TaxTMI 
TaxTMI 
2018 (1) TMI 1028
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....me state that the object was to help accountholders as agent of Post Office/Bank and invest a portion of the outest profitable returns. Sailent features of the terms and conditions which were printed in the application form itself, are reproduced below:- "For Opening Account: A application is to deposit Rs. 2,500/- with the company along with application form duly filled in, and in return he/she will receive a N.S.C. re-investment deposit plan receipt of, a post office/Bank within a month , from the date of becoming accountholder in his/her name. However, the company shall make the effort to arrange the Post Office N.S.C./Bank R.D.P. within one week to the accountholder. 5. Tenure of Maturity Value:- Tenure of the account is of 144 months. The accountholder shall get back his/her principal amount Rs. 2,500/- alongwith minimum interest earning of Rs. 1,500/- directly from the Post Office/Bank subject to the rules, regulation and directions of the post office/bank. In case of any increase in the interest rate of post office/bank of the increase interest earning amount shall obviously go to the accountholder. Accountholders shall directly get the ma....
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....l be entitled for minimum prize guarantee of Rs. 2,500/- worth articles as detailed in Clause-9. Account cant win the 10th consolation prizes any number of time but no accounts shall get the housing loan twice. Bumper Draw:- Every quarter (in addition to regular monthly draws) total 48 bumper draws one in each prize-Air conditioned, fully furnished Bungalow, (2 bed room, drawing dining) and a New car cost Rs. 6,00,000/- will be given. 9. Minimum Guarantee Prize:- Company guarantees all accountholders minimum prize of Rs. 2,500/- worth of articles. The persons who will not get any prize up to prize No. 9 or Bumper prize in 144 monthly/48 bumper draws all such person shall be given minimum prize of Rs. 2,500/- worth articles within 360 days after the 144th draws is finally held. 11. Dividend on opening the account:- The accountholder shall be entitled for dividend in shape of cash or gift (as per the choice of accountholder) after joining the account by depositing of Rs. 2,500/- to the company till the draws starts @ Rs. 11/- per month as per rules of the company or company shall hold mini draw every month with this amount i.e. on....
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....s also assured of minimum guarantee prizes (Para 9 of the scheme), according to which all those persons, who did not get any ' prize up to prize No.9 in the list of prizes or bumper prize in 144 monthly/ 48 number draw, would be given minimum prize of Rs. 2,500/- worth articles. Thus, the amount really put at stake by the member was 6,000/- minus Rs. 2,500/- = 3,500/- on the basis of the assumption already made. 7. Assessment Year 1987-88:- We will take up the two appeals and one cross objection for assessment year 1987-88 first. The return of income was filed on 30.6.1987 claiming a loss of Rs. 1,53,239/-. An assessment order was passed thereafter on 30.3.1990 on an income of Rs. 73,30,490/-. It was set aside by the C.I.T.(A) on 8.3.1991. Thereafter a fresh assessment order was passed on 26.3.93 computing net loss at Rs. 1,30,586/-. In first appeal, the C.I.T.(A) passed an order on 30.8.1995, which is before us, enhancing the income and computing total income at Rs. 26,19,774/-. This resulted in an enhancement of Rs. 27,50,340/- 8. The net loss as per audited profit and loss account was Rs. 1,46,298/-. However, in the course of assessment proceedings, the assessee recast ....
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....bsp; To Preliminary Expenses 2,305 2,305 - - Written off To Depreciation 468 468 468 468 To other expense - - 18,609 - As calimed To NSC being 40x of gross - - 3,393,852 - Collections N.S.C. actually paid - - - 788,000 Net Profit - - - 2,619,774 Total 1,132,630 2,633,912 3,143,989 5,225,424 1,132,630 2,633,917 6,143,898 5,225,424 9. The salient features of the audited accounts were: firstly, that as....
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....er the scheme 59,84,631/- Less: fully paid subscriber 19,70,000/- Partly paid subscribers 40,14,631/- Amount due for NSC x 40,14,631 x 1000 =16,05,853/- 2500/- DETAILS OF VARIOUS EXPENSES & LIABILITY AS ABOVE Process charges : 9,57,540/- Reserve for process charges for future adjustment : 26,33,238/- Liability towards NSC : 16,05,853/- 51,96,631 NSC issued (against full) : 7,88,000/- (paid account : 59,84,631/- 13. From the above, it will be seen that the gross collections were shown on deferred basis and in the first year only 16% was credited to the profit and loss account. A deduction was also taken for liability for partly paid N.S.C. @ 40% of the collections as well as for N.S.Cs. issued on fully paid subscription @ 40% thereof. This will be quite clear from realignment of the figures already mentioned in the following manner: Collections Gross-collection Reserve for process 59,84,631/- charges for future adjustment (44%) 26,33,238/- (showing deferment of collection) Liability for p....
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....r enquired in the course of assessment proceedings why 16% of gross collection had been credited to the Profit and loss account but the percentage could not be explained, The basis for deferring the expenses also could not be given. After referring to the various aspects of the scheme, she invoked proviso to section 145(1) on the ground that there were contradictory stands taken by the assessee with the result that the method of accounting employed by the company was such that its income could not be properly deduced. She made the following main adjustments to the accounts. (i) The total gross collection of Rs. 59,84,631/- as reduced by 40% for N.S.Cs. payable was taken as revenue receipts. The assessee's contention that they were capital receipts was turned down. (ii) Expenses payable to M/s. Sahara India (firm) were allowed fully instead of 40% claimed by the company in the profit and loss account. This consisted of development expenses and incentives to agents as well as agents commission. (iii) Actual expenses under certain heads were allowed fully as against 25% and 40% claimed in the audited profit and loss account. This included stationery and prin....
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....ent of the deposit is an integral part of the transaction of a receipt or deposit'. The court had further observed that the 'deposit or loan is a capital receipt and its full value shall be shown in the account books or the balance sheet as liability of a company. It cannot be credited to the P&L A/c Part-II of Schedule-iv of the Company's Act, 1956 which requires that amount shown in the P&L A/c should be confined to the income & expenditure of the company'. With reference to the aforesaid decision of the court, it was submitted that accounting treatment cannot determine the nature of income liable to tax. The mere fact that the amount has been entered in the books of account is not conclusive proof that income has accrued. A reference was made to the case CIT v. Shoorji Vallabhadas & Co. 46 ITR 144 (SC). To the same effect, reference was also made to various other case laws as given in the written submission". 22. A reference was also made to the case of a sister concern M/s. Sahara Investment India Limited for assessment year 1990-91 in which receipts against various financial scheme were treated as capital receipts by the I.T.A.T. and the income was treated as exempt. Finall....
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....ould not do so. The C.I.T. (A) therafter recomputed the profit and loss account entirely on cash system of accounting, which we have noted above. It resulted in a net profit of Rs. 26,19,770/-. A copy was sent to the assessee alongwith the show-cause notice since it would have resulted in enhancement. It was mentioned therein that if any transaction had been wrongly included or excluded, they should be brought to the notice or the assessee may submit its recast profit and loss account based on cash system of accounting. The assessee gave its own computation chart which we have already noticed in the computation by the CIT (A), the assessee contention regarding the receipts being of capital nature has not been accepted. The entire gross collections were taken as revenue receipts, through a deduction has been allowed for NSCs. actually issued of Rs. 7,88,000/-. Similarly, the prizes claimed at Rs. 1,54,000/- on mercantile basis have been replaced by actual payments of Rs. 82,1 35/-. 27. The CIT (A) justified adoption of cash system of accounting. He observed that the assessee was following inconsistent accounting policy and also methods of accounting shown by various computations ....
