AI Drafter 
TaxTMI 
TaxTMI 
2018 (6) TMI 514
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....nt of commission by the assessee to the Sri Lankan agents was allowable as an accrued liability? 3. Whether, on the facts and in the circumstances of the case, the expenditure incurred under the agreements with the Sri Lankan agents will amount to an expenditure incurred for maintaining an agency abroad within the meaning of Section 35B(1)(b)(iv) of the Income Tax Act? 4. Whether, on the facts and in the circumstances of the case, the liability to pay the premium for insurance policy could be allowed as accrued liability within the previous year ended 30.06.1983 even though the indemnity depended on payment of the premium which was made only subsequent to the end of the previous year? 5. Whether, on the facts and in the circumstances of the case, the liability to pay commission under the agreement dated 18.08.1981 with M/s. Annapurna Agencies accrued on the procurement of the purchase orders within the previous year ended 30.06.1983? 6. Whether, on the facts and in the circumstances of the case, the liability to pay the liquidated damages under the terms of the agreement accrued when the delivery was made within the previous year ended 30.06.1983....
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.... total sum of Rs. 31,03,608/-. The assessee's claim, that these amounts should be deducted in computing their income, was rejected by the Income Tax Officer who opined that, since the Award itself was made after the end of the previous year, the assessee could not have worked out the provision for increase in wages; the Award became final only on its publication; and, since publication of the Award was beyond the previous year, the liability did not arise during the previous year. Accordingly, he disallowed the claim. In appeal, the CIT (Appeals) agreed with the Income Tax Officer that the liability accrued only after the close of the relevant accounting period, and could not therefore be allowed as a deduction in the said year. In further appeal, the Tribunal held that, while the Award was no doubt made on 11.07.1983 after the end of the previous year on 30.06.1983, it was made before the accounts were closed on 29.09.1983; while an Award, under Section 17 of the Industrial Disputes Act, became enforceable on the date of its publication in the gazette, it came into operation, under Section 17(4) of the Industrial Disputes Act, with effect from the dates specified therein or on ....
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....lf of the assessee, that, as the assessee was following the mercantile system of accounting, they were obligated to adhere to Accounting Standard 4, as per Section 145(2) of the Act and, on following the same, the amount is deductible, is not tenable; Section 145(2), as it now stands, was inserted for the first time w.e.f. 01.04.1997; the said provision was not in existence in so far as the relevant previous year is concerned; and, even otherwise, A.S. 4 does not aid the assessee in respect of the claim made under this head. Learned Senior Standing Counsel for Income-tax would rely on (1) Nonsuch Tea Estates Ltd. v. CIT, Madras (1975) 98 ITR 189 (SC); (2) CIT v. Kirloskar Tractors Ltd. (1998) 231 ITR 849 (Bom); (3) Morvi Industries Ltd v. CIT (Cal) (1971) 82 ITR 835 (SC); and (4) CIT v. Excel Industries Ltd. (2013) 358 ITR 295(SC) 01.01.1982. On the other hand Sri S. Ravi, Learned Senior Counsel appearing on behalf of the respondent-assessee, would submit that the increase in wages was agreed to, in principle, by both the Cement Manufacturers Association and the Workmen on 19.05.1983 by filing a Joint Memo before the Arbitrator; it is on the basis of the said memo that an award ....
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.... cash or receipts basis, (ii) accrual or mercantile basis, and (iii) mixed or hybrid method which has elements of both the aforesaid methods. It was noticed that many assesses are following the hybrid method in a manner that does not reflect the correct income. The Finance Act, 1995, has amended Section 145 of the Income-tax Act to provide that income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall be computed only in accordance with either the cash or the mercantile system of accounting, regularly employed by an assessee. The first proviso to sub-section (1) of Section 145 has been deleted. 44.2. The Finance Act, 1995, has also empowered the Central Government to prescribe by notification in the Official Gazette, the accounting standards which an assessee will have to follow in computing his income under the head "Profits and gains of business or profession" or "Income from other sources". These accounting standards wil be laid down in consultation with expert bodies like the Institute of Chartered Accountants. 44.3. The amendment will take effect from 1st April, 1997, and will, accordingly, apply in relation to....
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....s upon that basis, and that basis alone, that he has to be assessed. (Smt. Indermani Jatia v. CIT 1959 Supp (1) SCR 45 : AIR 1959 SC 82 : (1959) 35 ITR 298). There are two principal systems of book-keeping, firstly, the cash system in which a record is maintained of actual receipt and actual disbursements, entries being posted when money or money's worth is actually received, collected or disbursed. There is, secondly, the mercantile system, in which entries are posted in the books of accounts on the date of the transaction, i.e., on the date on which rights accrue or liabilities are incurred, irrespective of the date of receipt or payment. For example, when goods are sold on credit, a receipt entry is posted as on the date of sale, although no cash is received immediately in payment of such goods; and a debit entry is similarly posted when a liability is incurred although payment on account of such liability is not made at the time. (State Bank of Travancore v. CIT (1986) 2 SCC 11; Commissioner of Income-Tax, Madras v. A. Krishnaswami Mudaliar 53 I.T.R. 122). According to the cash system, a record is kept of actual receipts and actual payments, entries being made only when ....
