2018 (1) TMI 1028
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....holders as agent of Post Office/Bank and invest a portion of the outest profitable returns. Sailent features of the terms and conditions which were printed in the application form itself, are reproduced below:- "For Opening Account: A application is to deposit Rs. 2,500/- with the company along with application form duly filled in, and in return he/she will receive a N.S.C. re-investment deposit plan receipt of, a post office/Bank within a month , from the date of becoming accountholder in his/her name. However, the company shall make the effort to arrange the Post Office N.S.C./Bank R.D.P. within one week to the accountholder. 5. Tenure of Maturity Value:- Tenure of the account is of 144 months. The accountholder shall get back his/her principal amount Rs. 2,500/- alongwith minimum interest earning of Rs. 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 ful....
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....olation prizes any number of time but no accounts shall get the housing loan twice. Bumper Draw:- Every quarter (in addition to regular monthly draws) total 48 bumper draws one in each prize-Air conditioned, fully furnished Bungalow, (2 bed room, drawing dining) and a New car cost Rs. 6,00,000/- will be given. 9. Minimum Guarantee Prize:- Company guarantees all accountholders minimum prize of Rs. 2,500/- worth of articles. The persons who will not get any prize up to prize No. 9 or Bumper prize in 144 monthly/48 bumper draws all such person shall be given minimum prize of Rs. 2,500/- worth articles within 360 days after the 144th draws is finally held. 11. Dividend on opening the account:- The accountholder shall be entitled for dividend in shape of cash or gift (as per the choice of accountholder) after joining the account by depositing of Rs. 2,500/- to the company till the draws starts @ Rs. 11/- per month as per rules of the company or company shall hold mini draw every month with this amount i.e. on over Rs. 1,000/- accounts Rs. 11,000/- worth items shall be given. (13) Death Help- In the event of death of any accountholder the nominee of that accountholder sha....
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....144 monthly/ 48 number draw, would be given minimum prize of Rs. 2,500/- worth articles. Thus, the amount really put at stake by the member was 6,000/- minus Rs. 2,500/- = 3,500/- on the basis of the assumption already made. 7. Assessment Year 1987-88:- We will take up the two appeals and one cross objection for assessment year 1987-88 first. The return of income was filed on 30.6.1987 claiming a loss of Rs. 1,53,239/-. An assessment order was passed thereafter on 30.3.1990 on an income of Rs. 73,30,490/-. It was set aside by the C.I.T.(A) on 8.3.1991. Thereafter a fresh assessment order was passed on 26.3.93 computing net loss at Rs. 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 Rs. 26,19,774/-. This resulted in an enhancement of Rs. 27,50,340/- 8. The net loss as per audited profit and loss account was Rs. 1,46,298/-. However, in the course of assessment proceedings, the assessee recast the same and claimed a net loss of Rs. 26,05,125/-. The Assessing Officer rejected the accounts under proviso to section 145(1) and computed the net loss at Rs. 1,30,586/-. The C.I.T (A) confirmed ....
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.... Collections N.S.C. actually paid - - - 788,000 Net Profit - - - 2,619,774 Total 1,132,630 2,633,912 3,143,989 5,225,424 1,132,630 2,633,917 6,143,898 5,225,424 9. The salient features of the audited accounts were: firstly, that as against gross collections of Rs. 59,84,631/- only a sum of Rs. 9,57,540/- was credited in the profit and loss account under the head administrative and process charges. Numerically it was 16% of the gross collection. It will be recalled that the collections as per terms and conditions reproduced above were Rs. 2,500/- per member. The total collections, include collection of Rs. 2,500/- each as well as partly paid subscription of lesser amount, the terms and conditions which we have noted above do not deal with partly paid, subscription and we shall deal with them in some detail later. For the present, it may be noted that the break-up of the gross collections for this year was as under:- Fully paid subscriptions : Rs. 19,70,000/- Partly paid subsc....
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....d subscription @ 40% thereof. This will be quite clear from realignment of the figures already mentioned in the following manner: Collections Gross-collection Reserve for process 59,84,631/- charges for future adjustment (44%) 26,33,238/- (showing deferment of collection) Liability for partly paid NSCs. 40,14,631/- (40% of partly paid 16,05,853/- NSCs. issued on fully paid subscriptions 19,70,000/- (40%) of fully paid 7,88,000/- Process charges (16%) 9,57,540/- 59,84,631/- 59,84,631/- 14. The debit side of the profit and loss account shows mainly payments to M/s. Sahara India, a firm of Directors. Method of accounting followed in this regard is described in Schedule "A" to the balance sheet in items 5, 6 and 7 as under:- "5. The Sahara India a partnership firm in which directors of the company are partners has let its office facilities for mobilising the business of the company in liew of 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....
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....nt expenses and incentives to agents as well as agents commission. (iii) Actual expenses under certain heads were allowed fully as against 25% and 40% claimed in the audited profit and loss account. This included stationery and printing as well as advertisement had publicity. (iv) Debit for prizes was recomputed. The entire liability for 12 years was first aggregated and then discounted. The net figure was allocated pro rata in proportion to the gross collection for this year to the total gross collection of the scheme acounting to 25 crores. A chart has been given in the assessment order giving the particulars of computation. The amount allowed was Rs. 12,29,000/- as against Rs. 1,54,000/- claimed in the profit and loss account. The net loss arrived at by the Assessing Officer by the above method was Rs. l,30,586/-. 19. The CIT (A) has observed that the Assessing Officer took the 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 profi....
