TMI Blog1998 (10) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... es towards entertainment by being cost of food or drinks etc. Following the judgment of the Gujarat High Court in the case of Gujarat Slate Export Corpn. Ltd. vs. CIT (1996) 131 CTR (Guj) 23 : (1994) 209 ITR 649 (Guj), we reverse the decisions of the lower authorities and direct that the expenses be allowed as revenue expense. 3. Ground No. 3 relates to the question of disallowance of share issue expenses to the total extent of Rs. 39,35,823. The assessee claimed the same as revenue expenses. The AO discusses in the assessment order that during the relevant previous year, the assessee came out with a public issue of shares on terms and conditions settled by the Controller of Capital Issues and the various Stock Exchanges in India. The AO referred to three decisions of different Courts like that of Gujarat High Court in the case of Ahmedabad Mfg. Calico (P) Ltd. vs. CIT (1986) 57 CTR (Guj) 151 : (1986) 162 ITR 800 (Guj) of Kerala High Court in the case of CIT vs. Commonwealth Trust Ltd., (1987) 66 CTR (Ker) 126 : (1987) 167 ITR 365 (Ker) and of the Karnataka High Court in the case of CIT vs. Motor industries Co. Ltd. (1988) 173 ITR 374 (Kar), and by following the unanimous decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as at the close of business on 30th Nov., 1983, pursuant to a scheme of amalgamation of be approved by the Karnataka High Court. It was also stated in the said connection that the nonresident interest in the equity capital of the assessee-company shall have to be reduced to a level not exceeding 40 per cent by 31st May, 1985. A further stipulation was also provided that till 60 per cent of the capital of the company was allotted to resident Indians, the company shall not declare and pay any dividend without the prior permission of R.B.I. 5. Sri Dastur states that pursuant to the above conditions having been imposed by R.B.I., towards limiting the non-resident interest upto the maximum level of 40 per cent, the assessee-company issued 30 lakhs new equity shares of Rs. 10 each for cash at a premium of Rs. 8 per share. For this purpose a detailed prospectus was issued. In the said prospectus, a specific mention was made about M/s. Eskay Lab having already established a research centre in 1971, which had been recognised by the Govt. of India and was being considered to be one of the five largest research centres in the industry. Sri Dastur places emphasis on this aspect of the matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Bom) 69 : (1990) 181 ITR 59 (Bom). In the said case Glaxo Laboratories. In the said case Glaxo Laboratories (India) Ltd. had entered into a collaboration agreement with a foreign company and subsequently made an application to the Government for permission to continue on the said agreement. Permission was granted by the Government subject to the condition that share holding of the foreign company be diluted. M/s. Glaxo Company complied with such directions of the Government by issuing fresh capital to Indian public. The Bombay High Court held that fresh capital had been raised for the purpose of running the business and hence the expenditure on raising fresh capital was of revenue nature. Sri Dastur has also relied on a few other decisions in support of his contention in this regard, which are being discussed as below: (i) Shri Meenakshi Mills Ltd. vs. CIT (1967) 63 ITR 207 (SC). It was held by the Supreme Court in this case that the deductibility of expenditure incurred in prosecuting a civil proceeding depends on the nature and purpose of the legal proceeding in relation to the assessee's business and cannot be affected by the final outcome of that proceeding. (ii) Ambala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (1966) 60 ITR 52 (SC). The learned Departmental Representative also relied on certain other decisions to which we shall make a reference in due course. In reply, Sri Dastur stated that the substance of the matter is to be taken into consideration. M/s. Eskay Lab, U.K., and the assessee-company belong to the same group and the main purpose behind issue of the shares was to consolidate the existing business in India. Sri Dastur also pointed out that the Supreme Court itself had remarked in the case of Brooke Bond India Ltd. that if the share issue was for raising working capital, the expense in that connection might be considered as revenue expense. He once more emphasised that the extra fund obtained by the assessee-company out of issue of the share capital was not at all required by it for expanding its project but was merely utilised towards refunding the excess contribution received on account of mammoth over-subscription of the shares. 