TMI Blog2006 (7) TMI 668X X X X Extracts X X X X X X X X Extracts X X X X ..... Hong Kong; and (iii) acting as a licensee in India in respect of Star Movies pay channel. 3. The assessee entered into an agreement on 31st May, 1994 with Star Advertising Sales BV of Netherland holding exclusive rights in India from Satellite Television Asian Region Ltd. of Hong Kong 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 Reserve Bank of India (RBI) on 22nd July, 1994 and subsequently renewed from time-to-time (pp. 1 to 5 of the paper book). Under cl. 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 cl. 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 cl. 7 of the agreement, the principal was required to send the invoice for advertisements telecast with instructions to the clients ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explained as one that brings into credit 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 recognized 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 recognize 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 31st March, 1997, would have been higher by ₹ 8,10,11,000 and the net loss for the year would have been net profit of ₹ 52,32,000. 5. The assessee was required to substantiate its claim regarding the change of policy. The explanation of the assessee before the AO was tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertiser 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 fact of 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 BV and no efforts are made to recover the same, and any inti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counsel for the assessee, Mr. Kaka, at the outset, pointed out that assessee had been following mercantile method of account 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 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 realized 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 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. 9. Proceeding further, on merits, it was contended by him that as per cl. 8 of the agreement, the commission income accures to the assessee o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... casting companies @ 10 per cent 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 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 it could remit the same to its principal. 11. To substantiate the above submission, he relied on the judgment of Bombay High Court in the case of Pfizer Corporation vs. CIT (2003) 180 CTR (Bom) 319: (2003) 259 ITR 391(Bom), wherein question for consideration of their Lordship related to the accrual of dividend income in the hands of non-resident com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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 assessee is maintaining mercantile system of accounting. 13. Lastly, it was argued that in such cases, theory of real income would apply. It was submitted by him that 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 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 Godhra Electricity Co. Ltd. vs. CIT (1997) 139 CTR (SC) 564: (1997) 225 ITR 746(SC) and in the case of CIT vs. Bokaro Steels Ltd. (1999) 151 CTR (SC) 276: (1999) 236 ITR 315(SC). 14. On the other hand, the learned Departmental Representative vehemently opposed the contentions of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, it was pleaded that order of the learned CIT(A) be upheld. 16. 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 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 para 5 of our order wherein assessee has admitted that method of accounting continues to be mercantile. Even the learned counsel for the assessee has made the statement before us that there is no change in method of accounting and it continues to be mercantile. Accordingly, the arguments made by the learned Departmental Representative in this regard are rejected. 17. On the other hand, the dispute between the parties centres round the date of accrual of commission income. The contention made on behalf of assessee is that under mistaken advise, the dates of accrual was taken by assessee as the date when advertisements were telecast while the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect 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. 20. Let us now explain the above view in the light of case law. In the case of E.D. Sassoon Co. Ltd. (supra), 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 Aggrawal Co., on 1st Dec., 1943. In the course of assessment proceedings of assessee, the question arose whether in respect of managing agency commission, tax was payable on the entirety of the commission by M/s Aggrawal Co. or by the assessee or it was liable to be apportioned between the two. The apex Court held that commission accrued only on the completion of the services under the agreement at the stated interval and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haracter 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 s. 4(1)(a) is not deferred till settlement of accounts. On that premises, counsel said, that profits dormant or embedded in the transactions carried on by M/s. Amrit Chemicals accrued from transaction to transaction till 12th Nov., 1955, and properly belonged to the assessee and were liable to be taxed in the hands of the assessee notwithstanding a subsequent disposition of those profits by the assessee. Such contention was negatived by the apex Court by holding as under : It is true that E.D. Sassoon Co. Ltd.'s case related to a managing agency transaction and the Court said that the managing agency being a service contract one and indivisible until the entire contract is performed, no right to remuneration arises. But the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 31st March, 1952 were passed by the shareholders at the meeting held on 28th March, 1953. The question arose whether commission of ₹ 41,842 due to assessee for the accounting period 1951-52 was assessable as income in asst. yr. 1952-53 or 1953-54. The Hon'ble Supreme Court held that assessee did not have any right to receive the commission till the general meeting of the managed company and, therefore, the same could form part of assessee's profit for the asst. yr. 1953-54. 24. In view of the above judgments of the apex Court, it is clear beyond doubt that normally the commission income would accrue to the assessee when the services are rendered or completed. However, the parties, with mutual consent, may provide that commission would accrue on happening of future contingency. Therefore, in such cases, commission would not accrue until the happening of the contingency and AO would not be justified in assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 assessee would be entitled to retain its commission @ 15 per cent of the net invoiced amount. It is because of this condition that assessee is required to put its best effort for recovery of the invoiced amount for its clients. Real effect of the cl. 8 is that assessee would never get any commission where the invoiced amount is not paid by the client. Therefore, contingency provided in the clause must happen before the right to receive the commission accrues. In the absence of payment by the clients, no enforceable debt is created in favour of assessee under the agreement since it cannot move the Court for recovery of the amount from its principal on the basis of telecasting of advertisement. The moment the advertising amount is paid by the clients, the assessee gets the right to retain its commission and consequently would be liable to pay tax in the year in which such amount is received. The date of remittance to the principal would be irrelevant. The claim of the assessee cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by referring to the judgment of apex Court in the case of CIT vs. Mewar Textile Mills Ltd. 1973 CTR (SC) 443: (1973) 91 ITR 542(SC), where assessee sent the goods by rail from Bhilwara but the railway receipt was taken in the name of buyer who was 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 judgments clearly reveals that place of payment was not relevant for deciding the place of accrual of profits. What is important is the place where property in goods passes. In view of the above discussions, the judgment relied on by the assessee's counsel does not help the case of the assessee. 