TMI Blog2018 (1) TMI 1028X X X X Extracts X X X X X X X X Extracts X X X X ..... zes were to be distributed to the subscribers throughout the tenure of Scheme of 12 years. Such subscribers, who could not get any prize, were to receive gifts in the form of articles worth ₹ 2500 at the end of the Scheme. Therefore, it is apparent that under the mercantile system of accounting, the entire amount of ₹ 2500 per subscriber for the subscriptions - whether fully or partly paid during the year - accrues as income at the time of subscribing to the scheme. It also entails liability running throughout the period of 12 years in the form of prizes The position which will follow is that from the second year onwards up to 12th year, there will be deduction for expenses without there being any corresponding income. This divulges that if cash system of accounting is followed, it will result in an artificial higher income in the hands of the assessee in the first year, on which it will be liable to pay tax; and in all succeeding years there will be expenses only which will not get adjusted against any income. Following cash system of accounting in the given facts would give distorted position of the income in the first year which, is not correct. Therefore, agree w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India was acting as assessee’s agent for collection of subscriptions under the Scheme - Held that:- We cannot concur with the view taken by learned Judicial Member that the invocation of section 211 of the Contract Act amounted to setting up of a new case by the Revenue and would have the effect of enlarging the controversy. The issue of notional interest was very much before the tribunal. The ld. DR simply supported his point of view of charging notional interest on the strength of section 211 of the Contract Act as well. No new case, much less the enlargement of the controversy, was set up by this argument, as has been opined by the ld. JM. In fact, this argument was on the same subject matter, which was there before the tribunal for adjudication On merits, it is noticed that the assessee entered into an Agreement with Sahara India for collecting subscriptions from its Members and remitting the same to the assessee at the end of the each month. There is nothing in the Agreement that if the amount collected is retained beyond a period of 30 days, Sahara India would be liable to pay interest on such amount. There is no actual accrual or receipt of income to the assessee by allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with minimum interest earning of ₹ 1,500/- directly from the Post Office/Bank subject to the rules, regulation and directions of the post office/bank. In case of any increase in the interest rate of post office/bank of the increase interest earning amount shall obviously go to the accountholder. Accountholders shall directly get the maturity payment from post office/bank. The reason for not getting the full interest on the total deposit of the accountholder with the company is due to the deduction of the portion of interest. The accountholders shall not be entitled to claim for the same deducted portion because of expenses of the company and prize/interest free loan etc. and to cover the overheads and the profit of the company however, in case of prematurity payment taken by the accountholder from the post office/bank, the company shall have the power to cease the right of the accountholder to participate in the remaining draws and to disallow all other benefits. 6. PRIZES: Monthly draws shall be held by the company together with a Bumper draw in each quarter. During total tenure each accountholder shall be entitled to get chances in 144 monthly draws and 48 bumper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... untholder shall be entitled for dividend in shape of cash or gift (as per the choice of accountholder) after joining the account by depositing of ₹ 2,500/- to the company till the draws starts @ ₹ 11/- per month as per rules of the company or company shall hold mini draw every month with this amount i.e. on over ₹ 1,000/- accounts ₹ 11,000/- worth items shall be given. (13) Death Help- In the event of death of any accountholder the nominee of that accountholder shall be eligible to take death loan either ₹ 50,000/- lump sum or ₹ 1,200/- per month for sixty months, from the company against personal guarantee to sixty months, from the company against personal guarantee to the satisfaction of the company. The death should not occur due to suicide or death punishment by court of law. The privilege of the death loan shall be given to nominees of only those accountholders who are only between 10-50 years of age at the time of joining the account and have not suffered from any chronic/fatal disease within three years at the time of becoming accountholder . 3. In essence, the members of the scheme contributed ₹ 2,500/- in cash in a lu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 93 computing net loss at ₹ 1,30,586/-. In first appeal, the C.I.T.(A) passed an order on 30.8.1995, which is before us, enhancing the income and computing total income at ₹ 26,19,774/-. This resulted in an enhancement of ₹ 27,50,340/- 8. The net loss as per audited profit and loss account was ₹ 1,46,298/-. However, in the course of assessment proceedings, the assessee recast the same and claimed a net loss of ₹ 26,05,125/-. The Assessing Officer rejected the accounts under proviso to section 145(1) and computed the net loss at ₹ 1,30,586/-. The C.I.T (A) confirmed the applicability of proviso to section 145(1) but ascertained a net profit of ₹ 36,19,774/ The comparative figures of the four profits and loss accounts may be seen below at a glance, the salient features will be highlighted thereafter:- PROFIT AND LOSS ACCOUNTS PARTICULARS AUDITED ACCOUNT REVISED COMPUTATION A.O.'S COMPU-TATION C.I.T (A)'S COMPU-TATION AUDITED ACCOUNIT REVISED COMPUTATION ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - To Audit Fee 6,000 6,000 - 6,000 To Legal Expenses 9,670 9,670 - 9,670 To General Charges - - - - To Preliminary Expenses 2,305 2,305 - - Written off To Depreciation 468 468 468 468 To other expense - - 18,609 - As calimed To NSC being 40x of g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Provision in the balance sheet 11. The same was elaborated by the assessee in one of the letters to the Assessing Officer as under:- As per accounting policy consistently followed by the company 16% of the gross collection is transferred to the P/L A/C of the first year of collection, N.S.C. for 40% of gross collection is obtained in the name of subscribers and balance 44% transferred to the Reserve A/c. This reserve is adjusted by credit to the Profit Loss Account in following 11 years @ 4% each year. Since the tenure of the scheme is of 12 years and prizes are distributed every year which are charged to the P/L A/C of the year, 4% of collection of every year is credited to the P/L A/C of every following year. Detailed working of the amount collected and transferred to Reserve A/C is being filed herewith . 12. The manner, in which collection received in the scheme, were worked out, was explained further numerically as under:- LIABILITY TOWARDS NSC UNDER SCHEMES Total collection under the scheme 59,84,631/- Less: fully paid subscriber 19,70,000/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which 5% of the total collection has been paid to the said firm. An agreement to this effect has been entered into between the company and firm. 6. 8% of the total collection has been incurred as commission development expenses of which 6.75% is towards development expenses and 1.25% as commission. 7. Advertisement Publicity commission and development expenses have been differred to the extent of 60% and balance 40% has been debited to P/L Account. Similarly expenses relating to stationery printing have been differed to 75% and balance 25% have been adjusted to P/L account . 15. Prizes under Golden Key were shown at ₹ 1,54,000/-. This consisted of prizes actually paid ₹ 82,135/- (adopted by CIT (A) and outstanding prizes payable ₹ 71,855/- (shown as current liability in the balance sheet. 16. In the course of assessment proceedings, the assessee urged that the credit to the Profit and Loss account of administrative and process charges ₹ 9,57,540/- had been erroneously given and should be withdrawn. It was claimed that the subscription received under the scheme was capital in nature and no part thereof was liable to tax. This is one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entire collections as revenue receipts with reference to cash receipts whereas the expenses were allowed with reference to liability worked out over a number of years. In other words, she adopted cash system with reference to credit side and mercantile system with reference to debit side of the profit and loss account. 20. In the first appeal, a preliminary objection was raised before the CIT (A) saying that the schemes floated by the company were adversely affected due to the decision of the Supreme Court against the company with reference to the prizes fixed and moneys circulations scheme (banning) Act, 1978, which has placed embargo for running such schemes. The Supreme Court had directed the Registrar of firms and societies and chits to look into the scheme and ensure that the interest of the depositors or subscribers got safeguarded. The entire money might be refunded to the subscribers. It was urged that the appeal may be kept in abeyance. The CIT (A) did not accept the objection. He observed that the scheme was floated after 8 years from the passing of the Act and had run about 8 years. The consequent of the judgment of the Supreme Court were very contingent. There was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent methods of accounting. 24. Even the liabilities for prizes computed by the Assessing Officer were disputed. It was pointed out that prizes which might be declared in future, had been computed and considered even though such prizes had not been declared and were future liabilites. Reliance was placed on a judgment of the Madras High Court in the case of M.S.P. Shanthi Kumar Nadan and Sons v. C.I.T. [1957] 32 ITR 138 where it was held that only an ascertained liability justified an entry account maintained on mercantile basis. Reliance was also placed on a decision of the Supreme Court in the case of Indian Molasses Co. (P.) Ltd. v. CIT[1959] 37 ITR 66 where it was held that what is deductible is expenditure which is towards a liability actually existing at the time but the putting aside of money, which became expenditure on the happening of an event was not expenditure. 