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TMI Blog2018 (6) TMI 514X X X X Extracts X X X X X X X X Extracts X X X X ..... placed on behalf of the assessee, on the judgment in Pact Securities and Financial Services Ltd.10 which had placed heavy reliance on the aforesaid two provisions to hold that Accounting Standards should be followed, is misplaced. Liability to pay tax cannot be determined relying on its possible consequences of whether or not it would make any difference if the deduction is claimed in one year or the other. The consequences of the liability being held to arise in a previous year, different from the previous year in which the liability actually arose, are many. It is wholly unnecessary for us to make a detailed analysis of such consequences as the Income-tax Act makes an assessee liable to tax on the income which accrued in his favour in the previous year; and, in determining such income, the liability/expenditure incurred in such a previous year alone should be take into consideration. - Decided against assessee Deduction towards commission payable to two agents in Sri Lanka - accrual of liability - Held that:- As the assessee maintained its books of accounts, under the mercantile system of accounting, their liability to pay commission to the agents arose in the relevant pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thstanding the fact that the obligation to make payment of commission was dependent on receipt of payment from the client, the liability to pay commission arose on the date on which the order was procured by the agent. The view taken by the Tribunal, that the liability arose, on the date on which the order was procured by M/s. Annapurna Agencies, is a possible view. Even if the view taken by the revenue is presumed also to be a possible view, it cannot be overlooked that, even if two views are possible, the view which is favourable to the assessee must be accepted while construing the provisions of a taxing statute - Decided in favour of assessee. - Referred Case No. 71 of 1993 - - - Dated:- 1-5-2018 - MR. RAMESH RANGANATHAN, ACJ AND GUDISEVA SHYAM PRASAD, J. For The Applicant : J.V. Prasad For The Respondent : S. Ravi JUDGMENT: {Per the Hon ble the Acting Chief Justice Ramesh Ranganathan} The Income Tax Appellate Tribunal, Hyderabad bench, has referred the following questions for our opinion. 1. Whether, on the facts and in the circumstances of the case, the provision made for increase in wages on the basis of the Wage Board Award which became enforceable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r dated 08.08.2013, answered the question in the affirmative, against the revenue and in favour of the assessee. Following the order of the Division bench, in R.C. No.342 of 1991 dated 08.08.2013, we answer question No.6 in the affirmative, against the revenue and in favour of the assessee. QUESTION No.1 : For the assessment year 1984-85, the assessee filed its return on 30.06.1984 declaring a total income of ₹ 1,47,92,909/-. A revised return was filed on 06.01.1987 declaring an income of ₹ 1,71,92,147/-. The Income Tax Officer passed an assessment order on 05.01.1988 determining the total income of the assessee as ₹ 11,95,39,861/-. Among the deductions claimed by the assessee, in its profit and loss account, was a provision for payment of increase in wages. A joint reference was made to the arbitrators, in an industrial dispute between the cement manufacturers association and their workmen, on 04.12.1981. The parties filed a memo before the arbitrators on 19.05.1983 agreeing that the award of the arbitrators would come into effect from 01.01.1982, and continue to remain in force till 30.06.1986. Thereafter the Award was made on 11.07.1983 which was rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that, in the case of an assessee following the mercantile system of accounting, the liability would arise or accrue only when the assessee becomes legally liable in respect of the same; till such time as the assessee is legally due, in respect of a liability, it cannot be said that the liability has accrued or has arisen to the assesee; in a situation where the liability may be contemplated, or the liability is uncertain on account of litigation or otherwise, such a liability can only be termed as a contingent liability, and not an accrued liability; it is only when a legally enforceable debt becomes due, can it be said that the liability has arisen, even if the amounts are actually paid at a later point of time; similarly, in the case of receipts, it is only when the assessee has acquired a legal right to receive the amounts, can receipt be said to have arisen to the assessee, even if they are not actually received; with respect to wages, liable to be paid on account of the Wage Board Award, the award was made only on 11.07.1983, it was received by the Central Government on 14.07.1983, and was published in the Gazette on 20.07.1983, i.e., all the three dates fall beyond the rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Sheet Date, issued by the Institute of Chartered Accountants of India (ICAI); the Accounting Standards (AS4 is relevant to the present case) issued by ICAI is a policy statement based on a number of Accounting Principles; if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date; the Accounting Standards were made mandatory only after the amendment to Sec.145 of the Income Tax Act, and Section 211 of Companies Act, 1956; though the Accounting Standards were not mandatory prior to the said amendments, the same was recognized to be a guiding principle to be adopted in Accounting Practice; judicial notice has been taken by this Court, in M.S. Raju v. Deputy Commissioner of Income Tax (2008) 298 ITR 373 (AP), regarding maintenance of accounts following AS- 4; the reason for amendment of Section 145, as explained by Circular No.717 dated 14.08.1995, was to standardize the Accounting system either on cash or mercantile system of accounting, but not mixed or Hybrid methods; and the said circular in (215 ITR (stat.) 70 @ pg. 103-104) reads thus:- Method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accounting Standard-4 