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....receive money, in the course of a trading transaction accrues or arises, even though income is not realised, income embedded in the receipt is deemed to arise or accrue. (Raja Mohan Raja Bahadur v. CIT (1967) 3 SCR 482 : AIR 1968 SC 114 : (1967) 66 ITR 378). Where the assessee keeps the accounts according to the mercantile method of book-keeping, the effect of making a credit entry in the interest account would be to treat that amount as income or profits received by the assesses or treated by him as received for the purpose of tax. (CIT, Madras v. A.T.K.P.L.S.P., Subramaniam Chettiyar AIR 1927 Mad. 841; Smt. Indermani Jatia 1959 Supp (1) SCR 45 : AIR 1959 SC 82 : (1959) 35 ITR 298). An assessee, who follows the mercantile system of accounting, is entitled to deduct, from the profits and gains of the business, such liability which had accrued during the period for which the profits and gains were being computed, even though it is required to be discharged at a future date. (C.I.T v. Kalinga Tubes Ltd. (1996) 2 SCC 277; Kedarnath Jute Manufacturing Co. Ltd. (1971) 82 ITR 363 (SC)). If a business liability has definitely arisen in the accounting year, the deduction should be allow....
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....d claimed the amount as a deductible allowance on the ground that he was keeping his accounts on the mercantile basis. The Madras High Court held that the assessee had incurred an enforceable legal liability on and from the date on which he received the Collector's demand for payment, and his endeavor to get out of that liability by preferring appeals did not detract from or retard the efficacy of the liability which had been imposed upon him by the competent excise authority. The law declared by the Madras High Court was approved by the Supreme Court in The Kedarnath Jute Mfg. Co. Ltd. (1971) 82 ITR 363 (SC). If a business liability has arisen in the accounting year, the deduction should be allowed even if such a liability may have to be quantified and discharged at a future date. (Bharat Earth Movers (2000) 245 ITR 428 (SC); Taparia Tools Ltd. (2015) 7 SCC 540). It is not open to the Income-tax Officer, if income has accrued to the assessee and is liable to be included in the total income of a particular year, to ignore the accrual, and thereafter tax it as income of another year on the basis of receipt. (Laxmipat Singhania v. C.I.T AIR 1969 SC 501). If an assessee r....
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....e to such person or persons (including the presiding officer of a Labour Court or Tribunal or National Tribunal) as an arbitrator or arbitrators as may be specified in the arbitration agreement. Section 10-A(3) requires a copy of the arbitration agreement to be forwarded to the appropriate Government and the Conciliation Officer, and the appropriate Government shall, within one month from the date of receipt of such a copy, publish the same in the official gazette. Under Section 10-A(3A) where an industrial dispute has been referred to arbitration and the appropriate Government is satisfied that the persons making the reference represent the majority of each party, the appropriate Government may, within the time referred to in sub-section (3), issue a notification in such manner as may be prescribed; and when any such notification is issued, the employers and workmen who are not parties to the arbitration agreement but are concerned in the dispute, shall be given an opportunity of presenting their case before the arbitrator or arbitrators. Section 10-A(5) stipulates that nothing in the Arbitration Act, 1940 shall apply to arbitration under Section 10-A. The parties to the indust....
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....in terms of the arbitration award made under Section 10-A of the Industrial Disputes Act. Section 17 of the Industrial Disputes Act, as it then stood, relates to publication of reports and awards and, under sub-section (1) thereof, every arbitration award shall, within a period of thirty days from the date of its receipt by the appropriate Government, be published in such manner as the appropriate Government thinks fit. Section 17(2) stipulated that, subject to the provisions of Section 17-A, the award, published under sub-section (1), shall be final and shall not be called in question by any Court in any manner whatsoever. Section 17-A related to commencement of the award and, under sub-section (1) thereof, an award (including an arbitration award) shall become enforceable on the expiry of thirty days from the date of its publication under Section 17. Though the proviso to Section 17-A(1) does not appear to have any application to arbitration awards, it is nonetheless necessary to note its contents as reliance is placed, on behalf of the assessee, on a judgment of this Court whereby the proviso was declared ultravires the constitutional scheme. Under proviso (a) to Section 17-A....