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....rn M/s. Sahara Investment India Limited for assessment year 1990-91 in which receipts against various financial scheme were treated as capital receipts by the I.T.A.T. and the income was treated as exempt. Finally attention was invited to sec. 12 of Residuary Non-Banking Companies Rules to the effect that such companies had to disclose its liabilites in its books of account and balance sheet. The rule had been upheld by the Supreme Court. In the light of the above submissions, it was urged that the entire deposits were in the nature of capital receipts. The claim of loss of Rs. 26,05,124/- was stated to be justified. 23. It was next submitted that proviso to sec. 145(1) was not applicable since the profit could easily be ascertained from the recast profit and loss account. A reference was made to the incorrent principle adopted by the Assessing Officer in employing different 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 judg....
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.... 27. The CIT (A) justified adoption of cash system of accounting. He observed that the assessee was following inconsistent accounting policy and also methods of accounting shown by various computations and recomputations. There was neither mercantile method of accounting nor cash system of accounting and not even hybrid system of accounting. He referred to a letter dated 22.1.1990 where the assessee had given the following version of its system of accounting: "The assessee firm is following mercantile system of accounting, however, a portion of expenses which crystallised from time to time are being paid as and when they crystallise and to this extent the system, of accounting is mixed." 28. The CIT (A) further observed that expenses were claimed in a phased manner without any rationale behind them and similar was the treatment of the receipts. 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 pr....
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....h Rs. 1,500/- only the member was entitled to prize draw and their was a minimum guaranteed of Rs. 2,500/- as per para 9 of the terms and conditions. The assessee had initially taken a view for the purpose of accounts that 16% of the collections were revenue receipts in the first year and 4% in the remaining 11 years i.e. 44%. The total amounted to 60%. Only 60% was shown as revenue receipts in all since 40% i.e. Rs. 1,000/- was being returned through the NSC. However, later on the assessee had been advised that the sum of Rs. 2,500/- collected was in the nature of deposit and full Rs. 2,500/- was to be refunded in the form of minimum guarantied return as per clause 9 of the terms and conditions. 33. Regarding the expenditure, he submitted that there was no dispute with regard to some part of the 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 rev....
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..../- for subscribers. This deduction should be without discounting. Our attention was invited to a decision of the Tribunal in the case of M/s. Sahara Investment India Ltd. for assessment year 1991-92 in IT Appeal No. 294 (Alld) of 1995 dated 30.6.95 where deposits had been held to be capital receipts. Our attention was also invited to a copy of the decision of the Tribunal in the case of secured Investment Co., Lucknow for assessment year 1982-83. In I.T.A.No.552 (All)/1986 dated 22.2.1989, Where it had been held that if collection were income, prize money may be deduced on pro rata basis, but without discounting. The learned counsel stated that discounting was not justified at all. 38. The learned counsel thereafter submitted that the prize chits and money circulation scheme (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 ....
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....cision of the Tribunal in the case of the assessee's sister concern, M/s. Sahara Investment India Limited for assessment year 1991-92 in ITA 294 (All.) of 1994 dated 13.6.1995. There also, the assessee had offered initially a part of the collections as income. The procedure was being followed in earlier years as well. However, the present assessee before us was better situated inasmuch as this was the first year of assessment. The only difference was that in that case, the deposit had to be returned in cash whereas in the present case it had to be returned in kind in the form of prizes. The tribunal held that the burden lay on the revenue to show that receipts were of revenue nature. The entries in the books were not determinative of the character of the receipts. 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....
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....epart from the income as per accounts without invoking proviso to section 145(1) of the Act. The learned counsel replied that section 145(1) of the Act was concerned with income "chargeable" as business income and, therefore, if the income was not chargeable at all because of the nature being capital receipts, then to that extent the account could be departed from. Our attention was also invited to section 5 of the Act. It was stated to be a basis of charge of income tax. According to section 5(1)(b) of the Act total income of any previous year of a person who is a resident included all income which accrued or arose to him in india during such year. If the income did not accrue at all, it was outside the scope of the total income and, therefore, such an 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 ....
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....licable to the assessee, followed by notice dated 14.9.1995 from the Registrar, Chits, Funds to the assessee made it necessary even more to adopt the single venture system. The prizes had to be accelerated and within one year i.e up to some date in 1996 and collections had to be stopped. There was great uncertainty of the consequences and resulting impact on income of the above. 51. The bench enquired from the learned counsel for the assessee as to the assessee's submission regarding the year in which the profit should be assessed in case single venture system was adopted. The bench also enquired from what the learned counsel as to what was the stand of the assessee with reference to the following decisions: 1. Champion Construction 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 to....
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....rt of the department. 56. The Tribunal observed that in the Rangoon and Allahabad High Courts case, the assessee was not having any adventure in the nature of trade as such in real estate. Besides, the sales were of a small portion as compared to the total area purchased or exploited both in Bombay and Allahabad High Court cause. Therefore, all the above three cases were distinguishable on facts. Thereafter, the following extracts were given:- (i) Shri Sukhdeodas Jalan's case (supra) "In the case of contracts, if accounts are maintained and completed on contract basis the profits or gains of the previous year cannot properly be extracted from the accounts, for a contract may take several years for being completed 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 t....