permitted events, occurring after the Balance Sheet date and before finalization of Accounts, to be taken into account as the liability 7 (2008) 220 CTR (Del.) 404 because of increase in wages accrued by virtue of the award dated 11.07.1983; and, once an amount is legally liable to be paid and enforceable though the same has not been actually incurred, such amount becomes expenditure and is allowable. Learned Senior Counsel would rely on Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC); Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC); CIT v. Pact Securities and Financial Services Ltd. (2015) 374 ITR 681 (T AP); M.S. Raju (2008) 298 ITR 373 (AP); Nagri Mills Co. Ltd (1958) 33 ITR 681; Shriram Pistons and Rings Ltd (2008) 220 CTR (Del.) 404; Kedarnath Jute Manufacturing Co. v. CIT (1971) 82 ITR 363 (SC); Morvi Industries (1971) 82 ITR 835 (SC) and CIT v. Swadeshi Cotton and Flour Mills (1964) 53 ITR 134 (SC)). In the present case, the assessment year is 1984-85, and the previous year relevant thereto is from 01.07.1982 to 30.06.1983. The assessee maintains its accounts on the mercantile system of accounting. The computation of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual cash receipts and actual cash payments that are recorded as credits and debits; whereas under the mercantile system credit entries are made in respect of amounts due, immediately they become legally due and before they are actually received; similarly, the expenditure items for which legal liability has been incurred are immediately debited even before the amounts in question are actually disbursed. ( Smt. Indermani Jatia 14; Morvi Industries Ltd . (1971) 82 ITR 835 (SC)). The distinguishing feature of the mercantile system 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. ( Commissioner of Income Tax v. Singari Bai (1945) 13 ITR 224( All. HC); State Bank of Travancore (1986) 2 SCC 11). Where accounts are kept on mercantile basis, the profits or gains are credited though they are not actually realised and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. The same is the position with regard to debits made. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... realised. ( Babulal Narottamdas v. CIT 1991 Supp (2) SCC 618). Income can be held to accrue when the assessee acquires a right to receive that income. Income must be held to accrue on the date when a debt becomes due. ( Babulal Narottamdas 25; E.D. Sassoon Co. Ltd. v. C.I.T. [1954] 26 ITR 27 (SC)). When the assesses is following the mercantile system of accounting, the liability to pay sales tax would accrue the moment the dealer made sales, which are subject to sales tax. At that stage the obligation to pay the tax arises. If the liability to pay the central sales tax arose or accrued, during the previous year relevant to the assessment year 1962-63, the liability to pay the quantified sales tax dues can be said to have accrued to the assessee for the relevant assessment year 1962-63, even though assessment, for that year, was completed by the Sales Tax Officer on 31.3.1966. If the tax liability is reduced in appeal/revision and if, in retrospect, it was found that, during the relevant assessment year, the assessee had claimed a large amount of deduction by way of business expenditure, the difference of the amount wrongly claimed and allowed in the earlier relevant as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he should include the said income in the assessment of the succeeding assessment year. No power is conferred on the Income Tax Officer under the Income-tax Act, to relate back an income, that accrued or arose in a subsequent year, to another earlier year on the ground that the said income arose out of an earlier transaction. ( A. Gajapathy Naidu (1964) 7 SCR 767 : AIR 1964 SC 1653 : (1964) 53 ITR 114). As the assessee, in the present case, is maintaining its books of accounts on the mercantile system of accounting, the question which necessitates examination is when its liability, to pay increased wages to its workmen, arose. In order to answer this question, it is necessary to take note of the relevant statutory provisions. In an industrial dispute between the Cement Manufacturers Association and their Workmen, a joint reference was made for arbitration under Section 10-A of the Industrial Disputes Act on 04.12.1981. Section 2(b) of the Industrial Disputes Act, 1947 defines an award to mean an interim or a final determination of any industrial dispute, or of any question relating thereto, by any Labour Court, Tribunal or National Industrial Tribunal and includes an arbitration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses relating to increase in wages from 01.01.1982 to 30.06.1982 for ₹ 7,75,902/-, and for expenses relating to increase in wages from 01.07.1982 to 30.06.1983 for ₹ 23,27,706/- i.e for a total sum of ₹ 31,03,608/- in its books of accounts for the previous year 01.07.1982 to 30.06.1983. The manner in which the assessee recorded its liability in its books of accounts is not conclusive, for the test to be applied, in cases where an assessee is regularly maintaining its books of accounts on the mercantile system of accounting, is when the liability accrued, and it is only on the date of accrual of such expenditure can the assessee claim its deduction from their income during the relevant previous years. The liability to pay tax on the income arises when it has arisen or accrued, and how the assessee deals with it subsequently does not affect that liability. ( CIT v. K.R.M.T.T. Thyagaraja Chetty (1954) SCR 258; Sree Meenakshi Mills Ltd. v. CIT 1956 SCR 691 : AIR 1957 SC 49 : (1957) 31 ITR 28). Whether income tax is due or not cannot be determined according to the manner in which the person, making the profit, pleases to deal with it. ( Californian Copper Syndicate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uires the appropriate Government, within one month from the date of receipt of a copy of the award, to publish the same in the official gazette. Section 17-A(1), as it then stood, stipulated that, after expiry of the 30 days period from the date of its publication under Section 17, the