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....ees' Union (1963) 1 LLJ 318; and Western India Match Company Ltd. v. Their Workmen (1962) 2 LLJ 459). As the award itself was made only on 11.07.1983, after the end of the previous year 01.07.1982 to 30.06.1983 for the relevant assessment year 1984-85, the liability to pay increased wages, in terms of the arbitration award dated 11.07.1983, can be said to have accrued only thereafter, and not prior thereto in the previous year 01.07.1982 to 30.06.1983. The mere fact that a joint memo was filed by the Cement Manufacturers Association and its members before the arbitrator on 19.05.1983 agreeing that the award be made applicable from 01.01.1982 is of no consequence, as it is only on an award being passed, could the joint memo be given effect to. Consequently, the assessee was not entitled to claim deduction of these amounts in the previous year relevant to the Assessment year 1984-85, merely because a joint memo was filed before the arbitrator on 19.05.1983, as their liability, to make payment of the increased wages, accrued only in terms of the arbitration award made on 11.07.1983, after the end of the previous year 01.07.1982 to 30.06.1983. As noted hereinabove, the arbitrator....
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....de before the expiry of 30 days. In other words, the enforceability of the award may be postponed beyond thirty days under certain circumstances by the appropriate Government. No award is, therefore, enforceable before the expiry of 30 days and, therefore, no obligation is to be discharged before the expiry of the said period. There is no obligation on the employer to implement the award before expiry of 30 days from its publication. (The State of Maharashtra v. Ajit Maneklal Choksi (1979) ILLLJ 423 (Bom) = 1979 LAB.I.C.59). Under Section 17-A(1) of the Industrial Disputes Act, an award shall become enforceable 30 days after its publication in the official gazette and since the Award, in the present case, was published in the Gazette of India on 20.07.1983, it was enforceable 30 days thereafter on and from 19.08.1983 onwards. While the award became enforceable only on 19.08.1983, payment under the award was required to be made with retrospective effect from 01.01.1982. The liability to make payment in terms of the award accrued only on the date on which the award became enforceable, and the fact that, on the date on which it is enforceable, the payment, in terms of the award, is....
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....f the words "subject to the provisions of Section 17-A" and whole of Section 17-A with sub-sections 1 to 4 thereof are non est under law. As an inevitable corollary, G.O.Ms. No. 2, Labour Department, dated 20-1-1994 is quashed as being unsustainable in view of what is held above. Now, the award which has been published in G.O.Rt. No. 2761, Women's Development, Chief Welfare and Labour Deparment, dated 23- 12-1993 shall be operative and the same be implemented by respondents 3 to 5 within a period of one month from the date of receipt of a copy of this order....." (emphasis supplied) Since Section 17-A of the Industrial Disputes Act, 1947 has been held ultra vires the Constitution, in Telugunadu Workeharged Employees State Federation 1997 (3) ALD 540 = 1997 (3) ALT 492, which is a binding precedent, the Government has no power to issue an order nullifying an award, and declaring it as not enforceable on public grounds. (Govt. of A.P v. Nagarjunasagar Dam Employees & Labour Union rep. by its Secretary (Judgment in W.A.No.403 of 2004 dated 26.11.2004)). While it is no doubt true that a Learned Single Judge of this Court had declared Section 17-A, and a part of Section ....
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....as Rs. 97,188/-. Though this amount did not pertain to the previous year, relevant to the assessment year 1959-60, the Company claimed it as deductible expenditure for that year on the ground that the sum became payable only during that year when the Government accorded its approval to the new agreement. The Income-tax Officer rejected this claim holding that the approval of the Central Government was necessary only for actual payment, the assessee should have ascertained the liability for each year, and claimed it on the mercantile basis which was the system adopted by them. It is in this context that the Supreme Court observed: "....In our judgment the High Court was in error in answering the question referred to it against the assessee. It appears that the Income-tax authorities, the Tribunal and the High Court all laid special emphasis on the fact that the Company followed the mercantile system of accounting. The distinction between the two methods of accounting, one on the cash basis and the other on the mercantile basis is well-known. In Commissioner of Income-tax, Madras v. A. Gajapathy Naidu : 1964) 53 I.T.R. 114 (SC), this Court explained the difference betwe in t....
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....sfield Limited as managing agents by its letter dated September 2, 1957 that the appointment became effective and the Company's liability to pay the remuneration of the managing agents accrued. The position here is not that the liability had arisen earlier and its quantification only depended on the approval of the Central Government. It is true that the liability became effective from April 1, 1956, a date anterior to the relevant previous year, but 'that is because the Central Government chose to give its approval retrospective operation. The liability in these circumstances cannot be said to have arisen from any date prior to September, 2, 1957 when the approval was given as Section 326 contains an absolute prohibition against the appointment or re-appointment of a managing agent before the approval of the Central Government was obtained. In our opinion, the position is quite clear from the terms of Section 326 and we do not consider it necessary to refer to the authorities cited by the learned counsel for either side......." (emphasis supplied) The law declared by the Supreme Court, in Naonsuch Tea Estates Ltd. (1975) 98 ITR 189 (SC), is that, in view of Section 326 ....