7. On an examination of the facts of the present case, we are clearly of the view that they are fully distinguishable from those in the case of Glaxo Laboratories (India) Ltd. on which Sri Dastur has placed main reliance. In that particula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng year during which it was formed. The entire issue of share capital, whether to the foreign company or to the Indian public, took place during the previous year corresponding to the year under appeal alone. Hence, all the expenses connected with issue of such share capital must be considered to be related to the capital structure of the company. Whether the assessee was in immediate requirement of the money raised in the process of issue of the shares and whether it kept the said money in the form of short-term deposits for certain period is of no consequence at all in deciding the present issue. The assessee was not carrying on any business, so to say, before issue of the share capital. Hence, the entire business is new to it and acquisition of the business having a close connection with issue of share capital, has got to be considered as related to the capital structure of the company alone. The three decisions in the cases of Sree Meenakshi Mills Ltd. and Ambala Bus Syndicate (P) Ltd. and Delhi Cloth General Mills Co. Ltd. do not have any connections with the facts of the present case and would not therefore at all be applicable in deciding the present issue before us. 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made in this connection of the judgment of Kerala High Court in the case of Commonwealth Trust Ltd. In that particular case, that assessee, a non-resident company, incurred certain expenditure for professional services rendered in regard to the steps taken by it for complying with s. 29 and other provisions of .the Foreign Exchange Regulation Act, 1973, which was referred to by that assessee as "dilution expenses" for Indianisation of the foreign holding as required under the said Act. The Kerala High Court ultimately held that the expenditure had been incurred for the purpose of changing the capital structure of the company to suit the requirements of the FERA by obtaining shares held by foreigners and transferring to Indian citizens, thereby converting what was a non-resident company into a resident company. The structure, character and status of that company was considered by the High Court as having been changed by the expenditure. The High Court furthermore held that the expenditure was incurred for creating or curing or perfecting title to the share capital of the company in accordance with the requirements of the statute and not for the protection of the business of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of issuing ordinary shares, was considered to be of capital nature. We have already discussed the facts of the case and found out that so far as the present assessee-company is concerned, the expenditure towards issue of share capital must be considered to have been incurred for acquiring a business undertaking. We have also discussed above that the assessee was virtually able to start its business by acquisition of the above-mentioned business undertaking which itself clearly is a capital asset to the assessee. There was no existing business with the assessee as such. Hence, the expenses under consideration can, in noway be considered to be related to maintenance or carrying on with the existing business of the assessee. We therefore uphold the decisions of the lower authorities in treating the expense to be of capital nature. An alternative argument has been provided by Sri Dastur in this connection. He has brought our notice to the details of expenses claimed in this regard, which are as below: Rs. Legal charges for drafting of Memorandum 90,000 Articles of Association Printing charges of Memorandum Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rongly contends that since it was the duty of the assessee-company to refund the excess money, the expenses incurred in such connection are required to be allowed as revenue expenses for carrying on the normal business of the assessee. We are unable to agree with the contentions of Sri Dastur. The entire expenses were incurred towards issue of prospectus, receiving of share applications etc., which were part of the process of inviting fresh share capital. Even the action taken by the assessee in refunding the excess subscription was also closely connected with the said process. Such process cannot at all be considered to be having any nexus with the day-to-day working of the assessee-company nor with its business activities as such. We, therefore, feel that all the expenses being directly connected with the process of raising of share capital of the company, are required to be treated as capital expenses. We reject the alternative argument of Sri Dastur also on this issue. 12. In the original ground No. 4, the assessee contends that the interest on the contribution received towards the subscription on public issue of shares represents capital receipts and hence not liable to ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etition filed by the applicants at Madras, etc. were not at all produced before the lower authorities and the additional ground was also not raised before them. He thus contends that the additional ground should be dismissed in limine. On merits, the learned Departmental Representative argues that whereas the issue of the share capital had been concluded on 17th April, 1985, the petitioners moved the Madras High Court on 4th Dec, 1985. The previous year for this particular assessment year had already ended on 30th Nov., 1985. He thus argues that throughout during the relevant previous year, the assessee had the right to fully enjoy the interest income. He also points out that the claim made by the petitioners