award shall become enforceable. Ordinarily, an award comes into operation from the time stated in Section 17(1) or Section 10-A(3) of the I.D. Act i.e., on its publication in the Gazette. The Tribunal, however, is given the power to order that its award shall be applicable from another date ( All India Reserve Bank Employees Association v. Reserve Bank of India (1965) 2 LLJ 175), even from a date prior thereto. Retrospective operation implies the operation of the award from a date prior to the reference, and the word 'retrospective' cannot apply to the period between the date of the reference and the award. ( Wenger Co. v. Their Workmen (1963) 2 LLJ 403; All India Reserve Bank Employees Association (1965) 2 LLJ 175). Section 17(4) gives a discretion to the Tribunal, and no general principle is either possible or desirable to be stated in relation to the fixation of the date fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... award of a Tribunal shall be operative is the date specifically mentioned as such in the award itself. The date of enforceability of the award of a Tribunal is the date which comes on the expiry of 30 days from the date of its publication under Section 17. A simple illustration will make this point clear. If an award specifically mentions that it is to come into operation on 10.11.1950, then that date is the date from which the award becomes operative. If the award is published in the Gazette on 15-11-1950, it will be enforceable, 30 days after its publication, on 16-12-1950. The enforceable date in this case is not the same as the date of operation of the award. The two dates are different. The directives given in the award, though operative, will not be enforceable except from 16-12-1950, and when it becomes enforceable then all the directions in the award must be implemented from the date of its operation, viz. 10-11-1950. If, however, it is not specifically mentioned in the award as to the date from which the award shall come into operation, then the date of operation as well as the enforceable date will be identical, that is to say, the date which falls on the expiry of 30 da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for consideration. A Learned Single Judge of this Court observed: .. But, the impugned provision, in the instant case, makes a distinction with regard to enforcement of the awards and while the awards rendered inter-se the workmen and the private sector undertakings are made binding and compulsorily enforceable, reserves the power to the Government to annul the award on the ground of either national economy or public interest, if the Government is a party to the dispute and suffered the award. This is clearly violative of equality clause guaranteed under Article 14 of the Constitution of India and the impugned provision is unconstitutional on this ground . The Constitution has assigned the Courts the function of determining as to whether the laws made by the legislature are in conformity with the provisions of the Constitution. In adjudicating the constitutional validity of the statutes, the Courts discharge an obligation which has been imposed on them by the Constitution. The Courts would be shirking their responsibility if they hesitate to declare the provisions of a statute to be unconstitutional, even though those provisions are found to be violative of constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased wages can be said to have accrued only on or after 11.07.1983 when the award was made, and was published in the official Gazette, and not prior thereto. In Nonsuch Tea Estates Ltd. (1975) 98 ITR 189 (SC), the question which arose for consideration was whether the Managing Agency remuneration, for the period 01.04.1956 to 30.06.1957, was deductible in computation of the income of the previous year ending 30th June 42 (Judgment in W.A.No.403 of 2004 dated 26.11.2004) 1958, relevant for the assessment year 1959-60. By an agreement entered into between the appellant and the managing agents, the latter were reappointed for a period of 10 years on a remuneration of 5% commission on the net profits of the company computed in the manner laid down in Sections 349 to 351 of the Companies Act, 1956. The revised terms were to take effect from 01.04.1956. As required by Section 326 of the Companies Act, the new agreement was sent to the Central Government for approval on 03.08.1957. The Government conveyed its approval on 02.09.1957 for appointing managing agents with effect from 01.04.1956. The appellant followed the mercantile system of accounting, and credited a sum of ₹ 9,32 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mercantile system of accounting is not entitled to claim a deduction until liability for the sum for which deduction is claimed has accrued . The reasons given by the High Court overlook the plain terms of Section 326 of the Companies Act, 1956. Section 326 so far it is material for the question involved in this case, is in these terms : Sec. 326.(1) In respect of any company............ ( a).......... ( b) unless the approval of the Central Government has been obtained for such appointment or re-appointment. ( 2) The Central Government shall not accord its approval under subsection (1) in any case, unless it is satisfied (a) that it is not against the public interest to allow the company to have a managing agent; (b) that the managing agent proposed is, in the opinion, a fit and proper person to be appointed or re-appointed as such, and that the conditions of the managing agency agreement proposed are fair and reasonable; and (c) that the managing agent proposed has fulfilled any conditions which the Central Government requires him to fulfil. Section 326 prohibits the appointment or re-appointment of a managing agent unless the Centr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date i.e 01.01.1982 did not result in accrual of liability, prior to the date of the award i.e 11.07.1983 or from the date of publication of the award in the Gazette on 20.07.1983. In Swadeshi Cotton and Flour Mills Pvt Ltd. 12, the assessee had paid a sum, by way of profit bonus, to its employees in the calendar year 1947 in