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....y year the liability can be properly attributed to is 1949, and hence we are of the opinion that the High Court was right in answering the question in favour of the assessee........." (emphasis supplied). The law declared, in Swadeshi Cotton and Flour Mills Pvt. Ltd (1964) 53 ITR 134 (SC), is that it is only when the claim is settled by industrial adjudication (in the present case - the arbitral award passed under the Industrial Disputes Act) that a liability is incurred by the employer-assessee. As, in the present case, the Award itself was passed only on 11.07.1983, the liability was incurred by the assessee only on that date or thereafter when it was published in the Gazette on 20.07.1983 or from the date of its enforcement under Section 17-A(1) of the Industrial Disputes Act on 19.08.1983. As the award itself was passed on 11.07.1983, the liability to pay increased wages arose only in the previous year 01.07.1983 to 30.06.1984, and the assessee was not entitled to claim deduction towards this liability in the previous year 01.07.1982 to 30.06.1983. It is, however, contended on behalf of the assessee, that even events beyond the balance sheet date must be taken into consid....
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.... this may be unique to a fiscal statute like the Act; however, in the guise of a delegated power, the Central Government could not do what was otherwise legally impermissible. In M.S. Raju5, a Division bench of this Court observed: "....The Accounting Standards relied on behalf of the assessee are those prescribed by the Institute of Chartered Accountants of India. Thereunder, the definition "events occurring after the balance-sheet date" are those significant events, both favourable and unfavourable, that occur between the balance-sheet date and the date on which the financial statements are approved by the board of directors in the case of a company and by the corresponding approving authority in the case of any other entity. Under paragraph 8.1, events, which occur between the balancesheet date and the date on which the financial statements are approved, may indicate the need for adjustments to assets and liabilities as at the balance-sheet date or may require disclosure. Under paragraph 8.2, adjustment to assets and liabilities are required for events occurring after the balance-sheet date that provide additional information materially affecting the determination of....
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....tutory recognition to the principle of capitalising the interest in case interest is paid on money raised to defray expenses of the construction of any work or building, or the provision of any plant, in the contingencies mentioned in that Section, even though such money constituted share capital. The Supreme Court, thereafter, observed that the same principle should hold good if interest is paid on money not raised by way of share capital, but taken on loan for the purpose of defraying the expenses of the construction of any work or building or the provision of any plant. The law declared by the Supreme Court, in Challapalli Sugars Ltd. [1975] 98 ITR 167 (SC), is not that the accounting standards framed by the Institute of Chartered Accountants of India would automatically apply but is that, in the absence of any statutory definition or other indication to the contrary, the accepted rules of accountancy should be adopted for determining the actual cost of the asset. No such question arises for consideration in the case on hand. In Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-tax (1997) 227 ITR 172 (SC), the assessee had approached the Supre....
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....de all expenditure necessary to bring such assets into existence and to put them in working condition; the Supreme Court had also taken note of Section 208(10(b) of the Companies Act, and had observed that the said provision gave statutory recognition to the principle of capitalising interest, in case the interest is paid on money raised to defray expenses of the construction of any work or building or the provision of any plant in contingencies mentioned in that Section, even though such money constituted share capital; the Supreme Court had also relied on an English case in Hinds v. Buenos Ayres Grand National Tramways Co. Ltd. (1906) 2 Ch.654 (Ch D); wherein it was held that the cost of construction will be the amount actually spent, and also the interest payable on the amount borrowed during the period of construction; the judgment in Challapalli Sugars Ltd. [1975] 98 ITR 167 (SC) showed that the Court was not in any way departing from legal principles because of any opinion expressed by the Institute of Chartered Accountants; the phrase actual cost was not defined in the Act, and therefore it had to be understood in commercial parlance; to find that out, the normal rule of acc....
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....he opinions expressed by larger benches of the Supreme Court, in preference to those expressed by smaller benches of the Supreme Court, should be followed. (Union of India v. K.S. Subramanian 1989 (3) SLR 713; O.Ramachandra Reddi v. Director, D.R.D.L 1993 (1) ALT 221 (DB)). When a decision rendered by a larger Bench of the Supreme Court is interpreted subsequently by a smaller Bench of the same Court, the lower Courts in the hierarchy have to follow the latter decision. (Sakinala Hari Nath 1993 (3) ALT 471 (F.B) = 1993 (6) SLR 1 (AP)). The law declared in Challapalli Sugars Ltd. [1975] 98 ITR 167 (SC), as explained in Tutirorin Alkali Chemicals and Fertilizers Ltd. (1997) 227 ITR 172 (SC), is that, in the absence of a provision in the Income-tax Act indicating the contrary, the rules of accountancy or the Accounting Standards framed by the Institute of Chartered Accountants of India can be adopted. The question whether the increased wages payable under an award passed on 11.07.1983, subsequent to the end of the previous year from 01.07.1982 to 30.06.1983, can be claimed as a deduction in the said previous year, must be examined in the light of the provisions of the Income-tax Act, ....
