TMI Blog1987 (5) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... ystem of accounting. During the relevant accounting year, the assessee supplied fire-bricks to a firm by the name of M/s. Jeewan Lal and Company (Construction). According to the assessee, the value of the bricks sold was Rs. 8,80,945. The assessee, however, did not include the entire sum of Rs. 8,80,945 in the income side of his accounts, but deducted a sum of Rs. 1,63,160. This deduction was made on account of the fact that the purchaser of the bricks disputed his liability to pay this sum presumably on the basis of differences between the parties about the rate at which the bricks were to be sold. The assessee filed a money suit for realisation of Rs. 1,63,160. The suit was pending on the day the assessment was done by the Income-tax Officer. The assessee claimed that this sum of Rs. 1,63,160 was an allowable deduction on the footing that it was a mere claim and not income. The Income-tax Officer rejected the stand of the assessee for treating the said sum of Rs. 1,63,160 as a bad debt and he, therefore, added it to his total income. On appeal, the assessee once again pressed his claim for deduction of the said sum of Rs. 1,63,160 as a bad debt. According to the assessee he had b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. All that is on the record is that in November, 1972, the assessee filed a money suit for realisation of a sum of Rs. 1,63,160 plus interest. The suit was pending on the date the assessment order was passed. The assessee, treating the said sum as contingent liability, deducted the said sum in his books. The question is, had the sum of Rs. 1,63,160 also become due to the assessee ? If it had become due, that income must be held to have accrued to the assessee. If it had not become due, it would not be deemed to have accrued. The core question in this reference is whether the sum of Rs. 1,63,160 was income of the assessee available to be taxed. What is to be taxed under the Income-tax Act is income. The profits and gains of business or profession constitute income. The profits and gains are those which have been received by the assessee or have accrued. What is taxable in any particular year depends materially upon the method of accounting adopted by the assessee. Income received or income accrued are both chargeable to tax under section 28 of the Income-tax Act, 1961. The computation of this income is provided for in section 29 of the Act. Section 36 deals with the deductions ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... systems of book-keeping. There is, firstly, the cash system in which a record is maintained of actual receipts and actual disbursements, entries being posted when money or money's worth is actually received, collected or disbursed. There is, secondly, the mercantile system, in which entries are posted in the books of account on the date of the transaction, i.e., on the date on which rights accrue or liabilities are incurred, irrespective of the date of Payment. For example, when goods are sold on credit, a receipt entry is posted as of the date of sale, although no cash is received immediately in payment of such goods and a debit entry is similarly posted when a liability is incurred although payment on account of such liability is not made at the time. There may have to be appropriate variations when this system is adopted by an assessee who carries on a profession. Whereas, under the cash system, no account of what are called the outstandings of the business either at the commencement or at the close of the year is taken, according to the mercantile method, actual cash receipts during the year and the actual cash outlays during the year are treated in the same way as under the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cantile system of accounting and the hybrid system of accounting overlap. Once again in CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC), Hidayatullah J. ruled that income-tax is a levy on income and the Income-tax Act takes into account two points of time at which the liability to tax was attracted, viz., the accrual of the income or its receipt. If income did not result at all, there could not be any tax, even though in accordance with the principles of book-keeping, an entry was made about a " hypothetical income " which did not materialise. In that connection, Hidayatullah J. observed as follows: " It may be reiterated that in some limited fields where something which is the reality of the situation prevents the accrual of the income, then the notion of real income, i.e., making the income accrue in the real sense of the term can be brought into play but the notion of real income as it shall presently be indicated cannot be brought into play, where income has accrued according to the accounts of the assessee and there is no indication by the assessee to treat the amount as not having accrued. Suspended animation following inclusion of the amount in the suspense acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry, but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee. (8) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well-recognised limits. " It will be seen from the above that the conduct of the party in treating an income in a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Travancore v. CIT [1986] 158 ITR 102 (SC), the facts were much worse. His Lordship emphasised upon the circumstance that the assessee had not only not written off the loans, but it was still treating the loans as alive by keeping them in its suspense account. His Lordship, affirming the decision of the Calcutta High Court in James Finlay and Co. v. CIT [1982] 137 ITR 698, observed as follows (p. 151): "In the instant appeals before us, the position is still worse for the assessee. There is no claim that there was any change in the method of accounting. The High Court further held in James Finlay's case [1982] 137 ITR 698 (Cal), that though there was difficulty in realising the interest in the year of account, there was no material to show that there was any agreement with debtors to waive the interest or to keep these in suspense account. Hence, the claim for interest had not been given up. The amounts accrued and continued to remain accrued and were, therefore, income assessable to tax. The situation in the instant case is similar to that of the cases of the Bombay and Calcutta High Courts and of State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC). In the instant case as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It will be seen that this sum of Rs. 35,251.02 had become unrealisable for the reason that the High Court had laid down that the company was entitled to bill only at the rate of 19 paise per unit. In that situation, the matter having been settled by the High Court, the claim to realise Rs. 35,251.02 would be a " mere claim ". If the final verdict of the High Court had not been there, things may have been different. The company was under no obligation to credit that sum in its books of account. The matter having been settled finally, the sum representing supply of energy at the rate of 11 paise per unit could not have accrued to the assessee. The case of Nadiad Electric Supply Co. Ltd. [1971] 80 ITR 650 (Bom) is thus, in my view, distinguishable on facts. At this stage, I should only recall the dictum of Sabyasachi Mukharji J. in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), and the actuality of the situation cannot be lost sight of. On the record of the case, there was nothing to show that Nadiad Electric Supply Co. Ltd., had any legal right. That was the actuality of the situation. The decision in that case rested upon its peculiar facts and can be of no ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department had verified the claim of having done extra work. The Appellate Assistant Commissioner accepted the claim of the assessee that the said sum of Rs. 23,06,079 had not accrued to the assessee, as it had not been accepted by the Department. Ahmad J., while considering the stand of the Revenue, emphasised the actuality of the situation in the following words at p. 437: "On behalf of the assessee, it was pointed out that there was certain confusion regarding the system of accountancy followed by the assessee and that the assessee's system of accountancy with regard to the claims was not cash system but mercantile system, and that the amounts were shown by the assessee only after the acceptance of these claims by the Government and only then it could be stated that the assessee's right to receive the claim had accrued. It was pointed out on behalf of the assessee that the assessee had followed the same system in the immediately preceding year also when the company was floated. " The Patna case was decided on the basis quoted above. If the assessee had not followed a special pattern in maintenance of accounts, that is, in entering the sum only when Government accepted the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no written agreement. That is not necessary in every case. Learned counsel for the Revenue placed reliance upon New Victoria Mills Co. Ltd. v. CIT [1966] 61 ITR 395 (All) and CIT v. Godhra Electricity Co. Ltd. [1983] 140 ITR 657 (Guj). It is not necessary to refer to them, in view of the decisions of the Supreme Court to which I have referred earlier. In this case, the basic facts are that the assessee sold fire-bricks. It was not gratis at all. The assessee claimed the sums. The assessee did not give up its claim, but pursued it by filing a money suit and making an entry in respect of the sum of Rs. 1,63,160. In my view, therefore, that sum did accrue to the assessee during the assessment year especially when the purchaser had not raised any objection to the payments during the assessment year. For all the reasons stated above and considering the fact that the assessee was following the mercantile system of accounting, I am of the view that the sum of Rs. 1,63,160 had accrued as the income of the assessee. The question referred to us for our opinion must, therefore, be answered in the affirmative, in favour of the Revenue and against the assessee. The Tribunal was correct in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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