TMI Blog1968 (10) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... ted company incorporated on 7th May, 1947, under the company law prevalent in the erstwhile State of Bikaner. It carries on business of extraction of Gypsum from Jamsar Mines in Bikaner District. The company sold gypsum so extracted to various persons all over India. The United State of Rajasthan was formed on 7th April, 1949, in which the State of Bikaner was merged. On January 26, 1950, when the Constitution of India came into force, the United State of Rajasthan became a Part B State under the Constitution. The registered office of the assessee-company is situate at Bikaner. During the accounting year ending 31st March, 1949 (assessment year 1949-50), the assessee-company sold 24,291 tons of gypsum to various cement companies and local parties, the sale value of which was Rs. 3,01,479-12-0. In this year, the assessee-company started negotiations with the Government of India for persuading them to use Jamsar gypsum for the Fertilizer Project, Sindri. In this connection the assessee-company incurred expenses to the extent of Rs. 14,914-10-6. These expenses were not shown by the assessee-company in its profit and loss account for that year, but this amount was shown in the suspense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses which had been incurred by it in the earlier two years and which, as already mentioned, was carried forward by it in the balance-sheet partly in " suspense account " on account of supply to the Sindri Fertilizer Project and partly as " overburden expenses ". The assessee-company claimed the entire amount of Rs. 91,617 as deduction under section 10(1) of the Act or under the general principles of determining the profit and loss of the assessee-company or under section 10(2)(xv) of the Act. The Tribunal disallowed this sum as it had not been spent in the accounting year ending on 31st March, 1951 (assessment year 1951-52). These facts relate to question No. (1) in Civil Reference (Income-tax) No. 12/63 which is as follows : " (1) Whether, in the facts and circumstances, the sum of Rs. 82,504 spent by the assessee-company in the earlier years as expense for procuring and execution of Sindri Fertilizer Project first contract and carried forward by it in its balance-sheet partly as ' suspense (on account of supply to Sindri Fertilizer Project) ' and partly as ' overburden removal ' is allowable as a deduction under the Indian Income-tax Act under section 10(1) or under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company in Part A State and as such the assessee-company was not entitled to any concession on these profits under the Tax Concessions Order. The following questions Nos. 2 and 3 have been referred by the Tribunal on these facts : " (1) Whether, in the circumstances of the case, there was any material before the Tribunal on which it could assume and hold that the profit on sales of Rs. 8,73,568 accrued in Part A State ? (2) Whether on a correct interpretation of sub-clause (iii) of clause (1) of para. 4 of the Part B States (Taxation Concessions) Order, 1950, the Tribunal was right in holding that the assessee-company was not entitled to concessions on profits of goods sold, the sale price of which was not received within the relevant previous year and stood as book debt, at Rs. 99,272.75 in the books of the assessee-company ? " Reference No. 13/63 relates to the year ending 31st March, 1952 (assessment year 1952-53). During this year, the total sales of the assessee company amounted to Rs. 6,75,376, of which the sales to parties in Part A States was of Rs. 6,34,888 and to the residents of Part B States was of Rs. 40,488. There appears to be some mistake in the figur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se deed. The assessee-company claimed a sum of Rs. 7,453 in defending the monopoly right enjoyed by it under the aforesaid instrument of assignment of lease as an admissible expense under section 10(2)(xv) of the Act. This claim was rejected by all the income-tax authorities. The Tribunal has referred question No. 3 on these facts. Notice of these references were given to the parties and elaborate arguments were addressed by the learned counsel for the parties. We first take up question No. (1) of reference No. 12/63. As mentioned above, the assessee-company has claimed deduction of this amount in the year ending March 31, 1951 (assessment year 1951-52), though this amount of Rs. 81,504 was not spent by the assessee-company in that year but was spent in earlier years. Three-fold arguments have been addressed by learned counsel for the assessee-company for claiming this amount as an allowable deduction under the Act. We proceed to discuss the first argument. It is urged that under section 13 of the Act, income, profits and gains have to be computed for the purpose of sections 10 and 12 of the Act in accordance with the method of accounting regularly employed by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits are to be computed in accordance with the method of accounting regularly employed by the assessee, then it is to the method of accounting that one must look. And if the method of accounting regularly employed is a method whereby litigation expenditure is, so to say, kept in a suspense account and is brought into the accounts only for the purpose of being claimed as expenditure when the fate of the litigation is clear and nothing can be recovered out of the sum expended then it ought not to matter whether the expenditure which has been kept in the suspense account was actually incurred in earlier years. If according to the regularly employed method of accounting the expenditure is treated as having been incurred in the accounting year, then it should matter little whether the expenditure was actually incurred in years earlier. Of course this does not mean that an assessee would be entitled to the benefits of his accounting system if that were brought ; into existence for the particular purpose of backing his claim only in the particular year. But if a method of accounting is regularly employed, then the assessee ought to get the advantage and suffer the disadvantage of that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------- --------------- Assessment year 1951-52 Dr. Rs. Cr. Rs. Opening balance 39,690 Transferred to mining expenses 66,158 Expenses incurred during the year 26,468 Nil ------------------- ---------------- 66,158 66,158 ------------------- ---------------- Assessment year 1952-53 Dr. Rs. Cr. Rs. Expenses incurred Transferred to mining during the year 44,031 expenses 12,027 By balance c/o 32,004 ------------------- ----------------- 44,031 44,031 ------------------- -------------- Assessment year 1953-54 Dr. Rs. Cr. Rs. Open debit balance 32,004 Credit amount trans- ferred