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.... year which, under Section 3(1) of the Income-tax Act, refers to a period of 12 months. An assessee that follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed. (Kedarnath Jute Mfg. Co. Ltd. (1971) 82 ITR 363 (SC)). Under the Income-tax Act, income charged to tax is the income that is received or is deemed to be received in the previous year relevant to the year for which assessment is made or on the income that accrues or arises, or is deemed to accrue or arise during such year. (Godhra Electricity Co. Ltd. (1997) 4 SCC 530). If an income accrues within a particular year, it is liable to be assessed in the succeeding year. (A. Gajapathy Naidu (1964) 7 SCR 767 : AIR 1964 SC 1653 : (1964) 53 ITR 114). The scheme of the Income-tax Act is that income-tax is assessed and paid in the next succeeding year upon the results of the year before. It is the income of the previous year which is brought to tax in the succeeding year, which is called the year of assessment. (C.I.T v. National Syndicate, Bombay53; Indian Iron & Steel Co. Ltd. ....
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....ndards nor the guidance note issued by the Institute of Chartered Accountants of India could be taken recourse to. The Division bench of this Court, in Pact Securities and Financial Services Ltd. (2015) 374 ITR 681 (T&AP), held that Section 145 of the Income Tax Act was substituted by Finance Act, 1995 with effect from April, 1st 1997; the assessment years, with which they were concerned, related to the period 1997-98 to 2000-2001; the Institute of Chartered Accountants of India had published a guidance note on accounting of leases in 1988, which was then revised in 1995; on April 1st 2001 the Institute of Chartered Accountants of India had published Accounting Standard No.19 in respect of leases; it was not in dispute that Accounting Standard No.19 was applicable, in respect of assets leased, during the accounting periods commencing on or after April, 1st 2001; the assessment years, under consideration in the appeals before them, were prior to April, 2001; the guidance note reflected the best practices adopted by Accountants in India; the Institute of Chartered Accountants of India was the authority to recommend Accounting Standards for ultimate prescription by the Central Governm....
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....d Section 211(3C) of the Companies Act, had held that the Accounting Standards framed by the Institute of Chartered Accountants of India would apply. Section 145 of the Income Tax Act, as substituted by the Finance Act, 1995, w.e.f. 1- 4-1997, related to the method of accounting. Under sub-section (1) thereof, Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Sub-section (2) enabled the Central Government to notify, in the Official Gazette from time to time, accounting standards to be followed by any class of assesses or in respect of any class of income. Under sub-section (3), where the Assessing Officer was not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1), or the accounting standards as notified under sub-section (2), had not been regularly followed by the assessee, the Assessing Officer could make an assessment in the manner provided in Section 144. Prior t....
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....s of the company were required to lay before the company (a) a balance sheet as at the end of the period specified in sub- section (3), and (b) a profit and loss account for that period. Section 210(3) stipulated that the profit and loss account shall relate (a) in the case of the first annual general meeting of the company, to the period beginning with the incorporation of the company and ending with a day which shall not precede the day of the meeting by more than nine months; and (b) in the case of any subsequent annual general meeting of the company, to the period beginning with the day immediately after the period for which the account was last submitted and ending with a day which shall not precede the day of the meeting by more than six months, or in cases where an extension of time has been granted for holding the meeting under the second proviso to subsection (1) of Section 166, by more than six months and the extension so granted. Section 210(4) stipulated that the period to which the accounts aforesaid related was referred to in the Companies Act as a "financial year"; and it may be less or more than a calendar year, but it should not exceed fifteen months. Under the pro....
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....and loss account and the balance sheet of the company did not comply with the accounting standards, such companies should disclose in its profit and loss account and balance-sheet, the following namely: (a) the deviation from the accounting standards; (b) the reasons for such deviation; and (c) the financial effect, if any, arising due to such deviation. Sub-section (3C) stipulated that, for the purpose of Section 211, the expression "accounting standards" meant the standards of accounting recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949, as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub-section (1) of Section 210-A(1) of the Companies Act. Under the proviso thereto, the standard of accounting, specified by the Institute of Chartered Accountants of India, shall be deemed to be the accounting standards until accounting standards are prescribed by the Central Government under sub-section (3C) of Section 211. In J.K. Industries Ltd. v. Union of India (2007) 13 SCC 673, the Supreme Court held that the scheme of the Compan....