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....tter from the registrar. The test given by the tribunal in the case of Champion Construction Co. (supra) in para 17 of their order was that under the entire cost/expenditure to the assessee was recouped and/or major portion of the venture/project is complete, there was no justification in taxing the income from the project. He submitted that this test had been applied and was possible because the expenditure came first and collection came later. However, the test could not be applied to the present case, where the collections came first and the expenditure came later. 58. It was further submitted that the decision of the supreme court in the case of P.M. Mohammed Meerakhan (supra) has been rendered 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....
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.... of Gratuity, where it was necessary to assess how many workers would work different periods of time, likely deaths, terminations of service, resignations etc. In the present case, however, there was complete certainty that 192 prizes would be paid in the course of 12 years. There was nothing contingent about it and therefore, no discounting was permissible even on the basis of contingent liability. 64. Our attention was invited to a decision of the Bombay High Court in the case of Addl. CIT v. Buckeu Wolf New India Engg. Works Ltd.[1986] 157 ITR 751, there was an agreement for provision of knowhow and it, specified the amount to be paid by the assessee. The payment was 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 ce....
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....this case deduction for entire prize money liability had been accepted on pro rata basis, but there was no dispute or contention about discounting at all. 69. In the end, the learned counsel submitted that if a decision was taken to proceed according to the assessee's account books though the assessee did not accept it, then only 16% of the year's collection could be credited to the profit and loss account and not the full 'amount as had been done by the CIT (A) as well as the Assessing Officer. In that case deduction should be allowed for the total prizes drawn. Further if the accounts were disturbed, though the assessee did not agree to if, and 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 adopti....
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....he appeal is stated in the original grounds of appeal and such additional grounds as may be raised by leave of the tribunal. It was not open to the tribunal to adjudicate or give a finding on a question which was not in dispute and which did not from the subject matter of the appeal. Where the subject matter of the appeal by the assessee to the appellate tribunal was a sum of Rs. 30,000/- which had been disallowed by the Income Tax Officer and the appellate Asstt. Commissioner, if the Tribunal found that the disallowance should have been more than Rs. 30,000/- the Tribunal could only confirm the findings of the income tax authorities 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 Rs. 36,000/- in place of Rs. 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 Rs. 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 b....
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....ription of Rs. 2,500/- the assessee should have got interest of Rs. 7,500/- but was actually getting interest of Rs. 1,500/- only. Thus, interest of Rs. 6,000/- was not being paid to the subscriber. The reason was to be found in para 5 of the term and conditions. It was stated 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 cont....
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....ible to get back the money they paid in driblets, Virtually, Without interest, the expression 'bonus in section 2(a) being an euphemism for a nominal sum. What is more, the repayable amount being small and the subscriber being scattered all over the country, they 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 priz....
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....e balance sheet in this regard. Further, there was no rationale of deferred revenue expenditure. 89. It was submitted that according to the first proviso below section 145(1) of the Act. where the accounts were correct and complete, 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 t....
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.... for the assessee thereafter replied to the above submissions of the learned special counsel for the department. Referring to para 5 of the Terms and Conditions of the golden key scheme, the clarified that there was 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 Rs. 2,500/- from each accountholder actually only 1,500/- was collected in reality since Rs. 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 Rs. 1,500/- in reality and it was an obligation of the assessee that the accountholder gets at least Rs. 2,5.00/- at the end of 12 years. No doubt Rs. 1,500/- would become much more than Rs. 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 ....
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....ting. 99. The same grounds of appeal are there for subsequent years i.e. Assessment Years 1988-89 to 1992-93. The appeals for these years were heard In continuation of the 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 Rs. 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 Rs. 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.....
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.... collections were revenue receipts or capital receipts will be taken up first. We will confine ourselves to fully paid subscribers of Rs. 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 Rs. 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 Rs. 2,500/- alongwith minimum interest earning of Rs. 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 Rs. 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 Rs. 2,500/- stood discharged according to the terms of the scheme by issuing of the N.S.C. of Rs. 1,000/-. Such a conclusion is further strengthen....
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....evenue receipts and not capital 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 Rs. 40,14,631....
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....e 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 Rs. 9,57,549/- was credited in the profit and loss account as against gross collections of Rs. 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 Rs. 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 revenue receipts. It i....
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....ding 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 respectfully agree with the ....
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....m 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 1988,89 3,52,01,857 1989-90 3,19,00,732 1990-91 66,96,017 1991-92 (48,44,565) 1992-93 (33,51,329) Figures in brackets denote ....
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....ot 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 Rs. 2,500/- were paid. Thus, this reply does not answer the question. Reference to section 5(1)(b) of the Act docs not answer the question cither, since we have held that the collections are not outside the scope of the total income. 135. The learned special counsel for the department has rightly observed that none is satisfied with the method of accounting in the assessee's books. The-assessee is not satisfied and....
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....hich 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 is not accepted. 140. We have already held earlier that the first proviso below section 145(1) is applicable to the assessee's accounts. It is, therefore open to us to consider whether mercantile system should be adopted or cash system or some other system. The C.I.T. has observed that the assessee was following neither mercantile system of ac....
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....lly 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 Rs. 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 Assessing Officer, where this question will arise, further, computation of deduction for prizes is also disputed. The assessee claimed a deduction of Rs. 1,54,000/- whereas the Assessing Officer allowed Rs. 12,29,000/-. Although the deduction is higher, the assessee is not satisfied. The amount has been arrived at by working out the total prizes payable for 12 ....
