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TMI Blog1953 (6) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... ps it so as to make it fit for building purposes and sells it at a profit in plots. The developments undertaken are, in the main, the roads are laid out, a drainage system provided and street lights installed and maintained. The whole of the development is not carried out before the land is sold, nor is the whole of the sale price received in cash at the time of the sales. The procedure followed is that when a plot is sold, the purchaser pays about 25% of the purchase price in cash and undertakes to pay the balance with interest at a certain rate in ten annual installments which he secures by creating a charge on the land purchased. The company, in its turn, undertakes to carry out the developments within six months from the date of the sale but that time, as was stated before us, is not of the essence of the contract and what the company really undertakes is to carry out the developments within a reasonable time. The undertaking is incorporated in the deed of sale itself, whereas the security is given by the purchaser by means of a separate instrument. Nothing is said in the sale deed as to the cost of the developments. The assessment year with which the present reference is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the sales, had been advanced to each individual buyer on a mortgage of the plot sold to him. After having failed even with the Tribunal, the assessee asked for a reference of the matter to this Court and in pursuance of that requisition, the following question has been referred:- Whether on the facts and circumstances stated above, the sum of ₹ 24,809 can legally be allowed as an expense of the year under consideration . Although the question refers to the facts and circumstances stated above , the statement of the case contains few of the facts I have so far recited. Those had to be collected from other sources, some of them not even contained in the paper book. Before us, Mr. Gupta, who appeared on behalf of the assessee, urged practically two contentions. The first contention was that in determining the profits of the assessee, the deduction claimed by it would have to be allowed on general principles, quite apart from whether or not it was an allowable deduction under Section 10(2)(xv) of the Act, because, as he put it, it was wrong to think that the allowance of only those deductions which were specified in Section 10(2) would always give the profits o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... become the assessee's money, was received by it and subsequently dealt with by way of making an advance thereof, the payment of interest cannot, to my mind, be explained. There might not have been any physical receipt of the money, but there was none the less an actual receipt in law. Mr. Gupta contended that there was no such receipt and relied, in support of his contention, on the decision of the House of Lords in Harrison v. John Cronk Sons Ltd. [1937] AC 185. That decision was given on facts of a very peculiar nature and whenever it has been referred to afterwards, it has been sought to be explained away, as by the House of Lords itself in Absalom v. Talbot [1944] AC 204, and Gardner, Mountain and D' Ambrumenil Ltd. v. Inland Revenue Commissioners [1947] 1 All ER 650. But even taking the decision as it is, I find nothing in it to support Mr. Gupta's contention. The facts were that a company was engaged in the business of selling small houses to men of moderate means to whom a building society would advance the whole amount of the purchase price at the request of the company and on a guarantee given by it, the amount being repayable by the purchaser to the society ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but he observed that he could not say that the view taken by the Court of Appeal was not right and the other learned Lords concurred. Even the view that the unpaid portions of the purchase price should, when retained by the purchasers as debts, be taken at a valuation, has not found general acceptance and it has been pointed out that Cronk's case (supra) was decided on very special facts in that a third party had intercepted portions of the sale price and also that none of the relevant decisions on the points was cited before the House. But assuming that whether a part of the sale price is withheld by the purchaser or withheld by a third party, the principle would be the same, as observed by Lord Russel of Killowen in Absalom v. Talbot [1944] AC 204, at p. 220, and that the distinction made by Viscount Simon and Lord Porter in the same case and by Lord Porter and by Lord Simonds in the case of Gardner, Mountain and D' Ambrumenil, Ltd (supra) is not material, it is still difficult to hold that when a vendor says in the sale deed that he has received the entire amount of the sale price and takes a separate document from the purchaser in respect of a portion of it which he lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ans in instalments spread over several years. Though such was the view of the majority, even Lord Atkin who made the leading speech on their behalf agreed that in the case of a solvent purchaser, the unpaid portion of the sale price, if fully secured and payable with interest, could be brought into the accounts at its face value. There is no question of face value or real value in the present case, because the assessee has itself brought the sums into the accounts of the year at their full face value. It has said in the sale deeds that it has received the price in full. It has taken a mortgage for the amount not received in cash and has been earning interest on them. It has granted installments, but in doing so it has not computed all the interest that will be payable, added it to the principal and then divided the total amount into ten equal parts, as appears to have been done in Absalom v.Talbot [1944] AC 204, but has kept the interest separate, leaving it to accrue and crediting it as and when it is paid or becomes payable. It has thus made a distinction between the amount of the principal which it has treated as received and the interest which it has treated as receivable. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act has its own principles for the determination of the taxable income which do not always accord with general principles and it is only those principles which the Income-tax authorities must apply. It is true that the charge of tax attaches only to profits and not to all receipts, but for income-tax purposes, the profits are to be extracted from the receipts only by application of the rules which the Act prescribes. The scheme of the Act is to divide the receipts according to sources from which they are derived and to take from the receipts from each source what may be left of them after making certain deductions of a specified character. No other method is allowable under the Act. Mr. Gupta contended that the question before us was not one of allowing any deductions, but one of ascertaining the profits and profits, he said, could be ascertained, when to earn an amount of income a certain liability had to be incurred, only by deducting the amount of the liability. That indeed is fundamental, but I am unable to agree with Mr. Gupta that the question lies at the threshold of an assessment proceeding, as he