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TMI Blog1959 (5) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... nor 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 instalments which he secures by creating a charge on the land purchased. The appellant, in its turn, undertakes to carry out the developments within six months from the date of the sale, but this time is not of the essence of the contract and what the appellant 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 document. In the accounting year relating to the assessment year 1948-49 the appellant sold a number of plots and received a portion of the sale price from the purchasers according to the scheme mentioned above. The appellant maintains its accounts in the mercantile method under which money not actually received but only treated as received on the basis that it was due and receivable is entered in the books of account on the credit side. Even though the appellant di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opments, it could bring expenses into account only when the expenses were actually incurred. The Tribunal accordingly dismissed the appeal. The appellant thereafter made an application before the Tribunal requiring it to refer to the High Court under section 66(1) of the Income-tax Act certain questions of law arising out of its order. The Tribunal thereupon stated a case and referred the following question to the High Court for its decision : " Whether on the facts and circumstances stated above, the sum of Rs. 24,809 can legally be allowed as an expense of the year under consideration." The statement of case drawn by the Tribunal was severely criticized by the High Court as under : " Unfortunately, the treatment of the question by the authorities below has been of a somewhat summary character, presumably because, it was raised and argued before them in a superficial form. But even if such was the case, there is hardly any justification for the Tribunal failing to realise at least what facts were required to be found and stated. The statement of case is sketchy and bare and like most of the statements we have to deal with during this session, has hardly any appearance of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opments undertaken to be carried out by the appellant as appears from the order of the Appellate Assistant Commissioner : " There was a condition in the conveyance deeds that the appellant does thereby covenant with the purchaser that the appellant shall complete the construction of roads, drains, provide suitable pucca surface drains on both sides of the roads and shall also make arrangements for lighting up the said roads and shall maintain the said roads, drains, lights till the same are taken over by the municipality." " Besides provision for roads, drains, etc., the deed provides for filling up of low lands and there is a clause in the conveyance deed which shows that the appellant shall at his own cost fill the low lands and tank with earth and bring the same to road level." This undertaking having been incorporated in the deeds of sale themselves there was certainly a liability undertaken by the appellant to carry out these developments within six months from the dates of those deeds. Time was of course not of the essence of the contract and the appellant therefore was at liberty to carry put that undertaking within a reasonable time. That, however, did not absolve it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at was the case only the sums actually expended could be deducted and not those which the company was liable to expend in the future. Simon in his Income Tax, second edition, volume II, at page 204, under the caption "Accrued liability" observes as under, after citing the case mentioned above : " In cases, however, where an actual liability exists, as is the case with accrued expenses, a deduction is allowable ; and this is not affected by the fact that the amount of the liability and the deduction will subsequently have to be varied. A liability, the amount of which is deductible for income-tax purposes, is one which is actually existing at the time of making the deduction, and is distinct from the type of liability accruing in Peter Merchant Ltd. v. Stedeford (Inspector of Taxes) which although allowable on accountancy principles, is not deductible for the purposes of income-tax." Approaching the question before us in the light of the observations made above we have got to determine what was the nature of the liability which was undertaken by the appellant in regard to the development of the lands in question, whether it was an accrued liability or was one which was conting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n cannot take place promptly, that may be a reason why the money figure set against it at the earlier date should be reduced in order to allow for an appropriate interval. Supposing, for example, the contract conferring the asset on the taxpayer included a stipulation that the asset should not be realised by the transferee for five years, and that if an attempt was made to realise it before that time, the property in it should revert to the transferor. This might seriously reduce the value of the asset when received, but it is no reason for saying that when received it must be regarded as having no value at all. The Commissioners, as it seems to me, in fixing what money equivalent should be taken as representing the asset must fix an appropriate money value as at the end of the period, to which the appellant's accounts are made up by taking all the circumstances into consideration." As in the case of assets received during the accounting year which could not be immediately realized in a commercial sense, so in the case of the liabilities which have already accrued during the accounting year, though they may not have to be discharged till a later date. It will be always open to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scharge of which rested only in a promise and that the expenses were entirely at large and the development work itself merely so. Apart, however, from the question whether section 10(2)(xv) of the Income-tax Act would apply to the facts of the present case, the case is, in our opinion, well within the purview of section 10(1) of the Income-tax Act. The appellant here is being assessed in respect of the profits and gains of its business and the profits and gains of the business cannot be determined unless and until the expenses or the obligations which have been incurred are set off against the receipts. The expression "profits and gains" has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom--whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date. As was observed by Lord Herschell in Russel v. Town and County Bank Ltd. : " The duty is to be charged upon 'a sum not less than the full amount of the balance of the profits or gains of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of a year ; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains." The High Court in disallowing the claim of the appellant in the present case only considered the provisions of section 10(2)(xv) of the Act and came to the conclusion that on a strict interpretation of those provisions the sum of Rs. 24,809 was not an allowable deduction. Its attention was drawn by the learned counsel for the appellant to the provisions of section 10(1) of the Act also but it negatived this argument observing that under the Indian Act, the profits must be determined by the method of making the statutory deductions from the receipts and any deduction from the business receipts, if it was to be allowed, must be brought under one or the other of the deductions mentioned in section 10(2) and that there was no scope for any preliminary deduction under general principles. It was, however, held by this court in Badridas Daga v. Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial practice and trading principles was a deduction which, if there was no specific provision for it under section 10(2) of the Act, was certainly allowable deduction, in arriving at the profits and gains of the business of the appellant under section 10(1) of the Act, there being no prohibition against it, express or implied, in the Act. It is to be noted that the appellant had led evidence before the Income-tax authorities in regard to this estimated expenditure of Rs. 24,809 and no exception was taken to the same in regard to the quantum, though the permissibility of such a deduction was questioned by them relying upon the provisions of section 10(2) of the Act. It, therefore, follows that the conclusion reached by the High Court in regard to the disallowance of Rs. 24,809 was wrong and it should have answered the referred question in the affirmative. Before we conclude, we are bound to observe that having accepted the receipts of Rs. 43,692-11-9 in their totality even though a sum of Rs. 29,392-11-9 only was actually received by the appellant in cash, thus making the appellant liable for income-tax on a sum of Rs. 14,300 which had not been received by it during the acco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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