TMI Blog2006 (7) TMI 569X X X X Extracts X X X X X X X X Extracts X X X X ..... nnel. The assessee entered into an agreement on May 31, 1994, with Star Advertising Sales B. V. of Netherlands, holding exclusive rights in India from Satellite Television Asian Region Ltd., of Hongkong for television advertising on various television channels under which, the assessee was appointed as an agency in India to market television advertising for the channels. This agency arrangement was approved by the Reserve Bank of India (RBI) on July 22, 1994, and subsequently renewed from time to time. (pages 1 to 5 of the paper book). Under clause 3 of the agreement, the assessee was required to solicit the advertisements in India for the channels at such rates as may be fixed from time to time. After having solicited the advertisement, the assessee was further required by clause 6 of the agreement to forward each client` s requisition for telecast of its advertisements to its principal, and the principal reserved the right to accept or reject the aforesaid requisition. Under clause 7 of the agreement, the principal was required to send the invoice for advertisements telecast with instructions to the clients to make the payment thereof to the assessee. Further, the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what is due, immediately when it becomes legally due and before it is actually received. Accordingly, the method of accounting continues to be mercantile, since the commission as per the agency agreement is legally due only upon payments made by advertisers." Apart from the above note, the auditor of the assessee-company also appended note 13 to the financial statements as under : "13. Revenues.-In the prior year, the company recognised commission income on the sale of time spots in the period during which time spots were aired. During the year, the company has amended this policy to recognise commission income based on the advertisement collections made during the year to appropriately reflect the terms of the agency agreement with SAS BV. Had the company followed the accounting policy used in the prior year, commission income for the year ended March 31, 1997, would have been higher by Rs. 8,10,11,000 and the net loss for the year would have been net profit of Rs. 52,32,000." The assessee was required to substantiate its claim regarding the change of policy. The explanation of the assessee before the Assessing Officer was that the commission accrued to the assessee und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations : "(a) At the time of only part payment being made by the advertiser to the appellant or to SAS BV, it cannot be predicted that the advertiser would not pay the remaining amount later. Accordingly, it cannot be inferred that the commission did not accrue to the appellant on the entire invoiced amount, part of which was not paid later by the advertiser. (b) The advertiser can pay directly to SAS BV after retaining the commission of the appellant which is paid to the appellant separately. The part payment of the advertising charges to SAS BV, falling in one accounting period and remaining part falling in another accounting period would not affect the accrual of commission to the appellant and has to account for entire commission income in the year of accrual. (c) When the advertiser pays only partly direct to SAS BV without retaining the commission of the appellant, in one accounting period and remaining part is paid in another accounting period the claim of the appellant is not affected and the commission income has to be accounted for the year of accrual. (d) No evidence is produced that the part payment not made by the advertisers to SAS BV has been forgone by SAS B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in appeal before the Tribunal for all the years. Learned counsel for the assessee, Mr. Kaka, at the outset, pointed out that the assessee had been following mercantile method of accounting and there has been no change in such method of accounting in the year under consideration. The dispute, however, has arisen because of wrong interpretation of the agreement in ascertaining the point of time of accrual of income. It was submitted by him that in earlier years, accrual of income was taken when the advertisements solicited by it were telecast by its principal. According to him, on correct interpretation of terms of agreement, it was found that time of accrual of commission income was the date when money was realised from its clients. Hence, the assessee started declaring income on the basis that commission income accrued on realization of money from its clients. Accordingly, it has been pleaded that correct claim of the assessee cannot be rejected merely on the ground that in earlier years the assessee declared the income on the basis that commission income accrued on the date of telecast of the advertisement. Proceeding further, on the merits, it was contended by him that as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidering the special features of the business and other complexities, the Board instructed the Revenue officers to assess the income of such telecasting companies at the rate of 10 percent of the amounts remitted abroad. According to Mr. Kaka, no income accrued to the foreign companies unless the amount was remitted. In this background, it was pleaded that if the income did not accrue to the principal on the date of telecasting, how it could accrue to the assessee. Thus, the contention of Mr. Kaka is that income to the assessee cannot be said to accrue unless the amount payable to foreign companies is received by the assessee from the Indian clients inasmuch as right to receive accrued on the dates when right to retain was acquired. So, the aspect of payment of money is most crucial for determining the point of accrual. According to him, the right to receive the commission remained inchoate till the assessee received the money from its clients since neither it could retain its commission nor could it remit the same to its principal. To substantiate the above submission, he relied on the judgment of the Bombay High Court in the case of Pfizer Corporation v. CIT [2003] 259 ITR 391 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly no rebate was allowable to the assessee. The assessee remained unsuccessful till the stage of the Tribunal and the matter reached in High Court. The High Court held that profits in such cases, accrued when property in goods was transferred from seller to the buyer. On facts, it was held that profits accrued when the payment was made by the buyers to the broker, i.e., at Kodarma. Consequently, the assessee was not entitled to rebate. This judgment was confirmed by the hon ble Supreme Court. On the basis of this authority, Mr. Kaka has pleaded that income accrues on the date of payment even when the assessee is maintaining mercantile system of accounting. Lastly, it was argued that in such cases, theory of real income would apply. It was submitted by him that the assessee was not even able to recover the various amounts from its clients due to various disputes and there was no point for offering income in one year and claiming deduction for bad debt in the next year. Therefore, it would be appropriate, in such cases, to apply the real income theory as enunciated by the Supreme Court in various cases. Reliance was placed on the latest judgments of the apex court in the case of G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) which provides payment of dividend rather than dividend declared or distributed. Thus, it was held that such income could be taxed on actual payment to non-resident. Since actual payment was the basis for taxing the same, it was held by the court that right to receive dividend accrued in the year in which the Reserve Bank of India approval was granted. Accordingly, it was pleaded that order of the learned Commissioner of Income-tax (Appeals) be upheld. Rival submissions have been considered carefully in the light of materials placed before us and the case law referred to. Much has been said on behalf of the Revenue regarding change in the method of accounting from mercantile to cash system. Such contention of the Revenue is devoid of force and untenable in view of the clear admission of the assessee that method of accounting continues to be mercantile. We have already extracted note 2 appended to the computation of income in paragraph 5 of our order wherein the assessee has admitted that method of accounting continues to be mercantile. Even learned counsel for the assessee has made the statement before us that there is no change in the method of accounting and it continues to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1968] 69 ITR 675 at page 681. The agency commission is contractual receipt. Under the contract of agency, unless different intention appears, the assessee acquires a right to receive the commission when the services are performed as per the agreement. For example, selling agent acquires a right to receive the commission as soon as the sale is effected by him. However, the parties may agree to the effect that right to receive commission would accrue on the happening of an event. In such case, the right to receive commission would accrue on the date when such event happens. Therefore, the accrual of commission income would depend upon the terms of agreement in each case. Let us now explain the above view in the light of case law. In the case of E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27, the assessee was the managing agent of a company called " United Mills" and was entitled to receive a percentage of annual profits of that company as its remuneration. The accounting period of that company was the calendar year. During the year 1943, the assessee assigned their office as managing agent and all their rights and benefits under the managing agency agreement to M/s. Aggrawa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that no part of the share of profits which accrued to Ashokbhai on December 31, 1955, was liable to be included in the income of the assessee, because on the date of accrual the assessee had no interest in those profits, and recorded a negative answer to the question referred. On appeal to the hon ble Supreme Court, it was contended by the Revenue as under (page 47 of 56 ITR) : " Counsel for the Commissioner submitted that the judgment in E. D. Sassoon and Co. Ltd.