seemed to contend, and that it had to be decided before entering upon the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preliminary deduction under general principles. Apart from that general position under the scheme of the Act, it must be remembered that the amount in question in the present case was claimed, as I have pointed out, as expenses and that being so, the assessee could not succeed unless it established that it was an allowable deduction under Section 10(2)(xv). The first contention of Mr. Gupta must accordingly fail. The really substantial contention of Mr. Gupta was the second one which undoubtedly involves questions of some difficulty. On the finding I have already arrived at, it does not arise, but assuming that the assessee did not receive the portion of the sale price not physically paid at the time of the sales, the contention was as follows. The assessee keeps its accounts in the mercantile method under which liabilities accrued but not actually met by payment can be brought into the books on the debit side, just as credit entries can be made in respect of amounts which have become legally due and receivable but have not yet been received. It was because of employing that method of accounting that the assessee had brought in on the credit side the unpaid balance of the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, there are several answers to Mr. Gupta's contention. In the first place, it is by no means correct to proceed on the assumption that profits for income-tax purposes must be profits as understood in trade and commerce and as computed by the commercial method from books kept in the commercial system. The Income-tax Act has its own notion of profits and therefore it is a mistake in method to assume that the Act taxes only what commercial men would regard as profits or what would appear to be profits to common sense and then to adjust the Act to such notions. It is true that generally speaking, profits and gains must be ascertained on ordinary principles of commercial trading , as Lord Halsbury said in Gresham Life Assurance Society v. Styles [1892] AC 309, but that is only when the Act leaves room for the application of those principles. No deduction is to be made other than is allowed by the Income-tax Act - Naval Colliery Co. Ltd. v. Commissioners of Inland Revenue: The Glamorgan Coal Co. Ltd. v. Commissioners of Inland Revenue [1928] 12 Tax Cas. 101?, per Lord Warrington of Clyffe-and the nature of liabilities which may be deducted on business and accountancy principles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntends to allow only expenses actually made but not also expenses incurred but not yet paid. Mr. Gupta contended, I think rightly, that the clauses where the word paid occurred were not concerned with expenses of the business operations, but only with payments of an incidental or ancillary character. Still, I should think that the provision of an explanation of the word paid and the omission of a similar explanation in the case of the words laid out or expended cannot be ignored and the omission appears to be a key to the intention of the Legislature that in the case of business expenditure proper, nothing except expenses actually made in the year of account were to be allowed. I shall, however, assume that the Legislature, having provided for the allowance of even liabilities incurred under the clauses where the word paid occurred, if the method of accounting according to which the profits were computed required it, could not have had a different intention in the case of the residuary clause and that the word expended must be read in the same way that the word paid had been directed to be read. But the expenditure claimed in the present case does not appear to be al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyed and if they could be, that method would be the compulsory basis of computation -Income-tax Commissioner, Bombay v. Sarangpur Cotton Manufacturing Co. [1938] 65 IA 1; 6 ITR 36 ,1 and it was to be seen how the entries were to be treated in view of the basis on which they had been made. That is true, but the finding in the present case is that the assessee had employed the mercantile method. For an exposition of the mercantile method, Mr. Meyer referred us to the Full Bench decision of the Allahabad High Court in Commissioner of Income-tax v. Shrimati Singari Bai [1945] 13 ITR 224 ; ILR 1945 All. 577 and the decision of the Supreme Court in Keshav Mills Ltd. v. Commissioner of income-tax, Bombay [1953] 23 ITR 230 at p. 239, which explains the method in the following words:- That system 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 . It would seem that debit entries of undisbursed expenditure which the mercantile method of accounting authorises and which are in practice made under that metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as come to the seller, notwithstanding that he elects to receive a part of the price in installments, spread over a number of years, charging a fee for the accommodation. Indeed, the minority held that in such a case, the seller received the full face value of the price and not merely, in respect of the portion allowed to be paid in installments, its present estimated value. The case of future expenditure seems to be different even under ordinary notions, but even if it be not different, it must be possible to predicate of it the same certainty and a completion of accrual. Mr. Meyer referred us to the three decisions which are always cited in cases of this kind, Edward Collins Sons Ltd. v. Commissioners of Inland Revenue (192S) 12 Tax Cas. 773, Whimsier Co. v. Commissioners of Inland Revenue [1926] 12 Tax Cas. 813, and Naval Colliery Co. Ltd. v. Commissioners of Inland Revenue: Glamorgan Coal Co. Ltd. v. Commissioners of Inland Revenue [1928] 12 Tax Cas. 1017The facts of those cases are undoubtedly very different, but it appears from the elaborate discussion of principles to be found in the judgments that except in the case of stock valuation which is a recognised exception, pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a claim by a catering company to deduct the estimated expenditure for replacements of cutlery, crockery and utensils which had been supplied to it by owners of factories for whose establishments it catered and which it had undertaken to maintain by its contracts with those owners. The contracts were originally for twelve months, but were thereafter to continue on a yearly basis, if satisfactory to both parties, and in fact continued. The cutlery, crockery and utensils, necessary for the business, were placed at the disposal of the catering company by the factory owners to whom they belonged and the contract provided that they were to be maintained in their original quantity and quality by the caterers. Thefts and breakages occurred, but owing to the scarcity and the high price of the equipment, the company found it impossible to make all the necessary replacements. In its accounts for each year, the company charged as expenses not only the amounts actually spent on replacements but also amounts which the company would be liable to spend in making the remaining replacements, when the equipment became available. The latter amounts also were computed at current prices. In computi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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