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TMI Blog1986 (8) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... by the income-tax authorities under section 10(2)(vi) subject to such realisation as may be mutually agreed upon between us in future. " On December 31, 1970, the contractors wrote a letter to the assessee stating, inter alia, that the coal industry had been passing through an unprecedented depression on account of meagre allotment of wagons for coal loading. It was stated further that this has resulted in a fall in production, with consequential increase in the cost of production and that prices of various commodities required for production of coal have been increasing, which again affected the cost of production. It was also stated that the raisings of and despatches from Ena Colliery had gone down during the year 1970 and the current price of coal was insufficient to meet the bare cost of production. The contractors stated that they could not afford to pay the full amount of depreciation in the year 1970 in terms of the contract, but agreed to pay up to 2/3rds of the ordinary depreciation on machinery, plant and buildings etc., of the colliery on their respective written down values. The board of directors of the assessee considered the said letter of the contractors dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e maintained its books of account on mercantile basis. It was further contended that the assessee had not proved that forgoing a part of the depreciation charges was on account of business considerations or on grounds of commercial expediency but was gratuitous. The addition made by the Income-tax Officer to the total income of the assessee to the extent of the full amount of depreciation charges, it was contended, was justified. The Tribunal held that it was established from the letter of the contractors and the resolution passed at the meeting of the board of directors of the assessee that the assessee had agreed to the reduction in charges covering depreciation on account of business considerations and on grounds of commercial expediency. The object of forgoing a part of the depreciation charges was to retain the services of the contractors. The Tribunal noted that the facts stated in the letter of the contractors in respect of the prevailing situation in the coal industry had not been disputed by the Revenue. The Tribunal held that the board of directors of the assessee had acted in a manner in which a businessman would have acted in the same position. The Tribunal held furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forgoing of the charges, if any, was not in the accounting year involved, but in the subsequent accounting year. In support of its contentions, the learned advocate for the Revenue drew our attention to section 145 of the Income-tax Act, 1961, which deals with the method of accounting by an assessee. He also cited the following decisions : (a) CIT v. K. R M. T. T. Thiagaraja Chetty Company [1953] 24 ITR 525 (SC); In this case, the assessee was the managing agent of limited company. Under the managing agency agreement, the assessee was entitled to a monthly remuneration and a commission of 10 per cent. on the net profits of the managed company as also a small percentage on sales and purchases. In the accounting year ending on March 31, 1942, the assessee became entitled to certain commission. On March 30, 1942, the assessee wrote to the managed company requesting that a certain debt, which the assessee owed to the managed company, should be written off. The directors of the managed company passed a resolution on March 30, 1942, refusing to write off the amount without consulting the shareholders and pending the settlement of the dispute resolved to keep the amount of commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of cloth and Yarn for two years. Under the managing agency agreement the commission became due to the assessee on the last day of the accounting year and was payable immediately after the annual accounts of the managed company were passed in general meeting. By resolution of its board of directors passed after the commission had become due and payable, the assessee relinquished its commission as well as office allowance as the managed company had been suffering heavy losses in the past years. The Tribunal held that the relinquishment by the assessee of its remuneration after it had become due was of no effect and the claim of the assessee that the amounts relinquished were allowable as deduction under section 10 of the Indian Income-tax Act, 1922, was rejected. The Tribunal held that as a result of the relinquishment, the financial position of the managed company did not become stronger but the position of the assessee had become weaker and, therefore, the relinquishment was not for the benefit of the assessee. The High Court affirmed the view of the Tribunal. On further appeal, the Supreme Court held that as the amount had been given up unilaterally by the assessee after the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved that the concept of real income could not be read in a manner so as to defeat the object of the provision in the statutory enactment. The concept of the reality of income and actuality of the situation may be relevant to determine the actuality of the income but once such accrual took place, the same could not be defeated by the theory of real income. After the conclusion of the arguments, learned advocate for the Revenue also relied on CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589 (SC) on the authority of which he sought to argue that the question involved in the present proceedings was the assessability of the said amount of depreciation charges claimed to have been forgone by the assessee and a necessary aspect of the said question was whether the said amount was assessable in the assessment year involved and could be argued in the reference though it may not have been specifically argued in the proceedings earlier. Learned advocate for the assessee contended, on the other hand, that there was sufficient evidence before the Tribunal to hold that a part of the depreciation charges was forgone for business considerations and on grounds of commercial expediency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded that under the agreement, the charges payable by the contractors to the assessee were subject to such realisation as may be mutually agreed upon in future. It was plainly indicated that the amount payable by the contractors under the said agreement was subject to further negotiations. Before the end of the relevant accounting year on December 31, 1970, the contractors clearly indicated to the assessee their inability to pay the depreciation charges as provided for and offered to pay only 2/3rds of the amount. The stand of the contractors was unequivocal. The assessee by the resolution of its board of directors passed on April 1, 1971, accepted the proposal of the contractor and the same must relate back to the accounting year involved. It was contended further that there was no dispute that the system of accounting followed by the assessee was mercantile and there was also no dispute as to the accrual of the income. The question involved was whether the forgoing of a part of the depreciation charges amounted to an expenditure on the ground of business considerations or commercial expediency and also whether the assessee was entitled to a deduction of the same. It was submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause the High Court had called upon the Tribunal to state a case on that question. The High Court might decline to answer the question if it did not arise out of the order of the Tribunal. (c) CIT v. Birla Gwalior (P) Ltd. [1973] 89 ITR 266 (SC). In this case, the assessee was the managing agent of two companies and maintained its accounts on mercantile basis. Under the agency agreements, the assessee was entitled to a commission as also an office allowance from each of the managed companies. No date for payment of the commission was stipulated in the managing agency agreements. The assessee gave up the managing agency commission from both the managed companies for three successive assessment years after the end of each of the relevant financial years but before the accounts were made up by the managed companies. It also gave up before the end of the relevant financial years its office allowance from one of the managed companies in respect of two of the said assessment years. On these facts, it was held by the Supreme Court that the office allowance forgone by the assessee was allowable as revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. It was hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng observations contained in the judgment of Sabyasachi Mukharji, J. (headnote): " The following propositions emerge in relation to the theory of real income: (1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation charges might have accrued to the assessee. But the question of surrender or forgoing the accrued income has also to be considered. The proposal for surrender of the part of the depreciation charges was mooted before the end of the accounting year and immediately, after the end of the previous accounting year, the proposal was finally accepted by the assessee. Following the decision of the Supreme Court in Morvi Industries Ltd. [1971] 82 ITR 835, the forgoing of part of the depreciation charges could be considered to be revenue expenditure and as such, an admissible deduction. As laid down by the Bombay High Court in H. M. Kashi Parekh Co. Ltd.[1960] 39 If R 706, accrual of an income, making of the accounts, legal obligation to give up a part thereof and the forgoing of the same are not disjointed facts and they dovetail. The same view has been taken by the Patna High Court in S. K. G. Sugar Ltd. [1974] 96 ITR 194, where it was held that the expenditure deemed to have been incurred by surrendering or forgoing part of depreciation charges must be held to relate back to the accounting year in question and not to the subsequent accounting year. We note the observations ..... X X X X Extracts X X X X X X X X Extracts X X X X
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