` s case [1954] 26 ITR 27 proceeded upon the special character of a managing agency agreement and did not purport to lay down a general rule that accrual of income depends on quantification, or that right to payment of an ascertainable amount does not arise till accounts are made. Counsel also submitted that in sale transactions of a trading venture, profits accrue to the trader from transaction to transaction and are embedded in each transaction carried on by the trader, and the charge imposed by section 4(1)(a) is not deferred till settlement of accounts. On that premise, counsel said, that profits dormant or embedded in the transactions carried on by Messrs Amrit Chemicals accrued from transaction to transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happens." (emphasis1 supplied). We would like to refer one more judgment of the apex court in the case of J. P. Shrivastava and Sons (Bhopal) P. Ltd. v. CIT [1965] 57 ITR 624. In that case, the assessee-company acted as managing agent of New Bhopal Textile Ltd. Clause 2(c) of the agreement provided (page 626 of 57 ITR) : " such commission shall become due and payable to the managing agents every year immediately on the passing of the audited accounts of the company by the shareholders at a general meeting at each and every year during the continuance of these presents." The accounting period of both companies was the financial year. The financial results for the accounting period ending March 31, 1952, were passed by the shareholders at the meeting held on March 28, 1953. The question arose whether commission of Rs. 41,842 due to the assessee for the accounting period 1951-52 was assessable as income in the assessment year 1952-53 or 1953-54. The hon ble Supreme Court held that the assessee did not have any right to receive the commission till the general meeting of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee from its clients, the right to retain the commission would accrue immediately irrespective of the remittance to the non-resident. The payments by the clients are a condition precedent for accrual of income which has been placed in the agreement to ensure the recovery of the amount. This condition was deliberately provided in the agreement because the principal of the assessee was not only interested in getting the advertisements but also in recovering the advertisement charges. In commercial transactions, the recovery of the money is the major consideration. The principal of the assessee did not have any infrastructure in India and, therefore, depended on its agent. Therefore, to ensure the recovery of the advertisement charges, the implied condition was made in the agreement to the effect that the assessee would be entitled to retain its commission at the rate of 15 percent of the net invoiced amount. It is because of this condition that the assessee is required to put its best effort for recovery of the invoiced amount for its clients. Real effect of clause 8 is that the assessee would never get any commission where the invoiced amount is not paid by the client. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since payment was a condition precedent for transfer of property in goods. (See page 166 of the report). So, this judgment is an authority for the proposition that profits accrue at the place where property in goods passes. Merely because in that case payment coincided with the date of transfer of property in goods, it cannot be ruled that profits accrue on the date of payment to non-resident. There may be cases where property of goods may pass even prior to the date of payment and, therefore, in such cases profits would accrue at a place where ownership passed and not at a place where payment was made. This view can be explained by referring to the judgment of the apex court in the case of CIT v. Mewar Textile Mills Ltd. [1973] 91 ITR 542, where the assessee sent the goods by rail from Bhilwara but the railway receipt was taken in the name of buyer who were dealer in British India and such railway receipt was sent by post. However, the buyer made the payment to the bank in British India who was banker of the assessee. On these facts, it was held that property in goods passed to the purchaser in Bhilwara and income did not accrue in India. The combined reading of the above two jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is much prior to the services rendered by the assessee. Clauses (iv) and (v) of the approval letter provides that (i) remittance shall not be made to the principal until the advertisement is telecast, (ii) at the time of seeking remittance, the assessee shall submit invoices obtained for Star TV indicating the dates on which advertisements were permitted and net amount of advertisement charges. In our considered opinion, these clauses do not come in the way of the assessee` s right to retain the commission from the payments received from the clients. The conditions prescribed only with reference to remittance to the non-resident. Therefore, the assessee` s right to commission is not dependent on the Reserve Bank of India` s condition and consequently, the judgment of the Bombay High Court in the case of Pfizer Corporation v. CIT [2003] 259 ITR 391 is distinguishable on facts though the ratio of the judgment is relevant on the point of law inasmuch as it speaks of the legal position that in case of contingency, the accrual of income would depend on the happening of the contingency. The judgment of the apex court in the case of Morvi Industries Ltd. v. CIT [1971] 82 ITR 835, heavi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l before the learned Commissioner of Income-tax (Appeals), before whom, it was contended that payments were made within the grace period in respect of the assessment year 1998-99 and, therefore, no disallowance could have been made in view of the decision of the Tribunal in the case of Hansur Plywood Works Ltd. v. Dy. CIT [1995] 54 ITD 394 (Bang) and in the case of Dy. CIT v. Asher Textiles Ltd. [2002] 73 TTJ 727 (Mad). The learned Commissioner of Income-tax (Appeals) noted that the assessee himself made disallowance of its own for the sum of Rs. 58,11,980 in respect of provident fund and Rs. 10,19,118 for pension fund and, therefore, the Assessing Officer was justified in retaining the disallowance. However, he allowed relief for Rs. 7,68,747 since it amounted to double addition. Consequently, disallowance for the assessment year 1999-2000 was upheld. For the similar reasons, the disallowance made for the assessment year 1999-2000 was also upheld. Aggrieved by the same, the assessee as well as the Revenue are in appeal before the Tribunal for both the years. For the similar reasons, the disallowance was made for the assessment year 1999-2000 which was also upheld by the learned Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that the payments made within the grace period is an allowable deduction in view of the decision in the case of Hansur Plywood Works Ltd. v. Dy. CIT [1995] 54 ITD 394 (Bang). Recently, the Delhi Bench of the Tribunal in the case of Addl. CIT v. Vestas RRB India Ltd. [2005] 275 ITR (AT) 81, has held that amendment in section 43B is curative and, therefore, retrospective. It has been further held that disallowance can be made in view of the retrospective amendment where the payment has been made before the due date of filing of the return. Apart from this, the Delhi Bench of the Tribunal in the case of Gallium Equipment P. Ltd. v. Dy. Commissioner [2002] 81 ITD 358 has held that the provisions of section 43B are not applicable in respect of employees contribution to the provident fund since such contribution has to be treated as income within the meaning of the definition clause, i.e., 2(24)(x) and, consequently, the deduction has to be allowed under section 36(1)(va) which provides deduction where the payment has been made within the due date as prescribed under the relevant Act. These judgments can be applied only after verification of the necessary facts and the date of paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of Income-tax (Appeals), before whom, it was contended that advertisements were inextricably linked with the business activities carried on by it. It was pleaded that expenses were incurred to promote the programme aired on the channels which results in creation of greater demand for the programmes and channels which in turn ensures that the assessee has buyer willing to purchase successful programmes. Further publicity facilitates the soliciting and marketing of advertising easier and, therefore, has direct impact on the assessee` s revenue. It was also contended that commercial expediency should be judged from the point of view of businessman and not the taxing department. Reliance was placed on various judgments in CIT v. Panipat Woollen and General Mills Co. Ltd. [1976] 103 ITR 66 (SC) ; CIT v. Sales Magnesite P. Ltd. [1995] 214 ITR 1 (Bom) ; CIT v. Chandulal Keshavlal and Co. [1960] 38 ITR 601 (SC) and Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52 (SC). The learned Commissioner of Income-tax (Appeals) noted that the assessee collected the subscription income of its own and not on behalf of Star India P. Ltd. Therefore, advertisement expenses fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The only relevant factor is whether incurring of expenditure was for the purpose of the assessee` s business. The assessee was carrying on its business activity exclusively for Star TV and, therefore, survival of its business depends on the success of programmes transmitted by Star TV. The assessee was required to solicit the advertisements for Star TV channel. No person would give advertisement unless he is sure of large viewership of programmes on Star TV. Therefore, if the assessee incurs expenditure on advertisement with a view to increase the viewership of Star TV, in our opinion, such expenditure would be in the interest of the assessee` s business though it may also benefit its principal. Accordingly, no disallowance was warranted in law. The order of the learned Commissioner of Income-tax (Appeals) is, therefore, modified and disallowance sustained by him is hereby deleted. The next issue arising from cross-appeals pertaining to the assessment year 1998-99 relates to disallowance of loss