25. On the other hand, the Assessing Officer, who was present in the appeal proceedings, submitted that minimum guarantee prize was actually a contingent liability whose amount was unasertainable and was not the return of principal. Attention was invited to remarks of the auditors saving that no provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eipts. The credits were on receipt basis and debits partly on cash and partly on mercantile basis. He relied upon a decision of the Madras High Court in G. Padmanabham Chettiar Sons v. CIT [1989] 45 Taxman 90/[1990] 182 ITR 1 which has laid down that consistent method has to be adopted for both sides. In the light of the above, he held that proviso to sec. 145(1) had been righty invoked as the assessee itself was not sure of the correct working. 29. The C.I.T. (A) further observed that the Assessing Officer has adopted cash system with reference to gross collections but as imaginary system of mercantile for allowing actual liabilities on the debit side. The last computation of assessee was also unsatisfactory, since all the collections had been excluded. He took a view that all the collections, excluding the amount desired as capital receipts to the extent of 40% of the fully subscribed deposits were of revenue nature. He upheld the finding of the Assessing Officer, treating 60% of the receipts as of revenue nature. The decision of the Supreme Court in the case of M/s. Peerless General Finance and Investment Limited (supra) was found to be distinguishable inasmuch as the schem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same. However, some part had been initially accounted for on deferred payment basis, but later on the assessee was advised that the entire amount would be deductible. The department had taken a view that the full amount collections, as deduced by liability for NSCs. at the rate of 40% would be revenue receipts. The CIT (A) had also taken a view that the full amount of collections were revenue receipts but had allowed deductions for NSCs. on cash basis i.e. only the amount of NSCs. actually issued during the year. 34. In response to a query from the Bench regarding the method of accounting being followed by the assessee. The learned counsel stated that it could be called a Hybrid system. As far as collections were concerned, they were claimed as capital receipts and not revenue receipts. There was, therefore no accounting system applicable to it. Earlier, the assessee had credited 16% of the collections in the Profit and Loss account and the Bench could draw its own conclusion regarding the system of accounting followed. Regarding expenditure, it was stated that it was on deferred revenue basis and the quantum which had been deferred, had been arrived on mercantile system. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (Banning) Act had been passed in 1978. However, the Allahabad High Court had held in 1984 that, the Act was not applicable to a scheme similar to the assessee s scheme, in the case of Secured Investment Co. Ltd. it was in this background that the assessee started the Golden Key scheme with effect from June 1986. Subsequently, however the Supreme Court had reversed the decision of the High Court in the case of Registrar of Firms Societies Chits v. Secured Investment Co. Lucknow 1988 Supp. SCC 268, a copy of which was placed before us. A similar decision was copy of which was placed before us. A similar decision was given in the assessee s case also. Consequently, the Registrar of Firms, Societies and Chits had issued a notice to the assessee on 24.9.1995 (copy given according to which the assessee was asked to wind up the Golden Key Scheme within the stipulated time in accordance with certain terms. These terms, inter alia, stated that the assessee will pledge in favour of the Registrar of Co. s of ₹ 24 Crores as security till winding up of the scheme. The company had to liquidate all the liabilities under Golden Key Scheme within a period of one year. For this purpose, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. The case law in support of the finding as mentioned in the order of the income tax appellate tribunal was brought to our notice. Our attention was also invited to a decision of the Allahabad High Court in Pt. Sheo Nath Prasad Sharma v. CIT [1967] 66 ITR 647 where it was observed that the assessee may have committed a mistake in treating a certain receipt as taxable. The mere circumstances that he has shown that receipt as income in his return does not make him liable to tax thereon. An assessee is liable to tax only upon such receipt as can be included in his total income and is assessable under the Income Tax Act. Our attention was also invited to a decision of the Allahabad High Court in Abdul Qayume v. CIT [1990] 184 ITR 404/50 Taxman 171. It had been held that an admission cannot be the foundation for an assessment. Where the income is returned under an erroneous impression or misconception of law, it is always open to an assessee to demonstrate and satisfy the authority concerned that a particular income was not taxable in his hands and that it was returned under an erroneous impression of law. Each assessment year is an independent year and it is always open to taxpayer t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n adjustment was permissible. 45. The learned counsel further submitted that the income should be computed on the above line and relief allowed to the assessee. 46. Alternatively and without prejudice to the first submission, a new plea was taken for treating the accounts on single venture system. It was stated that it was a purely legal plea and therefore, it could be taken for the first time in the present proceedings. Explaining the single venture system, it was submitted that the profits could not be ascertained till the scheme is completed. An illustration of a single venture was civil contract for construction of building extending over several years. It was submitted but this was fit case for adopting single venture system. 47. Our attention was invited to a decision of the Bombay High Court in the case of K.N. Mody, In re [1938] 6 ITR 179. In that case, the assessee purchased large area of land with borrowed capital and resold the same in plots for building purposes. The resale went on for several years. It was held that there is single venture in the nature of trade. The question of assessing profits arises only when the venture comes to an end. 48. The above d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. v. First ITO [1983] 5 ITD 495 (Bom.) 2. P.M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 (SC) 3. Tirath Ram Ahuja (P.) Ltd. v. CIT [1976] 103 ITR 15 (Delhi 52. The decision in the case of Champion Construction Co. (supra) may first be noted. The assessee undertook a project for construction of a multistoried building and sale of flats therein. The construction was completed during the assessment year 1978-79 though only 80 per cent of the total area was sold. The assessee filed returns for the assessment years 1977-78 and 1978-79 showing Nil income on the ground that until the whole project was completed, the income from the project could not be assessed. However for assessment year 1977-78 and assessment was made by applying on net profit rate of 15% whereas the assessment for assessment year 1978-79 was completed by applying net profit rate of 30%. The CIT (A) upheld the assessment for assessment year 1977-78, and cancelled the order of the Income Tax Officer for assessment year 1978-79. 53. The tribunal held that the proposition that profits of the assessee firm a single venture/project in the nature of trade cannot be ascertained unit the venture/project ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and payments is repaid to it may also be received by the assessee in several years. It may be convenient from the point of view of the assessee that profit should be ascertained on the completion of the contract and assessment of the profit should take place after the completion of the contract. But section 3 imposes a charge of income tax upon the profits and gains of the assessee for the accounting year and it is the duty of the income tax authorities to ascertain the profit and gains accruing to the assessee in respect of the payment received during the accounting year. It cannot be said that merely because a contract was completed after the accounting year, no profits arose or accrued to the assessee in the accounting year in the case an incomplete contract there, is a well established method of calculating profits accruing in the accounting year which is set out at page 971 Batliboi s advanced accounting mathemetical certainty is not demanded in a matter of description (p.618) . (ii) P.M. Mohammed Meerkhan (supra) . . . In our opinion, there is no justification for this argument. It is not a correct proposition to say that the profits of the assessee cannot be asc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in peculiar facts of the case. The assessee had hold 22 out of 23 flats and retained one flat, which was not going to be sold. It was, in these circumstances, that the I.T.O. could work out the profits. This position had been explained by the Allahabad High Court in Madan Lal Ahuja (supra) at Page 644. 59. Our attention was also invited to a decision of the Orissa High Court in CIT v. Guttof inungeshutto stock-rado [1992] 197 ITR 66/64 Taxman 303. In that case profits had been computed on complete contract basis for first two years of contract work. It was held that computation on different basis for last two years on contract work was not justified. 60. For the above reasons, it was stated that the single venture system should be adopted. Regarding the year of profit, the learned counsel submitted that it would only be proper to first compute the profits of the venture as a whole for 12 years and then apportion the same to different years on time basis. According to him, no other basis was possible. The collections were heavy in the beginning and ended in 1990, whereas the prizes were few in the beginning and heavy at the end. 61. The learned counsel for the assessee ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be done in instalments. The assessee did not make entries in the books of account, but it was held that this fact was not conclusive. The entire account payable under the agreement was deductible. 