was for 12 years. It envisaged the declaration of several prizes to be drawn at the end of every of month and also certian bumper draws to be drawn quarterly. The cost of the prizes has been given. No doubt, the prizes as originally stipulated by the scheme had to be drawn only after the enrolment of 99999 account holders but as also been held by the Learned Accountant Member in para 127 of his order to which there is no dispute that in practice the assessee company started prize draws after January, 1987 which continued till 1995 when the scheme had to be wound up as per the Apex Court dicrectives and the consequent directions of the Registrar Firms, Societies and Chits, Uttar Pradesh, Lucknow (refer to his letter at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 144th draw is finally held". I would only say that although as held by the Apex Court in Chunila's U. Mehta & Sons Ltd. case (supra), that what is relevant is the method of accounting and not the actual entires, method of accounting being one thing and actual entires in the accounts of a different thing, as held by the Learned Accountant Member since the assessee did not make any procision in this regard the accounts and there is a note in the schedule to the balance sheet according to which it is a contingent liability. I also agree with Learned Accountant Member in declining to consider this claim of the assessee. 35. My other disagreement with the Learned Accountant Member is relatable to the addition of "notional interest" in the hands of the assessee in relation to the collections made on their behalf by their agent, M/s Sahara India and which were received by the former late: 36. On facts, with reference to paragraphs 169 of the Learned Accountant Member's order, the Assessing officer noticed that large funds of the assessee company were lying with the sister firm M/s Sahara India or were advance to another sister firm M/s Sahara India or were advanced to another sist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act Act, we have to examine the terms of the agreement dated 19.4.1986 between the assessee company and the firm M/s Sahara India. No doubt the firm was entitled to collect amounts from the members of the ''Golden Key Project." However, at the same time, according to para 2 of the agreement reproduced above, the firm was under an obligation to "send it to the company the so collected amount at the end to every month of operations." We, therefore, hold that the credit balances in the name of M/s Sahara India are enquired to be bifurcated at the end of each month into two amounts. The first amount will be the collections of the same month. These amounts will be well within the terms of para 2 of the agreement and will not be hit by section 211 of the Indian Contract Act. However, amounts in excess of the above amounts will be hit by the provisions of section 211 of the Indian Contract Act. We agree with the contention of the Learned Special Counsel that it was the obligation of M/s Sahara India to invest the excess at interest. If it invested, the interest income would belong to the assessee. If it was not invested, the firm must make good to the assessee company the interest to be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany. They collected the amounts on behalf of the assessee from the subscribers and conducted lucky draws. Thus, the Learned Counsel for the assessee was very correct in submitting that a completely new case had been made by the department and should not be entertained at this late stage. It would have the effect of enlarging the controversy and providing an altogether new dimension to it. In these circumstances, there is no question of the remand of the matter for the bifurcation of credit balances at the end of each month into two amounts and for collection of notional interest as directed by the Learned Accountant Member in paras 206-207 of his order extracted above. No doubt the remittances by the firm were made late to the assessee company, but it is not as if the assessee company demanded early remittances which were demanded by the firm. To calculate notional interest would amount to taxing un-earnedincome, besides examining and permitting the department to open a altogether new line of argument which was never adopted either by the Assessing Officer or by the Learned C.I.T.(A). 43A. However, even if we examine the issue with reference to section 211 of the Contract Act, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts during this roughly two decades time. 46. The apex court in the case of Dooars Tea Co. Ltd. v. Commissioner of Agrl L.T. [1962] 44 ITR 6 observed that the word "income" used in the act was formidable wide and vague in its scope. It was a word of elastic import. But it should not be forgotten that as cautioned by the House of Lords, the word "income" is an ordinary word of the English language and it should be given its ordinary natural meaning, unless ofcourse, the context requires otherwise (refer to Chetwadi v. I.R.C. [1978] Tax L.R.324 (H.L.). 47. In Bhagwan Dass Jain v. U.O.I.[1981] 128 ITR 315/5 Taxman 7 (SC), the Supreme Court held that of whatever wide import the expression 'income' may be, according to the oxford Dictionary it meant "a thing that comes in". In order to be income as held by the jurisdictional High Court, it must be something which "comes in" (i) periodically, (ii) as a return, (iii) with some sort of regularity or expected regularity and from a definite source (Emphasis supplied) (Rani Amrit Kaur v. CIT[1946] 14 ITR 561 (All.). 48. A definite source is necessary as also pointed out by the judicial committee of the Privy Council in the case CIT v. Show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that in the case in hand there does not exist even a straw of material to show that by the non-remittance of the moneys collected by the firm by the end of every month as per the stipulation referred to supra, any income accrued to the assessee or it could even be attributed to the assessee Going a step further, I would say supose the remittances had been received by the assessee firm timely and they had kept such remittances in their current account getting no interest, could it be said that some income would still be includible because it could have accrued to them had they created fixed deposits in respect, thereof or at least deposited in the Savings Bank Account. The answer to such a question would have to be given in the negative on the principle that an amount which has been earned or which has 'come in' to the assessee and not notional, hypothetical, fictional or illusory sum alone could partake the character of "income" under the I.T. Act, 1961. 