on account of bad debts. Briefly stated the facts are, that the assessee claimed deduction of Rs. 1,08,15,000 by debiting the profit and loss account under the head " bad debts" . The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. v. CIT [1992] 197 ITR 528 (Ker) and CIT v. Inden Biselers [1990] 181 ITR 69 (Mad). In respect of the sum of Rs. 25,00,000, it was submitted before the learned Commissioner of Income tax (Appeals) that this amount actually represented the refundable security deposit given for acquiring premises on leave and licence basis for the purpose of its business and, therefore, the claim was allowable as deduction under section 37. The learned Commissioner of Income-tax (Appeals) found that the sum of Rs. 15,06,400 related to current year in respect of sponsorship of programmes and there was nothing to show that the debt had become bad. According to him, each and every debt could not be allowed as deduction unless it was shown that the debt was bad. Accordingly, he confirmed the disallowance of Rs. 15,06,400 out of the sum of Rs. 49,29,736, which was found to be relatable to sponsorship income. Rest of the amount aggregating to Rs. 34,23,363 was allowed as deduction. Regarding the sum of Rs. 3,85,489 found pertaining to advance given to production companies for supply of software programme, the learned Commissioner of Income-tax (Appeals) observed that this amount was never disclosed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was not allowable since the assessee was not the legal owner of the car. On appeal, it was contended that depreciation was allowable in view of the Delhi High Court judgment in the case of Addl. CIT v. General Industries Corporation [1985] 155 ITR 430. Reliance was also placed on Circular No. 9 dated March 23, 1943. The learned Commissioner of Income-tax (Appeals) examined the hire purchase agreement. After examination of the agreement, it was observed that ownership remained with the party who gave the asset on hire purchase till the last instalment was paid and the assessee exercises the option to purchase the vehicle. Thereafter, it was observed by him that the assessee was entitled to claim depreciation on such part of the cost which is included in the instalment payment. The remaining amount paid could be claimed as hire charges or interest. It was further observed that the assessee had not furnished complete details about the element of cost embedded in the hire purchase instalments. However, he allowed the interest element of Rs. 97,796 as deduction. The disallowance in respect of depreciation was confirmed. Aggrieved by the same, the assessee is in appeal before the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Accordingly, this ground is admitted. On the merits, the matter is restored to the file of the Assessing Officer to consider the claim of the assessee after verification of the material which may be placed before him for consideration. In the result, the appeal of the assessee for the assessment year 1997-98 is allowed while the appeals of the assessee for the assessment years 199899 and 1999-2000 are partly allowed. On the other hand, the appeal of the Revenue for the assessment year 1999-2000 is dismissed and appeal for the assessment year 1998-99 is partly allowed. V. K. Gupta (Accountant Member).-I have gone through the proposed order of the respected Judicial Member and have also discussed the issue with him. I am in full agreement with his views on all issues except two issues ; one the issue relating to the accrual of commission earned by the assessee in terms of agency agreement with Satellite Television Asian Region Advertising Sales BV ; and the common issue relating to disallowance of advertisement expenses incurred by the assessee at Rs. 90,32,000 and Rs. 93,85,000 for the assessment years 1998-99 and 1999-2000 respectively. It is with this considerable regret th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n May 31, 1994 (hereinafter referred to as " agreement" ), with Satellite Television Asian Region Advertising Sales, Netherlands (hereinafter referred to as " principal" ), a non-resident company, whereby the principal appointed the assessee as non-exclusive independent agent in India to sell television advertising on various television channels of Star TV. (iii) The principal, a non-resident, was holding exclusive rights in India from Satellite Television Asian Region Ltd., Hongkong (hereinafter referred to as the " owner" ) for television advertising on Star TV channels. Thus, the principal was working for the owner and it is in pursuance of this that the principal appointed the assessee as an agent in India to sell television advertising for the various television channels of Star TV. (iv) It is not in dispute that all the aforesaid entities are inter-linked and interconnected with each other either directly or indirectly. (v) In earlier years, the assessee, based upon the same agreement dated May 31, 1994, had treated the advertising commission as accrued at the time when time spots were aired. The aforesaid method of accounting was consistently followed by the assessee eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from commission accrued only upon payment of net invoiced amount by the clients, the further question that arises for consideration is whether the expenditure directly attributable to such commission should be claimed and allowed as an expenditure only in the period in which such commission is recognised as revenue following the well accepted accounting principle of matching of costs against revenue and concept of taxation of real income only ? Admittedly, the assessee, only on the basis of clause 8 of the agreement, has claimed that the commission income accrued when the amounts were paid by the clients. The Revenue, on the other hand, has on the basis of the entire agreement including the same clause 8 thereof has held that income from commission accrued to the assessee at the time of telecast advertisements. It is also a settled judicial principle that wherever the accrual of income or liability to tax flows from an agreement in writing, the entire agreement, and not its particular clauses by part, should be read as a whole so as to ascertain its true intention. It is, therefore, necessary to reproduce the following provisions of the agreement hereunder in the activity- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee unequivocally accepted such appointment. Thus, the appointment of the assessee was for the limited purpose of selling the television advertising for the said channels and for no other purpose. Clause 3 Rate " The agent shall solicit the advertisements in India for the said channels at such rates as the company may fix from time to time. Clause 12 Procedure for soliciting advertisements (a) The agent shall strictly follow the company` s procedures, and standard terms and conditions, and its instructions issued from time to time for soliciting advertisements from the clients in India. (b) The agent shall not accept any requisition from the clients unless they have assented to the terms and conditions prescribed by the company from time to time. Clause 6 Client requisition After having solicited the advertisements as above, the agent shall forward, by facsimile or telex, each client` s requisition for telecast of its advertisements to the company and the company reserves the right to accept or reject the aforesaid requisition at its sole discretion." From the combined reading of these clauses, it is further demonstrated that the assessee is required only to solicit the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Officer was intimated on August 11, 1953, that the share of the profit of the assessee in the partnership was to the extent of Rs. 70,895 and should be included in its assessment. After receipt of the intimation the Income-tax Officer rectified the original assessment made on February 29, 1952, and included the said amount of Rs. 70,895. In our opinion, there is no warrant for the argument put forward on behalf of the respondent. It is conceded in this case that the annual general meeting of the assessee was held on May 17, 1951, after the close of the accounting year of the Indian Steel Syndicate. It is true that the actual profits of the assessee from its partnership business were ascertained after the close of the accounting period, i.e., March 31, 1951. It is, however, well-established that the income may accrue to an assessee without actual receipt of the same and if the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on, on its being ascertained. The legal position is that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happens. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds. The House of Lords held that on the true construction of the agreements, the commissions in question were earned by the assessee in the year in which the policies were underwritten, and must be brought into account accordingly and confirmed the decision of the Court of Appeal. At page 96 of the report Lord Wright observed : ` I agree with the Court of Appeal in thinking that the necessary conclusion from that must be that the right to the commission is treated as a vested right which has accrued at the time when the risk was underwritten. It has then been earned, though the profits resulting from the insurance cannot be then ascertained and, in practice, are not ascertained until the end of two years beyond the date of underwriting. The right is vested, though its valuation is postponedand is not merely postponed but depends on all the contingencies which are inevitable in any insurance risk, losses which may or may not happen, returns of premium, premiums to be arranged for additional risks, reinsurance, and the whole catalogue of uncertain future factors. All these have to be brought into account according to ordinary commercial practice and understanding. But the delays an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of solicited advertisement by the principal. However, the assessee, by its own conduct in past, accrued commission on the sale of times spots during the period in which such times spots were aired. This practice of recognition of commission income was also accepted by the Department. In this situation, if I go with my views it may involve the recomputation of income of the assessee