65. The learned counsel thereafter invited our attention to section 37(1) of the Act according to which any expenditure not being in the nature of capital expenditure or personal expenses of the assessee was liable to be deducted. There was no question of valuating it or discounting it. However, if the liablity was certain and the figure was not known, then an estimate could be made but still no discounting would be involved. The estimate would be of the entire expenses. 66. Our attention was invited in this connection to a decision of the Supreme Court in the case of Calcutta Co. Ltd. (supra) . In that case, the assessee bought lands and sold them in plots fit for building purposes undertaking to develop them by laying out roads, providing a drainage system and installing lights, etc, then the plots were sold the purchaser paid only a portion of the purchase price and undertook to pay the balance in instalments. The assessee in its turn undertook to carry out the development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire collections were taken as revenue receipts, then the entire liablity for prizes should be allowed as a deduction 70. The learned counsel thereafter went through the assessee s grounds of appeal which have already been covered in the above arguments except ground No. 7 relating to interest under section 215/217, which was stated to be consequential. No separate submissions were made regarding interest. 71. The learned counsel also invited our attention to the grounds of appeal in the department s appeal. In ground No. 1 adoption of cash system of accounting by the CIT (A) as against mercantile system was objected to,, in ground No.2, the computation of prize liability on cash system by the CIT (A) was objected to end the computation by the Assessing Officer was supported. It was also stated that discounting method was based on the directions of the Tribunal in the case of Secured Investment Co. (supra). Ground No.3 related to deleting disallowance of expenses, but such a dispute did not exist in assessment year 1987-88 Ground No.4 was general. 72. Our attentions was also invited to the assessee s cross objection for assessment year 1987-88. The only ground relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities and dismiss the assessee s appeal and had no jurisdiction to pass an order placing the assessee in a worse position by disallowing a sum of ₹ 36,000/- in place of ₹ 30,000/-. 76. Summing up, the learned counsel submitted that the collections were capital receipts and not revenue receipts. In the view of the matter, the deduction for prizes was to be reduced and only excess of prize money over ₹ 1,500/- per subscriber should be allowed as a deduction. In case, it was held that collections were revenue receipts, then single venture system should be considered. The question of cash system of accounting or mercantile system of accounting was to be considered and it was the assessee s contention as well as the department s contention that mercantile system was the appropriate method of accounting, further if collections were revenue receipts, whether full amount should be taken or only 16% thereof as per accounts lastly, liability for prizes had to be computed in full without discounting as an alternative submission. 77. Shri P. Mehrotra Advocate learned special counsel for the department opposed the above contentions. Me first dealt with the nature of col ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tated therein that the reason for not giving full interest was that the accountholder was entitled to claim prizes, interest free loan etc, and the company had to incur expenses and cover the overheads and profit of the company. It was pointed out that in case of prematurity payments, the subscriber was not eligible for prize draws. The result was that number of participants for the prise draw get reduced and the number of accountholders for minimum guarantee prize also get reduced. The learned special counsel submitted that it was the simple matter for the assessee to ask a prize-winner whether he was still holding the NSC. It it was not there, then no prize would be given. 81. At this stage, Shri S.E. Dastur, Sr. Advocate, learned counsel for the assessee invited attention to a copy of affidavit according to which the company had enrolled total of 96,423 members in the scheme of which 28,438 members had not contributed their full contribution to date. It was also stated that the company had never forfeited the right of any member to participate in the prize draw nor forfeited any part of the amount deposited. The company had the power to cease the right of the account to parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find it difficult even to recover the money by expensive dilatory limitative process. 84. The reference thereafter was made to the following Summery regarding the reach and range of the definition of prize chit in para 21 of the judgement :- From the above analysis, it will be clear that the reach and range of the definition of prize chit is sweeping. The generality of the language appears to have deliberately used so that the transaction, arrangement or scheme in which subscribers or contributors agree to forgo a portion of their contributions in the hope of getting an prize or gift should not escape from the net of the definition. Even, the participation of any person in such chit or schemes has been prohibited. The object being that the people should not be attracted to invest their moneies in the hope of getting prizes. The reason being that it has been found by the study group of Dr. S. Raj that all such prizes chits or schemes are in the form of lottery and they do not serve any social purpose. They arc prejudicial to the public interest. They affect the monetary policies of the country. They benefit only the promoters. 85. The learned special counsel submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , but the method employed was such that the income could not be properly deduced therefrom the computation had to be made upon such basis and in such manner as the Assessing Officer may determine. It was quite evident that the income could not be properly deduced from the assessee s accounts. There was carry forward of expenditure on principle of deferment and also carry forward of income on principle of deferment. The C.I.T. (A) had pointed out the defects in para 17 of his order and had rightly come to the conclusion that the assessee was following inconsistent accounting policy and also methods of accounting. He submitted that the proviso had not been invoked just for the asking. None was satisfied with the method of accounting followed in the books. The assessee was not satisfied and had revised the entire computation primarily by excluding collections made in the year and also by claiming; full amounts as expenditure instead of certain percentages thereof. The Assessing Officer was not satisfied with the method primarily with respect to credits for the collections in the profit and loss account. The C.I.T. (A) was not satisfied with the method and had resorted to the cash syst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a power with the assessee company to stop the right of the accountholder to participate in the remaining draws, but this power had not been exercised. Though, apparently, the assessee company collected ₹ 2,500/- from each accountholder actually only 1,500/- was collected in reality since ₹ 1 ,000/- was returned in the form of N.S.C. The scheme was only a selling point and no altruistic motives could be involved. 94. Referring to para 9 of the Terms and Conditions relating to Minimum Guarantee Prize, the learned counsel for the assessee submitted that the assessee was getting only ₹ 1,500/- in reality and it was an obligation of the assessee that the accountholder gets at least ₹ 2,5.00/- at the end of 12 years. No doubt ₹ 1,500/- would become much more than ₹ 2,500/- by that time, but the accountholder accepted foregoing it because of the possibility of winning a prize. 95. It was next submitted that the decision in the case of M/s Sahara Investment India Ltd. (supra) was very much applicable to the facts of the present case. Ultimately, the question was whether the assessee was getting a sum which was going back i.e. a refundable deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above appeal, when certain further particulars were placed before us at the instance of the bench. They will be mentioned briefly. Since all the appeals are being decided together, they will also be taken into account here. 100. A copy of the writ petition No. 2824 of 1995 by the assessee before the Hon ble High Court has been filed. It contains an application for interim relief of staying the operation of the order of the registrar firms, societies and chits dated 11.09.1995 and in particular staying the requirement to deposit ₹ 24 crores. The payer included quashing of the above order except the condition allowing the petitioner to complete the winding up of the scheme by holding draw within one year and direction not to require the petitioner to deposit ₹ 24 crores. We were informed that the hearing of the writ petition had not yet taken place. 101. A statement was also filed giving total number of subscribers year-wise and giving break-up of fully paid accounts and partly paid accounts up to 31.3.1995. 102. A copy of circular issued by the assessee company to all offices dated 10.09.1986 was filed informing that it had been decided that payment under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubscribers of ₹ 2,500/- each in the first instance. 107. For this purpose, paras 4 and 5 of the Terms and Conditions of Golden key Scheme have to be scrutinised carefully. The accountholder filled in an application form and deposited ₹ 2,500/ - in cash with the assessee company. By filling the application form, he became bound by the terms and conditions given therein. The tenure of the account was 12 years. According to para 5 of the terms and conditions. The Accountholder shall get back his/her principal amount ₹ 2,500/- alongwith minimum interest earning of ₹ 1,500/- directly from the post office (Underlining ours). The accountholder was to get back the maturity payment directly from the post office after 12 years which would be ₹ 4,000/-. 