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TMI Blog1981 (7) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in I.T.C. No. 29/74 and this court directed a reference. This is how I.T.Rs. Nos. 38 and 39/79 are before us. Actually since there was only one appeal before the Tribunal and the issue pertaining to a sum of Rs. 1,00,000 was raised only at the instance of the assessee it would have perhaps been sufficient to refer to one of the reference applications while stating a case in pursuance of the directions in I.T.C. No. 29/74. However, the Tribunal has referred to both the reference applications, originally filed by the assessee and by the Department before it, while submitting the statement of the case and that is how two numbers have been given to the income-tax reference before us on this point. Before setting out the questions which have been referred to this court under s. 256(1) and (2), it may be convenient to set out the facts leading to the reference. The assessee-company is a private limited company. The reference relates to the assessment year 1962-63, the previous year being the financial year 1961-62. The assessee is admittedly a dealer in lands. On March 30, 1960, the assessee acquired leasehold rights of lands to the extent of 734 bighas in Illaqa Shahdara for a te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors fail to do so they will be liable to pay the; lessees all costs and damages incurred by the lessees on account of non-vacation of the land ". However, the compensation to be paid to the tenants shall be arranged by the lessees which will be adjusted on the balance of the nazrana money mentioned above. The agriculturist, who were occupying the portions of the land above referred to, did not vacate the land during the financial year 1961-62. The society became apprehensive about the prospects of getting the land vacated and approached the assessee for some redress in the matter. On March 31, 1962, an agreement was executed between the assessee and the society. Clause 4 of this agreement referred to the obligation on the part of the assessee to obtain the tenancy rights in respect of the land measuring 200 bighas. It appears that it had also been agreed by the assessee that some plots of land were not covered by the deed under which the assessee had acquired the leasehold rights from M/s. Hindustan Society Ltd. and the lease deed had also provided that the assessee would obtain the necessary assurance in respect of these lands at its responsibility and costs. ..This was referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd though subsequently there had been certain other restrictions in respect of the assessee's right to actually receive immediately the balance of the sale price. But at the same time the assessee also deducted a sum of Rs. 2,00,000 which, it was claimed, the assessee was liable to pay to the society in view of cl. 7 of the agreement dated March 31, 1962. The assessee also deducted from the sale proceeds of Rs. 4,00,000 a sum of Rs. 1,00,000 which it claimed, it was liable to pay to M/s. Nav Bharat Colonisers (hereinafter referred to as " the brokers "). On April 17, 1961, the assessee claimed to have entered into an agreement with the brokers. The preamble to this agreement recited that the transaction regarding the transfer of leasehold rights of the said land along with the ownership rights thereof had been struck with the society through the brokers and that the assessee had agreed " to pay the commission of the said transaction at 25% (to the brokers) on the total value of the said land ". The agreement proceeded to say that: " The first party will pay the commission at 25% (twenty-five per cent.) to the 2nd party against the valid receipts within the period of one week on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, the assessee was entitled to deduct the estimated compensation payable to the tenants. He noted that the society had already withheld payment of Rs. 2,00,000 in terms of the agreement dated March 31, 1962, and that the agriculturists had filed claims for varying amounts. But he was of opinion that having regard to the sale price of the land which was only Rs. 800 per bigha and having regard to the fact that the tenants occupied only 200 bighas reasonable estimate of the assessee's liability would be Rs. 1,60,000. He, therefore, disallowed Rs. 40,000 observing, however, that if, in the ultimate event, the estimate was found to be at variance with the actual payment, necessary adjustments would be made. So far as the sum of Rs. 1,00,000 claimed by the assessee as commission was concerned, the ITO doubting the genuineness of the transaction and of the firm constituting the broker, disallowed the assessee's claim. The assessee preferred an appeal to the AAC challenging the disallowance of the sum of Rs. 1,40,000 out of the deduction of Rs. 2,00,000 claimed by the assessee. The disallowance of the sum of Rs. 1,00,000 was also contested. So far as the first item is concerned, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and after referring to the provisions of the Delhi (Urban Areas) Tenants' Relief Act, 1961, the Tribunal came to the conclusion that a liability on the part of the assessee to meet the expenses of eviction had accrued during the accounting year. It was pointed out that the tenants had valuable rights under the Tenants Relief Act and it was inconceivable that the tenants would vacate the premises for no compensation whatsoever. It was also noticed that as a matter of fact not a single tenant had been evicted till the date of bearing of the appeal by the Tribunal. In the circumstances, the Tribunal following the principle of the decision of the Supreme Court in Calcutta Co. Ltd v. CIT [1959] 37 ITR 1, allowed the assessee's claim to the extent to which it had been allowed by the ITO. It may be mentioned that the Accountant Member and the judicial Member passed separate orders. The Accountant Member was clear that the assessee should get a deduction only for Rs. 1,60,000. He was of opinion that the estimate made by the ITO bad not been shown to be excessive or unreasonable. There is, however, some ambiguity in the order of the judicial Member because in his order, be refers to a cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for reference by the two parties the Tribunal made a reference on the following two questions As from the assessee " Whether, on the facts and circumstances of the case, the amount of Rs. 2 lakhs retained by the buyer-society is includible in the total income of the assessee ? " As from the Commissioner " Whether, on the facts and circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 1,60,000 retained by the buyer-society was an admissible deduction in the assessment of the assessee for the assessment year 