for past and subsequent years and other complexities may also arise in the process. Further, the principle of consistency also demands continuity of accounting policy from one accounting period to another accounting period and this principle of consistency has also been statutorily recognised as per Explanation 6(c) of the Accounting Standard notified by the Central Government under section 145(2) of the Act. Thus, after having held that commission accrued, both in law and on facts, to the assessee when the solicited advertisements were accepted by the principal, I would still prefer not to disturb the accounting policy under which commission income was recognised in the period in which the advertisement solicited by the assessee were telecast and find it more appropriate to hold that the assessee sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to realise the amount from the clients. Clause 13 Accounts " (a) The agent shall maintain an account of the advertisements bookings made by it and shall furnish to the company a weekly statement of such accounts. (b) If any dispute arises regarding the statement of accounts, the same will be scrutinised by the accountants appointed by the company and their decision shall be final and binding on the agent." As per this clause, the assessee is required only to maintain an account of advertisement bookings made by it and to furnish the same on a weekly basis to the principal. There is no provision in the agreement whereby the assessee is required to maintain the data of invoices raised by the principal, or any other information pertaining to realisation of money from the clients. Clause 14 Client list " The agent shall maintain a list of actual and potential clients, with particulars, and supply a copy of the same to the company upon request." As per this clause, the assessee is required to maintain a list of actual and potential clients with particulars and supply a copy of the same to the principal upon request, which again shows that the assessee` s role is essential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p possession of" . Thus, this word employed in this clause, clearly depicts the intention of the parties in the sense that the assessee can retain, i.e., keep or continue to hold or possess what is already due to it or for which it has already acquired legal entitlement, because one can retain only what is already possessed. The word " retain" is wholly inappropriate for the purpose of confirming a fresh obligation/duty rather it contemplates a continuation of an existing right or entitlement. The right to commission has already been acquired by the assessee at the point of rendering of his services of soliciting advertisements and such entitlement for commission is converted into money at the stage of payment of the net invoiced amount by the clients. The use of word " retain" is not inadvertent, it has been deliberately used so as to indicate the intention of the parties that the commission had accrued earlier to the payment of the net invoiced amount by the clients as evidenced by the scope of responsibilities of the assessee in the preamble and other clauses of the agreement. In a nutshell, clause 8 prescribes only for mode of distribution of money between the assessee and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntative in India (the territory) to solicit television advertising for the said channels and collect and remit advertisement charges. And whereas Star and representatives are desirous of recording the terms and conditions on which representative shall work for Star. Now therefore, this agreement witnesses, and it is hereby agreed by and between the parties hereto as follows : A. Appointment Representative is hereby appointed as the non-exclusive independent representative in the territory to solicit television advertising for the said channels and to collect and remit advertisement charges to Star and representative unequivocally agrees such appointment. Representative agrees that it is authorised only to solicit television advertisements in the territory and that any other solicitations (including those that encompass the territory but which are deemed to be regional or global) are reserved for Star and its assignees. B. Procedures 1. Star will make available for soliciting by representative, advertising time in the Star service programme. Star may from time to time change at its decision, the commercial format of each programme included in the Star service and the amount of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by Star for advertisement solicited by the representative during the term of this agreement. 2. Expenses : All expenses such as salaries, rent and travel within the territory involved to the solicitation of advertising by representative for Star shall be paid for by the representative and not reimbursed by Star. 3. Identification of commissionable transactions : Advertising orders on which representative shall be eligible to a commission shall be those solicited by representative in the territory even though obtained in collaboration with Star` s personnel or its promotional activities. For the avoidance of doubt, no commission shall be payable on orders derived from multinational entities in which the ultimate decision for releasing the advertising order was made outside of India. No commission will be paid to representative on any transaction which Star determines to have been initiated and communicated by anyone other than representative. 4. No commission shall be due to representative against amounts not received. Representative will use its best efforts to ensure the receipt of unpaid amounts by Star. F. Other duties 1. Representative` s duties include : (a) Esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue from clients has been specifically included in the scope of work and other duties in this regard like maintenance of records regarding amount due from clients, periodical reporting of the same to the owner have also been included in the new agreement. The invoices are being sent to the clients through the assessee as against the present practice of sending invoices directly by the principal to clients. In the new agreement, the assessee has been assigned with the duties to conduct credit investigations of advertisers, to put in best efforts for the realisation of all sums due from the clients and prepare various reports in this regard and submit the same to the principal, while in the existing agreement no such responsibilities have been assigned to the assessee. Therefore, once no such responsibilities existed in the agreement dated March 31, 1994, it can be safely stated the assessee was not liable for the realisation of the amount from the clients and in substance the only role assigned to the assessee was to receive money from the clients as per instructions of the principal and remit the money to the principal which are nothing more than incidental/ancillary tasks. Most im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and for a moment if the payment by the clients after the telecast is assumed as a contingency even then the ratio of the above decision squarely demolishes, this contention of the assessee for deferring the point of time for accrual of commission. In view of the above discussion, the assessee` s contention to defer the point of recognition of revenue in respect of income from commission on the plea of realisation of payment being a contingency is devoid of basis, both legal and commercial. (ii) It was also contended by the assessee that the change in accounting policy relating to accrual of income from commission was necessitated during the year under consideration due to non-realisation of commission from its principal in some cases and such unrealised amount had to be claimed as bad debts. Thus, recognition of income from commission during the period of telecast resulted into taxation of unreal income. Although the concept of consistency demands continuation of the same accounting policy from one period to another accounting period, but accounting policy can be changed if the circumstances so require. The change in the accounting policy is an exceptional situation which must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipal to make the payment and if such persuasion does not bear the fruit, then, the assessee can take legal action and even then if the amount is not realised, then the assessee would be entitled to claim it as bad debt/business loss. But, if the assessee does not take any legal action for the recovery of the commission then, in such cases, it would merely amount to relinquishment of income after accrual and in such situation the unrealised commission would neither be a business loss nor bad debt but it would merely be a loss of capital. It is also a settled proposition that after accrual, non-charging of tax on the same, because of certain conduct based on the ipse dixit of a particular assessee, cannot be accepted and once the accrual takes place, on the basis of conduct of parties subsequent to the year of closing, an income which has accrued cannot be made " no income" . (iv) The assessee, in order to justify the change in the accounting policy on the ground of correct interpretation of clause 8 of the agreement, also contended that due to such change the assessee would be liable to pay more tax in subsequent years because of change in tax rates in those years, but that by it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leted their performance, viz., the completion of the definite period of service of a year which was a condition precedent to their being entitled to receive the remuneration or commission stipulated thereunder no debt payable by the companies was created in their favour and they had no right to receive any payment from the companies. No remuneration or commission could, therefore, be said to have accrued to them at the dates of the respective transfers." From the perusal of the facts of the case, it emerges that there were twin conditions required to be fulfilled, i.e., performance as managing agent and working as managing agent for a definite period. However, the managing agency contract was not completed for the agreed duration of the contract and, therefore, the hon ble court came to the conclusion that no right to receive the payment in the form