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....essee Shri S.E. Dastur Sr. Advocate giving the background of the scheme stated that the Golden Key Scheme had been commenced with effect from June, 1986. The accounting year ended on 30th September initially. Thus, the previous year ended on 30.9.1986 for assessment year 1987-88 and on 30.9.87 for assessment year 1988-89. However, thereafter the previous year ended on 31st March in accordance with the new provisions of law. Thus, the previous year consisting of 18 months ended on 31.3.1986 for assessment year 1989-90 and thereafter the previous year consisted of 12 months ending on 31st March in later years. 32. The features of the Golden Key Scheme were then spelt out, which we have already noted earlier, certain aspects were highlighted. It was stated that a member of the scheme deposited Rs. 2,500/- in cash in lump sum in lieu of which the member was given a NSC in his name of Rs. 1,000/- which would became Rs. 4,000/- in 12 years duration of the scheme. Thus, the assessee was actually left with Rs. 1,500/- only the member was entitled to prize draw and their was a minimum guaranteed of Rs. 2,500/- as per para 9 of the terms and conditions. The assessee had initially taken a ....
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....ble, calculated in a certain manner. The total prize money over 12 years was computed by mixing-up the actual draws and estimates of prizes. The Assessing Officer should have rightly taken the total value of 144 draws and 48 special draws. Further the prizes over 12 years were discounted to give the present value and thereafter the present value was adopted on pro rata basis in the ratio of collections during the year to the total collections. 37. The CIT (A) he adopted a still different method having applied the cash method of accounting. Thus, he had allowed deduction for prize money actually paid during the year only. This finding had not been accepted even by the department. The department had taken a ground of appeal according to which the CIT (A) had erred in changing the entire method of accounting from mercantile system to cash system. The assessee also did not accept the cash system. The collections were not revenue receipts and, therefore, deduction per prizes should be only in excess of Rs. 1,500/- for subscribers. This deduction should be without discounting. Our attention was invited to a decision of the Tribunal in the case of M/s. Sahara Investment India Ltd. for ....
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....er January, 1987 even though 99,999 members were not enrolled. The company had enrolled in all 96,423 members till date out of which 28,488 members had not contributed their full contribution to date. No, fresh member had been enrolled after March, 1990. It was further stated that the company had never forfeited the right of any member to participate in the prize draw nor forfeited any part of the amounts deposited. Finally, it was stated that up to July 1993 the company had held 79 prize draws and there after no further draw had been held on account of subsequent legal development. 40. The learned counsel for the assessee thereafter stated that there were three main issues for consideration. The first issue was the manner in which the collection should be treated, the second issue was the manner in which deduction for prize money should be given and the third was the manner in which the estimate of liability for minimum guarantee should be made. 41. Regarding the first issue strong reliance was placed on the decision of the Tribunal in the case of the assessee's sister concern, M/s. Sahara Investment India Limited for assessment year 1991-92 in ITA 294 (All.) of 1994 dated 1....
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....elow:- "As regards the basis of transfer of 20% of collections as administrative and process charges, we have already explained to you that the basis has been adopted on sound accounting principles. The percentage has been worked out on the basis of actuarial and cost analysis in respect to collections under various schemes. The assessee-company is running various type of financial schemes. They are in form of fixed Deposit, daily collection schemes, monthly collection schemes etc. As per accounting policy followed, the assessee transfers 20% of collections made under various schemes, beside fixed deposit scheme to the credit of administrative and process charges. This credit represents the recovery of initial expenditure incurred by the assessee-company in procuring deposits". 43. The learned counsel however, explained that as far as the present assessee was concerned, the percentage was decided by internal discussion and no external information was taken. 44. The bench enquired further whether it was possible to depart from the income as per accounts without invoking proviso to section 145(1) of the Act. The learned counsel replied that section 145(1) of the Act wa....
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....d in each year and determining capital gains was not justified. 49. Reliance was also placed on a decision of the Bombay High Court in Gustad Dinshaw Irani v. CIT [1957] 31 ITR 92. There was on isolated transaction of purchase and resale. It was held that in determining the profits made by an assessee in such a transaction, expenditure incurred by the assessee in respect of that transaction during the years prior to the year of account cannot be disallowed on the ground that it was not incurred in the year of account. If the real profits made by the assessee from a commercial point of view can only be arrived at by taking into consideration, the expenditure in the prior years also, credit must be noted to the assessee in respect of such expenditure even though it may not strictly fall within the ambit of section 10 of the Indian Income-tax Act, 1922. 50. In further support of the submission the learned counsel stated that the prize chits and money circulation scheme (Banning) Act, 1978, and decisions of the Supreme Court making them applicable to the assessee, followed by notice dated 14.9.1995 from the Registrar, Chits, Funds to the assessee made it necessary even more to ad....
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....ear 1978-79, the construction had been completed and 80 per cent of the area was sold and therefore, it was possible to estimate the income of the assessee from the project. 54. Coming to the conclusion, the Tribunal considered the decision of the Bombay High Court in the case of K.H. Mody, In re [1938] 6 ITR 179 and the Rangoon High Court's decision in the case of CIT v. A.K.A.R. Family[1941] 9 ITR 347. These were cited on behalf of the assessee. We have already noticed the first decision. The Tribunal also noted the decision of the Allahabad High Court in Addl. CIT v. Madan Lal Ahuja [1982] 136 ITR 640/10 Taxman 85, which we have also noted and which was cited in support of the assessee. 55. On the other hand, the Tribunal observed that these decisions have to be read carefully in the light of Patna High Court decision in the case of Sukhdeodas Jalan v. CIT [1954] 26 ITR 617 and the Supreme Court decision in the case of P.M. Mohammed Meerakhan (supra) and that of the Delhi High Court in the case of Tirath Ram Ahuja (P.) Ltd. (supra). These cases were cited in support of the department. 56. The Tribunal observed that in the Rangoon and Allahabad High Courts case, the asse....
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....e profits have to be calculated and adjusted in the light of the provisions of the income Tax Act permitting allowances prescribed thereby. For that purpose. It was the duty of the Income Tax Officer to find out what profit the business has made according to the true accountancy practice. As a normal rule, the profit should be ascertained by valuing the stock-in-trade at the beginning and at the end of the accounting year... (P. 743)" (iii) Tirath Ram Ahuja (P.) Ltd.'s case (Supra) ". . . in the case of contracts, one need not wait till the contract was completed in order to ascertain the income and that it was open to the revenue to estimate the profit on the basis of the receipts in each year of construction although the contract was not complete....(p.l5)" 57. The learned counsel for the assessee submitted that it had to be decided on the facts of the case what will be the most appropriate method. In the case before us, the receipts came upfront, whereas the expenses were spread over many years. This was sufficient to justify adaptation of single venture system and this was reinforced by the letter from the registrar. The test given by the tribunal in the ca....
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....at in interpretation of taxing statutes, where strict literal construction leads to injustice or absurd result, equitable construction should be adopted. 63. In this connection, it was first submitted that the Assessing Officer had adopted discounting method for deduction of prize money, but such discounting was not acceptable. Certain examples were given in support of the contention. In case there was liablity to pay Rs. 5 crores for technical know how in five years, then a deduction was given for the entire Rs. 5 crores and no discounting was involved. In case of a voluntary retirement scheme, if a fixed account was payable over a course of five years, the liablity arose under the mercantile system in the first year itself. If a plant was installed costing Rs. 10 crores and the same was payable in instalments, the depreciation was allowed on the entire amount of Rs. 10 crores and the same was payable in instalments, the depreciation was allowed on the entire amount of Rs. 10 crores and not on discounted value. The learned counsel submitted that discounting was only justified in case of contingent liabilities, such as payment of Gratuity, where it was necessary to assess how ma....
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....allowed the expenditure. However, the Supreme Court held that the undertaking by the assessee to carry out the development was unconditional and it imported a liablity on the assessee which secured on the dates of the deeds of sale, though the liablity was to be discharged at a future date. The estimate of accrued liablity to be discharged at a future date was deductible. 67. The above decision has been followed by the Allahabad High Court in CIT v. Development Trust (P.) Ltd.[1991] 189 ITR 504/55 Taxman 200, In that case, the assessee undertook development of colony in a layout plan approved by the Municipal Committee. The facts were similar to those in the case of Calcutta Co. Ltd. (Supra). Following that decision, it was held that (he estimated liablity of development expenses to be discharged by assessee at a future date, was an allowable deduction. 68. Our attention was also invited to a decision of the tribunal in the case of Secured Investment Co. v. I.T.O. I.T.A. No. 652 (All.) of 1986, dated 22.2.1989. which had been relied upon by the department in its grounds of appeal in support of discounting. It was pointed out that in this case deduction for entire prize money ....