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....ess, 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 Rs. 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 those which were sold in the relevent accounting year. Thus, even aplying the ratio of these two judgments and even under the mercantile system of accounting, it is not the entire value of prizes which will be deductable, but only pro rata amount proportionate to the collections during the year. This is what the Assessing Officer did, but added a discounting factor, which is separately in ....
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..... 155. Grounds Nos. 8 for Assessment Year 1988-89 relates to addition of Rs. 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's contention was accepted that the collections were capital receipts and the first Rs. 1,500/- of the minimum guarantee prize was not allowed as a deduction, then section 40A(3) would be applicable to the balance only. The only further submission made was that the payments were genuine and therefore, they should be allowed as a deduction. 157. The contention was opposed by the learned special counsel for the dep....
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....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 Rs. 2,06,95,273/-. We therefore, accept the contention that the delay in payment of prize money was not due to the paucity of funds. No link has been established between the payment of interest and interest free credits to the two concerns. The disallowance is not considered to be justified. It is thereby deleted. 166. In the result, the assessee's appeal for the Assessment Year 1990-91 is partly allowed. 167. The assessee's appeal for Assessment Year 1991-92 also contains some further grounds. Ground Nos. 7....
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....r, 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 to disallowance of Rs. 20,500/- under section 40A(12) of the Act. The facts and agruments are the same as for the Assessment Year 1991-92. We, therefore, reject this ground for the same reasons as for that year. 176. Ground No. 6 also objects to a disallowance of Rs. 13,49,428/- under section 40A(3) of the Act. The Assessing Officer found the list of payments in cash exceeding Rs. 10,000/- each totalling to Rs. 13,49,428/- mentioned in the audit report under section 44AB of the Act. The payments had been paid ....
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.... 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, Societies and Chits to declare the remaining prizes as per letter issued by him. 185. Shri P. Pardiwala, the Learned Counsel for the assessee submitted further that the cases relied upon by the Learned Special counsel related to contingent payments. If there was a contingent liability, a discount was required to take care of contingencies. However, if there was accured liability, as was the case here, there was no need for discounting. 185.1 Although we have placed on record the further agruments of both sides on the issue of discounting, we have alrea....
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....nvestment India Limited charged interest of Rs. 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. 191. Thereafter, the Assessing Officer inferred that by foregoing/abandoning and surrendering its income in favour of sister firm/company, the assessee suppressed its taxable income. This was manifastly mala fied action on the part of the assessee company intended to defraud the revenue. 192 . Thereafter, the assessing officer notice that the assessee had paid the following amounts to M/s Sahara India:- Sl.No. Head Amounts (Rs.) 1. Establishment expenses 13,07,889 2. Commission and Development exp. 17,71,042 30,78,931 193. The assessing officer disallowed the claim of expenses amounting to Rs. 30,78,931/-. At the same time, the balance of Rs. 34,99,045/- (Rs. 65,77,976) - (Rs.38,78,931) was added to the income of the assessee. Similarly, the sum of Rs. 23,74,993/- representing interest on advance to ....
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.... on cash system of accounting where the debits for expenses duly found their places. Thus, in effect, he deleted the disallowances for expenses without any discussion and without stating any reason. This is the objection of the department in ground No.3. However, the CIT(A) dealt with the addition for notional interest. 199. It was submitted before the CIT(A) that no question of any notional interest arose which could be charged on the outstanding balances. They were in the nature of business transactions. A reference was made to the decision in CIT v. Premier Auto Finance (P.) Ltd.[1980] 4 Taxman 317/[1981] 128 ITR 540 (Delhi) to the effect that no question of any notional interest arises in such a case. He agreed with the contention and observed that there was no question of compelling the assessee for charging interest on money given interest free to sister concerns. The addition of the balance amounts of notional interest were accordingly deleted. 200. Shri S.C. Dastur, Senior Advocate, learned counsel for the assessee submitted that for allowing expenditure claimed by the assessee under section 37(1) of the Act, it should not be in the nature of capital expenditure of person....
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.... Alloys Ltd. v. Dy. CIT[1992] 42 ITD 218 (Bom.) It was held that the assessee could not be validly taxed on a notional incomes, which admittedly had not been earned by it on the ground that it could have earned such income. 202. The learned counsel made an alternative submission also. Our attention was invited to copy of agreement dated 19.4.1986 between the assessee company and M/s Sahara India a partnership firm. The company was about to launch its Golden Key Project in June, 1986 and the firm was established since 1982 having over 200 established offices with furnishing and equipment and also with required man power at various places in the country. The assessee company, therefore, appointed the firm as agents for its business activities on the terms and conditions given in the agreement. The agent was to conduct, promote, induce and secure business on behalf of the company. The firm was also to collect amounts from the members of the Golden Key Project. Para 2 of the agreement is reproduced below :- "2. The firm shall collect the requisite account from the members of the Golden Key Project and shall send to the company the so collected amount at the end of every month of op....
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....credit sells goods of A on credit to C, whose credit at the time was very high, C before payment, becomes insolvent, B must make good the loss to A." 207. It was next submitted that it was incumbent on M/s Sahara India to invest the funds and it was a prevalent constructional practice to do so; if the amount had been invested, the interest would be the assessee's interest and if the amount had not been invested, the notional interest would still be due from M/s Sahara India and would accrue to the assessee company under section 211 of the Indian Contract Act. The accrued interest would be income under section 5 of the Income-tax Act and would also be treated as profits and gains of business under section 28(1) of the Income-tax Act, 1961. 208. The Learned Special Counsel further submitted that the Balance Sheet of the assessee company for Assessment Year 1991-92 showed fixed deposit receipts of about Rs. 2 Crores and further advances. It shows that the assessee company was advancing amounts on interest. Similar position was there for other years. He, therefore, submitted that M/s Sahara India could not deprive the assessee company of the interest on account of section 211 of the ....