enforceable debt was created. However, in the present case, the right to receive the income is not dependent upon the completion of contract for a definite period and if the contract is terminated as per the provisions of the agreement, whatever services are rendered by the assessee till then, it would be eligible to receive the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he mirage of " real income" which has eluded the " accountant" , " the taxpayer" and tax gatherers. The term " accrual" is neither a term nor a code. It is only a concept. This concept is not static but is dynamic. Hence, it is in the constant state of evolution and development as new circumstances and situations arise. This concept must be consistent with other fundamental accounting principles implicit in the entire scheme of company accounts and taxation of income under the Income-tax Act. It is a concept which must be synthesised with other valid concepts, principles and practices and more particularly with the statutory frame work for computation of income under sections 4 and 5 read with section 145/145A of the Income-tax Act. What is required is not a dogma but a practical view based on the commercial facts, circumstances and business practices. By its very nature, it develops and evolves and this is possible only if a fixed view is not taken. Thus, the concept of accrual is of paramount importance because it is the general perception that there is a difference between an accounting thought on accrual and judicial thought on accrual. Generally, as per judicial decisions inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the accounting policies, which has no material effect on the financial statements for the previous year but which is reasonably expected to have a material effect in any year subsequent to the previous year, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted. (4) Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. For this purpose, the major/considerations governing the selection and application of accounting policies are the following, namely (i) Prudence.-Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainly and represents only a best estimate in the light of available information. (ii) Substance over form.-The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the lega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come. In pursuance of such powers, the Central Government notified Accounting Standard I relating to disclosure of accounting policies and Accounting Standard II relating to disclosure of prior period and extraordinary items and changes in accounting policies. The said notification came into force with effect from April 1, 1996, and hence these Accounting Standards are applicable for the assessment year 1997-98 and onwards. Section 4 is the charging section. Section 5 of the Income-tax Act, 1961, effectually mandate of section 4 of the Act. Section 145 lays down the method of computation of income and thus, it serves to the purpose of both sections 4 and 5. Section 5 and section 145 of the Income-tax Act are complimentary to each other and provide for the taxation of correct income. The changes in section 145(1) of the Act with effect from April 1, 1997, and Accounting Standards issued under the provisions of section 145(2) of the Act effective from the same date have been made to bridge the gap between the accounting thought on " accrual" and the judicial thought on " accrual" and this has been achieved by paragraph 6(b) of Accounting Standard 1 notified by the Government which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment. Thus, the commission income, in my humble view, ought to have been recognised by the assessee and also taxed by the Department at the time when it was earned by the assessee, i.e., when the advertisements solicited by the assessee were accepted by the principal. On the basis of the aforesaid discussion also, it can be safely concluded that once the services of soliciting advertisements are rendered, commission income thereon has been earned by the assessee in accordance with the provisions of section 145(2), the same has also " accrued" to the assessee. In my humble understanding, the decision given by the hon ble Supreme Court in the case of E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27, which was rendered under the specific settings of that case although applied subsequently in general is applicable only where earning of income itself cannot be said to have occurred and not otherwise and more so particularly in view of the statutory changes brought in section 145 of the Act and notification of Accounting Standards thereunder which have resulted in the convergence of accounting thought on accrual, taxman` s thought on " accrual" and judicial thought on accrual. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a direct nexus between income recognition and expense recognition and which is in total conformity with the concept of taxation of real income. Therefore, an attempt must be made to identify the costs with revenues and vice versa. If the income is recognised at the time of receipt of payment from the clients and all expenses are claimed as period costs then such accounting methodology is essentially hybrid system of accounting which is not permissible both under the provisions of the Companies Act, 1956, and the Income-tax Act, 1961. Admittedly, it is not the case of the assessee that the concept of matching of cost with the revenue is not applicable to its case. The matching concept is not a one way process in a sense that only the cost should be matched to the revenue but it also applies, otherwise, i.e., if the cost are being charged to the profit and loss account of a particular period correspondingly the revenue related to such cost should also be credited in the profit and loss account of the period. In this view of the matter, the assessee` s conduct of claiming the cost related to such commission in the period under consideration also obliges the assessee to account fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion made of Rs. 1,80,60,400 out of advertisement expenses." For better appreciation of the issue, I feel it pertinent to briefly narrate the relevant facts as under : (i) The assessee is a resident and is acting as agent of principal (a non-resident) holding exclusive rights for television advertising in India for Star, (another non-resident assessee). The Star is owner of the channels and is a foreign telecasting company. The Principal is having exclusive rights in India for television advertising from Star under a separate agreement (copy not placed on record). The assessee is also having separate activities for manufacturing programmes for Star and earning income on such programmes at the rate of 5 percent of the cost of such programmes (copy of agreement not placed on record) and cable TV operations. All the parties are interlinked and Star is holding approximately 69 percent of shareholdings of the assessee. (ii) The assessee is getting commission at the rate of 15 percent of net invoiced amount from the principal. The commission earned of by the principal from owner for the service rendered by the principal to owner is not known as the agreement between two has not been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad-revenue stand allowed. Cable subscription (a) The advertisement by the appellant would increase the demand of channels of Star TV and thereby result in higher collection for Star Pay Channels. This would not be beneficial to the appellant. (v) The assessee claimed before the Commissioner of Income-tax (Appeals) that the publicity of the programmes facilitated soliciting and marketing of advertisement easier and had a direct impact on the revenue of the assessee. It was also claimed that the channel recall, as a result of advertisement and publicity, promoted the programme recall and thereby resulted in more subscribers and higher television rating points (T.R.P.) and which consequently increased demand for advertisement on channels and higher revenue for the appellant. It was also contended that though there was no contractual obligation to incur such expenses, the appellant decided to advertise the TV programmes based upon the commercial expediency which had to be judged from the businessman` s point of view and not of the revenue authorities. It was also submitted that advertisement expenses on the manufactured programmes were not recovered from Star because advertiseme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unqualified because not only the conditions specified therein have to be met but also the other provisions of the Act such as section 92 of the Act, as it stood then, dealing with the situations of the present case. Further, the expenditure should also qualify the tests laid down by the judicial authorities. Accordingly, if the expenditure incurred by the assessee is excessive or unreasonable having regard to the legitimate needs of the business or profession of the assessee or the benefits derived by or accruing to him, so much of the expenditure as is so considered to be excessive or unreasonable shall not be liable for deduction. In a number of judicial decisions, it has been held that the Revenue authorities can certainly look into the aspects of " wholly" and " exclusively" for the purpose of business because it is an essential condition for the allowance specifically put by the Legislature and within the ambit of these aspects, the reasonableness can also be examined. Thus, the contention of the assessee that where the incurrence of the expenditure is not in doubt, the reasonableness of the same cannot be examined, is rejected. With regard to the aspect of commercial expedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have undergone a tremendous change. More and more parties are involved in carrying out the business activities and in such complex structure if the expenses incurred by one party benefit to all the parties then such expenses are generally shared by and between the parties deriving such benefits. It is evidently clear from the material on record that the other parties deriving the benefits have not shared the expenses nor reimbursed the same to the assessee. The assessee has not been given any additional incentives even which is clearly an exception to the prevalent business