terms of the award made on 13.01.1949 under the Industrial Disputes Act. It debited this amount to its profit and loss account for the year 1948. The books for the year 1948 had not been closed till the date of the award of the Industrial Tribunal i.e 13.01.1949. The bonus was paid to the employees in the calendar year 1949, relevant to the assessment year 1950-51. The assessee was following the mercantile system of accounting. It is in this factual matrix that the Supreme Court observed: .It follows from the above decisions of this Court that:- (a) workmen are entitled to make a claim to profit bonus if certain conditions are satisfied; (b) the workmen have to make a claim from year to year; (c) this claim has either to be settled amicably or by industrial adjudication; and (d) if there is a loss or if no claim is made, no bonus will be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at existed at the balance sheet date; and (b) those which are indicative of conditions that arose subsequent to the balance sheet date. Accounting Standard-4, which relates to contingencies and events occurring after the balance-sheet date, cannot be applied to determine the liability to tax under the Income-tax Act. The question which necessitates examination is whether the liability, which accrued on the award being passed on 11.07.1983 and its being published in the Gazette on 20.07.1983, can be treated as a liability which accrued in the previous year 01.07.1982 to 30.06.1983, which, in its entirety, is a period prior thereto. In CIT v. Woodward Governor India P Ltd. (2009) 312 ITR 254X (SC) the Supreme Court, having come to the conclusion that valuation was a part of the accounting system, business losses were deductible under Section 37(1) on the basis of ordinary principles of commercial accounting, and the Central Government had made Accounting Standard-11 mandatory, examined the said Accounting Standard ( AS ). In The Chamber of Tax Consultants v. Union of India 44 MANU/DE/3570/2017 it was held that, if the power to notify standards had to be exercised consistent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Supreme Court observed that the expression actual cost had not been defined, and it should be construed in the sense which no commercial man would misunderstand; and, for this purpose, it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. Reference was made by the Supreme Court to Accountancy by Pickles, 1955, Spicer Peglar s Practical Auditing, Higher Book-keeping Accounts by Cropper Morris Fison, on Section 208 of the Companies Act, 1956 and on para 2.5 and para 2.2 of the statement of Auditing Practices issued by the Institute of Chartered Accountants of India . Thereafter the Supreme Court observed that the accepted accountancy rule, for determining the cost of the fixed assets, was to include all expenditure necessary to bring such assets into existence, and to put them in a working condition; in case money was borrowed by a newly started company, which was in the process of constructing and erecting its plant, the interest incurred before the commencement of production, on such borrowed money, could be capitalised, and added to the cost of the fixed asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceipt of money was taxable or not, or whether certain deductions from that receipt was permissible in law or not, the question had to be decided according to the principles of law, and not in accordance with accountancy practice; accounting practice cannot override the provision of the Income Tax Act; and, as was pointed out by Lord Russell in B.S.C. Footwear Ltd. v. Ridgway (Inspector of Taxes) (1970) 77 ITR 857, the Income Tax law does not march step by step in the footprints of the accountancy profession. The Supreme Court, in Tuticorin Alkali Chemicals and Fertilizers Ltd (1997) 227 ITR 172 (SC), further held that the question, in Challapalli Sugar Ltd. [1975] 98 ITR 167 (SC), was about computation of depreciation and development rebate under the Indian Income Tax Act; in order to calculate depreciation and development rebate it was necessary to find out the actual cost of the plant and machinery purchased by the company; the Supreme Court had held that cost was a word of wider connotation than price, and there was a difference between the price of a machinery and its cost; Supreme Court had, thereafter, pointed out that the expression actual cost had not been de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en in a large number of decisions of the High Courts, the Privy Council and also the Supreme Court; and it was well-settled that income attracted tax as soon as it accrued. While the judgment in Challapalli Sugars Ltd. [1975] 98 ITR 167 (SC) is that of a two Judge bench of the Supreme Court, the judgment in Tutirorin Alkali Chemicals and Fertilizers Ltd. (1997) 227 ITR 172 (SC) is that of a three Judge bench of the Supreme Court. As the judgment in Challapalli Sugars Ltd. [1975] 98 ITR 167 (SC) was noticed by the Supreme Court, in its subsequent judgment in Tutirorin Alkali Chemicals and Fertilizers Ltd. (1997) 227 ITR 172 (SC), the law declared in Challapalli Sugars Ltd [1975] 98 ITR 167 (SC), as explained in the subsequent judgment of the Supreme Court in Tutirorin Alkali Chemicals and Fertilizers Ltd. (1997) 227 ITR 172 (SC), is binding on this Court. In order to guard against the possibility of inconsistent decisions on points of law by different Division Benches the rule has been evolved, in order to promote consistency and certainty in the development of the law and its contemporary status, that the statement of the law by a Division Bench is considered bindin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess not falling within clause (a) or clause (b), such period as may be determined by the Board or by any authority authorised by the Board in this behalf. Section 4 related to charge of income-tax and, under subsection (1) thereof, where any Central Act enacted that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of the Income-tax Act. Section 5 related to the scope of total income and under subsection (1) thereof, subject to the provisions of the