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....dopted by the CIT (A) was not suitable since it loaded everything in the first year. Both the department and the assessee had submitted that it was not a proper system. 74. Our attention was invited to a decision of the Madras High Court in the case of Gemini Pictures Circuit Ltd. v. CIT [1958] 33 TTR 547 where it was held that even if the accounts were rejected, it was not open to the department to adopt any method for computing the income. The other method of accounting employed by the department had to reflect the profits truly and justly. According to the learned counsel, the cash system did not do so. 75. It was further submitted that the tribunal had to give a decision on the grounds of appeal and not beyond that. If both sides agreed to a particular matter, that was the end of it. In this connection, our attention was invited to a decision of the Allahabad High Court in the case of J.K. Bankers v. CIT [1974] 94 ITR 107 (All.). It was observed therein that the tribunal "can pass such orders thereon as it thinks fit". The word "thereon" restricts the jurisdiction of the tribunal to the subject matter of the appeal, and the subject matter of the appeal is stated in the or....
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....etion of 12 years, the subscribers lost part of interest or interest along with the part of capital. There was no obligation on the assessee-company to compensate the subscribers for this loss. 78. A reference was thereafter made to para 9 of the terms and conditions and relating to minimum guarantee prize. The company guaranteed all accountholders minimum prize of Rs. 2,500/- worth of articles. The learned special counsel submitted that it was only a prize and not a reimbursement of capital. 79. It was not submitted that in case the entire contribution of Rs. 2,500/- had been put in NSC for 12 years, the amount would have become Rs. 10,000/- . This would consist of principal Rs. 2,500/- and interest Rs. 7,500/-. However, a NSC of Rs. 1,000/- was taken, which became Rs. 4,000/- at the end of 12 years. This consisted of principal Rs. 2,500/- and interest Rs. 1,500/-. There was a difference of interest of Rs. 6,000/- in the two calculations, it may be shown in tabular form as below:- Principal Interest for 12 years Total 1. 2,500 7,500 10,000 2. 2,500 1,500 4,000 Difference NIL 6,000 6,000 80. It was submitted tha....
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....rwise to a specified number of subscribers, prizes in cash or kind and (2) refunding to the subscribers the whole or part of the money collected on the terminination of the scheme or otherwise. The apparent tenure may not fully bring out the exploitative import lurking beneath the surface of the words which describe the scheme. Small sums are collected from vast numbers of persons, ordinarily of slender means, in urban and rural areas. They are reduced to believe by the blare of glittering publicity and the dangling of astronomical amounts that they stand a chance-in practice, negligible-of getting a huge fortune by making petty periodical payments. The indigent agrestics and the proletarian urbanites, pressured by dire poverty and doped by the hazy hope of a lucky draw, subscribe to the scheme although they can ill afford to spare any money. This is not promotion of thrift or wholesome small savings because the. Poor who pay, are bound to continue to pay for whole period of a few-years over peril of losing what has been paid and, at the end of it, the fragile prospects of their getting prizes are next to nil and even the hard-earned money which they have invested hardly carries an....
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.... copy of statement of facts filed before the C.I.T. (A) where it had been mentioned that collections of fully paid amounts during the year were Rs. 19,70,000/- whereas the collections of partly paid sums were Rs. 40,14,631/-. He submitted that those were the actual collections, but the balance amounts in the case of partly paid sums were outstanding and had not been considered either at the assessment or the first appellate stage. In mercantile system of accounting, the accrued collections should also have been taken into account and in the assessee's appeal adoption of mercantile system had been requested. In these circumstances, a request was made for enhancement of income. In reply to a query from the bench, the learned counsel submitted that the Tribunal had the power to enhance the receipts if it did not result in enhancement of total income. 88. The learned Special Counsel for the department thereafter submitted that proviso to section 145(1) of the Act was applicable to the assessee's case. According to him credit of 16% of the collections to the profit and loss account was apart of contractual stipulation and was not based on some internal decision. Our attention was inv....
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....be properly estimated without taking them into consideration. An estimated liability under the scheme of gratuity, if properly, ascertainable and if present value is discounted, is deductible from the gross receipts while preparing the Profit & Loss Account. 91. The learned Special Counsel also invited our attention to the Balance Sheet of the assessee company which showed interest free advances to M/s Sahara India Registered firm. According to him, this justified discounting. 92. The learned Special Counsel for the department thereafter opposed adoption of single venture system. He submitted that the accounting unit under the Income Tax Act was one year and accordingly income had to be computed for one year. In case it was not possible to ascertain the income on actual basis due to peculiar circumstances, as in the cases cited by the learned Counsel for the assessee, a departure could be made. However, there was no such element in the present case to justify a departure from computation of income on annual basis. 92.1 It was lastly submitted that the system of accounting which should be adopted was the mercantile system i.e. accrual basis and not cash basis as the C.I.T. ....
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....ot the reverse. The method of Accounting may be correct and adjustment may be necessary for ascertaining, the income as per Income Tax Act. For example, if capital expenditure of Rs. 10,000/- was written off, only an adjustment to disallow it was required and not rejection of account. Our attention was invited to a decision of the Supreme Court in Chunilal v. Mehta & Sons (supra). At page 61 where a remark was given that method of maintaining accounts is one thing and the actual entries in the accounts maintained is a different thing. What is relevant is the method of accountancy and not the actual entries. 98. Referring to the arguments regarding discounting of prize money, the learned counsel submitted that the decision of the Supreme Court in the case of Metal Box Co. of India Ltd. (supra) did not assist the department. That was a case of contingent liabilities for gratuities and he had already accepted earlier that discounting for contingencies was justified. However, there was no question to contingencies in the present case, and the liabilities were ascertained. Regarding the other argument that interest free loan was advanced to M/s. Sahara India, Registered Firm, he subm....
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....arly before the third draw he/she should complete Rs. 1,500/- deposit and so on. However, the prizes to such accountholder shall be given only on his/her depositing full subscription. (b) These instalments accountholders shall not be allowed for other benefits like death help etc. before the full and final payment as per terms and conditions of the account. However, the instalment accountholders are entitled to transfer of account and/or refund of their instalments paid at the termination of the scheme without any benefits." 104. The above circular was approved and ratified in the meeting of the Board of Directors on 22.6.1987 and an extract of the Minutes was also filed. 105. The bench enquired from Shri J.J. Mehrotra C.A. learned Counsel for the assessee what was the information to the accountholders regarding the above terms and conditions for partly paid account. He replied that the terms and conditions were explained to them by the agents. A further question was asked as to the type of form to be filled in case of payments by instalments. The Learned Counsel replied that the regular form for fully paid amounts was being utilised. 106. We have considered elabo....
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....uced to Rs. 3,500/- 110. Such a view of the scheme finds support from the judgment of the Supreme Court in Secured Investment Co. (supra). In para 12 thereof, it is stated that in the Scheme the subscribers agree to forgo a portion of their contribution in the hope of getting a prize. It was found by the study group that all such prize chits or schemes are in the form of lottery. 111. The learned Counsel for the assessee, on the other hand, has insisted that the return of the principal amount of Rs. 2,500/- was by Minimum Guarantee Prize of Rs. 2,500/- worth of articles. In other words, the principal amount of Rs. 2,500/- remained intact with the assessee company till the minimum guarantee prize was given. We are unable to accept this contention in view of the clear language of paras 4, 5, and 9 of the terms and conditions. We also notice that there was no such provision of issue of N.S.C. for return of principal amount in the case of M/s. Sahara Investment India Limited (supra). The facts of the present case are, therefore, materially different and the decision of the Tribunal in that case does not help the assessee in the least. 112. For the above reasons, it is our cons....