practices and this leads to an apparent conclusion that by shifting their primary obligation of advertising for promoting their channels to the assessee (resident assessee), both principal and Star (non-resident assessee) have reduced the business profits of the assessee (resident assessee) to mitigate the tax liability of the assessee and such practice clearly attracts the applicability of the provisions of section 92 of the Act which empowers the Assessing Officer to determine the profits of resident assessee and the Assessing Officer has, thus, rightly disallowed the expenditure by exercising his powers alth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following observations made by this court in CIT v. Chandulal Keshavlal and Co. [1960] 38 ITR 601 ; [1960] 3 SCR 38 at (page 48) : ` Another fact that emerges from these cases is that if the expenses is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment of expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party (Usher` s Wiltshire Brewery Ltd. v. Bruce [1914] 6 TC 399 (HL)). Another test is whether the transaction is properly entered into as a part of the assessee` s legitimate commercial undertaking in order to facilitate the carrying on of its business ; and it is immaterial that a third party also benefits thereby (Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC) ; [1951] SCR 594. But in every case it is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the hon ble apex court broadly include the situations where expenses are incurred for fostering the business of another only or are made by way of distribution of profits or are wholly gratuitous or for some oblique purpose outside the course of business. If the expenditure incurred comes within the ambit of any of the above negative criteria then such expenditure would not be allowable. In the present case, admittedly the principal of the assessee and the owner, the owner of the television channels are liable to pay tax at 10 percent of the gross receipts in accordance with the CBDT Circular No. 742 which means that although such expenditure is apparently their obligation, but no tax benefit would be derived by them if such expenditure is incurred by them and because of their of close connection with the assessee, business affairs have been so arranged as to reduce the profits of the business of the assessee, being a resident, thereby resulting into less incidence of tax on the assessee. Further, as discussed in detail hereinbefore, that the incurrence of advertisement expenditure is the primary and substantive obligation of parties other than the assessee and thus on this count ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee immune from 2. mainly in order to satisfy his philanimpending or reasonably apprethropic urges. hended litigation. Explanation.Factors (1) and (2) are laudable but the altruistic or philanthropic urges can be satisfied at one's own cost or sacrifice. Not at the cost of public exchequer or other taxpayers and those living below the poverty line. 3.in order to save losses in foreseeable 3. mainly in order to win applause or future. earn garlands or public appreciation. 4. for effecting economy in working 4. for illegal, immoral or corrupt purwhich may pay dividends today or poses or by any such means or for any tomorrow. such reasons. 5. for increasing efficiency working. 5. mainly in order to oblige a relative or an official. 6. for removing inefficiency in the work6. mainly in order to earn the goodwill of a ing. political party or a politician. 7. where the expenditure incurred is 7. mainly in order to show off or impress such as (i) wise, (ii) prudent, (iii) pragothers with his affluence or for ostenmatic, (iv) ethical, man of the world of tatious purposes. business would conscientiously incur with an eye on promoting his business prospects subject to the expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case and in law, the commission income under the agreement dated May 31, 1994, accrued to the assessee when it was received by it from its clients as held by the Judicial Member or accrued at the time of acceptances of the solicited advertisement by the principal though could be assessed in the year in which such advertisement was telecast as held by the Accountant Member ? 2. Whether, on the facts and in the circumstances of the case and in law, the assessee is entitled to deduction of advertisement expenses amounting to Rs. 9,03,02,000 for the assessment year 199899 and Rs. 9,38,05,000 for the assessment year 1999-2000 under section 37 of the Income-tax Act, 1961 ?" ORDER OF THIRD MEMBER Vimal Gandhi (President).-On account of the difference between the learned Members of the Income-tax Appellate Tribunal " D" Bench, Mumbai, the following questions have been referred to me under section 255(4) of the Income-tax Act, 1961 (" the Act" for short) : " 1. Whether, on the facts and in the circumstances of the case and in law, the commission income under the agreement dated May 31, 1994, accrued to the assessee when it was received by it from its clients as held by the Judic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion After having solicited the advertisements as above, the agent shall forward, by facsimile or telex, each client` s requisition for telecast of its advertisement(s) to the company and the company reserves the right to accept or reject the aforesaid requisition at its sole discretion. Invoicing and collection The company shall send the invoice for the advertisements telecast, to the clients and a copy to the agent, within thirty (30) days from the date on which the advertisement is so telecast, with instructions to the clients to make the payment thereof to the agent. The agent shall, without any charge to the company, collect all sums due from the clients and hold the same in trust for the company pending remittance as hereinafter provided. 8. Commission The agent shall be entitled to retain fifteen percent (15%) of the net invoiced amount paid by the clients as commission. 9. No profit The agent shall not make any profit under this agreement other than by means of the commission from soliciting advertisements under this agreement. 10. Remittance The agent shall promptly arrange to have the amount paid by the clients, against each invoice net of its commission retained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the agreement with its principal commission at the rate of 15 percent of net invoice amount accrued to the assessee when amount was paid by clients. Unless the amount was paid there was no accrual of income. The Assessing Officer did not accept the above contention of the assessee for the reason that under the system of accounting regularly followed by the assessee income accrued or arose when a legal right in respect of it came into existence. The Assessing Officer interpreted the word " paid" in clause 8 of the agreement in the light of the decision of various High Courts, viz., the Bombay High Court decision in Aziende Colori Nazionali Affini, Italy v. CIT [1977] 110 ITR 145, the Kerala High Court decision in Janatha Contract Co. v. CIT [1976] 105 ITR 627 and Neroth Oil Mills Co. Ltd. v. CIT [1987] 166 ITR 418. He was of the view that when question of accrual was to be determined on the basis of agreement, the whole agreement was to be considered to ascertain the true intention and not a particular clause. The Assessing Officer also relied upon the fact that in the past the assessee has been taking accrual of income as soon as advertisements were telecast. Since there was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as condition for accrual of income. Learned counsel also argued that Circular of the Central Board of Direct Taxes No. 742 supported the assessee` s contention. As per the above Circular, no income accrued even to the foreign principal unless the amount was remitted. Thus, learned counsel for the assessee contended, income to the assessee cannot be said to have accrued unless amount payable to its foreign principal is received by the assessee from the Indian clients. So, the aspect of payment of money was most crucial for determining the time of accrual. It was submitted that right to receive commission remained inchoate till the assessee received money from its clients, since neither the assessee could retain its commission nor could it remit the same to its principal. In support of the above claim, learned counsel for the assessee relied upon the decisions in the case of Pfizer Corporation v. CIT [2003] 259 ITR 391 and in the case of Seth Pushalal Mansinghka P. Ltd. v. CIT [1967] 63 ITR 109 (Raj). The latter decision was approved by the apex court and is Seth Pushalal Mansinghka P. Ltd. v. CIT [1967] 66 ITR 159. Learned counsel for the assessee also submitted that income did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual of income. Alternatively, commission could be said to have accrued when invoice was raised by the principal. The decisions cited by learned counsel for the assessee in the case of Pfizer Corporation v. CIT [2003] 259 ITR 391, as per the learned Departmental representative was distinguishable as it related to a non-resident and pertained to accrual or deemed accrual of dividend income. On consideration of the rival contentions of parties and other materials referred to above, the learned Judicial Member at the outset recorded that there was no change in the mercantile system of accounting followed by the assessee throughout and in the years under consideration. The dispute was relating to the dates when commission income had accrued to the assessee. The aforesaid question was required to be determined in accordance with the terms of agreement between the parties and the case law. If by mistake income was shown on some erroneous basis, the assessee could always show correct time of accrual of income in the subsequent year. The learned Judicial Member in his proposed order further observed that as per the settled legal position income accrues when an enforceable debt is created ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h speaks of commission to be paid to the assessee and provided as under : " The agency shall be entitled to retain 15 percent (fifteen per cent) of net invoice value paid by the clients as commission." The above clause, according to the learned Judicial Member, clearly provided