27. We are also unable to appreciate the contention of Mr. Kaka, the learned counsel for the assessee, that there cannot be accrual of income to assessee unless the income accrues to the principal of the assessee. The obligation of assessee's principal to telecast the advertisement and the obligation of assessee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to commission is not dependant on the RBI's condition and consequently, the judgment of Bombay High Court in the case of Pfizer Corporation (supra) is distinguishable on facts though the ratio of the judgment is relevant on the point of law in as much as it speaks of the legal position that in case of contingency, the accrual of income would depend on the happening of the contingency. 29. The judgment of the apex Court in the case of Morvi Industries vs. CIT 1974 CTR (SC) 149: (1971) 82 ITR 835(SC), heavily relied upon by the learned Departmental Representative also does not help the case of Revenue. In that case, it was held that once income accrues then the postponement of the payment or subsequent waiver of the same would not affect the taxability in the hands of the assessee. This judgment is nowhere in conflict with the judgments cited by us in the earlier part of our order. This judgment cannot be applied to a situation where the accrual itself depends upon the condition, i.e., payment of the amount in respect of which commission is to be received. 30. In view of the above discussions, we hold that in the present case, the income of commission accrued to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the similar reasons, the disallowance made for the asst. yr. 1999-2000 was also upheld. Aggrieved by the same, the assessee as well as Revenue are in appeal before the Tribunal for both the years. For the similar reasons, the disallowance was made for asst. yr. 1999-2000 which was also upheld by the learned CIT(A). 33. The learned counsel for the assessee has submitted before us that the assessee had challenged the disallowance for asst. yr. 1998-99 in respect of the entire amount notwithstanding the fact that the assessee had disallowed the amount of its own. He drew our attention to the statement of facts in this regard. Hence, the relief could not be restricted to a particular amount. Proceeding further, he relied on the decision cited before the learned CIT(A) for the proposition that no disallowance could be made where the payment was made within the grace period. Proceeding further, it was contended by him that in view of the omission of the second proviso to s. 43B by Finance Act, 2003, no disallowance can be sustained if the payments are made before the due date of filing of the return. This contention is based on the decision of the Tribunal in the case of Addl. CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribed under the relevant Act. These judgments can be applied only after verification of the necessary facts and the date of payments. Accordingly, the orders of the learned CIT(A) are set aside on this issue and the matter is remitted for both the years to the file of AO for de novo adjudication after verifying the necessary factual matrix. 35. The next common issue arising from cross-appeals relates to the disallowance of ₹ 9,03,02,000 for asst. yr. 1998-99 and ₹ 9,38,05,000 for asst. yr. 1999-2000 on account of advertisement expenses. The assessee was asked to explain the purpose for incurring such expenditure. In response to the same, following explanation was given : As submitted earlier, NTVI incurs expenditure for advertisements, which are undertaken to promote channel recall in the viewers minds. Customers see that advertisements for the channels, thus a demand is generated with the cable operator, who in turn approach NTVI for enabling channel viewing. 36. The AO noted that advertisement expenses were incurred in respect of (i) manufacturing programme for Star TV, (ii) activity of assessee as commission agent for collecting advertisements revenue for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses for such business deserves to be allowed. Regarding manufacturing activity, he was of the view that such advertisements only benefited Star TV. Since assessee was manufacturing only programmes for Star TV, it was Star TV which was required to expend on advertisement and not the assessee. Regarding agency business, it was observed by him that though such advertisements benefit Star TV yet assessee also needs advertisements for its own activity. Similarly, for cable subscription activity, assessee is required to incur such expenses. Accordingly, it was held by him that entire expenditure could not be disallowed. Accordingly, he allowed 20 per cent of such expenditure. Aggrieved by the same, the assessee as well as Department are in appeal before the Tribunal. 39. The learned counsel for the assessee reiterated the arguments taken before the learned CIT(A). In addition, he has relied on the decisions reported as Sarda Plywood Industries Ltd. vs. CIT (2000) 163 CTR (Cal) 45: (1999) 238 ITR 354(Cal) at p. 356 and CIT vs. Aluminium Industries Ltd. (1995) 126 CTR (Ker) 150: (1995) 214 ITR 541(Ker). On the other hand, the learned Departmental Representative relied on the order of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under : During the subject assessment year, NTVI has collected revenues from cable operators ('subscription revenues') under agreements executed with Satellite Television Asian Region Limited ('Star Ltd.') and Indian Sky Broadcasting Limited ('ISkyB'). Copies of these agreements were filed with your office vide our letter dt. 4th Jan., 2001. As per the agreements, NTVI has been granted the right to collect subscription revenues on its own account. As you will note, the agreements do not require repatriation of any amounts, on account of the subscription business, to Star Ltd., or ISkyB. We respectfully submit that the income earned and the expenses incurred by NTVI with respect to the subscription business are on its own account and not on behalf of any other company. Given the above, any bad debts suffered by NTVI with respect to the subscription business are on its own account. 42. The AO noted that bad debts had been claimed against the head Programming for ₹ 83,15,000 and against subscription ₹ 25,00,000. The AO disallowed the claim of the assessee by observing as under : It is well known fact by this time that in progr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id not constitute the expenses. Accordingly, this disallowance was confirmed. Regarding sum of ₹ 25,00,000, it was held by him that the same could not be allowed as deduction on account of bad debt , as this amount had never been disclosed as income of the assessee. It was also noted by him that the assessee had been consistently claiming as bad debt and only in the course of appellate proceedings, it was stated that this amount represented security deposit for acquiring premises on leave and license basis. It was observed by him that attempt was deliberately made to camouflage the claim under the guise of Bad debt . Apart from this, it was observed by him that the expenditure was on account of capital and, therefore, disallowable. Aggrieved by the same, the assessee as well as Revenue are in appeal before the Tribunal. 45. After hearing both the parties, we feel that the matter has not been examined in the right perspective by the lower authorities. The learned CIT(A) has allowed deduction of ₹ 15,06,400 under s. 36(2) of the Act without giving any reason. On the other hand, the claim of the assessee under s. 37(1) of the Act has been rejected by the learned CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oration (supra) wherein it was held that assessee was entitled to depreciation with reference to the cost element embedded in the payment made by the assessee under the hire-purchase agreement. Therefore, in principle, the claim of the assessee cannot be disallowed. However, it is pertinent to note that depreciation is allowable only with reference to the cost element embedded in the payment till the end of accounting year. It is not clear whether the entire payment was made by the assessee till the end of accounting period. Accordingly, this issue is restored to the file of AO with the direction that he shall ascertain the cost element in the hire-purchase payments made by the assessee upto the last day of accounting year and then allow depreciation on such amount. 