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....374 ITR 681 (T&AP) which had placed heavy reliance on the aforesaid two provisions to hold that Accounting Standards should be followed, is misplaced. Even otherwise, the attention of the Division Bench of this Court, in Pact Securities and Financial Services Ltd. (2015) 374 ITR 681 (T&AP), was not drawn to the judgment of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. (2015) 374 ITR 681 (T&AP). In any event the question whether Accounting Standard-4 can be applied, even if it results in increasing the previous year beyond a period of 12 months, did not arise for consideration in Pact Securities and Financial Services Ltd. (2015) 374 ITR 681 (T&AP). Reliance placed on this judgment is, therefore, of no avail. In Nagri Mills Co. Ltd. (1958) 33 ITR 681, on which reliance is placed on behalf of the assessee, the Bombay High Court held that the question, as to the year in which a deduction is allowable, may be material when the rate of tax chargeable on the assessee in two different years is different; but in a case where, on the income of a company, tax is attracted at a uniform rate it would be of no consequence to the department whether the deduction ....
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....logy, but only by the plain words of a statute applicable to the facts and circumstances of his case. (J.K. Steel Ltd. v. Union of India AIR 1970 SC 1173 = (1969) 2 SCR 481; Inland Revenue Commissioners v. Duke of Westminister (1936) A.C. 1). The principle of all fiscal legislation is this: If the person sought to be taxed comes within the letter of the law he must be taxed however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. (Partington v. Attorney-General (1869) 4 H.L. 100; J.K. Steel Ltd. AIR 1970 SC 1173 = (1969) 2 SCR 481). In construing fiscal statutes, and in determining the liability of a subject to tax, one must have regard to the strict letter of the law and not merely to the spirit of the statute or the substance of the law. If the Revenue satisfies the Court that the case falls strictly within the provisions of the law, the subject can be taxed. If. on the other hand, the case is not covered within the four corners of the provis....
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....ords ought to be added and only the language used ought to be considered so as to ascertain the proper meaning and intent of the legislation. The Court is to ascribe natural and ordinary meaning to the words used by the legislature and the Court ought not, under any circumstances, to substitute its own impression and ideas in the place of the legislative intent as is available from a plain reading of the statutory provision. (M/s.Gouri Shankar Modern Rice Mill64; Orissa State Warehousing Corporation v. CIT (1999) 4 SCC 197). The provisions of fiscal statutes must be strictly construed and, if the assessee falls within the letter of the law, he must be taxed. His liability to pay tax cannot be determined relying on its possible consequences of whether or not it would make any difference if the deduction is claimed in one year or the other. The consequences of the liability being held to arise in a previous year, different from the previous year in which the liability actually arose, are many. It is wholly unnecessary for us to make a detailed analysis of such consequences as the Income-tax Act makes an assessee liable to tax on the income which accrued in his favour in the ....
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....the assessee became legally due, in respect of a percentile of the commission to be paid to the agent, on the value of the goods supplied during the previous year to its Sri Lankan agents; the value of the goods, supplied during the relevant previous years, was Rs. 2,84,234/-; the assessee became legally obligated to pay the agent commission of 1½% on the FOB value, and hence the said amount alone could be allowed as a deduction; the Tribunal's finding is that the agent became entitled to payment of commission, on the full value of the goods, as the order was secured during the previous year, and Clause (d) of the agreement speaks of commission on securing the order; the Tribunal failed to read all the sub-clauses of Clause 4 together, in fixing the point at which the legal liability arises; the question that the Tribunal ought to have posed, and answered, is whether the agent had acquired a legal right to sue the assessee, for payment of the entire commission, the moment the order was secured, and whether the plaintiff would succeed in law if the suit was based only on Clause 4(a), and clause 4(d) were to be ignored; and the answer would have been in the negative as, while ....
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....e Commercial Agencies will meet all incidental expenses for obtaining this contract. (d). The commission shall be paid to Messers. Globe Commercial Agencies or their nominees in Sri Lanks. (e). Consideration referred to above arises only on K.C.P. securing the order. Till then each party will bear their respective expenses. The question whether liability has arisen to the assessee, during the relevant previous year, must be determined on a reading of the clauses in the agreement as a whole, and not piece meal. While the assessee's agents had secured an order during the previous year, relevant to the assessment year 1984-85, supplies were effected in the subsequent previous years. The agreement entered into by the assessee with its two agents in Sri Lanka viz., Eastern Indian Company Limited and Global Commercial Agencies Limited must, therefore, be read as a whole to determine when the liability of the assessee, to pay commission to these two agents, arose. A plain reading of the relevant clauses in the agreement, entered into between the assessee and Global Commercial Agencies, shows that the agent was to be paid consideration of 1½% on the FOB value of th....