on the entire amount of interest on the delayed refund throughout the period irrespective of whether the assessee had kept the money in a fixed deposit or not was ultimately dismissed by the Madras High Court, inasmuch as the petitioners had withdrawn the petition. The learned Departmental Representative relies on a judgment of the Supreme Court in the case of CIT vs. Sitaldas Tirathdas (1961) 41 ITR 367 (SC) and contends that as held by the Supreme Court in that case there ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t report under s. 44AB, but that the auditors had failed to make any such mention. The AO also found out that certain other personal expenses of Sri K.K. Arora and his family members of the nature of hotel, medical and travelling expenses had also been debited to the accounts of the company. Accordingly, the AO asked the assessee to file an affidavit stating that except for those personal expenses which had specifically been detected by the AO, no other expenditure of the nature of personal expenses of Sri K.K. Arora and/or his family members had actually been debited to the book of accounts of the assessee. It appears that no affidavit was filed by the company at any stage. However, the company did not object to disallowance of such personal expenses at the same time opposing any ad hoc disallowance under the head. The AO also asked the company to produce the expenses report of Sri K.K. Arora. He states that although most of such expenses reports were furnished but the compliance was not full. He referred to certain periods of omission like from 1st April to 17th of 1985, 20th April to 30th of 1985, July 1985, September 1985, etc., in respect of which such expenses reports were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business by rejecting the book of accounts. He argued that in the instant case, the book of accounts have not at all been rejected. He also stated that while computing the amount of disallowance under r. 6D, the entire travelling expenses had actually been taken into consideration. He also argued that the instances of inclusion of personal expenses of the managing director and his family members were rather far and few between and there is no case for making any generalisation on the issue and thereby resorting to a lump sum disallowance in a big manner. 17. We find some substance in the arguments of Sri Dastur. Since this is a case of disallowance out of expenses claimed by the assessee, it is for the Department, to show that certain amount of disallowable items like personal expenses, etc., are actually included in such expenses. At the same time again, the onus lies on the assessee to file full details of the expenses claimed by it and also to satisfy the AO that besides what have already been detected, no other personal expenses are actually included in the total expenses claimed. It is required to be remembered in this connection that the assessee had not filed such details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s High Court in the case of CIT vs. T.S. Hajee Moosa Co. (1986) 51 CTR (Mad) 2000 : (1985) 153 ITR 422 (Mad) and disallowed Rs. 49,075 incurred by the assessee as expenses towards ticket of Smt. Arora and a further amount of Rs. 32,380 out of the expenses on foreign exchange. In the first appeal, the CIT(A) held that so far as the lodging and boarding expenses of Smt. Arora were concerned, she could have shared the room and food with her husband and hence there was no case for making separate disallowance on this account. Hence, he deleted the disallowance of Rs. 32,280. At the same time again, he sustained the disallowance of Rs. 49,075 towards air ticket of Smt. Arora. During the course of the further appeal before us, Sri Dastur has drawn our attention to a communication dt. 21st May, 1990 of M/s. Smith Kline Beecham Pharmaceuticals, USA, addressed to the Board of Directors of the assessee-company inviting the wife of the managing director also and stating that it would be conducive to the development of a Eskayef business for Mrs. S. Arora to accompany Mr. Arora. Sri Dastur has also relied on the following two decisions of Tribunal to argue that in the present day global bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot allowable. We feel that these three decisions of two different High Courts including the latest of Gujarat High Court in the case of Shahibag Entrepreneurs (P) Ltd., should hold the field in preference to the aforesaid two orders of Tribunal. Hence, we uphold the decision of the CIT(A) in the instant case in disallowing the cost of air ticket of the wife of the managing director of the assessee-company. 19. In ground No. 7, the assessee contends that the surtax paid is an allowable deduction while computing the business income of the assessee. This issue has clearly been decided by the Supreme Court against the claim of the assessee in the case of Smith Kline French (India) Ltd. vs. CIT (1996) 132 CTR (SC) 500 : (1996) 219 ITR 581 (SC). Following the said decision, therefore, we uphold the actions of the lower authorities in not entertaining the claim of the assessee towards allowance of the surtax liability. 