48. The assessee has also taken the following grounds in respect of asst. yrs. 1997-98 to 1999-2000 : On the facts and in the circumstances of the case and without prejudice to the other grounds of appeal, where the income of the appellant is a profit, the appellant ought to have been allowed to deduction under s. 80HHC of the Act in respect of films/TV serials, etc. produced by it and exported 49. The learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, Star India (P) Ltd. (hereinafter referred to as the 'appellant') respectfully submits that the learned Commissioner of Income-tax (Appeals) [CIT(A)] has erred in upholding the assessment under s. 143(3) of the IT Act, 1961 ('Act'), on the following ground : 1. By not accepting the change in the accounting policy made by the appellant during the financial year ended 31st March, 1997 with respect to the recognition of commission earned under the agency agreement executed with Satellite Television Asian Region Advertising Sales BV. 2. The genesis of controversy lies in the qualified report given by the auditor's showing understatement of profits by ₹ 8,10,11,000 as a result of change in accounting policy shifting the point of time for recognition of commission as revenue, The assessee also appended a note to the computation of total income citing reasons for amendment in the policy of recognizing accrual of commission on the basis of payments made by the advertiser during the year to bring it in consonance with cl. 8 of the agency agreement with principal. The assessee also stated in the said note that there was no change in the method of accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terpretation to same cl. 8 of the same agreement. (vi) The effect of change in the accounting policy for recording the accrual of commission income as effected by the assessee during the assessment year under consideration on the profits of the year was reported by statutory auditors of the assessee-company and they qualified the financial results shown by the assessee-company, which have already been reproduced by respected JM in his proposed order. (vii) The AO took note of the aforesaid observations of the statutory auditors. After due consideration of all the relevant aspects of the case, the AO rejected the change in accounting policy with regard to the accrual of commission income on the ground that the sole objective of such change was to reduce the tax liability for the assessment years under consideration. (viii) On appeal, the learned CIT(A) confirmed, for the detailed reasons given in his appellate order, the order of the AO in this behalf. 4. With respect to the issue of accrual of income from commission, as per my understanding, following aspects are required to be considered : (i) Whether commission to the assessee accrued only upon payment of net invoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... context thereof mean and include its successors and permitted assigns) of the one part and News Television (India) (P) Ltd., a company incorporated in accordance with the Companies Act, 1956 and having its registered office at 47/53 Asgar Manzil, Janmabhoomi Marg, Fort, Bombay 400 001 (hereinafter referred to as the Agent which expression shall, unless it be repugnant to the meaning or context thereof mean and include its successors and permitted assigns of the other part. Whereas the Company has the exclusive rights in India from Satellite Television Asian Region Limited, a company incorporated in accordance with the laws of Hongkong and having its principal office at 12th Floor, Hutchison House, 10 Harcourt Road, Hongkong (hereinafter referred to as STAR ), for television advertising on various television channels (hereinafter referred to as the 'said channels'). And whereas the Company is desirous of appointing a non-exclusive independent agent in India to sell television advertising for the said channels. And whereas the Company and the agent are desirous of recording the terms and conditions on which the agent shall work for the Company. Now, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uisition sent by assessee. Thus, the functions of assessee qua its Principal are independent of the obligations of its Principal towards clients and client's obligations towards its Principal because the obligation of Principal to telecast the client's advertisement would be discharged as per the terms and conditions between Principal and client. The cumulative effect of these provisions of the Agreement is that the contractual obligations of the assessee comes to an end and once the client's requisition forwarded by assessee is accepted by Principal, at this very point, assessee becomes eligible for its commission, i.e., a legally enforceable debt has been created in favour of assessee because the sale of time spots is completed, and the commission receivable by assessee is also ascertainable on the basis of number of time spots sold at the rate accepted by the Principal and the client. For a moment, even if it is assumed that exact amount of commission may, depending upon the number (of) actual telecast of advertisements, vary either positively or negatively but that by itself would not make any difference because if it is a debt the fact that the exact amount has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s remuneration for its services in conducting the agency, commissions on the net profits of each year's underwriting. The agreements provided that 'accounts should be kept for the period ending 31st December, in each year and that each such account shall be made up and balanced at the end of the second clear year from the expiration of the period or year to which it relates and the amount then remaining to the credit of the account shall be taken to represent the amount of the net profit of the period or year to which it relates and the commission payable to the company shall be calculated and paid thereon.' The accounts for the underwriting done in the calendar year 1936 were made up at the end of 1938, and the question that arose was whether the assessee was liable to additional assessment in respect of the commission on underwriters' profits from the policies underwritten in calendar year 1936, in the year in which the policies were underwritten or in the year when the accounts were thus made up. The assessee contended that the contracts into which it entered were executory contracts under which its services were not completed or paid for, as regards commission, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of ratio of the aforesaid decision, it can be safely stated that once a debt is created the uncertainties attached thereto regarding quantification or realization would not alter its character though the amount of profit may change depending upon the realization, the delays and difficulties which may arise in particular case. In the present case, a debt in favour of assessee was created as soon as the assessee performed its part of contractual obligations and the quantification of commission based upon the contract with the clients at the stage of acceptance of soliciting advertisements by Principal could be done. Therefore, there is no limitation as such to account for the income from commission at this very point. It also emerges from the perusal of the above decision that the future uncertainties, difficulties and delays, etc. would not affect the right to receive the income, 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 Principal. If the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements and it also leads to the rejection of the contention of the assessee that except cl. 8, there is no other clause in the Agreement which directly or indirectly deals with the aspect of commission to be earned by the assessee for rendering of services. 