TMI Blog1983 (5) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... ing disposed of by this common order. Under an agreement of 1954, the assessee was to invest Rs. 25 lakhs for distribution and sale of products, manufactured by textile mills which amount was always to remain invested. On delivery of goods to the assessee on consignment basis against advance payment, the assessee was entitled to 5% interest from the date of payment till the sale of goods. Assessee was also entitled to 66 2/3 of the expenditure incurred by it on establishment, etc. And on sale of goods it was to get commission of l 1/2% of sales. The agreement appears to have remained in operation till November, 1958, when B.R. Sons wrote a letter to the assessee complaining that it was not fulfilling its obligation and responsibility under the agreement. Similar letters were repeated on 1st and 9th December, 1958. Ultimately, the dispute was referred to arbitration in 1959. Claims and counter-claims were made. In July, 1964, an award was given directing the assessee to pay Rs. 2,50,000 in full and final settlement. None of these letters are on record nor were they produced by the learned standing counsel despite a specific order of this court on the application of the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn showing a loss of Rs. 4,96,371 was filed again on the same basis, i.e., the dispute raised before the arbitrator. The ITO did not find any merit in the claim of the assessee as the dispute between the assessee and M/s. B. R. Sons had arisen after November , 1958, the previous year relevant to the assessment year 1959-60. Before the ITO numerous claims had been raised but when the matter came up before the AAC, the assessee modified its claim and sought deduction of Rs. 2,34,197 only. Out of this, Rs. 1,75,510 was in respect of interest debited to M/s B. R. Sons in books of account of the assessee. Rupees 17,224 was in respect of commission and Rs. 13,441 was for brokerage. The miscellaneous expenses claimed were Rs. 28,022. The claim of the assessee was that, in view of the award given by the arbitrators, the assessee was not entitled to get any amount from B. R. Sons,. It was apparent, therefore, that the amount shown in the accounts of the assessee as income was incorrect. According to the assessee, these entries were made on the assumption that the assessee was entitled to receive the same from M/s B.R. Sons under different heads but once the claim was negatived by the arbi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee did not carry on any business during these years it was not entitled to claim these expenses as business expenditure. But as the assessee had income from other sources, an estimated sum was allowed. In the same years, fees paid for income-tax representations was also allowed. Order was affirmed on appeal. On further appeal, the Tribunal held that the business of the assessee was sale and distribution and not financing, and, therefore, it was not entitled to claim expenditure incurred on recovery of advance payments made to principal for lifting of goods nor could it claim expenditure incurred on establishment, for this purpose, as there was complete closure of business. Inference was drawn against the assessee, as, after 1958, goods were lifted not on consignment basis but against cash payment. Litigation expenses were disallowed as it was not necessary for earning income from interest. Nor was it satisfied that the assessee was required to incur any expenditure for earning interest on money lying with the principal. On the application of the assessee under s. 256(1), the Tribunal referred the following questions of law : " 1. Whether, on the facts and in the circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee ceased to have the right to interest and commission, as provided in the agreement ". The letter dated November 17, 1958, cannot be held to have such an effect. It only deferred the payment on account of the dispute. In the assessment, interest and commission, therefore., were included as income not because they were received but because the assessee was entitled to it. Is taxability under the I.T. Act on entitlement or income ? If it is on the former, then the Tribunal, undoubtedly, was correct in its approach. But the charge under s. 4 of the Act is " on total income of the previous year ". Although what would amount to income has been left to be determined, as in sub-s. (24) of s. 2, definition of income is inclusive and not exhaustive, yet before it can be brought to tax, it must accrue or arise. That is in the year in which it is sought to be taxed the assessee must earn it actually or constructively. That is fundamental. And that is not altered by the method of accounting. Under s. 145, one may adopt any system, cash or mercantile, for convenience of computation. But taxability arises only when income accrues. In one it is received in the year in dispute, in the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erroneous on facts found by it. I.T.R. No. 185 of 1973 (1961-62 to 1965-66): In all these years, it has been found by the Tribunal that the principal source of income was interest on money lying with the erstwhile principals. But the income having been held to be from other sources, the claim of the assessee for deduction of expenses incurred by it on establishment, etc., as expenditure wholly and exclusively for business purposes was repelled. It also did not find any merit in the plea of the assessee that along with business of distribution it also undertook financing and, therefore, even after closure of distribution business, the business of financing continued. The Tribunal, relying on clause (5) of the agreement, held that entire capital investment by the assessee was solely for the purposes of distribution business and although the assessee was required to make advance payments to the principals before lifting goods yet that was as part of business arrangements and not a case of financing. It found that in the absence of business of distribution, the business of financing could not stand, and, therefore, the claim of the assessee that it was carrying on two businesses, one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... They are parts of same and are integrated. In the absence of effective and proper distribution, the activity of manufacturing was bound to be hampered. It could be carried on by the manufacturer or he could entrust it to others. A person carrying on business of distribution is only an agent and works on behalf of a person whose goods are to be marketed. For carrying it on effectively if the assessee invested funds or, to use the words of Tribunal, made advance payment due to business consideration, there is no reason to hold that it did not amount to financing. Learned standing counsel for the Commissioner urged that this being not the question referred, the assessee was not entitled to raise it. In order to satisfy if the contention of learned counsel was correct, the questions raised in applications under s. 256 were examined and from that it appeared that these questions were also raised but the Tribunal referred only two questions as it appeared to it to cover the entire controversy raised by the parties. Learned counsel for the assessee appears to be right in the submission that investment under the agreement was stock-in-trade. And by the termination of agreement, the natur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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