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....holder bound himself to pay the entire sum of Rs. 2.500/- but was allowed a facility of instalments. The stage at which N.S.C. was issued requires verification. It also requires verification as to whether there were defaults and if so what happened to the instalments paid till then. other enquiries may also be necessary to ascertain the true nature of these sums. 116. We find that the Assessing Officer has not noticed the distinction between fully paid amounts and partly paid amounts. The entire collections have been treated as if they were fully paid amounts, which is not factually correct. On this basis deduction for N.S.Cs. has been allowed at the rate of 40% on the entire collections. Thus, proportionate accrual of N.S.Cs. on partly paid amounts has also been deducted. 117. The CIT (A) has noticed that fully paid amounts were Rs. 19,70,000/- and partly paid amounts were Rs. 40,14,631/-. However he has made no distinction between there types of payments thereafter. This has not affected the amount deducted for N.S.Cs. by him, since he has proceeded on cash basis and not accrual basis. The amount deducted by him for N.S.Cs. is the actual amount of N.S.Cs. issued. Thus, no a....
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.... the matter was decided the appeal should be kept in abeyance. The C.I.T. (A) observed that the scheme was floated after 8 years from the passing of the Act and had already run almost about 8 years. The consequences were very contingent and in any case there was no adverse effect on the working of the company in relation to past years with which the appeals were concerned. The robust was not accepted. In the grounds before us, it is submitted that the factors would have a material hearing for the purpose of computing the total income of the assessee company and the C.I.T. (A) failed to appreciate it. It was submitted before us that single venture system would resolve the difficulty. Yet we repent that there is no ground before us for adoption of single venture system and the submission has been made for the first time before us orally during the hearing. 122. The learned Counsel for the assessee has invited our attention in connection with the method of accounting to be followed, to the decision of the Allahabad High Court in J.K. Bankers (supra). The jurisdiction of the Tribunal is restricted to the subject matter of the appeal and the subject matter of the appeal is stated in ....
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....The test is quite appropriate in this case also. In case receipts are not there, it must be appropriate to estimate income. However, if receipts are there and expenditure is not there, we sec no objection to estimate of income. If there are receipts without expenditure, then the income has been earned for that year. 126. The letter from the registrar firms, societies and chits was issued on 1.9.1995. It may or may not affect the working of the assessee company thereafter. The writ petition before the High Court was stated to be still pending. However, as far as the assessments up to assessment year1992-93 are concerned i.e. up to 31.3.92, functioning of the company was not affected and we agree with the C.I.T.(A) that it cannot have an effect on the income up to this period. We will add that even if the functioning had been affected, the income actually arising or accruing, after being affected, is subject to tax and not the income which the assessee company could have possibly earned without being affected. 127. The facts of the present case being distinguishable from the facts of the cases cited before us and since it is possible to ascertain the profits of the assessee com....
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....ccounting followed by the assessee. A letter dated 22.1.1990 was filed by the assessee before the C.I.T.(A) (see para 27 ante) according to which the mercantile system of accounting was being followed with the exception that a portion of exception which crystallised from time to time were being paid as and when they crystallised. To this extent, the system was described as mixed. However this version is not borne out from the facts. It has not been explained why 16% of the gross collections were transferred to the Profit and Loss Account of the first year and 4% in the next 11 years. It has not been explained why advertisement and publicity commission and development expenses were deferred to the extent of 60%. It has not been explained why expenses relating to stationery and printing were deferred to the extent of 75%. This is not mercantile system of accounting. 133. During the hearing, a query was made by the bench to the learned counsel for the assessee regarding the method of accounting being followed by the assessee (see para 34 ante). For Collections, it was stated that there was no accounting system applicable since they were claimed to be capital receipts. Regarding exp....
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....essee saying that both the assessee and the department were objecting to cash system of accounting adopted by the C.I.T.(A) and saying that therefore, mercantile system should be adopted. Reliance has been placed on the decision of the Allahabad High Court in J.K.Bankers (supra). 138. After careful consideration, we do not find merit in the contention. There is no procedure of out of Court settlement under the Income Tax Act as applicable to appeals before the tribunal. An assessee can file an appeal against an order passed by the C.I.T.(A) if he is aggrieved against it under section 253(1) of the Income-tax Act, 1961 and a commissioner may file an appeal if he objects to any order passed by the C.I.T.(A) under 253(2) of the Act, thereafter under section 254(1) of the Act, the Tribunal may after giving, both the parties to the appeal , an opportunity of being heard, "pass such order thereon as it thinks fit". These words were interpreted by the Allahabad High Court in the case of J.K.Bankers (supra). As we have noted earlier also , it was held that the words "thereon" restricts the jurisdiction of the tribunal to the subject matter of the appeal and the subject matter of the app....
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.... us. 141. We have tried to ascertain the system of accounting being followed by the assessee but as discussed above in connection with applicability of proviso to section 145(1), no clear answer has been forthcoming. As for as collections are concerned, we would hold that the cash system was being followed , the subscribers were giving cash. This is the essence of the scheme. The amount was accounted for as receipt of cash. As far as full payments of Rs. 2,500/- are concerned, there is no question of any further accrual even under the mercantile system. However, in case of part payments in instalments, the learned special counsel for the department has argued that the balance was an accrued amount, but has not been disclosed by the assessee under the mercantile system. In case the assessee is treated to be following the mercantile system for collections, this question will assume great importance and may require investigation and adjudication. However not disclosing the balance even if it accrues, is consistent with cash system. Looking to the overall facts and circumstances, we hold that cash system was being followed in respect of collection from subscribers. 142. In the ab....
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.... prize money in excess of Rs. 1,500/- per subscribers only should be allowed as a deduction. However, we have held that fully paid subscription of Rs. 2,500/- are revenue receipts. There is dispute about discounting, as noted earlier. A mentioned was also made that there should be an estimate for liability for minimum guarantee prize, though the argument was not followed up by the learned counsel for the assessee. No such provision has been made in the accounts and there is a note in the schedule, to the balance sheet according to which it is only a contingent liability and, therefore, no provision was being made, we decline to consider it, because this claim was not made earlier and there is no ground of appeal before us. It also involves investigation into facts. An alternative submission has been made that prize money in its entirety should be deducted in the first year itself without discounting. All these questions will arise in case mercantile system of accounting is adopted to be followed. However, since we have held that cash system of accounting is to be followed, it is not necessary to go into these questions at all. Only the actuals of prize money disbursed will be deduc....
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....terest under section 215/217, which was stated to be consequential and does not require separate consideration. The computation of income by the C.I.T.(A) has been upheld except for inclusion of collections of partly paid accounts on the credit side of profit and loss account which has been set aside and the matter restored to the file of the Assessing Officer. 149. In the result, the assessee's appeal is partly allowed. 149.1 We have also dealt with the grounds of appeal of the Department and noted that ground No.3 does not arise as far as Assessment Year 1987-88 is concerned. The grounds have been rejected. 150. In the result, the departmental appeal is dismissed. 151. We have also dealt with the cross objections of the assessee, which have been rejected. 152. In the result, the cross objection is dismissed. 153. The assessee's appeals, departmental appeals and the assessee's cross objections for Assessment Years 1988-89 to 1992-93 will now be taken up. ASSESSEE APPEALS : 154. The main dispute in the assessee's appeals for these years is the same as the dispute for Assessment Year 1987-88. Ground Nos. 1 to 7 for Assessment Year 1988-89. Grounds Nos. 1 to 6....
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....ircumstances have been shown. In the circumstances, the disallowance is confirmed. 160. In the result, the appeal for the Assessment Year 1988-89 is partly allowed. 161. There is no other ground in the assessee's appeal for Assessment Year 1989-90, apart from the six grounds alredy mentioned above. This appeal is therefore, partly allowed. 162. The assessee's appeal for Assessment Year 1990-91 contained a further ground. In ground Nos. 7 and 8 the assessee is aggrieved against disallowance of interest paid on borrowed funds amounting to Rs. 95,000/-. 163. The C.I.T.(A) worked out the profit and loss account under cash system of accounting as for earlier years. It contained a debit of interest of Rs. 95,000/- He observed that the assessment order and balance sheet showed diversion of Rs. 3,05,14,855/- to M/s. Sahara India and Rs. l,46,19,407/- to M/s. Sahara India Housing which were interest free. According to him, the borrowed funds were utilised involving the interest free diversion of funds and, therefore, the interest could not be allowed. The amount was added. 164. The learned special counsel for the assessee submitted before us that there was no nexus between th....