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....Appellate Assistant Commissioner and also in grounds of appeal to the Tribunal was whether a loss was speculative loss. However, the Tribunal directed the Appellate Assistant Commissioner to determine whether it was capital loss or revenue loss. It was held that the jurisdiction and the power that Tribunal was restricted only to deciding the controversy. The Tribunal was not entitled to enlarge the controversy and decide an issue not before it. 215. Our attention was also invited to a decision of the Delhi High Court in CIT v. Anand Prasad[1981] 128 ITR 388/5 Taxman 308. The case relates to the old Act of 1922, the I.T.O. held that the sale of plots constituted business and assessed the profits. The assessee appealed and the A.A.C. held that the sale of lands did not constitute business. The I.T.O. did not raise any alternative plea that capital gains arose. However, in the appeal before the Tribunal a ground was raised that the profits were taxable as capital gains. The Tribunal refused to permit the department to raise alternative contention. The action was approved by the High Court saying that capital gains was a completely different point. 216. Regarding alternative submissi....
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.... of the Gross Cash Collection shall be paid as reimbursement of establishment expenses. 6.75% of the gross cash collection shall be paid as reimbursement towards promotional and development expenses and incentive paid to field workers. Lastly, 1.25% of the gross cash collection shall be paid as commission for procuring the business on behalf of the company. No material has been placed before us to show that this is not wholly and exclusively for business. No link or nexus has been extablished between this expenditure and the notional interest calculated by the Assessing Officer. The Learned Special Counsel could not make any submission before us in respect of the disallowance. Thus, even through the CIT(A) has not passed a speaking order on this question, we consider it appropriate to decide the question in favour of the assessee in view of the above circumstances. We accordingly, confirm the deletion of the disallowances of expenses by the CIT(A) and reject ground No.3 of the department's appeals. 221. The ground regarding addition of notional interest for the assessment years 1989-90 to 1991-92, however, requires further scrutiny. In fact, this ground is included by implication ....
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....y were the same as the partners of M/s Sahara India. This is entirely a new arguement and its raising is hit by the decisions in the cases of R.L. Rajgheria (Supra) and Anand Prasad (Supra). We, therefore, decline to entertain this arguement. 225. 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 required to be bifurcated at the end of each such 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....
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....epartment's grounds for assessment years 1989-90 and 1992-93 is partly allowed. Ground No.3 of the department's appeal for assessment year 1988-89, which includes the question of notional interest, is also partly allowed. 229. In the result, the departmental appeals for all the years are partly allowed. CROSS OBJECTIONS : 230. The assessee's Cross objections for Assessment Years 1988-89 to 1992-93 are the same as for Assessment Year 1987-88, which have been rejected by us. For the same reasons, the Cross objections for Assessment Year 1988-89 to 1992-93 are also dismissed. ORDER 1. I have carefully gone through the order proposed by The Learned Brother V.K. Sinha. While appreciating and admiring the sweating and plains taken by him in production of this marathon judicial document, I sincerely regret my inability in wholly agreeing with him. 2. My reservation rests on the following counts, which are largely legal in nature. 3. However, before I set to dwell on these points, let the controversy be stated hereinafter, in a succinct manner. 4. In nut-shell, the principal dispute in these appeals is about the treatment to be accorded to the receipts of the assessee through their....
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....ned C.I.T.(A) has erred in law and on facts in rejecting the method of computation of income as applied by the Assessing Officer and changing the entire method of accounting from mercantile to cash system". 8. In the first instance, I am of the considered opinion that since both sides have challanged the adoption of cash system by the Learned C.I.T.(A) as against the mercantile system claimed by the assessee and applied by theAssessing Officer, nothing serves for adjudication. 8a. In this connection, reference may also be made to the following observations made by Learned Accountant Member in para 203 of his order while dealing with the system of accounting to be adopted in respect of the interest income. "Moreover both sides have taken grounds before us that mercantile system is the appropriate method." It is also not as if at any point of time, the department changed their stand and sought any amendment in the ground taken by them on this score, in the premises, the preliminary objection raised the Learned Counsel for the assessee to the effect that since both sides were praying for adopting of mercantile system, the same should be followed, has to be accepted. 9. In this c....
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....ree with the reasoning. There is no dispute that the Learned C.I.T.(A) has adopted cash system of accounting and till such time this view is reversed by a higher judical forum, the first in hierarchy being the appellate Tribunal, his decision will prevail. It may not be correct to say that the stand of the parties could or could not reverse the decision of the Learned C.I.T.(A), which will depend upon the various factors and facts and circumstances of the case. A dispute or issue arises only if one party asserts something and the other denies or disputes it. The tribunal is a creature of the statute, namely, the Income-tax Act and as such has to abide by the Legislative mandate. As pointed out hereinbefore, the Appellate Tribunal has given both the parties to the appeal an opportunity of being heard whereafter if is legally authorised to pass orders thereon as it thinks fit. The word "thereon" naturally mean the issues raised and reked up in an appeal. It is in this context that the case of J.K. Bankers (supra) of the Jurisdicational High Court is a complete answer to the controversy. It was clearly held by the Hon'ble Allahabad High Court that the word "thereon" restricted the jur....