5.4. Clause 7 Invoicing and collection (a) 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. (b) 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. Clause 7(a), clearly demonstrates the fact that Principal itself is sending the invoices directly to the clients and instructing them to make the payment to the assessee. As per cl. 7(b), the assessee is required to collect all sums due from the client and hold the same in trust for the Company pending remittance of the same to principal. Once the principal has instructed the clients to make the payments to the assessee, obviously as a na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement, only a selling or marketing agent, as rightly mentioned in the Preamble to the Agreement. All other clauses in the Agreement corroborate the aforesaid fact. The right to receive the commission would accrue, under the Agreement, to the assessee on sale of time spots. The assessee has, however, placed strong reliance on cl. 8 of the Agreement, which reads as under : Clause 8 Commission The agent shall be entitled to retain fifteen (15 per cent) of the net invoiced amount paid by the clients as commission. On bare perusal of aforesaid clause, the fact which readily emerges is that sole purpose of cl. 8 is to provide for rate, mode and mechanism for payment of commission to the assessee in consideration of its having solicited television advertisements for the Principal by authorizing the assessee to retain 15 per cent of net invoiced amount paid by the clients as commission. It seeks to pay what the assessee has already earned and which the assessee was entitled to receive and enforce in a Court of Law and not vice versa. It is only in pursuance of the assessee's right to receive the consideration after it had earned the commission that cl. 8 conferred the right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous clauses (including cl. 8) of Agreement, the change in accounting policy relating to point of time of accrual of commission is not correct and, hence liable to be rejected. 5.8 Although from the discussion hereinbefore, it is established that the commission to the assessee accrued at the time of acceptance and sale of time spots in the period of telecast, even then, with a view to further establish the same, I consider it relevant to mention the fact that a new Representation Agreement was signed between Owner and assessee on 1st April, 1999 (copy placed on record) whereby responsibilities of assessee have been defined not only to solicit television advertising for the Owner but also to collect and remit advertisement charges. Further, entitlement to commission has also been restricted on the amounts actually collected by assessee or received by Owner directly though such advertisement were solicited by assessee. The relevant provisions of the Representative Agreement between Owner and assessee are reproduced below to bring out the major differences between the present Agreement dt. 31st March, 1994 and Representative Agreement dt. 1st April, 1999 to further confirm the concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lars. Representative shall be responsible for delivering the invoices to the advertisers on timely basis. D. Payments 1. Representative shall use its best efforts to ensure the collection of all net advertising amounts in accordance with the terms of Star's invoices and shall cause the advertisers to pay all amount to Star as follows : (i) An advertiser may pay directly to Star in US dollars in such manner and in such location as Star directs. In such instance, the advertiser shall pay Star after deducing from gross billed advertising amount any allowable agency commission and the representative commission and pay each directly and separately in Indian rupees and advertiser shall also deduct withholding tax imposed by the Government of India. (II) In the alternative, an advertiser may pay to representative in Indian rupees the net billed advertising amount. Upon receipt, representative will deduct its commission and, subject to necessary Reserve Bank of India (RBI) approval and sub-cl. (iii) hereinbelow, immediately (but in no event later than forty-five days from receipt of funds from the advertiser, and excluding time taken for approvals from the RBI provided that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (f) Conducting credit investigations of advertisers; (g) Collecting all sums due from the advertisers where such payments are to be made by the advertisers in Indian rupees and holding the same in trust for Star pending remittance as hereinafter provided and using its best effort to ensure that Star receives all sums due to Star under this agreement but does not guarantee the payments thereof; (h) Rendering to Star such information advisory and supervisory services in matters of research and promotions as may be practicable and reasonable for representative or its research and promotion organization to perform, and (i) Co-operating fully with Star in promoting and advancing its standing as a television advertising medium. G. Reports 1. Each month, representative will provide Star with a written statement detailing for the prior month the commissions received by the representative, any amounts collected by representative (broken down by advertiser invoice number and amount paid) the status of payments made directly to Star by advertisers, the status of amounts in respect of which applications are pending with RBI, and any other information reasonably requested by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing grounds as well. (i) It was contended on behalf of the assessee that the accrual of commission was dependent on the contingency of the payment, i.e., if the payments were not made by the clients, no commission would accrue. This argument deserves rejection for three main reasons; one the agreement does not provide so. Two, the advertisements are solicited as per the standard terms and conditions formulated by Principal and accepted by the respective clients which provide for a credit period to the clients after the date of telecast with the purpose of regulating the mode of payment and settlement of dues and not for creating a contingency upon which the commission income would accrue to the assessee. Three, the income which had already accrued to the assessee could not be defeated on the basis of uncertainties involved in the receipt of money from clients. If such an interpretation as suggested by the assessee is accepted, the concept of mercantile method of accounting based on fundamental accounting assumption of accrual would collapse. Further a reference can be made to pp. 47 to 49 of this order where the decision of the Hon'ble High Court of Justice (Kings Bench) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Act, 1956. Further, Accounting Standard (AS) 2 notified by the Central Government under s. 145(2) of the Act permits the change in the accounting policy, provided it is required by statute or if the adoption of different accounting policy results in more appropriate preparation or presentation of the financial statements. Admittedly, there is no statutory requirement warranting such change. Also such change cannot be said to have resulted in more appropriate preparation or presentation of the financial statements as compared to earlier year for the reason of understatement of profit as reported by the auditors. Thus, change in such accounting policy is neither motivated by bona fide reasons nor it satisfies the tests laid down by the statute/judicial decisions for change in accounting policy. (iii) It was also contended that the change in accounting policy was made to offer to tax only real income because inclusion of unrealised commission from Principal on invoiced remaining unpaid/part paid into income as per earlier practice resulted into taxation of unreal income as the same had to be claimed as bad debt subsequently. Bad debts are business reality. Simply because the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;ble apex Court in the case of E.D. Sasson Co. Ltd. (supra), however, concept of accrual needs further elaboration so as to understand the meaning of the same in the contemporary environment. 