108. From the above terms, we agree with the contention of the learned Special Counsel for the department that the liabilities for payments of the principal amount of ₹ 2,500/- stood discharged according to the terms of the scheme by issuing of the N.S.C. of ₹ 1,000/-. Such a conclusion is further strengthened by subsequent sentences in para 5 of the terms and conditions. The reason for not get ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipts. 113. We will take up the cases of prematurity payments here itself. According to para 5 of the terms and conditions, in cases of prematurity payments taken by the accountholder from the post office the company shall have the power to cease the right of the accountholder to participate in the remaining draw and to disallow all other benefits. (Underlining ours). An affidavit dated 1.5.1996 by Shri O.R Srivastava, Director has been filed before us according to which the company has never forfeited the right of any member to participate in the prize draw nor forfeited any part of the amount deposited. The department has not sought any opportunity to verify this contention further. The learned Counsel for the assessee has clarified that the company had such a power, but it was never actually exercised. In the facts and circumstances of the case; we shall proceed on the above basis. It will, therefore, not be necessary to consider the implications of this clause any further. 114. The partly paid amounts will now be considered. As for as this year is concerned, the quantum was larger than the quantum for fully paid amounts, being ₹ 40,14,631/- as against ₹ 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see the fate of those partly paid deposits were the accountsholder did not comply with the conditions given in the assessee company s circular dated 2.1.1987 or any other terms and conditions for such subscribers. 119. We, therefore, set aside the addition insofar as it relates to partly paid accounts and restore the matter to the file of the Assessing Officer with the direction to ascertain full facts and thereafter take a fresh decision according to law. The assessee will be given an opportunity of being heard in the process. 120. We may mention that according to the assessee s account books only a sum of ₹ 9,57,549/- was credited in the profit and loss account as against gross collections of ₹ 59,84,631/-. It was 16% of the gross collections. However, the assessee made the revised claim according to which no amount of the gross collections were credited to the profit and loss account. The Assessing officer and the C.I.T. (A), on the other hand, included the entire gross collections of ₹ 59,84,631/- on the credit side of the profit and loss accounts. Thus, it is not anybody s case before us now that only 16% of the gross collections should be taken as rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djudicate or give a finding on a question, which is not in dispute and which does not form the subject matter of the appeal. 123. If the above ratio is applied to the submission regarding single venture system, we can decline to consider it. However, we do not propose to do so. The issue raised is a basic one and we will proceed to consider it under our discretionary powers in rule 11 of Income Tax (Appellate Tribunal) Rules, 1963. If there is hope of a solution to a appreciated question it deserve to be considered. We may state that the department was given sufficient opportunity of being heard on this account. 124. We have set out arguments of the learned counsel of the assessee in paras 46 to 60 ante. On the other hand, it is the contention of the learned Special Counsel for the department that only where it was not possible to ascertain the income on annual basis due to peculiar circumstances of the case, it would be justified to resort to single venture system. 125. After careful consideration, we find that all the case which have been cited before us, relate to land or building and presented practical difficulty in ascertaining the profit for a single year. We would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd further support incidentally from a submission of the learned counsel for the assessee himself. The Bench had asked him in the course of hearing that in case single venture system is adopted, then in which year or years the profit should be assessed. The learned counsel for the assessee stated (see para 60 ante) that it would only be proper to first compute the profits of the venture as whole for 12 years and then apportion the same to different years on time basis. No other basis was possible. If this is so, then clearly profits arise in all 12 years. The only difficulty is in estimation thereof. It is not a case where profits do not arise in the first 11 years i.e. unless the scheme is completed. We are of the same view. 129. It will also be worthwhile to see the implication of apportioning the profit of the venture as a whole to different years on time basis. The Profit/loss according to the recast profit and loss account on cash basis by the C.I.T.(A) for different years under consideration was as below:- Assessment Year Profit/Loss as per C.I.T.(A) 1987-88 26,14,774 1988 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated that there was no accounting system applicable since they were claimed to be capital receipts. Regarding expenditure, it was on deferred revenue basis, the quantum to be deferred leaving been arrived at on mercantile system. However, as far as collections are concerned, the assessee s system of account in the books does not treat them as capital receipts. They are treated as revenue receipts to the extent of 16% We are here concerned with the method of accounting followed by the assessee in the books of account. The gross collections considered are on cash basis as rightly observed by the C.I.T (A). 134. The bench further enquired from the learned counsel for the assessee whether it was possible to depart from the income as per accounts without invoking proviso to section 145(1) of the Act (Sec. para 44 ante). A reply was given that if the income was not chargeable at all because of the nature of being capital reciepts, then to that extent the accounts could he departed from. However, we have held that the collections are not capital receipts, but revenue receipts where full amounts of ₹ 2,500/- were paid. Thus, this reply does not answer the question. Reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereon restricts the jurisdiction of the tribunal to the subject matter of the appeal and the subject matter of the appeal is stated in the original Grounds of Appeal and such additional grounds as may be raised by leave of the Tribunal. It is not open to the Tribunal to adjudicate or give a finding on a question which is not in dispute and which does not form the subject matter of the appeal. 139. The above decision does not support the contention of the learned counsel for the assessee. The C.I.T.(A) has passed an order which is operative unless reversed in appeal etc. The order of the C.I.T.(A) has adopted cash system of accounting. Unless and until a decision is given to the contrary by the Tribunal, the ,cash system will continue to apply. In order to give a finding on this question, the Tribunal is competent to adjudicate on the grounds of appeal of the assessee as well as the department. It so happens in this case that their stand is similar. However, it is not their stand which can reverse the decision of the C.I.T.(A), but a decision of the Tribunal. It is therefore, necessary for the tribunal to adjudicate on the issue. The preliminary objection of the learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and circumstances, we hold that cash system was being followed in respect of collection from subscribers. 142. In the above view of matter, it would follow as a consequence that debits in the Profit and Loss Account should also be claimed on cash basis, if the decision in the case of G Padmanabha Chettiar Sons (supra) as followed, which we respectfully do. We therefore, uphold the adoption of cash system of accounting for the Profit and Loss Account as done by the C.I.T.(A). 143. It may be mentioned that adoption of cash system eliminates major disputes which would be there if mercantile system is adopted. The first would be whether the balance amount payable in case of partly paid accounts is accrued income or not. The second would be the deduction to be allowed for N.S.Cs. we have noted that the Assessing Officer allowed deduction for 40% of the gross collections inclusive of partly paid collections against which no N.S.Cs. were issued. The amount deducted by her was ₹ 23,92,852/- It would be a matter of dispute whether deduction for N.S.Cs. in case of partly paid accounts should be allowed. We have restored consideration of partly paid accounts to the file of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounting is to be followed, it is not necessary to go into these questions at all. Only the actuals of prize money disbursed will be deducted in the profit and loss account under the cash system of accounting. 146. Having said so, we will still like to place on record our observation regarding claim of deduction of prize money in this entirety in the first year of its business, relying on the decision of the Supreme Court in Calcutta Co. Ltd. (supra). The facts have already been noted by us in brief. It must be added that the assessee had undertaken to carry out the developments within six months from the date of sale. It estimated a sum of ₹ 24,809/- as the expenditure for the development to be carried out in respects of the plots which had been sold during the year and debited the same in its books of account. Thus, what was debited was only proportionate expenditure and not the entire estimaited expenditure for all the plots whether sold or unsold. It was this sum which was held to be deductable. Similiarly in the case of Development Trust (P.) Ltd. (supra), the assessee had been debiting the expenses to be incurred by it on development, but only in respect of tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeals for these years is the same as the dispute for Assessment Year 1987-88. Ground Nos. 1 to 7 for Assessment Year 1988-89. Grounds Nos. 1 to 6 for Assessment Year 1989-90, Ground Nos. 1 to 6 for Assessment Year 1991-92 and Grounds Nos. 1 to 5 for Assessment Year 1992-93 relate to the same matter. They are, therefore, disposed of in the same manner as for Assessment Year 1987-88 and are partly allowed. 155. Grounds Nos. 8 for Assessment Year 1988-89 relates to addition of ₹ 2,01,684/- under section 40A(3) of the act. The Assessing Officer made a remark that the disallowance was being made as per audit report. The C.I.T.