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.... 16,500/-. The C.I.T.(A) observed that the objection to the disallowence was not substantiated before him and, therefore, the disallowance was confirmed. The position remains the same before us. We therefore, decline to interfere. This ground is rejected. 170. Ground No.9 also objects to a disallowance of Rs. 7,77,396/ - under section 40A(3) of the Act. The Assessing Officer disallowed the same with the remark that the payment was in violation of rule 6DD. The C.I.T(A) observed that there was no break-up given by the assessee and no exceptional or unavoidable circumstances were explained which could have compelled cash payment. The only submission was that the prize winners were not ready to accept the payment by cheque or draft. Apart from making the assertion, no other evidence was given. The addition was confirmed by him. 171. The submission before us were the same as for Assessment Year 1988-89, where we have confirmed the disallowance. For the same reason, the disallowance is confirmed for this year also. 172. Ground No. 10 relates to disallowance of a sum of Rs. 1,54,122 being expenses relating to earlier years. The Assessing Officer made the disallowance under the m....
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....liability for 12 years discounting it and taking pro rata value. It is mentioned in the grounds that the Tribunal had given similar directions in the case of M/s. Secured Investment Co. (supra). 181. The learned special counsel for the department submitted that the decision in the case of M/s. Secured Investment Co. (Supra) had been mentioned due to an error and he fairly admitted that there were no directions for discounting in that decision. However, the supported discounting on the basis of the following decisions:- 1. Southern Railway of Peru Ltd. v. Owen [1957] 32 I.T.R. 737 (House of Lords). 2. Gemini Cashew Sales Corpn. (supra) 3. Metal Box Company of India Ltd. (supra). 182. The Learned Special Counsel for the Department thereafter submitted that it was common knoledge that in the real commercial world cash down prise was always different from credit prise and the time of payment was very much significant. It was only an illustration of the well known maxim that a bird in hand was worth two in the bush. 183. At this stage, the Bench invited the attention of the Learned Special Counsel for the assessee to para 6 of the terms and conditions....
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.... issue arised in the remianing five years now under consideration. 188. In order to have a proper perception, these grounds will be considered along with ground no. 4 for assessment years 1989-90 to 1992-93, which are common. Here, the department objects to deletion by the C.I.T.(A) of the additions made by the assessing officer as notional interest. 189. The assessment order for Assessment year 1990-91 is the speaking order for such additions. The assessing officer noticed that the balance sheet of the assessee company revealed that large fund were lying with a sister firms M/s. Sahara India or were advanced to another sister firm M/s. Sahara India Housing. The assessee did not charge any interest from them. However, if interest was computed on these advance, they would be very large figures. The following are the details:- Sl.No. Name Opening Balance (Rs.) Closing Balance (Rs.) Interest calculated at 18% (Rs.) 1. M/s. Sahara India 403,55,868 305,14,856 65,77,976 2. M/s. Sahara India Housing 1,77,69,407 146,19,407 23,74,993 It was further stated that the assessee was a finance company and its business was to earn income by inve....
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....uestion of adding any notional interest in this year. However, deduction for expenses relating to M/s. Sahara India was reduced by the amount of notional interest. 196 . The above position may be tabulated as below:- A.Y. Interest @ 18% on credited balances Payment to M/s. Sahara India Difference (2)-(1) Difference (1) (2) (2)-(l) (l)-(2) 1988-89 M/s Sahara India 22,48,883 Rs. Rs. Rs. M/s Sahara India Housing 8,79,513 Total 31,28,396 56,67,234 25,58,736 - 1989-90 M/s Sahara India 88,21,365 79,62,759 8,58,606 1990-91 M/s Sahara India 65,77,976 30,78,931 - 34,99,045 M/s Sahara India Housing 23,74,993 - - 23,74,993 1991-92 M/s Sahara India 60,29,421 13,75,152 46,54,260 1992-93 M/s Sahara India 53,00,000 7,19,877 45,80,123 197. As mentioned earlier, the Assessing officer recast the profit and loss account and copies of the same have been annexed to the respective assessment orders. The expenses in respect of M/s Sahara I....
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....lowing decisions :- (1) CIT v. Calcutta Discount Co. Ltd.[1973] 91 ITR 8 (SC) It was held that where a trader transfer his goods to another trader at a price less than the market price and the transaction is a bona fide one, the taxing authority cannot take into account the market price of those goods ignoring the real price fatched to ascertain the profit from the transactions. (2) Highways Construction Co. (P.) Ltd. v. CIT[1993] 199 ITR 702 (Gauhati) The finding if the I.T.O. was that the assessee ought to have collected interest on interest free loans given to directors from amounts borrowed on interest. If the assessee had not bargained for interest or had not collected interest, the income tax authorities could not fix a notional interest as due or as collected by the assessee. There was no such provision in the Income-tax Act. (3) Indian Finance and Construction Co. (P.) Ltd. v. Dy. CIT[1993] 200 ITR 710/67 Taxman 326 (Bom.) It was held that the law does not oblige a trader to make the maximum profit that he can, out of his trading transactions. Income which accrued to a trader is taxable in his hands. Income, he could hav....
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....was no question of charging interest here also as it was a business transaction. 205. Shri P. Mehrotra, Advocate, The Learned Special Counsel for the department opposed the above contention. He also invited our attention to the agreement appointing M/s Sahara India as agent of the assessee company and submitted that the agreement constituted a contract under section 10 of the Indian Contract Act, 1872. Our attention was also invited to a decision of the Supreme Court in CIT v. Bagyelaxmi & Co. [1965] 55 ITR 660, where it was held that except where therein a specific provision of the Income Tax Act, which derograted from any other statutory law, the provision will have to be considered in light of the relevant branches of law. Relying on the same, he submitted that the agreement should be considered in terms of Indian Contract Act, 1872. 206. Our attention was thereafter invited to section 211 of the Indian Contract Act, which is reproduced below for the sake of convenience :- "S.211. Agent's duty in conducting principal's business - An agent is bound to conduct the business of his principal according to the directions given by the principal, or in the absence of any ....
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....urt in the case of Juggilal Kamiaps v. CIT[1969] 73 ITR 702 it was held that in case such as that the Income tax authorities were entitled to pierce the veil of corporate personality and look at the reality of the transaction; Thereafter it was submitted that the assessee company was a closely held company and the directors were partners in the registered firm, M/s Sahara India. The transactions were, therefore, not itself and that interest earned by M/s Sahara India should be the interest earned by the assessee company. 211. The Learned Special Counsel did not make any submissions regarding disallowance of expenses made in the assessment orders. 212. Shri P. Pardiwala, Advocate, Learned Counsel for the assessee replied to the above contentions. At first, he pointed out that in any case M/s Sahara India Housing was not an agent of the assessee company and, therefore, even the agreement referring to section 211 of the Indian Contract Act was not applicable in respect of notional interest relating to it. 213. The Learned Special Counsel submitted that even under section 211 of the Indian Contract Act, M/s Sahara India had not acted contrary to instruction given by the assess....
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.... that even in the case of Sahara India Housing, there was contract for constructions of houses for distributions as prizes. This contract was also akin to a principal and agent since M/s Sahara India Housing was not constructing houses for itself but for the assessee company. The assessee had given much more money than warranted for this purpose and, therefore, section 211 of the Indian Contract Act was applicable. 219. It was further submitted that the cases relied upon by the Learned Counsel for the assessee were distinguishable since the plea for invoking section 211 of the Indian Contract Act was a purely legal one and did not raise any new matter. The matter remained the same i.e. whether notional interest could be charged. Further, reliance was also placed on Rule 11 of the Income Tax (Appealate Tribunal) Rules, according to which the Tribunal shall not be confined to the grounds set forth in the Memorandum of Appeal provided that the party who may be affected thereby should have a sufficient opportunity of being heard on that ground. Our attention was also invited to Rule 28 of the Income Tax (Appellate Tribunal) Rules, according to which the Tribunal had power of remand.....
