TMI Blog1993 (5) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... 28. It made a provision for unexpired portion of guarantee and submitted that the guarantee commission receivable in respect of the future period should not be taxed in the year under reference since it was following mercantile system of accounting. However, the IAC (Assessment) observed that the guarantee commission received is not in the nature of advance. According to him, the parties on whose behalf the guarantee is given by the assessee-bank, cannot demand the return of the guarantee commission paid. The assessee-bank, according to IAC (Assessment), acquires the right to receive the whole of the guarantee commission for the entire period covered by the guarantee the moment the guarantee bond is executed and even though the assessee is following the mercantile system of accounting, the IAC (Assessment) held that the entire guarantee commission is assessable in the year of receipt notwithstanding that it may relate to more than 12 months and/or the guarantee period may extend beyond the period covered by the previous year relevant to the year under assessment. On appeal, the Commissioner (Appeals) deleted the addition made by the IAC (Assessment) in the light of the Tribunal' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be revoked and that the guarantee commission relatable to the unexpired period was required to be refunded to the clients in terms of rule 16 as framed by the Foreign Exchange Dealers' Association of India Rules. Five sample cases were placed before the Tribunal on behalf of the assessee to show that the guarantee commission in respect of the unexpired period was factually refunded by the assessee-bank to its different clients. On behalf of the department, it was submitted before the Tribunal that the entire guarantee contract was irrevocable and the right to receive guarantee commission accrued and arose as soon as the agreement was entered into and this right did not get deferred merely because the bank had the option to realise the commission in instalments. It was also argued on behalf of the department that the method of accounting even though consistently followed by the assessee was irrelevant in this respect. In reply, it was submitted before the Tribunal on behalf of the assessee that since the bank was consistently following mercantile system of accounting and recording the guarantee commission in different years to which it actually related and since such system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins of business or profession' and in view of section 145(1) the income-tax authorities were bound to accept the method of accounting consistently followed by the assessee-company in this regard. The tax authorities were not competent to depart from the method of accounting followed by the assessee-bank when such method of accounting had all along been accepted by the tax authorities for and up to the assessment year 1975-76 - See CIT v. K. Sankarapandia Asari Sons [1981] 130 ITR 541 (Mad.) and ManilabKher Ambalal Co. v . A.G. Lulla, Seventh ITO [1989] 176 ITR253 (Bom.). (c)No defect whatsoever has been pointed out by the tax authorities in the method of accounting consistently followed by the assessee. The Tribunal has recorded and held in paragraph 17 at page 102 of the paper book that the system of accounting followed by the bank in this respect was bona fide. This is a finding of fact and has not been challenged by the tax authorities in the present reference. (d)The Tribunal has also recorded a finding of fact that the assessee-bank has been refunding guarantee commission to its different clients in those cases where guarantee contract was revoked prematurely. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contesting submissions boil down to one question whether accrual is co-eval with the payability, the same may be payable but may not be apportionable until the happening of an event; in the present case the expiry of the period of guarantee comprised in the previous year the right to receive for unexpired period, for, the guarantee beyond the expiry date of the previous year remains in a suspense. It may or may not fructify into an actual right to receive for the subsequent period of the term of the guarantee as the sooner determination of the guarantee is a contingency not ruled out by the agreement. It is only upon certain conditions being fulfilled, viz., the guarantee running the full course or period of the debt guaranteed, that the right to the entirety of the commission can be said to have accrued. To this proposition, as we have seen, rule 16 lends support. Clause (a) of the rule clearly indicates that commission though payable at the beginning for the full specified period of the debt shall, however, fall refundable in the event of the guarantee being redeemed before full time. Clause (a) of the said rule is the sheet anchor of the assessee's claim that the full commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT [1954] 26 ITR 27 (SC): . . . . If income has accrued to the assessee it is certainly earned by him in the sense that he has contributed to its production or the parenthood of the income can be traced to him. But in order that the income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words, a debitum in praesenti, solvendum in futuro it cannot be said that any income has accrued to him. ... (p. 51) Of course, in that case, the question was whether the managing agents working for a part of the accounting year and subsequently assigning the agency to two different parties for the rest part of the year in the course of the year could claim pro rata commission for managing agency. The Supreme Court in the majority decision found on the examination of t ..... 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