54. I am conscious of the law that wherein a word is given an exclusive definition by the statute it means not only the things mentioned therein but also includes within its ambit the meaning of the term as generally understoo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the case of CIT v. Motor credit Co. (P.) Ltd.[1981] 127 ITR 572/6 Taxman 63 (Mad.), the High Court of Madras held that notional income even in a mercantile system of accounting could not be added as where no income had resulted it cannot be said that income had accrued. In the case of CIT v. Ferozepur Finance (P.) Ltd.,[1980] 124 ITR 619/4 Taxman 439 (Punj. & Har.) the High Court of Punjab took the view that even if an assessee was following mercantile system and makes an entry for hypothetical interest income, the same connot be included in the total income where such income has neither accrued nor received. 58. On the basis of the aforesaid discussion based on various judicial pronouncements I am of the considered view that there has been no "coming in" to the assessee nor any "coming in" could be attributed to them either by virtue of any agreement between the parties or on the strength of any legal fiction created by the statute. It, therefore, follows that there connot be any notional addition on the count of interest de hours the fact that there was some Variation in between the parties qua the agreement referred to supra, inasmuch as the firm did not remit money collecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be invoked or not ? 5. Whether either with reference to the provisions of section 211 of the Contract Act or sections 2(24), 4 and 5 of the I.T. Act, 1961, any notional interest could be added in the hence of the assessee due to the delayed remittance of collections made by their agent M/s. Sahara India in respect of "Golden Key Scheme" ? 6. Whether in law as also according to the principles of natural justice the dissenting Member could refer to certain case laws of different High Courts (no dispute about Supreme Court xxx case laws) not cited by either side during the hearing of the appeals ? Question No.6 is being referred as the A.M. has expressed a view on this in negative. 7. Whether if adoption of mercantile system is upheld, the question of discounting and application of pro rata in respect of deduction towards prize liability under the "Golden Key Scheme" should go back to the regular Bench for its decision, considering that the A.M. has not adjudicated on these aspects. Question No.7 is being referred as the A.M. has expressed a view on this in affirmative. ORDER (THIRD MEMBER) R.S. Syal, Vice President (As a Third Member) The Hon'ble President has nominated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned Judicial Member did not agree with the opinion of the learned Accountant Member on certain issues. Ex consequenti, he rendered his separate opinion on 16/10/96. The learned Third Member delivered his decision on 26/03/98 deciding some of the issues in dispute before him and leaving the others open. Thereafter, a miscellaneous application was filed by the Revenue, which met with the fate of dismissal at the hands of the learned Third Member on 07/04/2000. The Division Bench, which sat for passing consequential order, noticed, vide its order dated 31/12/2003, that the learned Third Member instead of agreeing with either of the Members who passed the dissenting order had rather reopened some issues for a fresh decision. Accordingly, it was held that the appeals of the assessee/Department as well as the cross objections of the assessee should be disposed of afresh on the points of difference as observed by the learned Third Member. The case was fixed for hearing in the second week of February, 2004. The order was eventually passed by the Division bench on 31/05/2005 disposing of the relevant issues afresh on merits. The matter was carried before the Hon'ble High Court, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not chargeable to tax. It was claimed that the entire amount was capital receipt and hence not chargeable to tax. The Assessing Officer observed that the books of account were not maintained on mercantile system of accounting as claimed by the assessee. It was held that the entire collection was revenue receipt and all the expenses including the liability relating to NSC etc. were to be allowed as deduction. He invoked the provisions of section 145(1) of the Act and recasted Profit and Loss account in terms of the mercantile system of accounting. In this way, he computed total income by taking gross collections of ₹ 59.84 lakh to the credit side of the Profit & loss account; allowing deductions - at the rate of 40% of the gross collection towards NSC; other expenses; and Prizes worth ₹ 12,29,000. Deduction on account of Prizes was computed by considering total prize money to be paid by the assessee company throughout the period of 12 years at ₹ 12.84 crore. Such amount was discounted to ₹ 5.13 crore and proportionate deduction on account of prizes was computed by multiplying ₹ 5.13 crore with ₹ 59.84 lakh, being, the collections during the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry view. 5. Section 145(1) of the Act at the material time provided that income chargeable under the head 'Profit and gains of business or profession' should be computed in accordance with the method of accounting regularly employed by the assessee. First proviso states that where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that in the opinion of the Assessing Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Assessing Officer may determine. The assessee admittedly claimed to have followed mercantile system of accounting and the Assessing Officer did not disturb the mercantile system of accounting. 6. It needs to be seen if the income declared by the assessee was in accordance with the mercantile system of accounting. The assessee paid Advertisement and Publicity commission and development expenses. 