(A) observed that amounts were to be paid by account payee cheque or draft. It was submitted before him that payments related to prize money to the winner or payments for purchase of articles of prize money. However, the C.I.T.(A) observed that the assessee had not been able to demonstrate as to why such payments were made in violation of section 40A(3) of the Act and no exceptional or unavoidable circumstances were shown. The disallowance was therefore confirmed. 156. The learned counsel for the assessee submitted before us that in case the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the interest could not be allowed. The amount was added. 164. The learned special counsel for the assessee submitted before us that there was no nexus between the interest paid and the amount standing to the credit of the two concerns. It was further submitted that there was delay in payments of prizes resulting in payment of interest to the prize winners. The delay was not because of paucity of funds. but due to delay in construction of houses, which were to be given as prizes. In absense of a direct connection, the disallowance could not be made. Reliance was placed on the decision Shahibag Entrepreneur v. ITO [1994] 50 ITD 113 (Ahd.)(Mag.). The Learned Special Counsel for the department opposed the contention, but no further submission were made. 165. After the consideration we find merit in the contention of the Learned Counsel for the assessee. The reason for payment of interest and the payees were not noticed by the C.I.T.(A) and a clarification has been given by The learned counsel for the assessee before us. The balance sheet of the assessee company as on 31.3.1990 shows a substantial cash balance of ₹ 2,06,95,273/-. We therefore, accept the contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owance is confirmed for this year also. 172. Ground No. 10 relates to disallowance of a sum of ₹ 1,54,122 being expenses relating to earlier years. The Assessing Officer made the disallowance under the mercantile system of accounting. However, the C.I.T.(A) observed that the addition was not justified since separate computation had been made on the basis of cash system of accounting. The disallowance was, therefore, deleted. The assessee has come in appeal before us. 173. The learned counsel for, the assessee submitted before us that the matter should be examined on mercantile system of accounting for which proper facts were not available. He urged that the matter should be restored to the file of the Assessing Officer. However, we are not inclined to carry out this academic exercise since we have held that cash system of accounting is to be followed and the C.I.T.(A) has already allowed relief under this system. This ground is, therefore, rejected. 174. In the result, the assessee s appeal for Assessment Year 1991-92 is partly allowed. 175. The assessee s appeal for Assessment Year 1992-93 also contains some further grounds. In ground No.6 there is an objection t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the well known maxim that a bird in hand was worth two in the bush. 183. At this stage, the Bench invited the attention of the Learned Special Counsel for the assessee to para 6 of the terms and conditions according to which the company shall start monthly and bumber draws after enrolling 99,999 account holders. The scheme had been changed by the assessee and prizes were being given from January, 1987 as per afidavit filed before us. According to General Rules in the terms and conditions, the company could alter the terms and conditions by notifying on company s notice board or publication in newspaper. The bench enquired whether this had been done and whether the distribution of prizes could be stopped at will. 184. Shri P. Pardiwala, Advocate, the Learned Counsel for the assessee submitted that the changes had been conveyed to the branch office and from there to the field officers. They had been carried out and amounted to altering the terms and conditions. However, he accepted fairly that the alteration has not been put on the company s notice board or published in the newspaper. Further, the assessee company was now under directions from the Registrar of Firms, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest calculated at 18% (Rs.) 1. M/s. Sahara India 403,55,868 305,14,856 65,77,976 2. M/s. Sahara India Housing 1,77,69,407 146,19,407 23,74,993 It was further stated that the assessee was a finance company and its business was to earn income by investing its funds. By not charging any interest, the assessee abandened/surrendered its income in favour of its sister firm/company. 190. It was further noticed that M/s. Sahara India Savings and Investment Corporation Limited another sister company did charge interest of ₹ 27,76,297 in respect of its balance lying with M/s. Sahara India. Similarly another sister company M/s. Sahara Investment India Limited charged interest of ₹ 4,70,825/- on a loan to M/s. Sahara India Housing. Sum show cause notices dated 18.2.1993 and 3.3.1993 were issued to the assessee and replied dated 26.2.1993 and 15.3.1993 were obtained. Particulars have not been mentioned in the assessment order, but it is stated that the explanation was not satisfactory. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (l)-(2) 1988-89 M/s Sahara India 22,48,883 Rs. Rs. Rs. M/s Sahara India Housing 8,79,513 Total 31,28,396 56,67,234 25,58,736 - 1989-90 M/s Sahara India 88,21,365 79,62,759 8,58,606 1990-91 M/s Sahara India 65,77,976 30,78,931 - 34,99,045 M/s Sahara India Housing 23,74,993 - - 23,74,993 1991-92 M/s Sahara India 60,29,421 13,75,152 46,54,260 1992-93 M/s Sahara India 53,00,000 7,19,877 45,80,1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Counsel further submitted in respect of Ground No.4 for Assessment Year 1989-90 and 1992-93 that there was no provision of law under which income which had not been earned, could be added. Reliance was placed on the following decisions :- (1) CIT v. Calcutta Discount Co. Ltd.[1973] 91 ITR 8 (SC) It was held that where a trader transfer his goods to another trader at a price less than the market price and the transaction is a bona fide one, the taxing authority cannot take into account the market price of those goods ignoring the real price fatched to ascertain the profit from the transactions. (2) Highways Construction Co. (P.) Ltd. v. CIT[1993] 199 ITR 702 (Gauhati) The finding if the I.T.O. was that the assessee ought to have collected interest on interest free loans given to directors from amounts borrowed on interest. If the assessee had not bargained for interest or had not collected interest, the income tax authorities could not fix a notional interest as due or as collected by the assessee. There was no such provision in the Income-tax Act. (3) Indian Finance and Construction Co. (P.) Ltd. v. Dy. CIT[1993] 200 ITR 710/67 Taxman 326 (Bom.) It was held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the monies advanced to M/s Sahara India Housing were for construction of houses to be distributed as prizes by the assessee company. Hence, there was no question of charging interest here also as it was a business transaction. 205. Shri P. Mehrotra, Advocate, The Learned Special Counsel for the department opposed the above contention. He also invited our attention to the agreement appointing M/s Sahara India as agent of the assessee company and submitted that the agreement constituted a contract under section 10 of the Indian Contract Act, 1872. Our attention was also invited to a decision of the Supreme Court in CIT v. Bagyelaxmi Co. [1965] 55 ITR 660, where it was held that except where therein a specific provision of the Income Tax Act, which derograted from any other statutory law, the provision will have to be considered in light of the relevant branches of law. Relying on the same, he submitted that the agreement should be considered in terms of Indian Contract Act, 1872. 206. Our attention was thereafter invited to section 211 of the Indian Contract Act, which is reproduced below for the sake of convenience :- S.211. Agent s duty in conducting pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired verification. 210. Therefore, The Learned Special Counsel made an alternative submission. Our attention was invited to the direction of Supreme Court in the case of Juggilal Kamiaps v. CIT[1969] 73 ITR 702 it was held that in case such as that the Income tax authorities were entitled to pierce the veil of corporate personality and look at the reality of the transaction; Thereafter it was submitted that the assessee company was a closely held company and the directors were partners in the registered firm, M/s Sahara India. The transactions were, therefore, not itself and that interest earned by M/s Sahara India should be the interest earned by the assessee company. 211. The Learned Special Counsel did not make any submissions regarding disallowance of expenses made in the assessment orders. 212. Shri P. Pardiwala, Advocate, Learned Counsel for the assessee replied to the above contentions. At first, he pointed out that in any case M/s Sahara India Housing was not an agent of the assessee company and, therefore, even the agreement referring to section 211 of the Indian Contract Act was not applicable in respect of notional interest relating to it. 213. The Learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he agreement said so and the agreement did not say so. 218. In reply, Shri P. Mehrotra, Advocate, the learned special counsel for the Department submitted that even in the case of Sahara India Housing, there was contract for constructions of houses for distributions as prizes. This contract was also akin to a principal and agent since M/s Sahara India Housing was not constructing houses for itself but for the assessee company. The assessee had given much more money than warranted for this purpose and, therefore, section 211 of the Indian Contract Act was applicable. 