Income-tax Act, the total income of any previous year of a person who was a resident included all income from whatever source derived which (a) was received or was deemed to be received in India in such year by or on behalf of such person; or (b) accrued or arose or was deemed to accrue or arise to him in India during such year; or (c) accrued or arose to him outside India during such year. Section 9 related to income deemed to accrue or arise in India. Section 28 of the Income Tax Act defined profits and gains of business or profession. Thereunder the following income was to be chargeable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax Act ( Kedarnath Jute Mfg. Co. Ltd. (1971) 82 ITR 363 (SC); Tuticorin Alkali Chemicals Fertilizers Ltd. (1997) 227 ITR 172 (SC); Sutlej Cotton Mills Ltd. v. CIT (1978) 4 SCC 358; United Commercial Bank v. CIT (1999) 8 SCC 338; Taparia Tools Ltd. (2015) 7 SCC 540). The previous year, for which the liability to tax is to be determined, would not undergo a change based on the Accounting Standards issued by the Institute of Chartered Accountant of India. In Pact Securities and Financial Services Ltd. (2015) 374 ITR 681 (T AP), the appeals were preferred to this High Court, under Section 260A of the Income Tax Act, 1961, for the assessment years 1996-97 till 1999-2000. The assessing authority had disallowed deduction of lease equalisation charges from the lease rental income. Before the Division bench of this Court, reliance was placed by the assessee on the judgment of the Delhi High Court in CIT v. Virtual Soft Systems Ltd (2012) 341 ITR 593, and the Division bench of the Karnataka High Court in Prakash Leasing Ltd. v. Deputy CIT (2012) 208 Taxman 464 (Karn), to contend that similar questions fell for consideration before these High Courts; and, based on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts, which had the backing of professional bodies such as the Institute of Chartered Accountants of India, it could not be disregarded by the assessing authority; the accounting standards, prescribed by the Institute of Chartered Accountants of India, had received recognition of several decisions of the High Court and the Supreme Court; the proviso to Section 211(3C) of the Companies Act clearly specified that, till such time the Central Government so prescribed, the accounting standards, issued by the Institute of Chartered Accountants of India, shall be the relevant accounting standards; it was, therefore, not possible to read the words may employed in Section 145(2) of the Act as a wish; merely because the Central Government had not notified, in the Official Gazette, that the accounting standards would be followed by any class of assesses, or in respect of any class of income, it could not be stated that the accounting standards, prescribed by the Institute of Chartered Accountants of India or the accounting standards reflected in the guidance note, could not be adopted as an accounting method by an assessee; and notwithstanding the fact that the opinion of the Instit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roperly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Assessing Officer may determine. Section 145(2) enabled the Assessing Officer, if he was not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, to make an assessment in the manner provided in Section 144. Section 145 of the Income-tax Act, as it then stood, related to the method of accounting regularly employed by the assessee for his own purposes, and did not relate to a method of making up the statutory return of assessment to income-tax. Secondly, the Section clearly made such a method of accounting a compulsory basis of computation unless, in the opinion of the Income-tax Officer, the income, profits and gains could not properly be deduced therefrom. It may well be that, though the profit brought out in the accounts is not the true figure for income-tax purposes, the true figure can be accurately deduced therefrom. ( The Commissioner of Income Tax, Bombay v. Sarangpur Cotton Manufacturing Co. Ltd., (1938) 6 ITR 36 = AIR 1938 PC 1; State Bank of Travancore ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ass of companies under the Companies Act. Among others, the Advisory Committee was to consist of one member nominated by the Institute of Chartered Accountants of India. Sub-section (3) stipulated that the Advisory Committee should give its recommendations to the Central Government, on such matters of accounting policies and standards and auditing, as may be referred to it for advice from time to time. Section 211 of the Companies Act, 1956 related to the form and contents of the balance sheet and profit and loss account. Under sub-section (1) thereof, every balance sheet of a company should give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of Section 211, be in the form set out in Part I of Schedule VI, or as near thereto as the circumstances admit, or in such other form as may be approved by the Central Government either generally or in any particular case; and in preparing the balance sheet due regard shall be had, as far as may be, to the general instructions for preparation of balance sheet under the heading Notes at the end of that Part. Sub-section (2) stipulated that every profit and l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndards (NAC) under Section 211(3-C) of the Companies Act; it is not necessary for the Central Government to adopt, in every case, the accounting standards issued by the Institute of Chartered Accountants of India; nothing prevents the Central Government from enacting its own accounting standards which may not be in consonance with the standards prescribed by the Institute; and, similarly, nothing prevents the Central Government from adopting the standards issued by that Institute. The provisions of the Companies Act, as to the disposal of profits, are designed to protect the interests of the shareholders, and have no effect on the right which the State has under the provisions of the Income-tax Act to impose a tax on income when it arises or accrues. ( Sree Meenakshi Mills Ltd. 1956 SCR 691 : AIR 1957 SC 49 : (1957) 31 ITR 