to mining expenses 1,51,570 Expenses incurred By balance c/o to during the year 1,61,817 next year 42,251 ----------------------- ------------------- 1,93,821 1,93,621 ------------------------- ----------------- He has urged that the very nature of this account shows that the assessee-company had adopted the method of crediting part of the expenditure incurred by it in that very year and carrying forward the balance to be charged as expense in the subsequent years and this method of accounting prima facie shows that the assessee-company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these circumstances the court held that the real profits of the assessee could only be arrived at after taking into consideration the expenditure incurred in the prior year. Even though the expenditure may not strictly fall within the ambit of section 10, yet for the purpose of assessing the real profits credit must be given to the assessee in respect of the expenditure incurred in the prior years. In this view of the matter, the annual ground rent which the assessee paid previous to the year of account was allowed. In the instant case the assessee is carrying on the business of excavating gypsum and selling it in a regular manner though it may be that he was able to secure a highly profitable contract at a particular period of time. It cannot, therefore, be said that the assessee-company was entering into a single venture. In our opinion, this contention of the learned counsel for the assessee-company has also no force. The third argument on behalf of the assessee-company is that under section 10(1) of the Act, tax is payable by an assessee under the head " profits and gains of business " in respect of profits or gains of any business carried on by him and it is contended that p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess and was incidental to his business and, having regard to the accepted commercial practice and trading principles, was a deduction which, if there was no specific provision for it under section 10(2) of the Income-tax Act, was certainly an allowable deduction. The expenditure (sic) was actually incurred or the liability in respect thereof had accrued even though it may have to be discharged at some future date is an allowable expenditure. But it must be noted that the appellant in that case had adopted a well recognised method of accounting, that is, the mercantile method and the receipts appearing in the books of account included the unpaid balance of the sale price of the plot in question and the amount of liability undertaken by the appellant on those receipts was shown as an expenditure in the accounting period. It was held that such an expenditure could be deducted in the year under assessment. This is not the case before us. We do not mean to say that the expenditure incurred by the assessee company with regard to the travelling expenses of its officers and servants incurred in connection with the securing of the contract or for what has been described as an over-burden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in the assessment year could be charged as an expenditure in that year. For one reason or the other, the assessee-company did not show the expenditure incurred by it in the year in which the amount was spent nor has it been held by the Tribunal that the assessee-company had regularly adopted a method of accounting under which it could carry forward the expenditure incurred by it in a particular year to the subsequent year. Under these circumstances, we answer question No. 1 of Reference No.12/63in the negative. Now we take up question No. 2 of Reference No. 12/63. To answer this question we have to determine whether, in the circumstances of the case, the profits on the sales effected by the assessee-company in the assessment year 1950-51 accrued in Part A State or in Part B State. The relevancy of this will be apparent by noticing some of the relevant provisions of the Tax Concessions Order. The Order was made by the Central Government in exercise of the powers conferred by section 60A of the Indian Income-tax Act, 1922. The purpose of making this Order was that in some parts of the territories of Part B States, there was no income-tax. In other parts, income-tax was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the rate of 40 per cent., 20 per cent. and 10 per cent., respectively, for the assessment for the year ending on the 31st day of March, 1953, 1954 and 1955 ; ........... " Under paragraph 6, tax is payable only in respect of profits and gains included in the total income as accrues or arises in any Part B State other than the State of Jammu and Kashmir and the States of Patiala and East Punjab States Union and Travancore-Cochin. The Tribunal has taken the view that in Part A State in the year ending on 31st March, 1951 (assessment year 1951-52), the profits on the sale of Rs. 8,75,568 accrued to the assessee-company. The question as framed is whether there was any material before the Tribunal for taking this view. The assessee-company was carrying on business of excavating gypsum and selling it to its customer. The working of excavating the gypsum was confined to an area which formed part of the erstwhile Bikaner State. The business of selling gypsum extended to parties who not only resided in Part B State but also to the residents of the Part A State. The statement of the case in paragraph 7 mentions the nature of contract and the method and manner adopted by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was the document of title to the goods unconditionally. It may also be mentioned that bill of lading was issued in the name of the assessee in that case. In the case before us, the property in the gypsum passed to the buyers at Jamsar, in any case at Jamsar railway station when the goods were loaded. The railway receipts were drawn in the name of the buyers and from Jamsar the goods moved at buyers' risk. The railway receipts were handed over unconditionally to the buyers. The assessee-company reserved no lien on the railway receipts. With the handing over of the railway receipt, the property in the gypsum passed to the buyer. Thus profits on all the sales accrued to the assessee-company at Jamsar and there was no material before the Tribunal to hold that profits to the assessee-company accrued in Part A States. It has been urged by learned counsel for the department that the basis of assessment by the Appellate Assistant Commissioner was receipt of the sale price and he has contended that the matter of receipt of sale price is material for assessment for the assessment year 1951-52, in view of the provisions contained in paragraph 4(1)(iii) of the Concessions Order because p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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