20. Ground Nos. 8 to 13 are directed against the enhancement of Rs. 1,72,550 made by the CIT(A) in his appellate order over what had already been assessed. There are various aspects of this issue, each of which is of complicated nature. Before adverting to the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.73 ------- The rupee equivalent of the above Dollar amount as at the relevant time was Rs. 86,275. The CIT(A) issued a letter dt. 27th Feb., 1990 purporting to be a notice of enhancement, to the assessee asking it to explain the facts relating to why the above-mentioned amount of 6,930 US $ equivalent of Rs. 86,275 earned by the assessee during the relevant year was not offered for tax in that year and why the same amount along with a further amount of commission of 10 per cent calculated at US $ 6,930, paid by BIISA to the parent company/associate of the assessee at USA during the relevant period and later on repatriated to the assessee in India on 27th March, 1989, should not be assessed in the hands of the assessee in the asst. yr. 1986-87. The value of the latter amount of US $ 6,930 at the rate of exchange prevailing on 27th March, 1989 was considered by the CIT(A) to be Rs. 1,07,276. The assessee replied by a letter dt. 5th March, 1990 that the commission income in respect of its selling arrangement with BIISA was being accounted for by it under the cash system. In the said letter, the assessee mentioned its two earlier letters dt. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, he was of the view that as regards commission earned on sale of the products of BIISA, the assessee was actually following mercantile system of accounting. In this connection, the CIT(A) referred to the answer given by the assessee to the query raised by the AO at the assessment stage to the effect that during the year under consideration, the assessee had not earned any commission. The CIT(A) also emphasised on the suspicious circumstances about the alleged filing of the letter, dt. 17th March, 1989 by the assessee to the AO claiming that it was following cash system of accounting in respect of the commission income. The CIT(A) clearly came to the conclusion that the evidence in this regard was fabricated by the assessee with the view to mislead the Department. The CIT(A) also referred to page No. 281 in file No. S.K.F/A.2 of the seized materials which is actually a telex message received by the assessee from BIISA. The CIT(A) extracted one portion of the said telex message, as follows: "As usual, commission will be accrued at the time of booking and payable upon shipment of the order." The CIT(A) also noted that at p. 289 of the same seized file, exactly simil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The CIT(A) thus held that the moment the assessee books the order with BIISA, commission would accrue to it under the mercantile system. 22. The CIT(A) thereafter discussed that no submission had been made before him objecting to the proposed taxability of the further commission amount of 10 per cent diverted to Philadelphia. He also discussed that this issue had already become final as per the statement of Sri K.K. Arora recorded on 16th March, 1989. He finally held that under the mercantile system, the diverted commission amount will also have to be taxed in the year in which the normal commission is being taxed. Regarding the other issue as to whether the diverted commission amount will have to be converted into Indian rupee terms at the exchange rate prevailing on 27th March, 1989, the CIT(A) held that so far as asst. yr. 1986-87 is concerned, the value of the diverted commission in rupee term would have to be taken exactly at the same amount at which the normal commission received in India is being considered. The further increase on account of exchange rate variation was directed by the CIT(A) to be considered in asst. yr. 1989-90 alone. Ultimately, the CIT(A) enhanced th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) got the information about the existence of the two telex messages. Although the learned Departmental Representative states in this connection that the telex messages from part of the seized materials, Sri Dastur challenges the said contention by stating that there is no authenticity of the said so-called telex messages. Sri Dastur thereafter states that the learned CIT(A) must have embarked upon the task of initiating the enhancement proceedings on the basis of certain communications received from the AO. Initially, there was dithering on the part of the learned Departmental Representative to produce the copies of two communications of the AO dt. 22nd Feb., 1990 and 6th March, 1990 addressed to the CIT(A), requesting him to make the enhancement. At this stage, Sri Dastur relied on two decisions to contend that if the Department, does not disclose the materials which it wants to utilise for making assessment/enhancement, the entire proceedings would become invalid. Sri Dastur firstly relied on a judgment of the Supreme Court in the case of Suraj Mall Mohta Co. vs. A.V. Visvanatha Sastri (1954) 26 ITR 1 (SC) at p 13 in which case the Supreme Court held that inasmuch as there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by relying on a judgment of the Supreme Court in the case of CIT vs. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443 (SC) at p. 450. In that particular case, while dealing with the limitation of the power of enhancement of AAC in terms of the provisions of s. 31(3) of the IT Act, 1922, the Supreme Court (in a judgment delivered by three Judges) held that the AAC has no jurisdiction under s. 31(3) of the IT Act, 1922, to assessee a source of income which is not disclosed either in the returns filed by the assessee or in the assessment order. The Supreme Court furthermore held that it is therefore open to the AAC to travel outside the record i.e., the return made by the assessee or the assessment order of the ITO, with a view to finding out new source of income and the power of enhancement under s. 31(3) is restricted to the source of income which have been the subject-matter of consideration by the ITO from the point of view of taxability. The Supreme Court went on discussing that in this context, "consideration" does not mean "incidental" or "collateral" examination of any material by the ITO in the process of assessment, but that there must be something in the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee in its return nor even considered by the ITO in the assessment order. Sri Dastur argued in this connection that the above judgment was given by the Supreme Court solely by following its earlier judgment in the case of Jute Corpn. of India Ltd. vs. CIT (1990) 88 CTR (SC) 66 : (1991) 187 ITR 688 (SC) at pp. 692 693. Sri Dastur brought in to our notice that in the case of Jute Corpn. of India Ltd., the Supreme Court was engaged in the consideration of whether the appellate authority while hearing the appeal against the order of a subordinate authority could allow either of the parties to raise a completely new ground which was not there before the ITO at all. Sri Dastur argues in this connection that inasmuch as the Supreme Court did not at all decide the issue relating to the power of enhancement of AAC in the case of Jute Corpn. of India Ltd. and since the case of Nirbheram Daluram the Supreme Court arrived at a decision with regard to the power of enhancement of AAC simply by following the earlier decision in case of Jute Corpn. of India Ltd. without noticing that there existed a clear decision of the Supreme Court on the relevant issue itself in the case of Rai Bahadur Har ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be mentioned in this connection that while delivering the judgment in the case of Rai Bahadur Hardutroy Motilal Chamaria, the Hon'ble Judges of the Supreme Court had decided to follow the above-mentioned earlier judgment of the Supreme Court in the case of Shapoorji Pallonji Mistry. On the other hand, the learned Departmental Representative, during the course of his argument before us has firstly tried to rely on a judgment of the Bombay High Court in the case of Narrondas Manordass vs. CIT (1957) 31 ITR 909 (Bom) In this particular case the Bombay High Court has held that the power of AAC was not confined to the matter in respect of which the assessee had appealed but that he had power to revise the whole process of assessment once an appeal had been preferred, and the order remanding the case was not invalid in law. It has got to be stated in this connection that this particular judgment was delivered by the Bombay High Court prior to passing of the judgments by the Supreme Court in the case of Rai Bahadur Hardutroy Motilal Chamaria and even in the case of Shapoorji Pallonji Mistry. So far as therefore this judgment is concerned, it is not in conformity with the ratio decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , there is no diversion of commission to Philadelphia. Therefore no addition is being made as per assessee's statement." The learned Departmental Representative strongly argues in this connection that this note forms a part of the assessment order and hence it has got to be said that the source of income under consideration i.e., commission from BIISA is not a source discovered by the CIT(A) all of a sudden but that it already existed and was also duly considered by the AO at the time of assessment. In this connection, the learned Departmental Representative strongly relies on a judgment of the Madhya Pradesh High Court in the case of Dr. (Mrs) Bimla Gulati vs. AAC (1987) 64 CTR (MP) 68 : (1987) 165 ITR 296 (MP) in support of his contention that the office notice can be considered to be a part of the assessment order and the CIT(A) would be having power of enhancement with regard to a subject-matter mentioned in the office note. The facts of this particular case are that for the asst. yr. 1980-81 Dr (Mrs.) Bimla Gulati filed a return showing a total income of Rs. 25,305 out of which the income from her medical profession was shown at Rs. 24,000. The ITO, however, estimated the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of assessment. On account of failure on the part of the CIT(A) to consider the ITO's request, Revenue certainly gets prejudiced and hence ITO can appeal to the Tribunal against the action of the CIT(A) in non-considering his request of enhancement. Our special attention has been brought to the discussions made by the Kerala High Court in the aforesaid case to the effect that a compellable statutory duty is imposed upon the CIT(A) to exercise this jurisdiction either suo motu or on motion by the assessing authority to examine whether the assessment made is justified and proper and if it