a contingency in the agreement, i.e., payment of net invoice amount to the assessee by its clients. According to the learned Judicial Member, the assessee had no right to receive commission till the happening of such contingency as right to retain commission dependent upon payment of invoice amount to the assessee. Once invoice amount was received by the assessee, the right to retain commission would accrue immediately irrespective of the remittance to the non-resident. Thus, payment by the clients was a condition precedent for accrual of income, which has been provided in the agreement to ensure the recovery of the amount. The learned Judicial Member also observed that effect of clause 8 of the agreement was that the assessee would never get any commission where invoice amount is not paid by the clients. The date of remittance to the principal would be irrelevant and the claim of the assessee could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en to promote channel, recall in viewers minds. Customers see that advertisement for the channels, thus a demand is generated with the cable operator, who in turn approach NTVI for enabling channel viewing." The learned Judicial Member noted the objections of the Assessing Officer to the claim made by the assessee as under : " (i) manufacturing programme for Star TV ; (ii) activity of the assessee as commission agent for collecting advertisements, revenue for Star TV ; and (iii) activity of cable subscription for Star TV. The Assessing Officer was of the view that such expenditure was not incurred wholly and exclusively for the purpose of business of the assessee and, therefore, could not be allowed as deduction under section 37. Regarding the manufacturing activity, it was observed by him that the assessee was charging 5 percent additional sum over and above cost of manufacturing TV serials for Star TV and, therefore, there was no reason for the assessee to incur any expenditure as advertisement. In respect of commission activity, it was observed by him that there was no necessity to incur any expenditure for such activity. Sample of advertisements showed that the advertisemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer held that expenditure was not incurred wholly and exclusively for the purpose of business. Such grounds taken by the Assessing Officer are in conflict with the settled legal position as explained by the apex court in the case of Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261. In that case, it was held that no disallowance could be made on the ground that it was not necessary for the assessee to incur such expenditure or it benefited the third party. Accordingly, the Assessing Officer was not justified in considering these factors for the purpose of disallowance. The only relevant factor is whether incurring of expenditure was for the purpose of the assessee` s business. The assessee was carrying on its business activity exclusively for Star TV and, therefore, survival of its business depends on the success of programmes transmitted by Star TV. The assessee was required to solicit the advertisements for Star TV channel. No person would give advertisement unless he is sure of large viewership of programmes on Star TV. Therefore, if the assessee incurs expenditure on advertisement with a view to increase the viewership of Star TV, in our opinion, such expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied upon the decision of the Supreme Court in the case of CIT v. Shri Goverdhan Ltd. [1968] 69 ITR 675. The learned Accountant Member further observed that once a debt is created the uncertainties attached thereto regarding quantification or realisation would not alter its character, though the amount of profit may change depending upon the realisation ; that it also emerges from the perusal of the above decision that the future uncertainties, difficulties and delays, etc., which may arise in a particular case would not affect the right to receive the income and that, therefore, even if one assumes a situation that the telecast of solicited advertisements does not take place for any reason whatsoever, the assessee would remain entitled to receive the commission from principal in respect of such cases also on the basis of requisition accepted by the principal. The aforesaid observation seems to be inspired from the decision of the Kings Bench in the case of Commissioners of Inland Revenue v. Gardner Mountain and D` Ambrumenil Ltd. [1947] 29 TC 69 (HL). The learned Accountant Member also referred to Accounting Standard and the provisions notified by the Central Government under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned to the assessee was to receive money from clients as per the instructions of the principal. The learned Accountant Member in paragraph 5.9 of his proposed order discussed in detail and was of the view that change made by the assessee in accounting policy relating to accrual of commission income was not justified and liable to be rejected. In subsequent paragraph the learned Accountant Member discussed in detail how the assessee was not justified in changing accounting policy relating to accrual of commission. The learned Accountant Member thereafter discussed the proposition and distinction between " accrual of income" and " earning of income" . He also referred to Accounting Standard 1 and the provisions of sections 4, 5 and 145 of the Act. There is a reference to the dictionary meaning of the words " earned" and " accrual" . In ultimate analysis, the learned Accountant Member held as under : " 7.3 Admittedly, it is not the case of the assessee that the concept of matching of cost with the revenue is not applicable to its case. The matching concept is not a one way process in a sense that only the cost should be matched to the revenue but it also applies otherwise i.e., if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not correct on the part of the assessee to claim that reasonableness of expenses could not be examined by the Revenue authorities. The assessee was also not justified in claiming that increase in business resulted on account of advertisements carried on by the assessee. There could be several factors like quality and contents of programmes and not advertisements, which are responsible for increase in business. The assessee was further not able to show that advertisement expenditure was incurred on account of any commercial expediency. On the basis of the decision of the hon ble Supreme Court in E. D. Sassoon and Co. Ltd.` s case [1954] 26 ITR 27 the learned Accountant Member evolved the positive and negative steps to be applied to determine whether the expenditure was incurred for the purpose of business and was admissible in law. On application of the above tests, the learned Accountant Member held that expenditure incurred by the assessee was not deductible. The learned Accountant Member relied upon the following observations of the Supreme Court in the case of CIT v. Chandulal Keshavlal and Co. [1960] 38 ITR 601 (at page 610) : " Another fact that emerges from these cases is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of certain news papers, where such advertisements were carried, are included in the paper-book). In respect of the first question Shri Kaka argued that clause 8 of the agreement was more than clear that the assessee was to retain 15 percent of the net invoice amount paid by clients. Shri Kaka also explained as to why net invoice amount was written in the agreement. He submitted that 15 percent of the amount payable to the assessee` s principal was deducted by agents outside India and thus, commission of the assessee was worked out only on the balance amount. Shri Kaka argued that the learned Accountant Member had misread the agreement between the assessee and its principal to conclude that commission would accrue as soon as agreements were approved as far as terms and conditions on which advertisements were procured by the assessee was approved by its principal and invoice was raised. The learned Accountant Member was also not right in holding that it was not the responsibility of the assessee to make collection of the amount due to its principal. Shri Kaka argued that the learned Accountant Member misread the agreement relating to responsibility of the assessee to collect fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds of the total sales of yarn and of all cloth sold by the company or three pies per pound avoirdupois on the sale, whichever the managing agents chose ; thus there was an option to be exercised at the end of the year ; (3) they were also to be paid at 10 percent on the proceeds of sales of all other materials ; and (4) the mills were to pay to the managing agents each year after December 31, or such other date which the directors of the company may choose for the closing of the accounts. There was a further clause that if the net profits of the managed company, that is, the mills, were not sufficient to enable the directors to recommend a dividend of 8 percent per annum on the paid up capital, then the managing agents were bound to forgo a portion of their commission up to one third. All these provisions as to payment have to be read together as an indivisible and an integral whole. On a proper construction of this contract, therefore, it is obvious that the managing agents were to be paid at the end of the year. They had the option of receiving a percentage on total sales or three pies per pound and this was exercisable at the end of the year. There was also a liability to pay ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or its accrual was at the end of the accounting year when all the sales were and could be added up and the accounts were made up. The amount which alone accrued or which they were entitled to receive was the latter sum of Rs. 1,05,575 and not what would have been payable had there been no modification of the agreement. The amount of Rs. 1,00,000 was not, therefore, taxable. In C. A. No. 210 of 1958, by clause (3) of the managing agency agreement the managing agent of a company was to be paid for services as secretaries and treasurers and agents a commission of 3 percent on the gross sale proceeds of all yarn and cloth manufactured in the company` s mills provided that if there was not sufficient profit in any financial year to enable a distribution