6.2 Before proceeding further, it is pertinent to mention that the assessee has heavily relied on the decision of Hon'ble Supreme Court in the case of E.D. Sasson Co. Ltd. (supra) in support of its contention that no income from commission accrued until the clients made payment of net invoiced amount. In this regard it is very important to note that in that case Hon'ble apex Court dealt with the issue of concept of accrual for the purposes of IT Act in the settings of peculiar facts of the case wherein in addition to rendering of services, completion of a contract for a definite period was a condition precedent to receive remuneration or commission stipulated thereunder which was not met. The relevant para of the order is reproduced as under : If, therefore, on the construction of the managing agency agreements we cannot come to the conclusion that the Sassoon had created any debt in their favour or had acquired a right to receive the payments from the companies as at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd 'earned' has not been used in s. 4 of the IT Act. The section talks of 'income, profits and gains' from whatever source derived, which (a) are received by or on behalf of the assessee, or (b) accrue or arise to the assessee in the taxable territories during the chargeable accounting period. Neither the word 'Income' nor the words is received , 'accrues' and 'arises' have been defined in the Act. Thus, in my humble understanding, Their Lordships after observing that the term earned was not used in the Act and the term accrued was not defined in Act, differentiated the term earned from the term accrual in the context of the peculiar facts of that case only because these terms, in general, are used to indicate the generation of income in a commercial sense. The situation would have been entirely different if the term accrual was defined in the Act when the aforesaid judgment was rendered. The statutory changes made thereafter, have to be taken note of and from the following discussion, it would emerge that the concept of accrual has to be viewed differently in view of statutory changes made incidentally from asst. yr. 1997-98 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1961 and AS 1 notified by the Central Government under s. 145 (2) as under : (a) Accrual Revenue and costs are accrued, that is recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the period to which they relate. As per this definition, it would appear that the revenue and cost are recognized as they are earned or incurred and not as money is received or paid. (b) AS 1 relating to disclosure of accounting policies as notified by the Central Government under s. 145(2) reads as under : (1) All significant accounting policies adopted in the preparation and presentation of financial statements shall be disclosed : (2) The disclosure of the significant accounting policies shall form part of the financial statements and the significant accounting policies shall normally be disclosed in one place. (3) Any change in an accounting policy which has a material effect in the previous year or in the years subsequent to the previous years shall be disclosed. The impact of, and the adjustments resulting from such change, if material, shall be shown in the financial statements of the period in whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r; (d) Financial statements means any statement to provide information about the financial position, performance and changes in the financial position of an assessee and includes balance sheet, P L a/c and other statements and explanatory notes forming part thereof; (e) Going concern refers to the assumption that the assessee has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the business, profession or vocation and intends to continue his business, profession or vocation for the foreseeable future. 6.7 Sec. 145(1) of the IT Act, 1961 was amended w.e.f. 1st April, 1997 to require an assessee to maintain books of account either on cash or mercantile system of accounting for computation of income under the head Profit and gains of business or profession and Income from other sources . It is also pertinent here to mention that assessee, being a company, is required to maintain books of account on accrual basis of accounting only as per the provisions of the Companies Act, 1956. Sec. 145(2) was inserted w.e.f. 1st April, 1997 which empowered the Central Government to issue Accounting Standards to be followed by any class ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o something that entitles one to a reward or result, whether it is received or not. (Emphasis, italicised in print, supplied). Thus, earning of income takes place as soon as one performs his services or carries out his part of the contractual obligation regardless of whether he is paid for it immediately or in future. Actual receipt of earned income by the recipient has nothing to do with the earning of income. In the present case, the assessee earned the commission income as soon as it solicited the advertisements and forwarded them to the Principal for approval. Any other interpretation of the term accrual would defeat the legislative intent as expressed in s. 145(2) and the Accounting Standards notified by the Central Government in pursuance thereof. In this view of the matter, the assessee's contention that no accrual of commission income took place until the amounts were paid by the client deserves outright rejection being contrary to the plain provisions of s. 145 (1) and (2) r/w Expln. 6(b) of the AS 1 notified by the Central Government. Thus, the commission income, in my humble view, ought to have been recognised by the assessee and also taxed by the Department at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counting. 7.2 Under accrual basis of accounting, the expenses are recognized by the following approaches : (i) Identification with revenue transaction costs directly associated with the revenue recognized during the relevant period (in respect of which whether money has been paid or not) are considered as expenses and are charged to income for that period, (ii) Identification with the period of time. In many cases, although some costs may have connection with the revenue for the period, the relationship is so indirect that it is impracticable to attempt to establish it, However, there is an identification with a period of time. Such costs are regarded as period costs and are expensed in the relevant accounting period, e.g., administrative expenses such as salaries of general staff, telecom, travelling, depreciation on office building, etc. Similarly, the costs, the benefits of which do not clearly extend beyond the accounting period are also charged as expenses of that accounting period. Thus, there 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 mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the reasons mentioned in para 5.2 at pp. 50 and 51 of this order, the same would be recognized as revenue of the period in which telecast takes place. Accordingly, I uphold the decision of the Revenue authorities in this regard and this ground of the assessee is rejected for all the years under consideration. 9. The second issue is connected with the disallowance of advertisement expenses incurred by the assessee wherein both assessee and the Revenue are in appeal and the grounds taken by them in their appeals for asst. yr. 1998-99 read as under : Ground of assessee's appeal : By granting a deduction for only part of the expenses incurred by the appellant on advertisement and publicity during the financial year 1997-98. Ground of Revenue's appeal On the facts and in the circumstances of the case and in law, the learned CIT(A)-XI, Mumbai has erred in deleting the addition made of ₹ 1,80,60,400 out of advertisement expenses. 9.1 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvertisement and publicity shall increase the viewership and popularity of channels of Star network which shall be beneficial to Star network and not to the appellant. The appellant only gets 15 per cent commission on ad-revenue collected. (d) The specimen of advertisements produced before the AO did not bear the name of appellant and all advertisements were in the name of Star. (e) The Star TV holds 69 per cent shareholding of appellant. On the advertisement revenue Star TV/SAS-BV pays tax as per Circular No. 742. The income is deemed to be 10 per cent of net remittable amount to foreign telecast companies implying that all expenses related to 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 CIT(A) 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, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst two aspects, the discussion is made as under : In s. 37(1) of the Act, the word wholly refers to quantum of expenditure and the word exclusively refers to motive, objective and purpose of the expenditure and gives jurisdiction to taxing authorities to examine these matters. The term 'exclusively' used in s. 37(1) also means as to the exclusion of others . No doubt, ordinarily it is the assessee who has to decide whether any expenditure should be incurred in the course of its business or not. But the allowability of an expenditure under s. 37(1) of the Act is not unfettered and unqualified because not only the conditions specified therein have to be met but also the other provisions of the Act such as s. 