1962-63, under the Income-tax Act, 1961 ? " The Tribunal, however, declined a reference regarding the commission claimed by the assessee but subsequently by the order in I.T.C. No. 29 of 1974, this court directed a reference also on the following question: "Whether, on the facts and circumstances of the case, the amount of Rs. 1.00,000 claimed as a deduction by the assessee is allowable in law ? " Shri K. K. Wadhera, learned counsel for the Department, raises preliminary objection that the question regarding the sum of Rs. 1,00,000 is not properly before this court. He raises this objection on the short ground that the judicial Member has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel, therefore, fail. Coming to the questions referred to us, we think that in principle the allowability of both the deductions claimed by the assessee go together and really raises one issue. One important fact to be kept in mind in deciding this issue is that the assessee is maintaining its accounts according to the mercantile system of accounting and that the entire sum of Rs. 4,00,000, which was the consideration for the transfer of the lands in favour of the society by the assessee, has been taxed as income in the hands of the assessee. It is common ground that the assessee had received in cash only a sum of about Rs. 60,000 during the previous year. But, as it was maintaining accounts according to the mercantile system, the entire sum of Rs. 4,00,000 was taken as having accrued to the assessee. The question that arises for consideration is whether this entire sum of Rs. 4,00,000 can be brought to tax without taking into account the full extent of the liabilities which the assessee had to incur for earning the said sum. It may be mentioned here that the assessee had obtained a 99 years' lease of 734 bighas only on March 30.1960, for Rs. 90,000. The lease deed in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant was a dealer in land and property and carried on land developing business. In the accounting year, relevant to the assessment year 1948-49, the appellant sold a number of plots. Normally the procedure was that when a plot of land was sold the purchaser was asked to pay 25% of the purchase price and give an undertaking to pay the balance with interest in a number of instalments spread over a number of years securing the same by creating a charge on the land purchased. The appellant in its turn undertook to carry out the development within 6 months from the date of the sale but time was not of the essence of the contract. This undertaking was incorporated in the deed of sale itself. The assessee maintained its accounts according to the mercantile system and in respect of the plot sold the entire amount of price was entered on the credit side of the books though only a part of the same had been received by the assessee during the previous year. On the same basis the assessee deducted in its books an estimated sum as the expenditure for the developments to be carried out in respect of the plots which had been sold during the year, even though no part of that amount had actually be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaking to carry out the developments within six months from the dates of the deeds of sale was incorporated therein and that undertaking was unconditional, the appellant binding itself absolutely to carry out the same. It was not dependent on any condition being fulfilled or the happening of any event, the only condition being that it was to be carried out within six months which in view reasonable time. Whatever may be considered a reasonable time under the circumstances of the case, the setting up of that time-limit did not prescribe any condition for the carrying out of that undertaking and the undertaking was absolute in terms. If that undertaking imported any liability on the appellant the liability had already accrued on the dates of the deeds of sale, though that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could very well be deducted from the profits and gains of the business. Inasmuch as the liability which had thus accrued during the accounting year was to be discharged at a future date the amount to be expended in the discharge of that liability would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of different plots of land depending upon the attitude of the tenant in occupation of each plot. In these circumstances, the position is no different from that considered by the Supreme Court in the case of Calcutta Co. [1959] 37 ITR 1. In our opinion the Tribunal was right in holding, applying the principle in the Calcutta Co.'s case, that an estimated amount in regard to the assessee's liability for evicting the tenants was allowable as an expenditure. Learned counsel for the Department referred to the decision of the Supreme Court in the case of Indian Molasses [1959] 37 ITR 66. But this decision does not in any way affect the principle laid down in the Calcutta Co.'s case. In the case of Indian Molasses Co. it was found that the amount in respect of which a deduction was claimed was only a contingent liability and that there were certain circumstances in which the trust contemplated to be set up would fail and there would be a resulting trust in favour of the assessee itself. In the present case, having regard to the terms of the agreement as well as a realistic assessment of the legal position in the light of the Delhi Tenants' Relief Act, there is absolutely no doubt tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t allowing the assessee a corresponding deduction for the liabilities which it has to incur under the contract in order to become entitled to that sum of Rs. 4,00,000. There are a series of decisions on the doctrine of real income but it will be sufficient to refer to those in H. M. Kashiparekh & Co. Ltd. v. CIT [1960] 39 ITR 706 (Bom), CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC) and Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC). For the reasons above discussed, we are of the opinion that the assessee is entitled to deduction in computing its total income of the amount of its liability for the eviction of the tenants. On this issue there is also a dispute regarding the quantum. The ITO had disallowed Rs. 40,000 and this was upheld by the Tribunal. In our opinion, there is no reason to interfere with this conclusion of the Tribunal as it is essentially one of fact. As we have already pointed out, the assessee is clearly entitled to deduction of its liability for the eviction of the tenants but since the exact liability is not known it has to be estimated. The assessee's estimate of Rs. 2,00,000 had no doubt been arrived at on its assessment of the situat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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