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....did not amount to export development; and, accordingly, confirmed the disallowance. In further Appeal, the Tribunal held that Section 35-B ceased to apply with respect to the expenditure incurred after 01.03.1983; it was, therefore, necessary to ascertain whether the expenditure was incurred before that date, and whether it fell within item (iv) of Section 35-B(1)(b) of the Income-tax Act; under the agreements, the assessee had maintained an agency in Sri Lanka for the purpose of representing it in developing the export market for its services; the expenditure, therefore, fell within the scope of item (iv); and the assessee had paid 5,00,000 U.S. Dollars, equivalent to Rs. 45,00,000/-, to its agent on 16.12.1982, with the permission of the Reserve Bank of India, before the Section was repealed on 01.03.1983. The claim of the assessee, for weighted deduction, was allowed. With regards the contention of the Revenue that appointment of an agent for a particular purpose could not be regarded as "maintaining an agency", within the meaning of item (iv) of Section 35-B(1)(b) of the Income-tax Act, the Tribunal opined that this question involved interpretation of the phrase "maintaining....
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....econdly, there is no claim by the assessee of having incurred any expenditure on an agency; thirdly, the commission paid is not in respect of any specified amount required to be spent by the agents in running their agency, but is in respect of commission paid to agents to secure a contract; and it is thus clear that the assessee has not made out any case for weighted deduction. With regards the judgment of the Supreme Court, in Velvet Carpet & Co. Ltd. v. CIT, Allahabad (2017) 395 ITR 515 on which reliance was placed on behalf of the respondent-assessee, Sri J.V.Prasad, Learned Senior Standing Counsel for Income-Tax, would submit that the said decision is based on its own facts, and has not considered the question that arises herein; that apart, the provision extracted in the judgment would show that it is slightly different in its wording i.e., "agent" is reflected, instead of "agency"; there is also no discussion regarding the nature of expenditure that is allowable, under the provisions, in the said judgment; subsection (2) of Section 35B of the Act also acts as a bar; and, as held by the Supreme Court in CIT v. Stepwell Industries Ltd. (1997) 7 SCC 655 = (1997) 228 ITR....
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....nd exclusively on - (i) advertisement or ..... (iv) maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities; (vii) travelling.... (ix) such other activities.... (Explanation 1) - In this section, "domestic company" shall have the meaning assigned to it in clause (2) of Section 80B. (Explanation 2) - For the removal of doubts, it is hereby declared that nothing in clause (b) shall be construed to include any expenditure which is in the nature of purchasing and manufacturing expenses ordinarily debatable to the trading or manufacturing account and not to the profit and loss account) ( (1A)****) (2) Where a deduction under this Section is claimed and allowed for any assessment year in respect of any expenditure referred to in sub-section (1), deduction shall not be allowed in respect of such expenditure under any other provision of this Act for the same or any other assessment year. While the commission actually paid to agents is required to be deducted as an expenditure in determining the income of the assessee for the previous y....
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....e must first examine what the word "maintain" means? The dictionary meaning of the word 'maintain' is to carry on, to keep up, to support. The word "maintenance" means to support, and it is only if the contractual terms require the assessee to incur expenditure to support its agent in Sri Lanka, can it then be said to have maintained an agency. As noted hereinabove, the requirement of the aforesaid provision is not only that the assessee should have maintained an agency, but also that "maintenance of an agency" must be for the promotion of sale of the assessee's goods outside India. The word 'promotion' is an act of promoting, encouraging, an effort to publicize and increase the sales of a particular product. It is only in cases where the contract entered into between the assessee and its agent requires the assessee to maintain an agency, and requires the agent to publicise the goods of the assessee for the purpose of increasing its sales, would the expenditure incurred, towards promotion of sale of the assessee's goods, be entitled for weighted deduction. Payment of 500,000 US dollars by the assessee to its agent is only the advance commission payable on the agent securing the ord....
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....he sale outside India of such goods, services or facilities; what was not in dispute was that the expenditure was in fact incurred; it was also incurred wholly and exclusively outside India as the payment was made to Mr. Jack Barouk a resident of Brussels; it is also not in dispute that this payment was made against some sales of carpets belonging to the assessee, made by the said Mr. Jack Barouk; the only dispute was whether he could be treated as "agent" of the assessee; a perusal of the judgment of the ITAT revealed that the ITAT had looked into the agreement that was entered into between the assessee and the aforesaid Mr. Jack Barouk, and found that this agreement was an agency agreement; the ITAT also took into consideration another supporting fact that, as per the legal requirement, the said agreement was approved by the Reserve Bank of India, and the Reserve Bank of India, in its approval, had treated this agreement to be an agency agreement; the High Court, while allowing the appeal of the Department and rejecting the claim of the assessee, had observed that, at no stage, the assessee had put up a case that it had maintained a branch or agency outside the country; this was ....