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 unreason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that advertisement expenditure has helped the assessee in marketing and soliciting of advertisements but again no material has been placed to establish conclusive nexus between the two. In the absence such nexus, mere fact of increase in revenue/business volume over the years alone would not be sufficient to justify the expenditure. 9.7 Further, if the commercial expediency is applicable to the assessee, it is far more applicable to all other parties involved. The assessee has not even got any additional incentives. The business models/structures prevalent in the modern world 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business or profession shall be allowed'. The introduction of the word 'necessarily' in the above section resulted in public protest. Consequently, when s. 37 was finally enacted into law, the word 'necessarily' came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under s. 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. This view is in accord with the following observations made by this Court in CIT vs. Chandulal Keshavlal Co. (1960) 3 SCR 38 at p. 48 : (1960) 38 ITR 601(SC). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the same as third party. At this point, it is relevant to mention that the word exclusively used under s. 37(1) of the Act refers to the exclusion of others, i.e., it should exclusively be incurred for the business of the assessee. In view of above, it is clear that the expenditure incurred by the assessee does not pass the primary criteria (positive test) even and, therefore, the contention of the assessee that the expenditure cannot be disallowed merely it benefited the third party is not valid. The negative criteria as laid down by 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 above negative criteria then such expenditure would not be allowable. In the present case, admittedly the Principal of the assessee and Owner, the owner of the television channels are liable to pay tax at 10 per cent of the gross receipts in accordance with the CBDT Circular No. 742 which means that although such expenditure I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into two categories, namely, (1) Positive tests, (2) Negative tests. One (at least one) of the positive tests must nod its head and none (not even one) must do in order to affirmatively hold that the expenditure is a business expenditure inter alia, incurred on account of commercial expediency. It is apparently clear that the expenditure incurred by the assessee falls into more than one of negative tests, i.e., cls. 1,8, 11, 12, and 13 of aforesaid negative list and, therefore, the same is not allowable under s. 37(1) of the Act. 10. In view of above discussion, I am of the considered opinion that the learned CIT(A) was not justified in restricting the disallowance made by AO to 80 per cent merely on the ground that some benefits were derived by the assessee, therefore, I set aside the order of learned CIT(A) and restore the order of AO in this regard for all the years under consideration. REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961 19th Dec., 2005 Since there is a difference of opinion between the Members constituting the Bench on certain points, we request the Hon'ble President, Tribunal to kindly refer the following questions for the opinion of the Third M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SAS BV ); (ii) producing/procuring and supplying programmes to Satellite Television Asian Region Advertising Sales ( STAR ), Hong Kong; and (iii) acting as a licensee in India in respect of Star Movies pay channel. 4. The assessee entered into an agreement on 31st May, 1994 with a non-resident with the name Star Advertising Sales BV of Netherlands, which had exclusive rights in India from Satellite Television Asian Region Ltd. of Hong Kong for television advertising on various television channels. The assessee was appointed as one of the agents in India to market television advertising for the channels. This arrangement had the approval of the Reserve Bank of India (RBI) as per their approval letter dt. 22nd July, 1994. 5. The relevant features of the agreement are as under : 1. Appointment The company hereby appoints the agent as its non-exclusive independent agent in India to market television advertising for the said channels, and the agent unequivocally accepts such appointment. 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. Client requisition After having solicited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvertisements booked, but accrued when payment was received from clients. Accordingly, in the years under consideration, the assessee claimed that income accrued from commission from its Principal on the date when the money was realized by it from the clients. After giving appropriate notes, the assessee returned income on above basis, i.e., taking accrual of income when realized from the clients and to that extent method of computation of income was changed. In the notes given along with the return submitted, assessee relied upon the decision of the Supreme Court in the case of Keshav Mills Ltd. vs. CIT (1953) 23 ITR 230(SC) to justify the change and also pointed out that on account of change in accounting policy, commission income for the year ended 31st March, 1997 would be lesser by ₹ 8,10,11,000. The assessee disclosed loss instead of net profit of ₹ 52,32,000 if the system earlier adopted was followed in the year under consideration. The relevant notes are reproduced in detail at pp. 4 and 5 of the proposed order of the JM. 7. When called upon to justify above change in policy, the assessee explained that under cl. 8 of agreement with its Principal, commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmission to the assessee did not accrue when the advertisements solicited by the assessee were telecast by its Principal. It was accordingly submitted that the assessee in the years under appeal had shown income correctly on the ground that income accrued to the assessee only when the amount was realized. In this connection, reliance was placed on cl. 8 of agreement under which assessee as an agent was entitled to retain 15 per cent of the net invoice amount paid by clients as commission. The aforesaid cl. 8 of the agreement when read with conditions on which permission to the assessee was granted by RBI leaves no amount of doubt that commission accrued to the assessee only when it got the right to retain the commission, which situation did not arise unless the amount was paid by the clients. He submitted that no enforceable debt in favour of assessee accrued till the amount was realized from the clients. Receipt of amount was condition for accrual of income. The learned counsel also argued that Circular of CBDT No. 742 supported assessee's contention. As per above Circular, no income accrued even to the foreign Principal unless the amount was remitted. Thus, the learned counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n detail by the AO on the telecast of advertisements. As soon as advertisements were telecast, right to receive commission accrued to the assessee. The learned Departmental Representative further submitted that once income has accrued its taxability cannot be postponement merely because it is not quantified or not realized subsequently. The agreement between the parties is to be read as a whole and when so done, it is clear that primary job of the assessee was to market and elicit advertising for telecast for its Principal. Therefore, when advertisements were telecast on Star TV, the job of the assessee can be said to be fully executed. So right to receive commission would accrue as soon as services in the shape of telecast of advertisements is carried. Clauses 7 and 8 of agreement only provided for modalities for remitting the amounts to the Principal. Likewise, approval of RBI and conditions imposed by them had nothing to do with the accrual of income. Alternatively, commission could be said to have accrued when invoice was raised by the Principal. The decisions cited by the learned counsel for the assessee in the case of Pfizer Corporation (supra), as per the learned Departmenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrue until the happening of the contingency and AO would not be justified in assessing the same merely on the basis of completion of services by the assessee. Such contingency may, in certain case, also coincide with date of payment as in the case of Seth Pushalal Mansinghka (P) Ltd. vs. CIT (1967) 66 ITR 159(SC), where transfer of property in goods, which was the basis of accrual of income, coincided with the date of payment. So, the contention of Revenue that date of payment can never be the date of accrual, cannot be accepted. So accrual of income would depend on the terms of agreement in each case. 15. Thereafter, the learned JM referred to the agreement between the parties as according to him the agreement as a whole was required to be considered. He found that cl. 8 of the agreement was the only clause, which speaks of commission to be paid to the assessee and provided as under : The agency shall be entitled to retain 15 per cent (fifteen per cent) of net invoice value paid by the clients as commission Above clause, according to the learned JM, clearly provided a contingency in the agreement, i.e., payment of net invoice amount to the assessee by its clients. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on this issue and consequently, the AO is directed to re-compute the income for all the years under consideration in accordance with our order. 18. The ground relating to disallowance of ₹ 9,03,02,000 and ₹ 9,38,05,000 on account of advertisement expenses for asst. yrs. 1998-99 and 1999-2000, respectively is discussed by learned JM in para 35 of his proposed order. The learned JM has noted explanation of the assessee to justify the expenditure in question as under : As submitted earlier, NTVI incurs expenditure for advertisements, which are undertaken 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 JM noted the objections of the AO to the claim made by the assessee as under : (i) manufacturing programme for Star TV, (ii) activity of assessee as commission agent for collecting advertisements, revenue for Star TV and (iii) activity of cable subscription for Star TV. The AO was of the view that such expenditure was not incurred wholly and exclusively for the purpose of business of assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertisements by assessee only increased the viewership of Star TV and, therefore, it was neither obligatory nor necessary for the assessee to incur such expenditure, (ii) that advertisement had no nexus with assessee activity since advertisements were in the name of Star TV. In view of these grounds, the AO held that expenditure was not incurred wholly and exclusively for the purpose of business. Such grounds taken by AO are in conflict with the settled legal position as explained by the apex Court in the case of Sassoon J. David Co. (P) Ltd. vs. CIT (1979) 10 CTR (SC) 383: (1979) 118 ITR 261(SC). 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 AO 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 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. Assessee was required to solici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debt will not affect accrual of income. For the aforesaid conclusion, the learned AM relied upon the decision of the Supreme Court in the case of CIT vs. Shri Govardhan Ltd. (supra). The learned AM further observed that once a debt is created, the uncertainties attached thereto regarding quantification or realization would not alter its character, though the amount of profit may change depending upon the realization; 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 Principal. The aforesaid observation seems to be inspired from the decision of Kings Bench in the case of IRC vs. Gardener Mountain D'Ambrumenil Ltd. (1947) 29 Tax Cases 69 (HL). The learned AM also referred to Accounting Standard and provisions notified by the Ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osed 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 para the learned AM discussed in detail how assessee was not justified in changing accounting policy relating to accrual of commission. 22. The learned AM thereafter discussed the proposition and distinction between accrual of income and earning of income . He also referred to AS 1 and provisions of ss. 4, 5 and 145 of the Act. There is reference to the dictionary meaning of the word earned and accrual . In ultimate analysis, the learned AM 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 the cost are being charged to the P L a/c of a particular period correspondingly the Revenue related to such cost should also be credited in the P L a/c of the period. In this view of the matter, the assessee's conduct of claiming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 J. David Co. (P) Ltd. (supra) the learned AM evolved the positive and negative steps to be applied to determine whether expenditure was incurred for the purpose of business and was admissible in law. On application of above tests, the learned AM held that expenditure incurred by the assessee was not deductible. The learned AM relied upon the following observations of the Supreme Court in the case of CIT vs. Chandulal Keshavlal Co. (supra) : Another fact that emerges from these cases is that if the expense 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia and thus, commission of the assessee was worked out only on the balance amount. Shri Kaka argued that the learned AM 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 AM 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 AM misread the agreement relating to responsibility of the assessee to collect fees due to its Principal. He also submitted that Principal of the assessee was a non-resident and was interested in amounts remitted to it. It was not interested in merely booking advertisements on Star TV. Having above in mind, it had provided in the agreement that commission would be due to the assessee only when amount due to the Principal is collected by the assessee. 26. Shri Kaka vehemently contended that the learned AM was wrong in concluding that commission due to the assessee would accrue as soon as services are rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat is, the mills were not sufficient to enable the directors to recommend a dividend of 8 per cent per annum on the paid-up capital, then the managing agents were bound to forgo a portion of their commission upto 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 back a portion of the commission in certain contingencies, which also could be determined only when the accounts were made up for the year. It is thus clear that there was no accrual of any commission till the end of the year. On this construction of the contract it cannot be held that the commission had accrued as and when the sales took place and that as a result of their agreeing to the modification of the agreement the managing agents were entitled to receive commission only at the end of the year and before then the agreement was varied modifying its terms as fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit in any financial year to enable a distribution of a dividend of ₹ 1,20,000 on the total paid-up capital the managing agent was to give up out of the commission an amount upto 1/3 of the commission to enable the distribution of that amount of dividend to the shareholders. On 28th Dec., 1950 and 1951 that if the directors having regard to the results of the working of the managed company were of the opinion that a lesser remuneration should be paid to the managing agent for any of the two years the directors shall have the right to fix such lesser remuneration either by way of a lump sum or at a reduced percentage rate and the managing agent shall be bound to accept the same. On 17th March, 1951, there was a supplemental agreement embodying the terms of this resolution and on a supplemental agreement embodying the terms of this resolution and on 8th April, 1651. the directors by a resolution fixed the remuneration at ₹ 4,11,875 instead of the commission calculated at the old rates which worked out at ₹ 5,11,875. In this case also the question was whether the sum of ₹ 1,00,000 was subject to income-tax : Held (i) that the agreement was one integrated an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. Birla Gwalior (P) Ltd. 1973 CTR (SC) 349: (1973) 89 ITR 266(SC) there were no date fixed in the agreement for payment of managing agency commission. The assessee had foregone commission upto 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, therefore, could not be given up after the end of the financial year. This contention was repelled by Their Lordships with the