TMI Blog1959 (5) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... . Appeal allowed. - C.A. 213 OF 1955 - - - Dated:- 12-5-1959 - Judge(s) : BHAGWATI., HIDAYATULLAH., S. R. DAS JUDGMENT The judgment of the court was delivered by BHAGWATI, J.-This appeal with a certificate under article 135 of the Constitution read with section 66A(2) of the Indian Income-tax Act raises the question as to whether the appellant was entitled to a deduction of Rs. 24,809 in the computation of its profits and gains for the assessment year 1948-49. The appellant deals in land and property and carries on land developing business and in the course of the said business, it buys land, develops it so as to make it fit for building purposes and sells it at a profit in plots. The developments undertaken are in the main, that roads are to be laid out, a drainage system to be provided and street lights installed and they are to be maintained till the same are taken over by the municipality. The whole of the development is not carried out before the land is sold, nor the whole of the sale price received in cash at the time of the sales. The procedure followed is that when a plot is sold, the purchaser pays about 25% of the purchase price in cash and undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant claimed a deduction of the said sum of Rs. 24,809 in the computation of the profits and gains of its business. The Income-tax Officer disallowed that claim on the ground that the expenses had not been actually incurred in the year of account and also on the ground that the estimate had not been proved to be based on a consideration of the real expenses which the company would have to incur for the purpose. The Appellate Assistant Commissioner, on appeal, confirmed the disallowance by the Income-tax Officer on the ground that there was as yet no accrued liability and on the further ground that as the development would be carried out in the future, the expenditure estimated at current prices could not be allowed. On appeal taken by the appellant before the Income-tax Appellate Tribunal, the Tribunal held that it was by no means certain what the actual cost would be when the developments were carried out and that although the appellant had undertaken to carry out certain developments, it could bring expenses into account only when the expenses were actually incurred. The Tribunal accordingly dismissed the appeal. The appellant thereafter made an application before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deducted in determining the taxable profits and gains of the appellant. The mercantile system of accounting is well-known and this method has been explained in a judgment of this court in Keshav Mills Ltd. v. Commissioner of Income-tax : " That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed." The main ground on which the claim of the appellant for deducting this sum of Rs. 24,809 was disallowed by all the authorities below was that the expenditure was not actually incurred in the year of account, it was by no means certain what the actual cost would be when the developments were carried out and that there was as yet no accrued liability but only a contingent liability undertaken by the appellant, even though the undertaking was incorporated in the deeds of sale themselves. The following were the developments undertaken to be carried out by the appellant as appears from the order of the Appellate Assistant Commissioner : " There was a condition in the conveyance deeds that the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available. The company claimed to be entitled to deduct in computing its profits amounts representing at current prices, the liability to effect replacements as soon as the required equipment became obtainable. The former amounts were allowed as deductions, and the latter the Court of Appeal (reversing the decision of the court below) held not to be deductible. The basis of the decision was that the real liability under the contract was contingent, not actual, since the obligations of the company were not such that it might be sued for the cost of replacements at current prices, but only for possible damages for breach of contract in the event of the factory owner preferring a claim under the contract, and since no legal liability could arise until such a claim was made, the liability had to be regarded as continent and not deductible. It is clear from the above that on the facts and circumstances of that case the court held that it was not an accrued liability but was merely a contingent one and if that was the case only the sums actually expended could be deducted and not those which the company was liable to expend in the future. Simon in his Income Tax, second edition, v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated in order that under the mercantile system of accounting the amount could be debited before it was actually disbursed. The difficulty in the estimation thereof again would not convert an accrued liability into a conditional one, because it is always open to the Income-tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case. That it can be so done is illustrated by Gold Coast Selection Trust Ltd. v. Humphrey (Inspector of Taxes) where a particular asset which could not be immediately realised in a commercial sense was valued in money for income-tax purposes in the year of its receipt and it was observed by Viscount Simon : " It seems to me that it is not correct to say that an asset, such as this block of shares, cannot be valued in money for income-tax purposes in the year of its receipt because it cannot, in a commercial sense, be immediately realized. That is no reason for saying that it is incapable of being valued, though, if its realization cannot take place promptly, that may be a reason why the money figure set against it at the earlier date should be reduced in order to allow for an appropriate interval. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appellant had, it appears, claimed this deduction as and by way of expenditure wholly laid out for the purposes of its business under section 10(2)(xv) of the Income-tax Act. On an interpretation of that provision, the High Court was inclined to hold, though it did not decide the question, that to the extent that a definite liability had accrued about which all preliminary proceedings causing the accrual of the liability in a concluded form had already been gone through although the actual disbursement had not yet taken place, section 10(2)(xv) would cover accrued liabilities though the amount may not actually have been expended on the footing that the liability being certain, the amount was as good as spent and on that basis there would be room in the clause for debits which are proper debits under the mercantile system of accounting. It, however, distinguished the present case on the ground that the liability here was a floating liability, the measure of which depended upon the will of the appellant and the discharge of which rested only in a promise and that the expenses were entirely at large and the development work itself merely so. Apart, however, from the question w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as stated by Lord Macmillan in Pondicherry Railway Co. Ltd. v. Commissioner of Income-tax : " English authorities can only be utilised with caution in the consideration of Indian income-tax cases owing to the differences in the relevant legislation, but the principle laid down by Lord Chancellor Halsbury in Gresham Life Assurance Society v. Styles, is of general application unaffected by the specialities of the English tax system. 'The thing to be taxed', said his Lordship, 'is the amount of profits or gains'. The word 'profits', I think, is to be understood in its natural and proper sense--in a sense which no commercial man would misunderstand." It may be useful to observe at this stage that prior to the amendment of the Indian Income-tax Act, 1939, bad and doubtful debts were not treated as deductible allowance for the purpose of computation of profits or gains of a business. The Privy Council in Income-tax Commissioner v. Chitnavis observed : Although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of a year ; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken under the terms of the deeds of sale of the lands in question and was an accrued liability which according to the mercantile system of accounting the appellant was entitled to debit in its books of account for the accounting year as against the receipts of Rs. 43,692-11-9 which represented the sale proceeds of the said lands. Even under section 10(2) of the Income-tax Act, it might possibly be urged that the word "expended" was capable of being interpreted as "expendable" or "to be expended" at least in a case where a liability to incur the said expenses had been actually incurred by the assessee who adopted the mercantile system of accounting and the debit of Rs. 24,809 was thus a proper debit in the present case. We need not however base our decision on any such consideration. We are definitely of opinion that the sum of Rs. 24,809 represented the estimated amount which would have to be expended by the appellant in the course of carrying on its business and was incidental to the same and having regard to the accepted commercial practice and trading principles was a deduction which, if there was no specific provision for it under section 10(2) of the Act, was certainly allowa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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