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....count. We have already held that cash system is applicable to this business income, accordingly, cash system will be applicable to the expenses also. However, the facts are not similar with respect to interest income. The Assessing Officer taxed it on mercantile system of accounting, but the C.I.T.(A) did not give any specific finding about the system of accounting applicable to it. However, he deleted the addition on merits, which could be considered only under mercantile system. Moreover both sides have taken grounds before us that mercantile system is the appropriate method. After careful consideration, we are of the opinion that, interest is a seperate source of income quite distinct from the other part of income and should appropriately be brought to tax, if it is taxable, under the mercantile system; the reasons for applying cash system to the other part do not apply here: mainly there is no question of receipts being considered under one system and expenditure on another system. We, therefore, hold that mercantile system of accounting is applicable to interest income if any. 223. In our opinion, the reliance on section 211 of Indian Contract Act by the Learned Special Cou....
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....ng Officer to the above extent with the direction to allow the assessee an opportunity to supply the above information of bifurcation of the credit balances. The quantum of notional interest in respect of M/s Sahara India should be recomputed accordingly. In case bifurcation is not made available by the assessee company despite reasonable opportunity, the Assessing Officer will make an estimate on the available facts. An addition will be made accordingly. 227. Regarding M/s Sahara India Housing, we are unable to accept the contention of the Learned Special Counsel for the department that they were also agent of the assessee company within meaning of section 10 of the Indian Contract Act in absence of material in support of the contention. Such material was not collected either the assessment stage or at the first appellate stage. It has not even been placed before us at the second appellate stage. We, therefore, decline to accept the contention that section 211 of the Indian Contract Act is applicable in respect of credit balances of M/s Sahara India Housing. 228. We now come to that part of credit balances of M/s Sahara India to which section 211 of the Indian Contract Act i....
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....e amount of Rs. 1,000/- spent on the purchase of N.S.Cs. became revenue receipt as against the assessee's claim of capital receipt. Similarly I also agree that cases of premature payments i.e. where the whole of the amount of Rs. 2,500/- has not been paid, the matter is to be set aside to the Assessing Officer for re-adjudication by him with a direction to ascertain full facts, as held by the Learned Accountant Member in para 99 of his order. There is no disagreement to the treatment accorded by the Learned Accountant Member to the single venture system in paragraphs 101 to 110 of his order, which plea of the assessee fails. 6. However, there is a difference of perception about the invokation of the first provision to sub-section (1) of the section 145 of the I.T. Act, 1961. (hereinafter referred to as "the Act" for brief), and the consequent change of system of accounting from mercantile to cash in respect of the computation of income from the "Golden Key Scheme" on which aspect pactices are not at variance. I would, however, deal with the latter part first, namely, the justification given by the Learned Accountant Member in upholding the change of system of accounting from ....
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....ibunal". Section 253 vests in the assessee as well as the department a right to appeal to the Appellate Tribunal against such orders as are specified therein. Dealing with the powers of the appellate tribunal, sub-section (1) of section 254 of the I.T. Act, 1961, reads as under :- "254(1) The appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit". The words "thereon" appearing above, restict the jurisdiction of the Tribunal to the subject matter of an appeal which could be stated to be contained in the original grounds of appeal and additional grounds, if any, raised by the parties with the leave of the Tribunal before it, in this connection, reference may be made to a decision of the Jurisdictional High Court in the case of J.K. Bankers (supra). 10 As per the Learned Accountant Member this decision does not support the stand of the assessee that mercantile system be upheld. In arriving at this conclusion, the Learned Accountant Member has observed as under:- "119. The above decision does not support the contention of the Learned Counsel for the assessee. The C.I.T.(A) has....
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....of the view that since there is no dispute whatsoever on the stand taken by the assessee and the department about the method of accounting to be followed, both sides claiming that it should be the mercantile system adopted by the assessee and accepted by the Assessing Officer, inter alia, manifest from column 8 of the format to the assessment order (Page 1) showing method of accounting as 'mercantile' by no stretch of logic it could be said that there existed any dispute on which an adjudication was required. A fortiori it is the choice/privilege of the assessee to choose one of the recognised system of accounting, the only rider being that the same should be consistently followed by him, as has been held in legion number of judicial pronouncements. In this case, it is pertinent to point out here and now that Assessment Year 1987-88 to which the appeals relate, being first year of the assessee's business, the rule of consistency has no relevance. 12. Learned Accountant Member has also observed in para 123 of his order that "it may be mentioned that adoption of cash system eliminates major disputes which would be there if mercantile system is adopted". I disagree with him whole h....
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....firm is following mercantile system of accounting, however, a portion of expenses which crystalised from time to time are being paid as and when they crystilised and to this extent the system of accounting was mixed." 13. This categorical assertion made by the assessee and also accepted by the Assessing Officer, in my considered opinion goes a long way to strengthen the assessee's stand that they have been following mercantile system about which their does not appear to be any dispute from various other circumstances described in the foregoing paragraphs. 14. What should be the system of accounting to be followed by an assessee under the Income-tax Act is the choice of the assessee. Further reference may be made in this connection to several decisions of the Apex Court, such as, Investment Ltd. v. CIT[1970] 77 ITR 533, CIT v. A. Krishnaswamy Modeliar[1964] 53 ITR 122 (SC) and McMillan & Co. (supra). Similar view has been taken by various High Courts also. 15. Further assuming though wholly disagreeing despite the absence of any controversy between the assessee and the accounting followed by the assessed, this being their first year of business, I may go a step still ahead ....
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....ned in this sub-section shall preclude an assessee from being charged to income tax in respect of any interest on securities received by him in a previous year if such interest had not been charged to income tax for any earlier previous year. (2) Where the Assessing Officer is not satisfied about the correctness or the compeletness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144". 17. The question which, therefore, arises before the Tribunal is to see as to whether the system adopted by the assessee is such scrutinising which the Assessing Officer could have come to the conclusion in law that the income of the assessee could not be properly deduced therefrom. In this connection, if may also be stated that the power vested in the Assessing Officer is not arbitrary and has to be exercised in a judicious manner. In the case Manilalkher Ambalal & Co. v. A.G. Lulla, Seventh ITO[1989] 176 ITR 253/[1988] 40 Taxman 329 (Bom.) the High Court of Bombay took the view that even the Deputy Commissioner of income tax, was not empowered to i....
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....provisional, notional or contingent payments which the assessee considers that he might ultimately be called upon to pay. 21. In this connection, it may be stated that it is nobody's case that the accounts of the assessee were incorrect or incomplete. Learned Accountant Member has also upheld the invokation of proviso (1) to section 145 only and not proviso (2) or sub-section (2) of section 145. It would be useful to recall the language of the proviso I appended to sub-section (1) of section 145, reproduced hereinbefore. With reference to this provision it may stated that it is not a case where the assessee was found not regularly employing any method of accounting (referred to proviso (2) to section 145(1)) or that the revenue authorities were not satisfied about the correctness or the completeness of the accounts of the assessee and/or no method of accounting was found to have been regularly followed by the assessee (refer to sub-section (2) of section 145). Coming to the sine qua non of the legal requirement to alter a system regularly followed by an assessee, it may once again be pointed out that there should be a clear finding that income could not properly be deduced from ....
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....deduced (rather better) from the method followed and employed by the assessee. Similarly expenses relating to such receipts and the "Golden Key Scheme" whether in the form of prizes or other incentive etc. if they fit in the bill and legally partake the character of an enforceable liability and have accrued or arisen and are not either provisional or notional or contingent, have to be allowed to the assessee. Such would be the situation which is both legal and equitable, besides being practical. There is no reason, therefore, as to why as per the method employed by the assessee it could not be said that income cannot properly be deduced therefrom. In so far as the assessee's submission in their letter dated 22nd January, 1990 reproduced above that despite following mercantile system of accounting a portion of expenses which crystilised from time to time were being paid as and when they crystilised and to this extent the system of accounting was mixed is concerned, I would only say that following the mercatile system whatever adjustments whether in the credit side or debit side are required as per the setteld norms and principales of accounting and law the Assessing Officer would al....