40% of such amount was debited to the P&L account for the year and the remaining 60% was deferred. Similarly 25% of Stationery and Printing expenses was debited to the P & L account and the remaining 75% was deferred. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depart from the prescription of such method. When the assessee declared to have followed mercantile system of accounting but did neither draw its accounts nor declared income accordingly, no exception can be taken to the view of the Assessing Officer in rejecting the books of account in terms of section 145 of the Act because such books were not reflecting the true income according to the mercantile system accounting. 8. The Ld. JM agreed with the Id. AM that the collection of ₹ 2500 from each account holder as reduced by the amount of ₹ 1000 spent on purchase of NSC was a revenue receipt as against the assessee's depiction of only 16% as income in its books of account and then claiming that the entire amount of ₹ 2500 per account as a capital receipt and not chargeable to tax at all. Then the Ld. JM also agreed with the Ld. AM that the cases of premature payments should be restored to the Assessing Officer for re-adjudication apart from agreeing with the rejection of single venture system as put forth on behalf of the assessee. Having concurred with the view of the Id. AM on the above aspects, which constituted some of the prominent reasons for the approval of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to be followed in the given circumstances. 11. It can be seen from the Scheme that the subscribers were required to pay full amount of ₹ 2500 in one go and they were to be given NSC worth ₹ 1000 each simultaneously. Prizes were to be distributed to the subscribers throughout the tenure of Scheme of 12 years. Such subscribers, who could not get any prize, were to receive gifts in the form of articles worth ₹ 2500 at the end of the Scheme. Therefore, it is apparent that under the mercantile system of accounting, the entire amount of ₹ 2500 per subscriber for the subscriptions - whether fully or partly paid during the year - accrues as income at the time of subscribing to the scheme. It also entails liability running throughout the period of 12 years in the form of prizes. The Assessing Officer has considered the total amount of prizes payable during the period of 12 years at ₹ 12.84 crore, against the gross receipts of ₹ 25 crore. This shows that more than 50% of receipts were to be disbursed in the shape of prizes in the period of 12 years. If the entire amount of ₹ 2500 per subscriber is considered as income in the first year itself o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed deduction for prize money on the basis of cash system of accounting. The learned Accountant Member primarily held that deduction should be allowed only on the basis of payment since he approved cash system of accounting. He however also recorded a finding in para 126 of his proposed view that 'even under the mercantile system of accounting, it is not the entire value of prizes which will be deductible, but only pro rata amount proportionate to the collections during the year'. The learned Judicial Member held that 'the assessee company would be entitled to the entire prize money as the expenditure to be incurred on such prizes was indisputable ascertained and enforceable liability.' Thereafter he recorded in para 33 that 'the assessee would be entitled only to the pro rata amount proportionate to the collection made during a particular year as also held by the learned Accountant Member.' The Ld. AR argued that the proportionate deduction for prizes to be allowed during the 12 years period should be allowed in the first year itself since admittedly the right to receive full amount of ₹ 2500 was acquired during the year, even in respect of partly paid subscriptions. To put i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, it is axiomatic that both the Id. Members agreed to the grant of deduction of full prize money for the 12 years period in the first year of subscription itself but on pro rata basis. The learned Judicial Member further held that discounting cannot be done and there is no view of the learned Accountant Member on the aspect of discounting. Therefore, it is patent that none of the ld. Members opined to restore the matter to the regular Bench for its decision on the question of discounting and application of pro rata in respect of deduction towards prize money. Once both the ld. Members upheld the deduction of the prize money on pro rata basis, the question proposing restoration to the Division Bench for fresh adjudication, cannot be said to arise from the views expressed by the Id. Members in their respective opinions. This question is therefore, held to be not arising from the orders proposed by learned Members and hence cannot be answered in the capacity of a Third member. 14. The question No. 6 is about referring of certain decisions in the order which were not cited during the course of hearing. Both the sides before me are in unison that there is no decision referred by any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , was set up by this argument, as has been opined by the ld. JM. In fact, this argument was on the same subject matter, which was there before the tribunal for adjudication. I, therefore, do not agree with learned Judicial Member to this extent. Even otherwise, the Tribunal is empowered to allow or disallow a claim pending before it for adjudication on a different plea as has been held by Hon'ble Supreme Court in the case of CIT v. Mahalakshmi Textile Mills Ltd.[1967] 66 ITR 710. 17. On merits, it is noticed that the assessee entered into an Agreement with Sahara India for collecting subscriptions from its Members and remitting the same to the assessee at the end of the each month. There is nothing in the Agreement that if the amount collected is retained beyond a period of 30 days, Sahara India would be liable to pay interest on such amount. Section 211 of the Indian Contract Act simply deals with the consequences where an agent does not conduct business of his principal according to directions and customs. Illustration (a) given in section 211 of the Indian Contract Act provides that an agent carrying on business in which it is custom to invest from time to time, the amount at i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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