of a dividend of Rs. 1,20,000 on the total paid up capital the managing agent was to give up out of the commission an amount up to one-third of the commission to enable the distribution of that amount of dividend to the shareholders. On December 28, 1950, a resolution was passed varying the agreement in regard to the payment of commission and adding a proviso to it applicable to years 1950 and 1951 that if the directors having regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that only the sum settled by the assessee, i.e., commission agent had accrued to it by stating as follows (headnote of 40 ITR) : " (i) That under the managing agency agreement no commission accrued or arose on the sale proceeds at the time of each transaction of sale. There was neither any debt created nor any right to receive payment when each transaction of sale took place. The commission of the managing agents became due at the end of the financial year and that was when it accrued. As the remuneration, accrued at the end of the financial year, the remuneration for the entire financial year 194445 accrued in the hands of the assessee. (ii) That the fact that the original managing agents were also assessed to tax in respect of the commission for the period April 1 to December 31, 1944, had no relevancy." (iv) In the case of CIT v. Birla Gwalior P. Ltd. [1973] 89 ITR 266 (SC), there were no date fixed in the agreement for payment of managing agency commission. The assessee had forgone commission up to the end of the previous year before the accounts of the managing company was made up. The Revenue contended that commission had accrued to the assessee as income and, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars under consideration, followed mercantile system of accounting. The question and issue involved here was whether income had accrued to the assessee. He submitted that the learned Accountant Member confused the two issues and, therefore, made observations relating to the method of accounting, which are not relevant as there was no dispute on this count. In this connection, Shri Kaka drew my attention to a decision of the hon ble Madras High Court in the case of CIT v. Devi Films P. Ltd. [1983] 143 ITR 386 wherein their Lordships have observed as under (headnote of 143 ITR) : " Regular mode of accounting only determines the mode of computing taxable income and the point of time at which the tax liability is attracted, it cannot determine or affect the range of taxable income or the ambit of taxation. Where no income has resulted, it cannot be said that income has accrued merely on the ground that the assessee has been following the mercantile system of accounting. Even if the assessee makes a debit entry to that effect, still no income can be said to have accrued to the assessee. If no income has materialised, there can be no liability to tax on a hypothetical income. It is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e context in which such expressions has been used and on the interpretation of the terms of relevant contracts. For tax purposes, the accrual or receipt of income in the relevant previous year, will have to be determined in consonance with the ambit of taxable income as per section 5 on the basis of a careful scrutiny of the terms of contract for hire purchase and lease agreements regardless of the method of accounting followed by the assessee for recognition of such income in its books of account." Shri Kaka further submitted that even if it is accepted that commission accrued to the assessee on completion of services required to be rendered by the assessee as an agent, then collection of amount due to the principal was part of the obligation to be performed by the assessee. In this connection, he drew my attention to clause 7(b) of the agreement, which casts a duty on the agent to collect all sums due from clients and hold the same in trust for the company pending remittance as provided in the agreement. The collections are to be made without any charge to the company. In the light of the above clause, it is difficult to hold that the assessee does not have obligation to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , mentioned in question No. 2, referred to the Third Member, the learned Departmental representative pointed out that onus was on the assessee to establish that expenses were incurred wholly and exclusively for purposes of business. Thus, the test to be applied while considering the claim of expenditure was to see the purpose of expenditure and whether it was laid out wholly and exclusively for purposes of business. The learned Accountant Member as per elaborate order, pointed out that neither the expenditure was necessary for purposes of the assessee` s business nor the same was laid out wholly and exclusively for purposes of business. It was the expenditure which the principal should have incurred for promoting his business. The learned Departmental representative further argued that the learned Accountant Member did not as such invoke the provisions of section 92 of the Income-tax Act. Only the spirit of the section has been invoked to show that the benefit of expenditure was derived by the principal and not by the assessee. It was, therefore, a case of diversion of income. The learned Departmental representative accordingly supported the impugned order of the learned Accountant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of account were made up and amount was determinable as per terms and conditions of the agreement. It is agreed and even the Supreme Court has emphasised that income would accrue as per terms and conditions of the agreement. Reference be made to the decision of the Supreme Court in the case of CIT v. Harivallabhadas Kalidas and Co. [1960] 39 ITR 1, wherein it has been emphasised by their Lordships of the Supreme Court that income will not accrue as soon as services are performed. Their Lordships have held (headnote) : " the managing agent` s commission did not accrue as and when the sales took place." In the case of CIT v. Chamanlal Mangaldas and Co. [1960] 39 ITR 8 (SC), their Lordships reiterated on " construction of the clause containing the terms for payment of commission." Thus, for determining accrual of income, the agreement and in particular, " clauses containing terms of payment are required to be construed" . Applying the above principle here in the present case, it is seen as per clause 8, the assessee is entitled to, i.e., he gets a right to retain " 15 percent of the net invoice amount paid by the clients as commission" . Thus, commission is required to be worked and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at this very point the assessee becomes eligible for its commission, i.e., legally enforceable debt has been created in favour of the assessee because the sale of time spots is completed and commission receivable by the assessee is also ascertainable on the basis of a number of time spots sold at the rate accepted by the principal and the client" . In my humble opinion, the aforesaid observations are contrary to the other clauses of the agreement casting duty on the assessee to realise amount due to its principal and remit the same to its foreign principal after retaining 15 percent towards its commission. So realisation of amount and remittance is very much part of the job required to be performed by the assessee and having regard to the wording of the agreement the assessee becomes entitled or acquires right to retain 15 percent of amount realised on account of principal. No right can be said to have accrued to the assessee before the amount is actually realised and the assessee is in a position to remit the same to its foreign principal. The learned Accountant Member in support of his view has placed strong reliance on the decision of the Supreme Court in the case of CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. In the agreement there are further steps to be taken and advertisements solicited are required to be sent for approval by the principal. The principal under the agreement is not only to approve the advertisement solicited by the assessee but also to raise invoices within 30 days from the date on which advertisement is so telecast. The principal has also to issue instructions to the client to make payment thereof to its agent (assessee). The assessee is further obliged to collect all the sums due to its principal. It is not possible to ignore all the abovementioned clauses of the agreement and hold that the assessee acquires right to receive income as soon as advertisements are solicited by the assessee and that other situations provided in the agreement relate only to " future uncertainties, difficulties and delays" and these would have no effect on the accrual of income. Other clauses cannot be understood to be relating to relinquishment of income after its accrual. In my opinion, the learned Accountant Member has not properly appreciated the ratio of the decision of the Supreme Court in the case of CIT v. Shri Goverdhan Ltd. [1968] 69 ITR 675. In the said case, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the accounting period of the partnership, i.e., March 31, 1951." The proposition laid down in the aforesaid decision that share income accrues to the partner as soon as the previous year of the firm comes to a close. It is immaterial that exact amount of profit is not known on the close of the year (31st March in the cited case). Whenever the profit is worked out, it would be the profit as on 31st March and liable to be taken in assessment year immediately following the previous year. Therefore, having regard to the facts involved in Goverdhan Ltd., no support can be derived by the Revenue from the decision. The Revenue and the learned Accountant Member has also referred to decision of the House of Lords in Commissioners of Inland Revenue v. Gardner Mountain and D` Ambrumenil Ltd. [1947] 29 TC 69 (KB). In the said case on construction of the relevant material, the House of Lords held that right to receive commission accrued to the assessee when the risk was underwritten. It was earned at that stage though profit resulting from insurance could not be ascertained at that time, the right of the assessee was a vested right. The conclusion has been arrived at after considering t ..... 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