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.... are not to be construed in the sense of mere discretionary power as held by the Apex Court in the case of CIT v. McMillan & Co.[1958] 33 ITR 182. In my opinion, the long and short of the matter is that the assessee adopted mercantile system of accounting which was accepted by the Assessing Officer. No doubt that the same was disturbed by the Learned C.I.T.(A) who changed the system from, mercantile to cash. However, both the assessee and revenue in unequivocal terms challenging the change of system from mercantile to cash, there is nothing which survives before the tribunal for adjudication. In saying so, due importance has to be accorded to the option legally available to an assessee to choose one of the recognised systems of accounting, mercantile being on of them. This option was exercised by the assessee in favour of mercantile system and this is their first year of business. In this connection, reliance is placed on few decisions of the Supreme Court in the cases of Nalinikant Ambala Mody v. S.A.L. Narayan Row, CIT[1966] 61 ITR 428 Calcutta High Court in the case of Snow White Food Products Co. Ltd. v. CIT[1983] 141 ITR 847 and Dr. N.K. Brahmachary v. CIT [1992] 104 CTR (Cal)....
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.... the Assessing Officer, the income, profits and gains cannot be properly deduced therefrom. This provision confers sufficient power upon the Assessing Officer rather imposes a duty upon him to make such computation in such manner as he determines for deducing the correct profits and gains. Short of this, it is entirely within the discretion of the assessee to adopt a method of accounting subject only to rule of consistency (not applicable in this case, as this is the first year of the assessee's business). For this view, reference could be made to a comparatively recent decision of the Supreme Court in the case of CIT v. British Paints India Ltd.[1991] 188 ITR 44. 16. The relevant provision of law reads as under:- "145 (1) Income chargeable under the head "profits and gains of business or profession" or "Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee: Provided that in any case 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 co....
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....ave to briefly examine the main characterisations of the two principal systems of accounting. 20. In cash system, a record is maintained or regular receipts and actual disbursement, the entries being posted when money or moneys worth is actually received, collected or disbursed. In the mercantile system entries are posted in the books of account on the date of a transactions i.e. on the date on which rights accrued or liabilities are incurred irrespective of date of payment. This system brings into credit what is due, immediately it become due and before it is actually received and it brings into debit the expenditure of the amount for which a legal liability has been incurred before it is actually disbursed. Reference may be made in this connection to the observations made by the Supreme Court in the case of Keshav Mills Ltd. v. CIT[1953] 23 ITR 230 and Calcutta Co. Ltd. v. CIT[1959] 37 ITR 1 (SC) in addition to plethora of other authorities on the subject. It may, however, be added that under mercantile system before a debit or credit entry could legitimately be made in the accounts, it must be shown that a certain enforceable liability has accrued or arisen. Such liability shou....
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....ould eliminate major disputes which would be there if mercantile system is adopted. 23. I am unable to fall in line with this proposition. 24. It is not as if in a case where the receipts of an assessee are mainly or mostly in cash he cannot adopt mercantile system. Law does not put any such embargo. On the other hand, in a case where receipts are mainly or mostly in cash the adoption of mercantile system is likely to inflate the credit side of the profit & loss account in as much as apart from the cash receipts which are actually received by the assessee even those receipts in respect of which right to receive has accrued to him, irrespective of the date of payment, would be added to the receipt side, which would not be liable to be added if cash system is followed. In mercantile system, an amount due before it is actually received would have to be credited. In the present case viewed from this angle also, there is an additional factor. In large number of cases the whole of the amount of Rs. 2,500/- under the "Golden Key Scheme" was not received by the assessee. The issue of part payment has been set aside to the Assessing Officer for re-adjudication on which there is no disagre....
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....med by them and not disputed by the department be accepted and all or any adjustments which may be required, be made. In my opinion, in the facts and circumstances of the case, although it is not a legal criteria, the profits from the adoption of mercantile system could be arrived in a still better manner. I would, however, confine myself to the mandate given by the Legislature by proviso 1 to sub-section (1) of section 145 which authorises the Assessing Officer to alter the method of accounting employed by an assessee only if he comes to a conclusion that the income could not properly be deduced therefrom. In this case, as the facts have clearly demonstrated, the income is properly deduceable from the method employed by the assessee and the same, therefore, does not call for any interference. 25. I also derive some strenth though indirectly in taking the above view from the provisions of the Companies Act, 1956. 26. Section 209 of this enactment enjoins upon every company to keep at its registered office proper books of account with respect to :..... Sub-section (3) of section 209 runs as under :- "(3) for the purpose of sub-sections (1) and (2), proper books of account shal....
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.... be that while under the Companies Act a company is bound to maintain accounts on accrual basis and not on cash/receipts basis, under the Income-tax Act the choice is left to the assessee, subject only to the rule of consistency, It would further mean that a company can maintain two sets of account books, one under the companies act on mercantile/accrual basis and the other on cash/receipt basis under the Income-tax Act, if a company so desires. It is important to mention that it is not the department's case that the assessee company maintain two sets of, accounts/books, one for the Companies Act and the other under the Income tax Act. This not being so, lends further support to the stand of the assessee that they were following accrual basis/mercantile system of accounting. 29. In my opinion, therefore, the system of accounting on which the income of the assessee from "Golden Key Scheme" should be computed is the mercantile/accrual system. 30. On this analogy itself based on the elaborate discussions in the foregoing paragraphs, the crux of which is that : (a) accounts maintained by the assessee are correct and complete and ; (b) there is no material or legal basis on the st....
