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TMI Blog1980 (9) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... tion entered into a contract with the State Trading Corporation of India (hereinafter referred to as the " trading corporation ") for the sale of tractors imported by the trading corporation. In that contract, the Agro Corporation was described as a business associate. The business associate was required to dispose of the goods imported through the trading corporation only to the bona fide agriculturists having sufficient land in accordance with the instruction; given by the Ministry of Food and Agriculture, C.D. and Co-operative Dept., Govt. of India and/or STC (State Trading Corporation). The business associates were required to deliver the goods to the registered purchasers on the basis of first-come-first served subject to, any priority that the Ministry of Food and Agriculture and/or STC may assign and they were not to charge from the customers/purchasers of the goods price more than ceiling price as may be approved by the trading corporation. During the accounting year ending on March 31, 1972, relevant for the assessment year 1972-73, the Agro Corporation sold a number of Zero Tractors imported through the trading corporation to various customers. The sale price realised by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this, figure had been arrived at after taking into account amongst other items the debit in respect of the sums of Rs. 12,80,428 and Rs. 2,23,480 made by the assessee in respect of finance charges and assembling charges mentioned above. In this connection, the ITO observed thus: The STC on 31-10-1973 (correct date appears to be 5-8-1971) has written to the assessee that these finance charges cannot be allowed to be realised by the assessee from its customers. Similar orders existed even before the charging of this amount. Thus, the liability of refunding of this amount is contingent and was determined only by this letter dated October 31, 1973. It has nothing to do with the relevant previous year when the assessee in fact realised this amount from various farmers and purchasers as sale price. Merely because that a letter was received in 1971, the contents of which the assessee has not accepted and it cannot be presumed at this time also that even the contents of this letter dated October 31, 1973, he would accept, he cannot debit the sales in 1972. Not only this when he had such intention of obeying Government orders why he charged this amount at all. The assessee wants to have t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dispute in the relevant previous year. The verdict of the Government was given only in the subsequent year. The Appellate Assistant Commissioner rejected the claim with regard to finance charges by making the following observation : The decision of the Government of India on this topic was not available during the year under appeal. In the previous year under appeal, there was a dispute between the appellant and the STC which was a sister corporation but there was no decision on this topic by the Government which could have entitled the appellant to write off this amount realised from the purchasers. The appellant is maintaining the mercantile system of accounts and, in my opinion, the write off or the debit of this amount of Rs. 12,80,428 is not relevant to the year under appeal. This entry is relevant only to be passed on October 31, 1973, when the Government decision was communicated. In my opinion, the appellant was not justified in reducing its profits by Rs. 12,80,428 as far as the year under appeal is concerned. This reduction is relevant only to the date, October 31, 1973, as per reasons mentioned above. The addition of Rs. 12,80,428, therefore, is confirmed." While d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt realised by it at Rs. 15,99,030.96. The other letters are subsequent to this date. Thus, the assessee having in view the contract with the STC and mercantile system of accounting, could only provide for the amounts, for which it was legitimately entitled according to the contract. From the letter dated August 5, 1971, from the STC, who was the authority under the contract to fix the ceiling price, it clearly indicates that the assessee charged the amount in excess of the ceiling fixed by it. As such, the assessee was perfectly justified to reverse the entry during the year under appeal for Rs. 12,80,428 and Rs. 2,23,480 for finance and assembling charges, respectively." The Tribunal further opined in para. 29 of its judgment that as the Agro Corporation had been following the mercantile system of accounting, the taxability of the finance and assembling charges recovered by it had to be considered on the basis of their accrual under the contract entered into between the Agro Corporation and the Trading Corporation and that on this point the letter dated August 5, 1971, from the Trading Corporation was quite clear and it indicated that the said amounts did not accrue to the Agro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above). According to this system, the entry is passed for the amount which has legally accrued in the hands of the assessee. Here, the income from assembling and finance charges reached the hands of the assessee because of the contract of the STC dated September 10, 1970. According to this contract, the assessee did not charge the amount correctly and, therefore, the incorrect amount charged by the assessee could not be said to have accrued during the year under appeal." In the result, the Tribunal concluded that the excess amount charged by the assessee was not its trading receipt. Accordingly, the second proposition stated by the revenue was rejected. In this view of the matter, the Tribunal allowed the appeal filed by the Trading Corporation by making the following observation: " After considering the above facts, we hold that on the basis of the mercantile system of accounting, followed by the assessee and the contract with the STC dated September 10, 1970, the sum of Rs. 12,80,428 and Rs. 2,23,480 were not rightly included as income of the assessee during the year and, therefore, they are deleted. The observations made by the Tribunal with regard to the nature of the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e material time and the same is the position with regard to debits made. Again, in the case of CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144, the Supreme Court observed that income-tax is attracted either at the time of accural (where the accounts are maintained on mercantile system) or receipt (where the accounts are maintained on cash system) of income, but the substance of the matter remains income. If income does not result at all, there cannot be a tax even though in book keeping an entry is made about an hypothetical income which does not materialise. Where income has, in fact, been received and is subsequently given up, in such circumstances that it remains the income of the recipient, even though given up, the tax is payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income even though an entry to that effect might in certain circumstances have been made in the books of account. Likewise in the case of CIT v. Poona in Chand Trilok Chand [1976] 105 ITR 618 (All), a Division Bench of this court opined that under the mercantile system an assessee is entitled to claim deduction as