219. It was further submitted that the cases relied upon by the Learned Counsel for the assessee were distinguishable since the plea for invoking section 211 of the Indian Contract Act was a purely legal one and did not raise any new matter. The matter remained the same i.e. whether notional interest could be charged. Further, reliance was also placed on Rule 11 of the Income Tax (Appealate Tribunal) Rules, according to which the Tribunal shall not be confined to the grounds set forth in the Memorandum of Appeal provided that the party who may be affected thereby should have a sufficient opportunity of being heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer and interest, which was added. As far as the expenses are concerned, they are part of the business of the assessee and were debited to profit and Loss Account. We have already held that cash system is applicable to this business income, accordingly, cash system will be applicable to the expenses also. However, the facts are not similar with respect to interest income. The Assessing Officer taxed it on mercantile system of accounting, but the C.I.T.(A) did not give any specific finding about the system of accounting applicable to it. However, he deleted the addition on merits, which could be considered only under mercantile system. Moreover both sides have taken grounds before us that mercantile system is the appropriate method. After careful consideration, we are of the opinion that, interest is a seperate source of income quite distinct from the other part of income and should appropriately be brought to tax, if it is taxable, under the mercantile system; the reasons for applying cash system to the other part do not apply here: mainly there is no question of receipts being considered under one system and expenditure on another system. We, therefore, hold that mercantil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o that extent accrues to the assessee, and addition to the income to that extent is confined in principle. 226. We accordingly set aside the matter to the Assessing Officer to the above extent with the direction to allow the assessee an opportunity to supply the above information of bifurcation of the credit balances. The quantum of notional interest in respect of M/s Sahara India should be recomputed accordingly. In case bifurcation is not made available by the assessee company despite reasonable opportunity, the Assessing Officer will make an estimate on the available facts. An addition will be made accordingly. 227. Regarding M/s Sahara India Housing, we are unable to accept the contention of the Learned Special Counsel for the department that they were also agent of the assessee company within meaning of section 10 of the Indian Contract Act in absence of material in support of the contention. Such material was not collected either the assessment stage or at the first appellate stage. It has not even been placed before us at the second appellate stage. We, therefore, decline to accept the contention that section 211 of the Indian Contract Act is applicable in respect of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,500/- stood dischared, according to the terms of the scheme, by issue of N.S.Cs, worth ₹ 1,000/-. The collection of ₹ 2,500/- each from the account holders as reduced by the amount of ₹ 1,000/- spent on the purchase of N.S.Cs. became revenue receipt as against the assessee s claim of capital receipt. Similarly I also agree that cases of premature payments i.e. where the whole of the amount of ₹ 2,500/- has not been paid, the matter is to be set aside to the Assessing Officer for re-adjudication by him with a direction to ascertain full facts, as held by the Learned Accountant Member in para 99 of his order. There is no disagreement to the treatment accorded by the Learned Accountant Member to the single venture system in paragraphs 101 to 110 of his order, which plea of the assessee fails. 6. However, there is a difference of perception about the invokation of the first provision to sub-section (1) of the section 145 of the I.T. Act, 1961. (hereinafter referred to as the Act for brief), and the consequent change of system of accounting from mercantile to cash in respect of the computation of income from the Golden Key Scheme on which aspect pactices ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment has been claimed by either side. 9.1. Appeals to the appellate Tribunal are governed by part B of Chapter xx of the I.T. Act, 1961. Section 252 of this chapter defines Appellate Tribunal . Section 253 vests in the assessee as well as the department a right to appeal to the Appellate Tribunal against such orders as are specified therein. Dealing with the powers of the appellate tribunal, sub-section (1) of section 254 of the I.T. Act, 1961, reads as under :- 254(1) The appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit . The words thereon appearing above, restict the jurisdiction of the Tribunal to the subject matter of an appeal which could be stated to be contained in the original grounds of appeal and additional grounds, if any, raised by the parties with the leave of the Tribunal before it, in this connection, reference may be made to a decision of the Jurisdictional High Court in the case of J.K. Bankers (supra). 10 As per the Learned Accountant Member this decision does not support the stand of the assessee that mercantile system be upheld. In arriving at this concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal to adjudicate or give a finding on a question which is not in dispute and which does not form the subject matter of appeal. Such being the legal position, I am clearly of the view that since there is no dispute whatsoever on the stand taken by the assessee and the department about the method of accounting to be followed, both sides claiming that it should be the mercantile system adopted by the assessee and accepted by the Assessing Officer, inter alia, manifest from column 8 of the format to the assessment order (Page 1) showing method of accounting as mercantile by no stretch of logic it could be said that there existed any dispute on which an adjudication was required. A fortiori it is the choice/privilege of the assessee to choose one of the recognised system of accounting, the only rider being that the same should be consistently followed by him, as has been held in legion number of judicial pronouncements. In this case, it is pertinent to point out here and now that Assessment Year 1987-88 to which the appeals relate, being first year of the assessee s business, the rule of consistency has no relevance. 12. Learned Accountant Member has also observed in para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee referred to by the Learned Accountant member in para 27 of his order, the contents of which are being repeated here for facility of proximate reference :- The assessee firm is following mercantile system of accounting, however, a portion of expenses which crystalised from time to time are being paid as and when they crystilised and to this extent the system of accounting was mixed. 13. This categorical assertion made by the assessee and also accepted by the Assessing Officer, in my considered opinion goes a long way to strengthen the assessee s stand that they have been following mercantile system about which their does not appear to be any dispute from various other circumstances described in the foregoing paragraphs. 14. What should be the system of accounting to be followed by an assessee under the Income-tax Act is the choice of the assessee. Further reference may be made in this connection to several decisions of the Apex Court, such as, Investment Ltd. v. CIT[1970] 77 ITR 533, CIT v. A. Krishnaswamy Modeliar[1964] 53 ITR 122 (SC) and McMillan Co. (supra). Similar view has been taken by various High Courts also. 15. Further assuming though wholly disagreei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee: Provided also that nothing contained in this sub-section shall preclude an assessee from being charged to income tax in respect of any interest on securities received by him in a previous year if such interest had not been charged to income tax for any earlier previous year. (2) Where the Assessing Officer is not satisfied about the correctness or the compeletness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144 . 17. The question which, therefore, arises before the Tribunal is to see as to whether the system adopted by the assessee is such scrutinising which the Assessing Officer could have come to the conclusion in law that the income of the assessee could not be properly deduced therefrom. In this connection, if may also be stated that the power vested in the Assessing Officer is not arbitrary and has to be exercised in a judicious manner. In the case Manilalkher Ambalal Co. v. A.G. Lulla, Seventh ITO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pur Tannery Ltd. v. CIT[1958] 34 ITR 863 (All.), the jurisdictional High Court has held that mercantile system can never be stretched to embrace all sort of provisional, notional or contingent payments which the assessee considers that he might ultimately be called upon to pay. 21. In this connection, it may be stated that it is nobody s case that the accounts of the assessee were incorrect or incomplete. Learned Accountant Member has also upheld the invokation of proviso (1) to section 145 only and not proviso (2) or sub-section (2) of section 145. It would be useful to recall the language of the proviso I appended to sub-section (1) of section 145, reproduced hereinbefore. With reference to this provision it may stated that it is not a case where the assessee was found not regularly employing any method of accounting (referred to proviso (2) to section 145(1)) or that the revenue authorities were not satisfied about the correctness or the completeness of the accounts of the assessee and/or no method of accounting was found to have been regularly followed by the assessee (refer to sub-section (2) of section 145). Coming to the sine qua non of the legal requirement to alter a sy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct to all just exceptions, the Assessing Officer after hearing the assessee would decide. Such being the position, the income could very well be deduced (rather better) from the method followed and employed by the assessee. Similarly expenses relating to such receipts and the Golden Key Scheme whether in the form of prizes or other incentive etc. if they fit in the bill and legally partake the character of an enforceable liability and have accrued or arisen and are not either provisional or notional or contingent, have to be allowed to the assessee. Such would be the situation which is both legal and equitable, besides being practical. There is no reason, therefore, as to why as per the method employed by the assessee it could not be said that income cannot properly be deduced therefrom. In so far as the assessee s submission in their letter dated 22nd January, 1990 reproduced above that despite following mercantile system of accounting a portion of expenses which crystilised from time to time were being paid as and when they crystilised and to this extent the system of accounting was mixed is concerned, I would only say that following the mercatile system whatever adjustments wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company or branch office, as the case may be, and to explain its transactions. 