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....reon being coterminous under the mercantile system, the two being inextricably related as disclosed herein before. There is no question, however, about the discounting of the prizes as the department could not make out any case thereon. Discounting could be done only in case of contingent expenditure, which is not the position here. In this case, the liability to dole out prizes is definite, ascertained, ripended and encorceable as per the terms of the scheme refer to pages 3-14 of the assessee's paper-book. 33A. I will now deal with the assessee's claim on the minimum guarantee prize of Rs. 2,500/- worth of articles to be payable to all the subscribers who do not get prizes till the end of the scheme (refer to condition No.9 of the Scheme). 34. This condition runs is under :- "9. Minimum Guarantee prize:- Company guarantees all account holders minimum prize of Rs. 2,500/- worth of articles. The persons who will not get any prize upto a prize No.9 or Bumper prize in 144 monthly/48 bumper draws all such persons shall be given minimum prize of Rs. 2,500/- worth articles within 360 days after the 144th draw is finally held". I would only say that although as held by the Apex Cour....
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....ndered its income in favour of its sister firm of the company. 38. The Assessing Officer noted that the assessee had paid an amount of Rs. 30,78,931/- to M/s Sahara India towards establishment, commission and development expenses. The disallowed the claim of expenses amounting to Rs. 30,78,931/- and added the balance of Rs. 34,99,045/- (Rs.65,77,976 - 30,78,931/-) to the income of the assessee. Similarly the sum of Rs. 23,74,993/- representing interest on advance to M/s Sahara India Housing was also added to the income of the assessee. 39. Insofar as the addition relatable to M/s Sahara India Housing is concerned, the view taken by the Learned C.I.T.(A) has been upheld by the Learned Accountant. Member with which I agree and there is no dispute. 40. About the addition made in respect of M/s Sahara India, the Learned Accountant Member has invoked the provisions of section 211 of the Contract Act vis-a-vis the agreement between the assessee company and firm. In this respect, the Learned Accountant Member has taken the following 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 compan....
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....uct the business of his principal according to the directions given by the principal, or in the absence of any such directions, according to the custom which prevails in doing business of the same kind at the place, where the agent conducts such business. When the agent act otherwise, if any loss be sustained, he must make it good to his principal, and if any profit accrues, he must account for it. ILLUSTRATIONS: (a) A, an agent engaged in carrying on for B a business, in which it is the custom to invest from time to time, at interest, the moneys which may be in hand omits to make such investment. A must make good to B the interest usually obtained by such investments. (b) B, a broker in whose business it is not the custom to sell on credit sells goods of A on credit to C, whose credit at the time was very high, C before payment, becomes insolvent. C must make good the loss to A." 43. It may be pointed out that it is nobody's case much less supported by any material or evidence that M/s Sahara 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 luc....
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....Edition, page 614). It may be further pointed out that the award of damages if any solely lies within the competence and domain of a civil court having jurisdiction over the matter and does not vest any wright either on the income tax authorities prescribed by the income-tax act or the appellate tribunal. 45. It may then be stated that Income-tax Act, 1961, is concerned only with taxing "Income". The terms "Income" has been defined by sub-section (24) of section 2 of the act. It is an inclusive definition. To say a word on the subject, it may be pointed out that for the direct tax law the term 'income' was for the first time introduced in 1922 act, as section 2(6c) by the 1939 amendment. Ultimately, its scope was enlarged by the 1961 Act. Thereafter several amendments were bought to expand the term further. For example in 1964 sub-clauses (va) and (viii) were inverted by the Finance Act, 1964, w.e.f. 1.4.1969 consequent upon the introduction of provisions relating to annuity deposit and 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.....
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.... that in the case of P.H. Diveicha v. C.I.T.[1963] 48 ITR 222 (SC), the highest court of the land observed that a nomenclature given by a party to a receipt though relevant would not be decisive of the matter. 51. Not alone this, as explained by the Supreme Court in the case of Dooars Tea Co. (Supra), all receipts are not income, the concept of receipt being much wider than the concept of income. A receipt must be one having the character of income H.S.K. Rawlley v. CIT[1993] 199 ITR 270 (Ori.). 52. It is important to refer here to a decision of the High Court of Gauhati in the case of Highways Construction Co. (P.) Ltd. (supra) which it was held that the income tax authorities cannot assess all receipts, they can assess only those receipts which amount to income. It follows, therefore, that before they assess a receipt, they must find it to be income and they cannot find so unless they have some material to justify their finding. This view find support from the decision in 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....
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....ate from giving the normal meaning to the word 'income' and expand it, it made a specific provision. 56. It also appears to be relevant to point out that the definition of income, inter, allia, includes 'profits and gains' within its ambit as provided by section 2(24)(1) of the Act. However, as held by the Apex Court in the case of Calcutta Co. Ltd. (supra) profits and gains have to be understood in commercial sence as they refer to income from business or profession. Profits are the surplus by which the receipts from the trade of business exceeded the expenditure necessary for the purpose of earning those receipt. Gains of trade are those which are gained by the trading for what ever purpose it is used. In this connection, reference may also be made to certain case laws Shaw Wallance (supra) in the case of Bengali Urban Cooperative credit society Ltd. 57. If we also advert to Sec. 4 of the I.T. Act, which is the "charging section" it may be pointed out that the income 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 Co....
