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TMI Blog1953 (1) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany ex-mills. The company employs Messrs. Jagmohandas Ramanlal & Co. as guaranteed brokers. That firm guarantees the sale price of goods sold by the company ex-mills to the purchasers from Ahmedabad and receives commission as consideration for the guarantee and the work which it does for the company. The company is a non-resident and its accounts are maintained according to the mercantile system. In the assessment year 1942-43 (the previous year being the calendar year 1941) the total sales of the goods by the company amounted to Rs. 29,68,808. In making the assessment on the company for that assessment year the following three amounts were considered for the purpose of determining the company's liability to British Indian tax. (a) Sale proceeds recovered throng Messrs. Rs. Jagmohandas Ramanlal & Co. ... 12,68,480 (b) Sale proceeds through British Indian banks and shroffs received by means of drafts or hundies drawn on by the company ... 4,40,878 (Railway receipts handed over to British Indian merchants by the banks on payment). (c) Sale proceeds received by cheques on British Indian banks and hundies on British Indian shroffs and merchants, and collected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the goods were invoiced to the merchants and these accounts were credited with the moneys thus received by the company from the merchants. The Income-tax Officer brought to tax the profits derived by the company represented by the said three items in the assessment year on the basis that the sale proceeds having been received in British India the profits were received in British India. The Appellate Assistant Commissioner on appeal held that profits from items (a) and (c) were exempt from British Indian tax while those represented by item (b) were rightly taxed. The Department filed an appeal to the Appellate Tribunal against the decision of the Appellate Assistant Commissioner in regard to items (a) and (c) and the company filed an appeal in respect of item (b). The Appellate Tribunal held in regard to item (a) that the merchants in British India were not absolved either in law or in fact from their responsibility to pay to the company its dues by virtue of the debit entries in the account of Messrs. Jagmohandas Ramanlal & Co. and in regard to item (b) that the payment of the amounts due was a condition precedent to the delivery of goods by the banks in British India on behal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 68,480 and Rs. 4,40,878 ?" This question was also answered by stating that they were included in these two sums. The company obtained leave from the High Court to appeal against the decision in regard to the two sums of Rs. 12,68,480 and Rs. 4,40,878 and hence this appeal. It is common ground that the company is a non-resident and its accounts have been regularly kept according to the mercantile system. Its balance sheets were also prepared on that basis. The company was assessed to tax in British India on the basis that these two sums of money were received in British India by or on behalf of the company. In regard to the item of Rs. 12,68,480, even though the amounts of the sales bills were in the first instance debited by the company in its books to the account of Messrs. Jagmohandas Ramanlal & Co. the sale proceeds in accordance with the terms of the sales bills were paid by the respective merchants to Messrs. Jagmohandas Ramanlal & Co. in British India and were either credited by Messrs. Jagmohandas Ramanlal & Co. in the company's accounts with banks or shroffs in British India or were disbursed by them in accordance with the instructions of the company in British India. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own as the double entry system is opposed to the cash system of book keeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. That system brings into credit what is due, immiediately 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. The profits or gains of the business which are thus credited are not realised but having been earned are treated as received though in fact there is nothing more than an accrual or arising of the profits at that stage. They are book profits. Receipt being not the sole test of chargeability and profits and gains that have accrued or arisen or are deemed to have accrued or arisen being also liable to be charged for income-tax the assessability of these profits which are thus credited in the books of account arises not because they are received but because they have accrued or arisen. Mr. Kolah appearing for the company drew our attention to the following cases :--- Subramaniyan Chettiar v. Commissioner of Income-tax, Ahme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income of the assessee and is compulsory on the Income-tax authorities as well when computing the total income [vide Section 2(15)] does not lay down any exemption from liability. It only sets up a mode of computation of the income which is liable to assessment and imposes upon the Income-tax authorities an obligation to accept the mode of accounting regularly adopted by the assesssee except in the cases where the proviso to that section comes into operation. The profits earned and credited in the books of account being thus taken as the basis of computation, the system of accounting postulates the existence of debts in so far as moneys remain due and payable by the parties to whom they have been debited and when it is realised that these debts are not recoverable the assessee gets a deduction for the bad debts under Section 10(2)(xi). This however does not mean that the transaction as it has been recorded in the book of account under the mercantile system of accounting or the double entry system is metamorphosed or the relationship between the parties assumes a different character. What was in its inception a transaction of sale and purchase is not converted into another tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia Assurance Co., Ltd.). An amount cannot be "deemed to be received" merely by the volition or sweet will of an individual. In all the cases which we have mentioned above the profits earned which were credited in the books of account according to the mercantile system of accounting were at best "treated as having been received" which is neither "received" nor "deemed to be received" and therefore not within the purview of Section 4(1)(a). If then profits which have been thus credited cannot be said to be received nor deemed to have been received when the entries were made in the books of account, the contention urged before us by Mr. Kolah that there could not be a second receipt of the amount in British