following observations : (i) That the office allowance forgone by the respondent was allowable as revenue expenditure under s. 10(2)(xv) of the IT Act, 1922.'CIT vs. Chandulal Keshavlal Co. (1960) 261 SCR 38 (SC) followed. (ii) That, as the managing agency commission receivable could have been ascertained only after the managed company had made up its accounts and the respondent had given up the commission even before the managed company made up its accounts, and no date had been fixed in the agreement for payment of the commission, the mere fact that the respondent was maintaining its accounts on the mercantile system did not lead to the conclusion that the commission had accrued to it by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 materialized, there can be no liability to tax on a hypothetical income. It is not the hypothetical accrual of income based on the mercantile system of accounting followed by the assessee that has to be taken into account, but what should be considered is, whether the income has really materialized or resulted to the assessee. The question whether real income has materialized to the assessee has to be considered with reference to commercial and business realities of the situation in which the assessee has been placed, and not with reference to his system of accounting. Similar is the view taken by the Tribunal, Special Bench at Hyderabad in the case of Dy. CIT vs. Nagarjuna Investment Trust Ltd. (1998) 62 TTJ (Hyd)(SB) 33: (1998) 65 ITD 17(Hyd)(SB). Relevant observations are reproduced below : (m) From a reading of the provisions of s. 145 in conjunction with the charging provisions contained in s. 4. the scope of the total income defined in s. 5 and other relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny pending remittance as provided in the agreement. The collections are to be made without any charge to the company. 29. In the light of above clause it is difficult to hold that assessee does not have obligation to collect sums due to its Principal as the assessee was required to make collection on behalf of its Principal and the service of the assessee would be treated as complete only when sums due to the Principal are collected by the assessee. Therefore, even on principle accepted by the learned AM, commission could not accrue unless collection was made by the assessee. This position is made more explicit as per cl. 8 of the agreement referred to above. 30. The learned Departmental Representative supported the proposed order of learned AM. He submitted that the learned Member had taken into account concept of accrual of income and concept of real income. He has noted that under mercantile system of accounting, point of accrual of income is when assessee acquires a right to receive income. Right to receive in the present case accrued to assessee as soon as job was performed under the contract. As soon as job was completed, right to receive commission arose to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rival submissions of the parties and examined orders of my learned Brothers in the light of above submissions. I have also carefully examined agreement between the parties which has been reproduced in the earlier part of this order. There is no controversy that assessee's income is to be computed on the basis of mercantile system of accounting. It is nobody's case that assessee is following cash system of accounting. There is further no dispute that under the above system, income is liable to be taxed as soon as assessee has right to receive the income. Likewise expenditure under the system is to be allowed on the basis of liability to pay. Actual payment is not relevant. There is further agreement that aforesaid question has to be determined with reference to provisions of ss. 4 and 5 of the IT Act. The main controversy involved here is at what point of time, income accrued to the assessee. According to the assessee, commission income under the agreement could accrue to the assessee as per cl. 8 of the agreement which provided that the agent (assessee) shall be entitled to retain 15 per cent of net invoice amount paid by clients as commission. So the case of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount is paid by assessee's client. It cannot accrue prior to or before payment is made by the assessee's client. The payment or realization of amount from client for the advertisement aired in TV channel is a condition precedent for accrual of income in this case. Though cl. 8 of the agreement is in clear terms and is sufficient to indicate as to when income would accrue to the assessee, other terms of the agreement also support the same inference : The learned AM, in the proposed order, on the basis of cl. 7 of agreement, has observed, it is relevant to mention that no contractual obligation has been cast upon the assessee to make efforts to realize the amount from clients as it would have cast implications and the assessee is not getting any money from Principal on this score, therefore, it leads to an obvious conclusion that role of the assessee is limited to receive the amount paid by clients. In nutshell the assessee is under no obligation to realize the amount from clients. The aforesaid inference drawn by the learned AM is legally and factually incorrect. Sub cl. (b) of cl. 7, of the agreement provides as under : (b) The agent shall, without any charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reto regarding quantification or realization would not alter its character though the amount of profit may change depending upon the realization, the delays and difficulties which may arise in particular case. In the present case, a debt in favour of assessee was created as soon as the assessee performed its part of contractual obligations and the quantification of commission based upon the contract with the clients, at the stage of acceptance of soliciting advertisements by Principal could be done. Therefore, there is no limitation as such to account for the income from commission at this very point. It also emerges from the perusal of the above decision that the future uncertainties, difficulties and delays etc would not effect the right to receive the income, 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 Principal. If the assessee does not claim commission in such cases, it would amount to relinquishment of income after its accrual. 38. Having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 23A of the IT Act. Undisputedly s. 23A was attracted if aforesaid sum of ₹ 70,895, i.e., the share income of assessee-company from partnership was taken into account. The contention of the assessee was that meeting of board of directors to declare dividend was held on 17th May, 1951 and by that time books of account of the firm were not made up nor share of profit was known. Therefore, income of ₹ 70,895 had not accrued to the assessee. Their Lordship of Supreme Court rejected above contention by observing as under : It is conceded in this case that the annual general meeting of the assessee was held on 17th May, 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., 31st March, 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Lords is based on peculiar terms of that contract. No material is brought on record to show that contract involved in the case before House of Lord and one in the case before us were identical or so similar that from the terms of the contract, it can be held that right to receive compensation accrued to the assessee, much earlier than amount on which commission was to be worked out was actually realized. Aforesaid cases are distinguishable on facts and not applicable to the present case. 42. The decisions cited by the learned counsel for the assessee are fully applicable and, therefore, on that basis and in the light of cl. 8 of agreement, it has rightly been held by the learned JM that income accrued to the assessee when payment due to its Principal was realized by the assessee and he was in a position to retain his commission. 43. As far as second question relating to disallowance of expenses is claimed, I find that there is no dispute about the genuineness of the expenditure incurred by the assessee. There can further be no dispute that expenditure incurred by the assessee on advertisement made had direct nexus with earning of income by the assessee. It is possible that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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