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....by state the points on which we differ and refer the matter to the Hon'ble President of the Income-tax Appellate Tribunal for further appropriate action : 1. Whether on the facts and circumstances of the case particularly the fact that both the assessee and the revenue have challenged the alteration of system of accounting by the C.I.T. (A) from mercantile to cash in the computation of assessee's income from the "Golden Key Scheme", the Tribunal with reference to its powers under sub-section (1) of section 254 of the I.T. Act, 1961, could adjudicate the issue ? 2. If the answers to question No. 1 is in the affirmative, whether on the facts and circumstances of the case and in law, system of accounting to be adopted by the assessee should be cash or mercantile ? 3. Whether if mercantile system of accounting is to be adopted, the assessee should be entitled to prize money for the entire scheme running over 12 years during the first year itself ? 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 Con....
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....ct or sections 2(24), 4 and 5 of the IT. Act, 1961, any notional interest could be added in the hands of the assessees 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 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 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 ce....
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....otal amount of subscription receipts at Rs. 59,84,631. A sum of Rs. 9,57,540 being 16% of the gross collections, was credited to the Profit and loss account under the head 'Administrative and processing charges'. Remaining 44% was taken to Balance sheet to be shown as income in the remaining 11 years at the rate of 4% in each year. Certain expenses were claimed towards establishment and management; advertisement expenses and incentive to agents and agent's commission. 40% of Advertisement and Publicity commission and development expenses were debited to the P&L account for the year and the remaining 60% were deferred. Similarly 25% of Stationery and Printing expenses were debited to the P&L account and the remaining 75% were deferred. During the course of assessment proceedings, the Assessing Officer required the assessee to explain the basis for crediting only 16% 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 Offic....
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....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 Rs. 2500 per account as a capital receipt and hence not chargeable to tax at all. The Ld. JM also agreed with the Ld. AM that the cases of pre mature payments should be restored to the Assessing Officer for re-adjudication apart from agreeing with the rejection of single venture system as put forth on behalf of the assessee. He, however, held that cash system of accounting was not proper and only mercantile system of accounting should be applied. He also did not concur with the view canvassed by the learned Accountant Member on the rejection of books of account. 4. Question No. 4, as referred to me, is whether the proviso appended to section 145(1) could be invoked? Whereas the 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 acco....
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....of profits nor the assessee's claim of the entire amount being a capital receipt. Ergo, it is clear that the assessee though followed mercantile system of accounting, but failed to offer income on accrual basis and also did not claim deduction of expenses on due basis. Thus it is palpable that the assessee did not apply mercantile system of accounting in true sense. 7. The Ld. AR contended that the treatment given to items of income and expenses in the books of account by the assessee may be treated as in consonance with hybrid system of accounting as was also prevalent at the material time. It is no doubt true that hybrid system of accounting, like cash system, was also a permissible method at the relevant time. It was open to the assessee to follow hybrid system also. However, it is an admitted position 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 accordingl....
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....ted by the Bench. As such question no. 1 is answered in positive that the Tribunal could adjudicate the issue of alteration of system of accounting from mercantile system to cash. 10. Answer to the first question in affirmative brings me to question No. 2 as to whether on the facts and circumstances of the case and in law, system of accounting to be adopted by the assessee should be cash or mercantile. It has been noticed above that the assessee admittedly claimed to have applied mercantile system of accounting. The Assessing Officer, without disturbing such system of accounting, computed the income by rejecting the books of account. The Ld. CIT (A) changed the system to cash method. The learned Accountant Member approved, in principle, the cash system of accounting despite both the parties 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 Rs. 2500 in one go and they were to be given NSC worth Rs....
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....m of accounting in the given facts would give distorted position of the income in the first year which, in my considered opinion, is not correct. I, therefore, agree with learned Judicial Member in approving the application of mercantile system of accounting in the given facts. Apart from the ld. AR, even the ld. DR has also supported the order of the ld. JM to the effect that mercantile system of accounting should have been followed instead of the cash system of accounting. It is therefore, held that the mercantile system of accounting should be adopted. 12. Having held that the mercantile system of accounting should be adopted, question No. 3 is whether the assessee should be allowed deduction in the first year itself on account of Prize money payable 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 how....
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....that learned Accountant Member held that cash system of accounting should be followed. He however proceeded to decide the deductibility or otherwise of the proportionate prize money under the mercantile system of accounting in the first year of subscription itself by recording that such an adjudication was otherwise not necessary as he had upheld the following of cash system of accounting. In such adjudication, he held that pro rata amount of the entire value of prize was deductible to the proportionate collections during the year. No adjudication was done on the question of discounting of such collections. However, the learned Judicial Member categorically held that the assessee would be entitled only to the pro rata amount of proportionate collections 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 discou....
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....art would be collection of the same month which will not call for any charging of notional interest. As regards the remaining amount, the learned Accountant Member held that the same was hit by section 211 of Indian Contract Act and hence, interest income to that extent accrued to the assessee. The learned Judicial Member disagreed with learned Accountant Member and deleted the addition. 16. Having heard both the sides and perused the relevant material on record, I 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. I, therefore, do not agree with learned Judicial Member to this extent. ....