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....of facts. As noted hereinabove neither does the agreement, between the assessee and its Sri Lankan Agent, disclose fulfillment of the ingredients of Section 35-B(1)(b)(iv), nor was the payment of 500,00 U.S dollars, by the assessee to its agent, made for any expenditure incurred in the promotion of the sale outside India of the assessee's goods. In the present case, the assessee has not discharged the onus of establishing that the expenditure was wholly or exclusively incurred for the purposes mentioned in Section 35-B(1)(b)(iv) of the Act. The Tribunal fell in error in 84 1901 AC 495 holding otherwise. This question is answered in the negative, in favour of the Revenue, and against the assessee. QUESTION No.4: The assessee had claimed deduction of Rs. 15,45,932/- as the insurance premium payable for a policy to cover all risks in erection of the project in Sri Lanka. This claim of deduction was disallowed by the Income-tax Officer on the ground that the insurance premium had not been paid, and had been shown as outstanding in the accounts as on 30.06.1983. With respect to another policy, the assessee had claimed only the pro-rata amount, referable to the period of the ....
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....lments, starting from the inception; as the assessee had incurred the liability as per the policy, it got reimbursement from the Government of Srilanka; the liability had arisen even though premium was paid in instalments; and therefore, following the same accrual basis, the Assessee has been rightly allowed deduction. The assessee claimed deduction towards insurance policy premium of Rs. 15,45,932/-. The insurance was to cover all risks in the erection of the project in Sri Lanka. While the insurance cover started from 14.03.1983, and was extended upto 13.03.1985, the assessee did not pay the premium before the end of the previous year i.e by 30.06.1983; and the entire premium payable of Rs. 15,45,932/- was shown as an outstanding liability in the balance-sheet of the assessee as on 30.06.1983. The Insurance Corporation of Sri Lanka had also addressed a letter to the assessee on 30.06.1983 requesting it to pay the premium. While the assessing authority treated it as a mere provision, and not as a liability which had accrued during the previous year ending 30.06.1983, the assessee contended that, since the insurance cover started from 14.03.1983, and the policy was issued on ....
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....ip as between the parties to the agreement still subsists and there does not come into existence a new relationship as between the parties with all its necessary consequences. (Keshav Mills Ltd. 1953 SCR 950 : AIR 1953 SC 187 : (1953) 23 ITR 230). In a case of supply of goods, merely because the goods have been supplied and the price thereof has been debited to the purchaser, the rights and obligations of the vendor and purchaser inter-se are not in any manner affected. The vendor is bound to fulfil all his obligations under the contract, and continues to be liable for all the consequences of his default including rejection of his goods by the purchaser or a claim for damages for breach of warranty by him. The purchaser is equally entitled to reject the goods or to claim the damages as on breach of warranty by the vendor, and all these rights and obligations should be worked out inspite of the fact that the entries are made in the books of accounts by the vendor in accordance with the mercantile system of accounting adopted by him. The vendor cannot say that he is under no further obligation to the purchaser, and that the purchaser must pay the price of the goods debited to him ....
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.... insurance premium, in the previous year 01.07.1982 to 30.06.1983 (as is evident from the letter of the Insurance Corporation of Sri Lanka dated 30.06.1983), the liability towards the insurance policy did not arise in the previous year 01.07.1982 to 30.06.1983, since the basic condition, relating to actual payment of insurance premium, had not been fulfilled by the assessee by then. This question is also answered in the negative, in favour of the Revenue and against the assessee. QUESTION No.5: The assessee entered into an agreement, with M/s.Annapoorna Agencies, on 18.08.1981 for procuring purchase orders. Clause (1) of the agreement provided that the agent would be allowed 5% commission on the total value of the order. Clause (5) stipulated that payment of commission shall be made pro-rata to the payments received by the assessee. On the ground that the total work order procured was Rs. 4,54,72,289/-, the commission payable was computed at 5% thereof i.e Rs. 22,73,614/-; and, as the assessee had received payment of only Rs. 95,47,220/- on which the commission payable was Rs. 4,77,361/-, the balance commission payable, to the extent of Rs. 17.96,253/-, was debited to the acc....
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....ue of the order". Clause (5) of the agreement stipulated that "this payment of commission shall be made pro-rata to the payments received by the assessee". The assessee entered into an agency agreement with M/s. Annapurna Agencies, and Clause(1) of the said agreement stipulated that the agent (Annapurna Agencies) would be allowed 5% commission on the total value of the order. Clause (5) of the said agreement stipulated that payment of commission shall be made pro-rata for the payments received by the assessee. As against the total order procured by M/s. Annapurna Agencies for Rs. 4,54,72,289, the assessee received payment of only Rs. 95,45,220/- during the previous year 01.07.1982 to 30.06.1983. As against its claim for deduction towards commission payable at 5% on the entire value of the order i.e., R.s.22,73,614/-, the assessing authority had allowed deduction of only 5% of the amount received by the assessee i.e for Rs. 4,77,361/-, and disallowed the balance Rs. 17,96,253/-, on the ground that the liability to pay commission at 5% arose only on receipt of payment by the assessee; and, since the assessee did not receive payment, corresponding to the commission of Rs. 17,96,253....