27. As is evident, if such books are not kept on mercantile basis and according to the double entry system of accounting it would be deemed that the assessee did not maintain proper books of account. This would mean that under the Companies Act, a company has to maintain books of account on accrual basis i.e. on mercantile system. No doubt this sub-section was substituted by the Companies (Amendment) Act, 1988 w.e.f. 15.6.1988 and the first year of assessment for which these appeals are being disposed of by the Tribunal is the Assessment Year 1987-88 the amended provision had not come into force, it is pertinent to point out that even under the earlier sub-section (3) of section 209 which read as under :- (3) for the purpose of sub-sections 1 2, proper books of account shall not be deemed to be kept with respect to the matters specified therein, if they are not kept such books as are necessary to give a ture and fair view of the state of affairs of the company or branch office, as the case may be, and to explain its transactions, the department of company affairs had issued following c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase for invokation of the first proviso to section 145(1) and to this extent I also disagree with my Learned brother. 31. This view taken by me would give rise to a consequence following therefrom. 32. The duration of the Golden Key Scheme was for 12 years. It envisaged the declaration of several prizes to be drawn at the end of every of month and also certian bumper draws to be drawn quarterly. The cost of the prizes has been given. No doubt, the prizes as originally stipulated by the scheme had to be drawn only after the enrolment of 99999 account holders but as also been held by the Learned Accountant Member in para 127 of his order to which there is no dispute that in practice the assessee company started prize draws after January, 1987 which continued till 1995 when the scheme had to be wound up as per the Apex Court dicrectives and the consequent directions of the Registrar Firms, Societies and Chits, Uttar Pradesh, Lucknow (refer to his letter at pages 47 and 48 of the assessee s paper book), the assessee company would be entitled to the entire prize money as the expenditure to be incurred on such prizes was indisputable ascertained and enforeable liability. Such lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, method of accounting being one thing and actual entires in the accounts of a different thing, as held by the Learned Accountant Member since the assessee did not make any procision in this regard the accounts and there is a note in the schedule to the balance sheet according to which it is a contingent liability. I also agree with Learned Accountant Member in declining to consider this claim of the assessee. 35. My other disagreement with the Learned Accountant Member is relatable to the addition of notional interest in the hands of the assessee in relation to the collections made on their behalf by their agent, M/s Sahara India and which were received by the former late: 36. On facts, with reference to paragraphs 169 of the Learned Accountant Member s order, the Assessing officer noticed that large funds of the assessee company were lying with the sister firm M/s Sahara India or were advance to another sister firm M/s Sahara India or were advanced to another sister firm M/s Sahara India Housing. The assessee did not charge any interest in either case. If interest was computed on these advances it would work out as under :- 169. The assessement order for Assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing view :- 206. Coming to section 211 of the Indian Contract Act, we have to examine the terms of the agreement dated 19.4.1986 between the assessee company and the firm M/s Sahara India. No doubt the firm was entitled to collect amounts from the members of the Golden Key Project. However, at the same time, according to para 2 of the agreement reproduced above, the firm was under an obligation to send it to the company the so collected amount at the end to every month of operations. We, therefore, hold that the credit balances in the name of M/s Sahara India are enquired to be bifurcated at the end of each month into two amounts. The first amount will be the collections of the same month. These amounts will be well within the terms of para 2 of the agreement and will not be hit by section 211 of the Indian Contract Act. However, amounts in excess of the above amounts will be hit by the provisions of section 211 of the Indian Contract Act. We agree with the contention of the Learned Special Counsel that it was the obligation of M/s Sahara India to invest the excess at interest. If it invested, the interest income would belong to the assessee. If it was not invested, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra India, the firm at any time acted contrary to the instructions given by the assessee company. They collected the amounts on behalf of the assessee from the subscribers and conducted lucky draws. Thus, the Learned Counsel for the assessee was very correct in submitting that a completely new case had been made by the department and should not be entertained at this late stage. It would have the effect of enlarging the controversy and providing an altogether new dimension to it. In these circumstances, there is no question of the remand of the matter for the bifurcation of credit balances at the end of each month into two amounts and for collection of notional interest as directed by the Learned Accountant Member in paras 206-207 of his order extracted above. No doubt the remittances by the firm were made late to the assessee company, but it is not as if the assessee company demanded early remittances which were demanded by the firm. To calculate notional interest would amount to taxing un-earnedincome, besides examining and permitting the department to open a altogether new line of argument which was never adopted either by the Assessing Officer or by the Learned C.I.T.(A). 43A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Finance Act, 1922 sub-clause (ve) was inserted w.e.f. 1.4.93 with several intermediary amendments during this roughly two decades time. 46. The apex court in the case of Dooars Tea Co. Ltd. v. Commissioner of Agrl L.T. [1962] 44 ITR 6 observed that the word income used in the act was formidable wide and vague in its scope. It was a word of elastic import. But it should not be forgotten that as cautioned by the House of Lords, the word income is an ordinary word of the English language and it should be given its ordinary natural meaning, unless ofcourse, the context requires otherwise (refer to Chetwadi v. I.R.C. [1978] Tax L.R.324 (H.L.). 47. In Bhagwan Dass Jain v. U.O.I.[1981] 128 ITR 315/5 Taxman 7 (SC), the Supreme Court held that of whatever wide import the expression income may be, according to the oxford Dictionary it meant a thing that comes in . In order to be income as held by the jurisdictional High Court, it must be something which comes in (i) periodically, (ii) as a return, (iii) with some sort of regularity or expected regularity and from a definite source (Emphasis supplied) (Rani Amrit Kaur v. CIT[1946] 14 ITR 561 (All.). 48. A definite source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lal Chand Gopa Das v. CIT[1963] 48 ITR 324 (All.) 53. Applying the aforesaid judicial decisions, it may be stated that in the case in hand there does not exist even a straw of material to show that by the non-remittance of the moneys collected by the firm by the end of every month as per the stipulation referred to supra, any income accrued to the assessee or it could even be attributed to the assessee Going a step further, I would say supose the remittances had been received by the assessee firm timely and they had kept such remittances in their current account getting no interest, could it be said that some income would still be includible because it could have accrued to them had they created fixed deposits in respect, thereof or at least deposited in the Savings Bank Account. The answer to such a question would have to be given in the negative on the principle that an amount which has been earned or which has come in to the assessee and not notional, hypothetical, fictional or illusory sum alone could partake the character of income under the I.T. Act, 1961. 54. I am conscious of the law that wherein a word is given an exclusive definition by the statute it means not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome tax could be charged on the total income of an assessee and as provided by section 5 from whatever source it comes. In the case of CIT v. Motor credit Co. (P.) Ltd.[1981] 127 ITR 572/6 Taxman 63 (Mad.), the High Court of Madras held that notional income even in a mercantile system of accounting could not be added as where no income had resulted it cannot be said that income had accrued. In the case of CIT v. Ferozepur Finance (P.) Ltd.,[1980] 124 ITR 619/4 Taxman 439 (Punj. Har.) the High Court of Punjab took the view that even if an assessee was following mercantile system and makes an entry for hypothetical interest income, the same connot be included in the total income where such income has neither accrued nor received. 58. On the basis of the aforesaid discussion based on various judicial pronouncements I am of the considered view that there has been no coming in to the assessee nor any coming in could be attributed to them either by virtue of any agreement between the parties or on the strength of any legal fiction created by the statute. It, therefore, follows that there connot be any notional addition on the count of interest de hours the fact that there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Whether on the facts and circumstance of the case, proviso 1 appended to sub-section (1) of section 145 of the I.T. Act, 1961, could be invoked or not ? 5. Whether either with reference to the provisions of section 211 of the Contract Act or sections 2(24), 4 and 5 of the I.T. Act, 1961, any notional interest could be added in the hence of the assessee due to the delayed remittance of collections made by their agent M/s. Sahara India in respect of Golden Key Scheme ? 