soon as liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not the head under which it is entered in the account books as would prove decisive. If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as trading receipt. We may in this context refer to the case of Punjab Distilling Industries Ltd. v. Commissioner of Income-tax [1959] 35 ITR 519 (SC). In that case certain amounts received by the assessee were described as security deposits. This court found that those amounts were an integral part of the commercial transaction of the sale of liquor and were the assessee's trading receipt. In dealing with the contention that those amounts were entered in a separate ledger termed 'empty bottles return security deposit account', this court observed: 'So the amount which was called security deposit was actually a part of the Consideration for the sale and, therefore, part of the price of what was sold. Nor does it make any difference that the price of the bottles was entered in the general trading account while the so-called deposit was entered in a separate ledger termed 'empty bottles return deposit account', for, what was a consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the finance and the assembling charges mentioned above were over and above the maximum price fixed by the Trading Corporation, the Agro Corporation was not entitled in law to charge the same and it was liable to refund the same to its customers. In the circumstances, it can be said that this part of the income never accrued to the petitioner and in any case the liability to refund the same also accrued simultaneously. Accordingly, even though the Agro Corporation had received the amount it could not be said to be its income. In the alternative, it was entitled to adjust its liability for refunding the amount in the same year. In either view of the matter, the finance and the assembling charges realised by the Agro Corporation could not be taken into consideration in computing its taxable income. The submission made by the learned counsel that as under the contract entered into between the Agro Corporation and the Trading Corporation, the former was not entitled to charge anything in excess of the price determined by the latter for the sale of tractors and that the amount realised by the Agro Corporation over and above the price fixed by the Trading Corporation never accrued to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poration and the entire amount of price for which the tractors were sold continued, to be the trading receipt or income of the Agro Corporation and was liable to be included in its total income. We now proceed to deal with the second submission of the learned counsel appearing for the Agro Corporation, that because of the contract entered into between the Agro Corporation and the Trading Corporation, the former became liable to refund the excess realisation to its customers and as such the finance charges and the assembling charges were liable to be excluded in computing the Agro Corporation's income. For the reasons already stated above, we are not impressed by the argument that because of the existence of the contract between the Agro Corporation and the Trading Corporation that the former will not sell tractors at a price higher than that fixed by the latter, the purchasers could either insist that they would not pay the price agreed upon by them or that they would claim refund of the excess price. We are, accordingly, not satisfied that the Agro Corporation was liable to refund the excess realisation made by it because of the existence of the contract entered into between it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion charged a price higher than that fixed by the Trading Corporation in derogation of its contract with the Trading Corporation, the purchasers who had agreed to purchase the tractors from the Agro Corporation at a higher price were not entitled to claim refund of the excess price from the Agro Corporation. The letter dated 5th of August, 1971, did not improve the situation in favour of the purchasers at all. By the said letter the Trading Corporation merely invited the attention of the Agro Corporation to the fact that it had acted in derogation of the contract entered into with it and called upon the Agro Corporation to refund the excess amount. But then it does not mean that because the Trading Corporation had called upon the Agro Corporation to refund the excess amount, the purchasers could enforce the direction contained in the letter and claim refund of the excess price paid by them. If, to begin with, there was no legal enforceable liability to refund the amount, the same certainly was not created by the letter dated August 5, 1971. No other material was brought to our notice whereunder such a liability to refund the amount had been created in the year in question. The Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting its profits liable to income-tax. While dealing with the question of admissibility of the claim made by the assessee, the Supreme Court observed that u/s. 10(1) of the I.T. Act, tax shall be payable by an assessee under the head " Profits and gains of business " in respect of profits and gains of any business carried on by him. The said profits and gains are not profits regulated by any statute, but profits in a business computed on business principles. They are business profits and not statutory profits. The real profit of a businessman under s. 10(1) of the I.T. Act cannot obviously include amount returned by him by way of rebate to the consumers under statutory compulsion. It is as if he received from the customers the original amount minus the amount he returned to them. In substance there cannot be any difference between the businessman collecting from his constituents a sum of Rs. "Y" in addition to Rs. " X " by mistake and returning Rs. " Y " to them and another businessman collecting Rs. " X " alone. The amount returned is not a part of the profits at all. The court further observed that incometax is a tax on the real income, that is, the profits arrived at on commerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled to receive as commission 10% of the freight charge. During the period relevant to the assessment in question the assessee became entitled to receive certain amount from the managing company by way of commission. Subsequently, for certain reasons the assessee agreed to accept only 2% as commission from the two managing companies and gave up the remaining amount of its commission earnings during the relevant year. The department sought to assess the amount given up by the assessee on the ground that the commission of 10% had already accrued to the assessee in the relevant accounting year and the fact that the assessee gave up a portion of that income subsequently, did not alter its position. The Supreme Court, after considering the agreements entered into between the assessee-company and the managing company, came to the conclusion that the effect of the subsequent agreement whereby the assessee-company gave up its claim for commission over and above 2 1/2% was that it had altered the rate of commission in such a way as to make the income which really accrued to the assessee different from what had been entered in the books of account. This was not a case of a gift by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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