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.... on mercantile basis and according to the double entry system of accounting it would be deemed that the assessee did not maintain proper books of account. This would mean that under the Companies Act, a company has to maintain books of account on accrual basis i.e. on mercantile system. No doubt this sub-section was substituted by the Companies (Amendment) Act, 1988 w.e.f. 15.6.1988 and the first year of assessment for which these appeals are being disposed of by the Tribunal is the Assessment Year 1987-88 the amended provision had not come into force, it is pertinent to point out that even under the earlier sub-section (3) of section 209 which read as under :- "(3) for the purpose of sub-sections 1& 2, proper books of account shall not be deemed to be kept with respect to the matters specified therein, if they are not kept such books as are necessary to give a ture and fair view of the state of affairs of the company or branch office, as the case may be, and to explain its transactions, the department of company affairs had issued following clarification on the subject :- (a) The maintenance of the account of a company on cash or receipt basis would not amount to....
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.... 31. This view taken by me would give rise to a consequence following therefrom. 32. The duration of the "Golden Key Scheme" was for 12 years. It envisaged the declaration of several prizes to be drawn at the end of every of month and also certian bumper draws to be drawn quarterly. The cost of the prizes has been given. No doubt, the prizes as originally stipulated by the scheme had to be drawn only after the enrolment of 99999 account holders but as also been held by the Learned Accountant Member in para 127 of his order to which there is no dispute that in practice the assessee company started prize draws after January, 1987 which continued till 1995 when the scheme had to be wound up as per the Apex Court dicrectives and the consequent directions of the Registrar Firms, Societies and Chits, Uttar Pradesh, Lucknow (refer to his letter at pages 47 and 48 of the assessee's paper book), the assessee company would be entitled to the entire prize money as the expenditure to be incurred on such prizes was indisputable ascertained and enforeable liability. Such liability was neither provisional, notional or contingent. As held by the Apex Court in various cases, some of which hav....
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....r since the assessee did not make any procision in this regard the accounts and there is a note in the schedule to the balance sheet according to which it is a contingent liability. I also agree with Learned Accountant Member in declining to consider this claim of the assessee. 35. My other disagreement with the Learned Accountant Member is relatable to the addition of "notional interest" in the hands of the assessee in relation to the collections made on their behalf by their agent, M/s Sahara India and which were received by the former late: 36. On facts, with reference to paragraphs 169 of the Learned Accountant Member's order, the Assessing officer noticed that large funds of the assessee company were lying with the sister firm M/s Sahara India or were advance to another sister firm M/s Sahara India or were advanced to another sister firm M/s Sahara India Housing. The assessee did not charge any interest in either case. If interest was computed on these advances it would work out as under :- "169. The assessement order for Assessment Year 1990-91 is the speaking order for such additions. The Assessing officer noticed that the balance sheet of the assessee company....
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....ove, the firm was under an obligation to "send it to the company the so collected amount at the end to every month of operations." We, therefore, hold that the credit balances in the name of M/s Sahara India are enquired to be bifurcated at the end of each month into two amounts. The first amount will be the collections of the same month. These amounts will be well within the terms of para 2 of the agreement and will not be hit by section 211 of the Indian Contract Act. However, amounts in excess of the above amounts will be hit by the provisions of section 211 of the Indian Contract Act. We agree with the contention of the Learned Special Counsel that it was the obligation of M/s Sahara India to invest the excess at interest. If it invested, the interest income would belong to the assessee. If it was not invested, the firm must make good to the assessee company the interest to be so obtained by such investments. Interest income to that extent accures to the assessee, and addition to the income to that extent is confirmed in principle. 207. We accordingly set aside the matter to the Assessing officer to the above extent with the direction to allow the assessee an opportuni....
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....d at this late stage. It would have the effect of enlarging the controversy and providing an altogether new dimension to it. In these circumstances, there is no question of the remand of the matter for the bifurcation of credit balances at the end of each month into two amounts and for collection of notional interest as directed by the Learned Accountant Member in paras 206-207 of his order extracted above. No doubt the remittances by the firm were made late to the assessee company, but it is not as if the assessee company demanded early remittances which were demanded by the firm. To calculate notional interest would amount to taxing un-earnedincome, besides examining and permitting the department to open a altogether new line of argument which was never adopted either by the Assessing Officer or by the Learned C.I.T.(A). 43A. However, even if we examine the issue with reference to section 211 of the Contract Act, in the first instance, it may be pointed out that the aforesaid provision of the contract act determines the duty of an agent in the conduct of his principal's business. This is therefore, a matter primarly between a principal and agent. If the agent voilates the mand....
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....mport. But it should not be forgotten that as cautioned by the House of Lords, the word "income" is an ordinary word of the English language and it should be given its ordinary natural meaning, unless ofcourse, the context requires otherwise (refer to Chetwadi v. I.R.C. [1978] Tax L.R.324 (H.L.). 47. In Bhagwan Dass Jain v. U.O.I.[1981] 128 ITR 315/5 Taxman 7 (SC), the Supreme Court held that of whatever wide import the expression 'income' may be, according to the oxford Dictionary it meant "a thing that comes in". In order to be income as held by the jurisdictional High Court, it must be something which "comes in" (i) periodically, (ii) as a return, (iii) with some sort of regularity or expected regularity and from a definite source (Emphasis supplied) (Rani Amrit Kaur v. CIT[1946] 14 ITR 561 (All.). 48. A definite source is necessary as also pointed out by the judicial committee of the Privy Council in the case CIT v. Show Wallace & Co. [1932] 2 Comp. Cas 276 in this connection, reference may be made to section 5 of the Act which clarifies this position by defining total income referred to in Section 4(1) of the Act which is the basis of the charge to include all incomes "f....
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....see or it could even be attributed to the assessee Going a step further, I would say supose the remittances had been received by the assessee firm timely and they had kept such remittances in their current account getting no interest, could it be said that some income would still be includible because it could have accrued to them had they created fixed deposits in respect, thereof or at least deposited in the Savings Bank Account. The answer to such a question would have to be given in the negative on the principle that an amount which has been earned or which has 'come in' to the assessee and not notional, hypothetical, fictional or illusory sum alone could partake the character of "income" under the I.T. Act, 1961. 54. I am conscious of the law that wherein a word is given an exclusive definition by the statute it means not only the things mentioned therein but also includes within its ambit the meaning of the term as generally understood, the word "income" as held by the High Court of Punjab in the case of Raja Raghavendra Singh, v. State of Punjab[1976] 102 ITR 40 (Punj. & Har.) has to be given a very wide meaning. However, as held in CIT v. Jaora Oil Mills[1981] 129 ITR 42....
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....not be said that income had accrued. In the case of CIT v. Ferozepur Finance (P.) Ltd.,[1980] 124 ITR 619/4 Taxman 439 (Punj. & Har.) the High Court of Punjab took the view that even if an assessee was following mercantile system and makes an entry for hypothetical interest income, the same connot be included in the total income where such income has neither accrued nor received. 58. On the basis of the aforesaid discussion based on various judicial pronouncements I am of the considered view that there has been no "coming in" to the assessee nor any "coming in" could be attributed to them either by virtue of any agreement between the parties or on the strength of any legal fiction created by the statute. It, therefore, follows that there connot be any notional addition on the count of interest de hours the fact that there was some Variation in between the parties qua the agreement referred to supra, inasmuch as the firm did not remit money collected by them on behalf of the company at the end of every month. 59. The gravemen off the charge against the assessee in upholding the optional addition, therefore, would be to see as to whether with reference to the definition of the ....