India does not survive. It is true that the words used in Section 4(1)(a) relate to the first receipt after the accrual of the income. Once it is received by the party entitled to it, in respect of any subsequent dealing with the said amount is cannot be said to be "received" as income on that occasion. (Per Kania, J., in B. M. Kamdar). The "receipt" of income refers to the first occasion when the recipient gets the money under his own control. Once an amount is received as inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al profits of the assessee have to be computed, in which event he would be entitled to claim that they should be computed according to the system of accounts maintained by him. But the section would hardly be relevant where stray items of income are caught in taxable territories as received in taxable territories by a non-resident. The entries in the present case were put in merely to prove that the sale proceeds were received outside British India where the entries were made. That contention however could not be sustained, as Section 4(1)(a) is concerned with cases of actual receipt and not with cases of paper receipts. Having regard to the observations made above we have come to the conclusion that the High Court was right in holding that the two sums of Rs. 12,68,480 and Rs. 4,40,878 were the sale proceeds of the goods sold and delivered by the appellant to merchants in British India, that they were received by Messrs. Jagmohandas Ramanlal & Co., and by the banks and shroffs through whom the railway receipts were negotiated, on behalf of the appellant in British India, that they were liable to tax under Section 4(1)(a) of the Act as having been received in British India on its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unilal B. Mehta they drew attention to the antithesis between "accruing and arising in" and "received in", though they also said in the earlier case that there is not a complete disjunction between them and that they are not three mutually exclusive qualifications ; that is, that there may be some overlapping in certain cases. Next, we turn to Section 6 which divides the various sources of income under various heads for the purposes of computation and chargeability and states that each head shall be "chargeable" "in the manner hereinafter appearing". It is to be observed that the word "shall" has been used and not "may" thereby implying that there is no option in the matter. So far as business is concerned, the head is No. (iv) "Profits and gains of business etc." That carries us on to Sections 10 and 13 which prescribe the method of computation. Here again, the language is imperative and in the case of a business the method of computation has to be in accordance with the method of accounting regularly employed by the assessee : see Commissioner of Income-tax v. Kameshwar Singh. Now in the present case, the method of accounting was the mercantile system. The essential differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, therefore if the book profits which are directed to be taxed in a given year are, say, Rs. 10,000 and the actual receipts only Rs. 100, it makes a lot of difference which figure is taken ; nor does it even itself out in the long run, for if the rate of taxation increases in the following year and the state of the business is just the reverse, namely that the book profits are only Rs. 100 whereas the actual receipts arising from the previous year's transactions are Rs. 10,000, it will make a considerable difference to the assessee in the aggregate of tax payable over the years, whether he pays on the basis of boook profits or actual receipts in the two years. I am not able to draw a distinction between a resident and a non-resident in these matters. I can find no ground for holding that in the case of a resident the mercantile system must be adopted for computing the profits if that is the system of accounting regularly employed but that need not be done in the case of a non-resident. If the assessee had been a resident company, the taxation would, in my opinion, have been under Section 4(1)(b) on profits and gains which had accrued or arisen and not under Section 4(1)(a) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amely, to the assessee's banks in British India. These banks retained the documents of title and had the right to refuse delivery until the money was actually handed over. Therefore, the right to get possession of the goods and to take delivery accrued or arose in British India where the money was actually paid, and that to my mind must be taken to be the place where the profits accrued and arose for income-tax purposes, not because the money was received there, for we are not concerned with actual receipts, but because the right which accrued at the date of the transaction was to receive the money in British India and hand over the goods there on the receipt of the money. As I have said, the substance of the transaction must be viewed and that cannot be made to depend upon the method of book-keeping. Even if there are no books the profits on such a transaction would accrue in the place where the money is to be paid and the goods are to be handed over. I cannot see how that can alter by reason of the method of accounting employed. Accordingly, I agree that the method of accounting adopted by the assessee cannot affect the substance of the transactions between the parties or affect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the accounting year with which we are concerned, though I gathered that that was the case. The actual receipts, which followed later, amounted to only Rs. 12,68,480. In my opinion, if anything is computable for the purposes of tax, it is the former figure (assuming all the entries are in the accounting year) and not the latter. But in order to determine whether the profits on these transactions are taxable at all, we must examine the transactions. In these cases the sales were to merchants resident in Ahmedabad. But according to the assessee's affidavit, "In respect of buyers from Ahmedabad, the applicant mills have no account of such buyers. The price is debited to the account of the said Jagmohandas Ramanlal and Company and credited to the sales account in the books of the applicant ;" and later Jagmohandas "discharges its debts by making payments to the applicants from time to time towards the balance in their said accounts in the books of the applicant mills. The said amounts are paid by the said firm by paying the same to the credit of the applicant mills with British Indian banks or shroffs." Now it is evident from this that Jagmohandas & Company do not merely ..... X X X X Extracts X X X X X X X X Extracts X X X X
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