28). Accrual of income cannot be confused with its disposal. Income, which has accrued to an assessee, might remain undisposed of by him, but the liability to tax attaches to it, under the provisions of the Indian Income Tax Act, as soon as it accrues. It is no concern of the revenue how and when profits are disposed of by the assessee. ( Sree Meenakshi Mills ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on which the liability had crystallized; it appeared that there was no change in the rate of tax for the assessment year 1983-84 with which they were concerned; the question, therefore, was only with regard to the year of deduction; and it was a pity that the Court had to expend so much time and energy only to determine the year of taxability of the amount. The contention, based on the aforesaid judgments of the Bombay and Delhi Courts, that it matters little whether the liability is to be determined with respect to a particular previous year or the next, is only to be noted to be rejected. If the language of a provision in a taxing statute is plain and unambiguous, the provisions thereof must be enforced and it is, normally, not the concern of Courts to examine its reasonableness or consider its consequences. In a taxing statute one has to look at what is clearly said. There is no equity about a tax. There is no intendment. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly on the language used ( Cape Brandy Syndicate v. IRC (1921) 1 KB 64). If the meaning of the provision is reasonably clear, Courts have no juri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one meaning, the legislature must be taken to have meant and intended what it has plainly expressed, and whatever it has in clear terms enacted must be enforced though it should lead to absurd or mischievous results. If the language of the Section be not controlled by some of the other provisions of the Statute, it must, since its language is plain and unambiguous, be enforced, and the Court is judicially not concerned with the question whether the policy it embodies is wise or unwise, or whether it leads to consequences just or unjust, beneficial or mischievous. ( Cooke v. Charles A. Vogeler Co. 1901 AC 102 M/s. Gouri Shankar Modern Rice Mill (Judgment in TRC No.153 of 2004 Batch dated 05.10.2005). As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the legislature cannot then be appealed to whittle down the statutory language which is otherwise unambiguous. If the intendment is not in the words used it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do not manifest th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xamining the contents of the agreement, the Income Tax Officer held that they provided a formula for quantification of the commission according to which the commission was payable only in respect of supplies made during the year. He computed the commission payable during the year at ₹ 14,211/-, on the supplies of machinery for ₹ 22,84,234/-, and disallowed the balance of ₹ 99,03,062/-. This order of the Income-tax Officer was confirmed in appeal. In further appeal, the Tribunal held that the issue had to be decided on the effect of Clause (d) of the agreement; under Clause (d) the consideration was to arise only on the assessee securing the orders, and consequently the liability to pay commission arose on that date; sub-clause (a) provided only for the manner of computation of commission on the basis of FOB value, which was also specified in the contract approved by the Reserve Bank; accrual of liability was under clause (d), while computation of the amount of commission was under Clause (a); and merely because the actual payment was staggered, by mutual agreement, did not affect accrual of liability. The Tribunal allowed deduction, of the entire accrued liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of commission, as per the agreements, is to happen at a later date, since the liability had accrued, and became enforceable, the Assessee was entitled to claim deduction. Before we consider the rival submissions, it is useful to take note of the relevant clauses of the two agreements which read as under: Eastern Trading Co. Ltd . In consideration of the above services and on K.C.P. securing the contract (a) Agent will be paid a consideration of 1 % on the FOB value of Machinery and Equipment supplied for the Sugar Corporation and also on the consideration received by K.C.P. for services rendered in Sri Lanka towards Civil Works and Erection. No commission is payable on taxes/levies, customs duty (if payable/levies, freight/transport charges. (b) Within 15 days of K.C.P. getting the first advance from the customer, U.S. Dollars 5,00,000/- (Five hundred thousand U.S. Dollars) will be paid to the Agent. Balance Commission will be paid on mutually agreed instalment. (c) Agent will meet all incidental expenses till the contract is awarded . (d) Consideration referred to above arises only on K.C.P. securing the order. Till then each party will bear their re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore that, while the liability of the assessee to pay commission to its agents accrued, in terms of clause (e), on the agent securing the order, actual payment of commission was to be made, at 1 % of its FOB value, on the supply of machinery and equipment to the client as well as on the consideration received by the assessee for services rendered by them for erection and civil works. As the assessee maintained its books of accounts, under the mercantile system of accounting, their liability to pay commission to the agents arose in the relevant previous year in which the agent secured the order; and as, in the present case, both the agents had secured orders from the clients in Sri Lanka, during the previous year relevant to the assessment year 1984-85, the Tribunal has, in our view rightly, held that the liability to pay commission accrued when the orders were secured by the agents, and not when supplies were effected by the assessee. This question is answered in the affirmative, in favour of the assessee, and against the Revenue. QUESTION No.3: The assessee had claimed weighted deduction, under