6. Whether in law as also according to the principles of natural justice the dissenting Member could refer to certain case laws of different High Courts (no dispute about Supreme Court xxx case laws) not cited by either side during the hearing of the appeals ? Question No.6 is being referred as the A.M. has expressed a view on this in negative. 7. Whether if adoption of mercantile system is upheld, the question of discounting and application of pro rata in respect of deduction towards prize liability under the Golden Key Scheme should go back to the regular Bench for its decision, considering that the A.M. has not adjudicated on these aspects. Question No.7 is being referred as the A.M. has exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g referred as the A.M. has expressed a view on this in affirmative. 2. This case has a checkered history. The learned Accountant Member proposed the lead draft order in August, 1996. The learned Judicial Member did not agree with the opinion of the learned Accountant Member on certain issues. Ex consequenti, he rendered his separate opinion on 16/10/96. The learned Third Member delivered his decision on 26/03/98 deciding some of the issues in dispute before him and leaving the others open. Thereafter, a miscellaneous application was filed by the Revenue, which met with the fate of dismissal at the hands of the learned Third Member on 07/04/2000. The Division Bench, which sat for passing consequential order, noticed, vide its order dated 31/12/2003, that the learned Third Member instead of agreeing with either of the Members who passed the dissenting order had rather reopened some issues for a fresh decision. Accordingly, it was held that the appeals of the assessee/Department as well as the cross objections of the assessee should be disposed of afresh on the points of difference as observed by the learned Third Member. The case was fixed for hearing in the second week of Febru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the gross collections to the Profit loss account. No convincing reply was given. Rather, the assessee took a stand that even 16% of the gross receipts credited to the P L account, was not chargeable to tax. It was claimed that the entire amount was capital receipt and hence not chargeable to tax. The Assessing Officer observed that the books of account were not maintained on mercantile system of accounting as claimed by the assessee. It was held that the entire collection was revenue receipt and all the expenses including the liability relating to NSC etc. were to be allowed as deduction. He invoked the provisions of section 145(1) of the Act and recasted Profit and Loss account in terms of the mercantile system of accounting. In this way, he computed total income by taking gross collections of ₹ 59.84 lakh to the credit side of the Profit loss account; allowing deductions - at the rate of 40% of the gross collection towards NSC; other expenses; and Prizes worth ₹ 12,29,000. Deduction on account of Prizes was computed by considering total prize money to be paid by the assessee company throughout the period of 12 years at ₹ 12.84 crore. Such amount was disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Accountant Member held that the authorities below were justified in rejecting the books of account and invoking section 145(1) of the Act, the learned Judicial Member took the contrary view. 5. Section 145(1) of the Act at the material time provided that income chargeable under the head Profit and gains of business or profession should be computed in accordance with the method of accounting regularly employed by the assessee. First proviso states that where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that in the opinion of the Assessing Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Assessing Officer may determine. The assessee admittedly claimed to have followed mercantile system of accounting and the Assessing Officer did not disturb the mercantile system of accounting. 6. It needs to be seen if the income declared by the assessee was in accordance with the mercantile system of accounting. The assessee paid Advertisement and Publicity commission and development expenses. 40% of such amount was debited to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee chose and declared to have followed mercantile system of accounting in its audit reports etc. Once a choice was made to follow mercantile system of accounting, it was not open to depart from the prescription of such method. When the assessee declared to have followed mercantile system of accounting but did neither draw its accounts nor declared income accordingly, no exception can be taken to the view of the Assessing Officer in rejecting the books of account in terms of section 145 of the Act because such books were not reflecting the true income according to the mercantile system accounting. 8. The Ld. JM agreed with the Id. AM that the collection of ₹ 2500 from each account holder as reduced by the amount of ₹ 1000 spent on purchase of NSC was a revenue receipt as against the assessee s depiction of only 16% as income in its books of account and then claiming that the entire amount of ₹ 2500 per account as a capital receipt and not chargeable to tax at all. Then the Ld. JM also agreed with the Ld. AM that the cases of premature payments should be restored to the Assessing Officer for re-adjudication apart from agreeing with the rejection o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies before the Bench contending for applying the mercantile system of accounting. However, the Ld. JM took a contrary view. In such circumstances, I am now supposed to decide the correct method of accounting to be followed in the given circumstances. 11. It can be seen from the Scheme that the subscribers were required to pay full amount of ₹ 2500 in one go and they were to be given NSC worth ₹ 1000 each simultaneously. Prizes were to be distributed to the subscribers throughout the tenure of Scheme of 12 years. Such subscribers, who could not get any prize, were to receive gifts in the form of articles worth ₹ 2500 at the end of the Scheme. Therefore, it is apparent that under the mercantile system of accounting, the entire amount of ₹ 2500 per subscriber for the subscriptions - whether fully or partly paid during the year - accrues as income at the time of subscribing to the scheme. It also entails liability running throughout the period of 12 years in the form of prizes. The Assessing Officer has considered the total amount of prizes payable during the period of 12 years at ₹ 12.84 crore, against the gross receipts of ₹ 25 crore. This shows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in entire 12 years period. It has been noticed above that the Assessing Officer entitled the assessee to deduction for prize money relating to 12 years period but on discounted basis. The Ld. CIT (A) allowed deduction for prize money on the basis of cash system of accounting. The learned Accountant Member primarily held that deduction should be allowed only on the basis of payment since he approved cash system of accounting. He however also recorded a finding in para 126 of his proposed view that even under the mercantile system of accounting, it is not the entire value of prizes which will be deductible, but only pro rata amount proportionate to the collections during the year . The learned Judicial Member held that the assessee company would be entitled to the entire prize money as the expenditure to be incurred on such prizes was indisputable ascertained and enforceable liability. Thereafter he recorded in para 33 that the assessee would be entitled only to the pro rata amount proportionate to the collection made during a particular year as also held by the learned Accountant Member. The Ld. AR argued that the proportionate deduction for prizes to be allowed during the 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollections made during the year. He further noticed in para 33 of his view that: There is no question, however, about the discounting of the prizes as r the Department could not make out any case thereon. Thus, it is axiomatic that both the Id. Members agreed to the grant of deduction of full prize money for the 12 years period in the first year of subscription itself but on pro rata basis. The learned Judicial Member further held that discounting cannot be done and there is no view of the learned Accountant Member on the aspect of discounting. Therefore, it is patent that none of the ld. Members opined to restore the matter to the regular Bench for its decision on the question of discounting and application of pro rata in respect of deduction towards prize money. Once both the ld. Members upheld the deduction of the prize money on pro rata basis, the question proposing restoration to the Division Bench for fresh adjudication, cannot be said to arise from the views expressed by the Id. Members in their respective opinions. This question is therefore, held to be not arising from the orders proposed by learned Members and hence cannot be answered in the capacity of a Third member. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the tribunal. The ld. DR simply supported his point of view of charging notional interest on the strength of section 211 of the Contract Act as well. No new case, much less the enlargement of the controversy, was set up by this argument, as has been opined by the ld. JM. In fact, this argument was on the same subject matter, which was there before the tribunal for adjudication. I, therefore, do not agree with learned Judicial Member to this extent. Even otherwise, the Tribunal is empowered to allow or disallow a claim pending before it for adjudication on a different plea as has been held by Hon ble Supreme Court in the case of CIT v. Mahalakshmi Textile Mills Ltd.[1967] 66 ITR 710. 17. On merits, it is noticed that the assessee entered into an Agreement with Sahara India for collecting subscriptions from its Members and remitting the same to the assessee at the end of the each month. There is nothing in the Agreement that if the amount collected is retained beyond a period of 30 days, Sahara India would be liable to pay interest on such amount. Section 211 of the Indian Contract Act simply deals with the consequences where an agent does not conduct business of his princ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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