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....e added in the hence of the assessee due to the delayed remittance of collections made by their agent M/s. Sahara India in respect of "Golden Key Scheme" ? 6. Whether in law as also according to the principles of natural justice the dissenting Member could refer to certain case laws of different High Courts (no dispute about Supreme Court xxx case laws) not cited by either side during the hearing of the appeals ? Question No.6 is being referred as the A.M. has expressed a view on this in negative. 7. Whether if adoption of mercantile system is upheld, the question of discounting and application of pro rata in respect of deduction towards prize liability under the "Golden Key Scheme" should go back to the regular Bench for its decision, considering that the A.M. has not adjudicated on these aspects. Question No.7 is being referred as the A.M. has expressed a view on this in affirmative. ORDER (THIRD MEMBER) R.S. Syal, Vice President (As a Third Member) The Hon'ble President has nominated me u/s 255(4) of the Income-tax Act, 1961 (hereinafter also called the "Act") to render opinion on the difference between the learned Members who initial....
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....ber on certain issues. Ex consequenti, he rendered his separate opinion on 16/10/96. The learned Third Member delivered his decision on 26/03/98 deciding some of the issues in dispute before him and leaving the others open. Thereafter, a miscellaneous application was filed by the Revenue, which met with the fate of dismissal at the hands of the learned Third Member on 07/04/2000. The Division Bench, which sat for passing consequential order, noticed, vide its order dated 31/12/2003, that the learned Third Member instead of agreeing with either of the Members who passed the dissenting order had rather reopened some issues for a fresh decision. Accordingly, it was held that the appeals of the assessee/Department as well as the cross objections of the assessee should be disposed of afresh on the points of difference as observed by the learned Third Member. The case was fixed for hearing in the second week of February, 2004. The order was eventually passed by the Division bench on 31/05/2005 disposing of the relevant issues afresh on merits. The matter was carried before the Hon'ble High Court, which set aside the order of the Third Member and has directed to resolve the conflict betwe....
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....ssing Officer observed that the books of account were not maintained on mercantile system of accounting as claimed by the assessee. It was held that the entire collection was revenue receipt and all the expenses including the liability relating to NSC etc. were to be allowed as deduction. He invoked the provisions of section 145(1) of the Act and recasted Profit and Loss account in terms of the mercantile system of accounting. In this way, he computed total income by taking gross collections of Rs. 59.84 lakh to the credit side of the Profit & loss account; allowing deductions - at the rate of 40% of the gross collection towards NSC; other expenses; and Prizes worth Rs. 12,29,000. Deduction on account of Prizes was computed by considering total prize money to be paid by the assessee company throughout the period of 12 years at Rs. 12.84 crore. Such amount was discounted to Rs. 5.13 crore and proportionate deduction on account of prizes was computed by multiplying Rs. 5.13 crore with Rs. 59.84 lakh, being, the collections during the year and dividing with Rs. 25 crore, being, gross collection to be received. The assessment order was assailed before the ld. first appellate authority.....
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....omputed in accordance with the method of accounting regularly employed by the assessee. First proviso states that where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that in the opinion of the Assessing Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Assessing Officer may determine. The assessee admittedly claimed to have followed mercantile system of accounting and the Assessing Officer did not disturb the mercantile system of accounting. 6. It needs to be seen if the income declared by the assessee was in accordance with the mercantile system of accounting. The assessee paid Advertisement and Publicity commission and development expenses. 40% of such amount was debited to the P&L account for the year and the remaining 60% was deferred. Similarly 25% of Stationery and Printing expenses was debited to the P & L account and the remaining 75% was deferred. The assessee could not explain the basis of deferment of expenses. During the course of assessment proceedings, it was urged that 100% of both the expenses was revenue and de....
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....d income accordingly, no exception can be taken to the view of the Assessing Officer in rejecting the books of account in terms of section 145 of the Act because such books were not reflecting the true income according to the mercantile system accounting. 8. The Ld. JM agreed with the Id. AM that the collection of Rs. 2500 from each account holder as reduced by the amount of Rs. 1000 spent on purchase of NSC was a revenue receipt as against the assessee's depiction of only 16% as income in its books of account and then claiming that the entire amount of Rs. 2500 per account as a capital receipt and not chargeable to tax at all. Then the Ld. JM also agreed with the Ld. AM that the cases of premature payments should be restored to the Assessing Officer for re-adjudication apart from agreeing with the rejection of single venture system as put forth on behalf of the assessee. Having concurred with the view of the Id. AM on the above aspects, which constituted some of the prominent reasons for the approval of rejection of accounts, the Id. JM was not right in holding that the books of account reflected true profits and hence the provisions of section 145 were not attracted. There is ....
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....re to be given NSC worth Rs. 1000 each simultaneously. Prizes were to be distributed to the subscribers throughout the tenure of Scheme of 12 years. Such subscribers, who could not get any prize, were to receive gifts in the form of articles worth Rs. 2500 at the end of the Scheme. Therefore, it is apparent that under the mercantile system of accounting, the entire amount of Rs. 2500 per subscriber for the subscriptions - whether fully or partly paid during the year - accrues as income at the time of subscribing to the scheme. It also entails liability running throughout the period of 12 years in the form of prizes. The Assessing Officer has considered the total amount of prizes payable during the period of 12 years at Rs. 12.84 crore, against the gross receipts of Rs. 25 crore. This shows that more than 50% of receipts were to be disbursed in the shape of prizes in the period of 12 years. If the entire amount of Rs. 2500 per subscriber is considered as income in the first year itself on the basis of cash system and deduction is allowed also on cash basis only to the extent of expenses actually incurred during such year, there will arise an artificial income in the first year which....
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.... system of accounting. He however also recorded a finding in para 126 of his proposed view that 'even under the mercantile system of accounting, it is not the entire value of prizes which will be deductible, but only pro rata amount proportionate to the collections during the year'. The learned Judicial Member held that 'the assessee company would be entitled to the entire prize money as the expenditure to be incurred on such prizes was indisputable ascertained and enforceable liability.' Thereafter he recorded in para 33 that 'the assessee would be entitled only to the pro rata amount proportionate to the collection made during a particular year as also held by the learned Accountant Member.' The Ld. AR argued that the proportionate deduction for prizes to be allowed during the 12 years period should be allowed in the first year itself since admittedly the right to receive full amount of Rs. 2500 was acquired during the year, even in respect of partly paid subscriptions. To put it simply, he submitted that if the assessee has received, say, full (20%) and part (25%) subscribers out of 99,999 which were to be enrolled in total, then full amount of Rs. 2500 per person would become i....
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....Member further held that discounting cannot be done and there is no view of the learned Accountant Member on the aspect of discounting. Therefore, it is patent that none of the ld. Members opined to restore the matter to the regular Bench for its decision on the question of discounting and application of pro rata in respect of deduction towards prize money. Once both the ld. Members upheld the deduction of the prize money on pro rata basis, the question proposing restoration to the Division Bench for fresh adjudication, cannot be said to arise from the views expressed by the Id. Members in their respective opinions. This question is therefore, held to be not arising from the orders proposed by learned Members and hence cannot be answered in the capacity of a Third member. 14. The question No. 6 is about referring of certain decisions in the order which were not cited during the course of hearing. Both the sides before me are in unison that there is no decision referred by any of the Ld. Members which was not cited during the course of hearing of the appeals. As such this question is also not arising from the views expressed by both the Ld. Members and hence cannot be answered in....
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....rned Judicial Member to this extent. Even otherwise, the Tribunal is empowered to allow or disallow a claim pending before it for adjudication on a different plea as has been held by Hon'ble Supreme Court in the case of CIT v. Mahalakshmi Textile Mills Ltd.[1967] 66 ITR 710. 17. On merits, it is noticed that the assessee entered into an Agreement with Sahara India for collecting subscriptions from its Members and remitting the same to the assessee at the end of the each month. There is nothing in the Agreement that if the amount collected is retained beyond a period of 30 days, Sahara India would be liable to pay interest on such amount. Section 211 of the Indian Contract Act simply deals with the consequences where an agent does not conduct business of his principal according to directions and customs. Illustration (a) given in section 211 of the Indian Contract Act provides that an agent carrying on business in which it is custom to invest from time to time, the amount at interest, such agent must pay interest to the principal if he omits to make the investment. No such custom necessitating the making of investment by an agent from time to time, has been referred to by learned....