Section 35-B of the Income-tax Act, with respect to payment of commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two Sri Lankan agents; the assessee had claimed the said sum as allowable, under Section 35B(1)(b)(iv), contending that it had maintained an agency outside India, they had paid commission to the agents, and were therefore eligible for an allowance of 1/3rd of the said commission; the assessing officer and the CIT(A) had disallowed the claim; the Tribunal had allowed the claim relying on the order of the Allahabad Bench of the Tribunal in Kothari Carriers v. ITO (1984) 19 TTJ 572 (All.), wherein it was held that maintenance of an agency meant an act of continuing the relationship of principal and agent; Section 35B(1)(b)(iv) speaks of allowance in respect of expenditure incurred for the maintenance of a branch, office or agency for the promotion of sale outside India of such goods, services or facilities; a plain reading of Section 35-B would, unambiguously, show that the assessee is not entitled for the deduction; the Tribunal erred in allowing the same by a perfunctory order; in order to claim the benefit, the assessee must have firstly incurred some expenditure; such expenditure should have been incurred towards maintenance of (i) a branch, (ii) office, or (iii) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction at 1 and 1/3rd times that expenditure; the assessee had an agreement with two Sri Lankan agencies to act as their agent for procuring business in Sri Lanka; having succeeded in the same, and upon the issuance of purchase orders, the said agents were entitled for a commission in terms of the agency agreement; and the question whether the expenditure incurred, on account of commission paid to an agent outside India, would qualify to claim weighted average deduction under Section 35B(1)(b)(iv), fell for consideration, in CIT v. Usha Telehoist Ltd . (1995) 212 ITR 177 (Cal) and Velvet Carpet Co. Ltd. (2017) 395 ITR 515, and is no more res-integra. It is useful, in this context, to refer to Section 35-B as it then stood, which read as follows: S. 35 B. Export Markets development allowance ( 1) (a) Where an assessee, being a domestic company or a person(other than a company) who is resident in India, has incurred after the 29th day of February, 1968 (but before the 1st day of March, 1983) whether directly or in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outside India of such goods, services or facilities. The weighted deduction under Section 35-B(1)(a), for a sum equal to 1 and 1/3rd times the amount of expenditure, was available only if such expenditure (i) had actually been incurred in the previous year; (ii) such expenditure had been incurred wholly and exclusively on the maintenance of an agency outside India; (iii) such an agency outside India had been maintained by the assessee for the promotion of sales outside India of its goods, services and facilities. It is not in dispute that the assessee had two agents in Sri Lanka to procure orders from Sri Lanka clients for the supply of machinery and equipment by the assessee to them. The assessee had claimed weighted deduction for the U.S. Dollars 5,00,000/- (Five hundred thousand U.S. Dollars) which it had paid as advance commission to its agent M/s. Eastern Trading Company Limited. The contention of the revenue was that payment of advance of U.S. Dollars 5,00,000/- (Five hundred thousand U.S. Dollars) to M/s. Eastern Trading Company Limited did not satisfy the requirements, of Section 35-B(1)(b)(iv), for being granted weighed deduction. The agreement with M/s. Eastern Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all incidental expenditure for obtaining the contract. We find considerable force in the submission of Sri J.V. Prasad, Learned Senior Standing Counsel for Income Tax, that appointment of an agent and paying him commission only for procuring orders for the assessee to supply goods, does not, by itself, fulfill the requirements of Section 35B(1)(b)(iv); and it is only if the assessee incurs expenditure in the maintenance of an agency, that too for promotion of sale outside India of its goods, would the assessee be eligible to claim weighted deduction on the expenditure incurred in this regard. The expenditure incurred towards payment of commission for procuring orders, cannot be equated to expenditure incurred for maintaining an agency for promotion of sales, outside India, of the assessee s goods. In Velvet Carpet Co. Ltd. (2017) 395 ITR 515 the question which fell for the consideration of the Supreme Court was whether the appellant/assessee was entitled to weighted deduction, in terms of Section 35B(1)(b)(iv) of the Income Tax Act, 1961, which was the provision in force during the relevant period. In the return filed by the assessee for that year, it had stated that a sum o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be read as Euclid s theorems nor as provisions of a Statute, and that too taken out of their context. ( Amar Nath Om Prakash v. State of Punjab (1985) 1 SCC 345; CCE v. Alnoori Tobacco Products (2004) 6 SCC 186; London Graving Dock Co. Ltd. v. Horton 1951 AC 737; Home Office v. Dorset Yacht Co. (1970) 2 ALL.E.R 294; Shepherd Homes Ltd. v. Sandham 1971 (1) WLR 1062 British Railways Board v. Herrington 1972 (2) WLR 537). The decision of a Court is only an authority for what it actually decides. What is of the essence in a decision is its ratio, and not every observation found therein nor what logically follows from the various observations made in it. ( State of Orissa v. Sudhansu Sekhar Mistra Hegde AIR 1968 SC 647; Quinn v. Leathem 1901 AC 495). In Velvet Carpet Co. Ltd. (2017) 395 ITR 515, the Supreme Court held that the ITAT had looked into the agreement between the assessee and its agent; and the said agreement had been approved by the Reserve Bank of India which had treated the agent as an agency agreement. As held by the Supreme Court, in Velvet Carpet Co. Ltd. (2017) 395 ITR 515, the question whether the assessee is entitled for weighted deduction wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spective effect, and there was no liability at all during