is pointed out by the assessing authority that a lapse or omission has occurred in making the assessment, it is the duty, of the CIT(A) to advert to the same and dispose of the matter in accordance with the law. The learned Departmental Representative has also strongly contended in this connection that once the CIT(A) is seized of jurisdiction to make enhancement, he could take into consideration even subsequent events to arrive at the actual quantum of enhancement to the made. In this connection a judgment of the Supreme Court in the case of Pasupuleti Venkateswarlu vs. Motor General Traders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht be that the office note along with the tax calculation memo was typed in a different typewriter machine but there cannot be any reason to conclude that they do not form a part of the assessment order itself. Sri Dastur also tries to argue in this connection that item No. 5 in the office note regarding issue of show-cause notice for the assessee not having complied with the provisions of s. 194C, was not complied with by the office staff. He tries to prove thereby that the office note was not at all contemporaneous. We are however unimpressed with these arguments of Sri Dastur trying to find out minor faults and discrepancies in the office note. We are of the opinion that the office note along with the tax calculation memo form nothing but the part of the assessment order itself. It may be that the office staff did not comply with some of the instructions of the AO. But that by itself cannot lead to the conclusion that the office note was non-genuine. Furthermore when the office note and the assessment order bear the same date, we must conclude that the office note must also have been prepared and signed by the AO during the ordinary course of his business i.e., at the time of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... office note vis-a-vis the requirement of the assessment records mentioning the relevant source of income was duly considered by the Supreme Court in the case of Shapoorji Pallonji Mistry and furthermore that this particular judgment of the Supreme Court was not brought to the notice of the Madhya Pradesh High Court while dealing with the case relating to Dr. (Mrs.) Bimla Gulati. It would be required of us to discuss the facts of the case of Shapoorji Pallonji Mistry in some what detail. That assessee had received on 20th July, 1946, a sum of Rs. 40,000. In the proceeding for asst. yr. 1946-47, this came to the notice of the ITO. Since the receipt fell within the accounting year relating to the asst. yr. 1947-48, the ITO did not assess the amount, making a note "the question will however be considered again at the time of 1947-48 assessment". In the return filed in the asst. yr. 1947-48, this amount was not shown by the assessee. The ITO also over-looked the note at the end of his order in the back year assessment, with the result that this item was omitted. The assessee appealed to the AAC against his assessment for the year 1947-48. While the appeal was pending, the ITO wrote a le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t events like finding of materials against the assessee during the course of search and seizure proceeding and also information obtained by the AO during the course of the assessment proceeding for the subsequent year. Ultimately, we dismiss the appellate ground taken up by the assessee on the question of jurisdiction of the AAC to make enhancement in the instant case. 29. Thereafter, it is the contention of the assessee that so far as the commission income is concerned, it constitutes a completely separate business for the assessee. The assessee is stated to be normally engaged in the business of manufacture of pharmaceutical items. The business of selling the products of BIISA has got nothing to do with the normal business of the assessee and hence the said business, according to the assessee is required to be treated as a separate business and the source of income also as a separate source of income. It has been pointed out by Sri Dastur that the transaction relating to earning of commission stated taking place towards the last part of the accounting year corresponding to asst. yr. 1986-87 only viz., in the month October 1985 for the first time. Sri Dastur argues that since be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure on accrual basis. The Tribunal held that having accepted such system for a number of years, the ITO could not change the system to accrual basis in later years, especially when real profits were ascertainable from the system adopted by the assessee. (5) Reform Flour Mills (P) Ltd. vs. CIT (1978) 114 ITR 227 (Cal)- It was held in this case that if an assessee has regularly employed the altered method of accounting viz., the cash system, regarding its income from other source and its income from other source can properly be deduced therefrom by the taxing authorities, in that event its income from other source must be computed in accordance with the cash system of accounting and, therefore, interest on a loan which is not received, cannot be included in the relevant accounting year. (6) CIT vs. Citi Bank, N.A. (1994) 119 CTR (Bom) 383 : (1994) 208 ITR 930 (Bom)- In this particular case, the assessee-bank was following a hybrid system of accounting inasmuch as it was generally following mercantile system of accounting for most of its transactions but was keeping separate account for problem loans and that the interest on problem loans were being credited only on actual r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e subsequently made." On the other hand, the learned Departmental Representative started his arguments by firstly pointing out that in the return of income, the assessee mentioned its system of accounting to be "mercantile" and the tax audit report under s. 44AB also mentioned so. The learned Departmental Representative also strongly contended that the expenses pertaining to earning of commission income were also debited to the accounts on mercantile basis and hence the assessee cannot claim that the receipt of commission income should be treated on cash basis. He also pointed out that even in asst. yr. 1987-88 also, the accounting method was stated to be mercantile both in the return and also in the certificate issued by the auditors under s. 44AB. The learned Departmental Representative also argues by referring to the statement of the managing director of the assessee company Sri Arora given under s. 132(4) offering certain additional income for the three years, that had the assessee been actually following cash system of accounting in respect of this particular source of income there would not have been any question of offering any extra income. The learned Departmental Repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to a royalty of 5 per cent on all sales effected by the Indian company. The royalty less the Indian tax was to be remitted to the assessee in pound sterling. The Indian company credited the royalty to the assessee in its accounts books. For asst. yrs. 1969-70 and 1970-71, the assessee contended that it was maintaining its accounts on cash basis and that no part of the royalty had been received by it during the years and was therefore not taxable. The Supreme Court held that the credit entry of the royalty to the account of the assessee in the books of the Indian company amounted to receipt of the royalty by the assess and it was accordingly taxable. The Supreme Court further more held that it was immaterial when that assessee actually received the royalty amount in the UK and the method of accounting adopted by the company was irrelevant. However, the special facts in this particular case are required to be taken into consideration while trying to understand the decision of the Supreme Court. In arriving at the above mentioned decision of the Supreme Court had relied on its earlier decision in the case of Raghava Reddy vs. CIT (1962) 44 ITR 720 (SC). In that particular case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Standard Trumph Motor Co. Ltd. is not applicable to the facts of the present case. 30. It therefore remains for us to examine whether the assessee actually-maintains its accounts with regard to receipt of commission income on cash basis. In the voluminous paper books filed before us, the assessee has produced copies of its general ledger for different months during the relevant period. We find therefrom that the assessee actually credited the receipt of the commission income in respect of the three transactions pertaining to the assessment year under consideration and stated to be received by it on 15th April, 1986, in the month of April 1986, as a part of the receipt of the total amount of $ 27,806.38 corresponding to rupee value of 3,46,281.20, received as a whole on 15th April, 1986. Thereafter, the assessee further received a total amount of $ 70829.28 (Rs. 8,85,366) on 21st July, 1986. This amount was also actually credited to the ledger account of the assessee in that every month. Factually therefore, we find that the assessee has been maintaining its accounts with regard to receipt of commission income from BIISA on cash basis. We completely agree with the argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntain its accounts in respect of this particular source of income on cash basis. The learned Departmental Representative has made a very big issue about the expenses pertaining to the Instrument Division being debited on mercantile basis. Sri Dastur has further argued in this connection that the expenses are of the nature of actual expenses incurred like salary, travelling expense, postage and stationery, etc., and there is no material on record to show that the assessee has debited any provision in respect of the expenses other than actual disbursement of its expenses during the year under consideration. The salary to employees is stated to be payable towards the end of the relevant month. We find sufficient force in the argument of Sri Dastur. All the expenses pertaining to the Instrument Division appear to be of the nature of expenses actually incurred and also disbursed. Hence, there is no difference between cash system of accounting and mercantile system of accounting so far as the expenses are concerned. We are therefore of the view that the Department, cannot argue that inasmuch as the expenses were accounted for on mercantile basis, the assessee would not be permitted to ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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