the previous year. Accordingly, he enhanced the assessment by disallowing the entire amount of ₹ 15,45,932/-. In further appeal, the Tribunal held that the assessee, as a contractor, was bound to take an insurance policy to cover the risk from the date of commencement of the work which was on 14.03.1983; even though the policy was issued on 16.06.1983, it covered the period from 14.03.1983 to 13.03.1985, and from 14.03.1985 to 13.03.1986; the terms of the insurance policy showed that the assessee had incurred the liability to pay the premium, but had been permitted to pay the same subsequently; even though the indemnity was subject to payment of premium, the policy itself came into operation from 14.03.1983; the liability to pay the premium also arose on that date as mutually agreed; and the assessee had been reimbursed to the extent of ₹ 9,19,995/-, and the amount charged in the account was only ₹ 6,25,937/- which was the difference between the premium payable of ₹ 15,45,932/- and the reimbursed amount. The Tribunal allowed the deduction. Sri J.V. Prasad, Learned Senior Standing Counsel for Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gle premium policy; since the date of both the insurance policy and the insurance cover fell within the relevant accounting period, the assessee was entitled for deduction of the insurance premium, as it maintained its accounts on the mercantile system of accounting; and the fact that the insurance premium was actually paid only in the subsequent previous years was of no consequence. It is no doubt true that, since the assessee maintained its books of accounts under the mercantile system of accounting, it was entitled to claim deduction of a liability on the date of its accrual, and not on the date of its actual payment. The assessee may, therefore, be justified in contending that the mere fact that the insurance premium was paid in the subsequent previous years, and not in the previous year 01.07.1982 to 30.06.1983, was not relevant. The question which, however, necessitates examination is when the liability of the assessee arose. The terms and conditions of the agreement, entered into by the assessee with the Insurance Corporation of Sri Lanka, stipulated that the policy of insurance was subjected to the insured having paid to the insurer the premium mentioned in the schedule; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sured (assessee) having paid the insurance premium, the insurance coverage depended on the assessee making payment of the insurance premium. While the assessee was given the facility of payment of premium in four installments, and the first such installment was required to be paid on 14.03.1983, the fact remains that the assessee did not even pay the first installment, of the insurance premium, before 30.06.1983, the last date of the relevant previous year; and, since even the first installment was not paid, the insurance cover under the policy was not available to the assessee during the previous year 01.07.1982 to 30.06.1983. While in a cash system of accounting, deduction can be claimed only on the date on which payment is actually made, and not on the date on which the liability accrued, in a mercantile system of accounting the liability arises on the date of its accrual. This date of accrual must be ascertained on a reading of the terms and conditions of the underlying contract. It is possible for the terms and conditions of the contract to stipulate that the date on which the amount is paid is the date on which the liability accrued. For instance, under the very same insur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to receive the commission under clause (1) of the agreement, even though payment was to be made pro-rata according to the amounts received by the assessee. The Tribunal upheld the claim of the assessee that the provision, for the balance amount due, was allowable as an accrued liability. Sri J.V. Prasad, Learned Senior Standing Counsel for Income-Tax, would submit that, as per Clause (5) of the agreement between the parties, commission is to be paid at the rate of 5% of the payment received by the assessee; Clause (1) only speaks of the percentage of commission to be paid on the total value of the purchase; all the terms of the agreement should be read together; if so read, it would be clear that the liability of the assessee, to pay commission, would have accrued or arisen only at the stage when the purchase price is received by the assessee. On the other hand Sri S. Ravi, Learned Senior Counsel, would submit that, as per the Agreement dated 18.08.1981, M/s. Annapurna Agencies was entitled for 5% commission upon procurement of purchase orders; the Purchase Order was received at the instance of Annapurna Agencies and, therefore, it became entitled to 5% Commission i.e., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bligated the assessee to allow 5% commission to its agent M/s. Annapurna Agencies. It is no doubt true that Clause (5) stipulated that the actual payment of commission will be made pro-rata to the payment received by the assessee. While the liability arose when the agent procure the order itself, the obligation to make payment was made conditional on the assessee receiving payment from the client, pursuant to the order procured by the agent and after supplies were effected by the assessee. The obligation to pay commission, in terms of Clause(1) of the agreement, is on the procurement of an order by the agent, and the agent had procured the order during the previous year 01.07.1982 to 30.06.1983. Notwithstanding the fact that the obligation to make payment of commission was dependent on receipt of payment from the client, the liability to pay commission arose on the date on which the order was procured by the agent. The view taken by the Tribunal, that the liability arose, on the date on which the order was procured by M/s. Annapurna Agencies, is a possible view. Even if the view taken by the revenue is presumed also to be a possible view, it cannot be overlooked that, even if tw ..... X X X X Extracts X X X X X X X X Extracts X X X X
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