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TMI Blog1998 (10) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... ctual expenses towards entertainment by being cost of food or drinks etc. Following the judgment of the Gujarat High Court in the case of Gujarat Slate Export Corpn. Ltd. vs. CIT (1996) 131 CTR (Guj) 23 : (1994) 209 ITR 649 (Guj), we reverse the decisions of the lower authorities and direct that the expenses be allowed as revenue expense. 3. Ground No. 3 relates to the question of disallowance of share issue expenses to the total extent of Rs. 39,35,823. The assessee claimed the same as revenue expenses. The AO discusses in the assessment order that during the relevant previous year, the assessee came out with a public issue of shares on terms and conditions settled by the Controller of Capital Issues and the various Stock Exchanges in India. The AO referred to three decisions of different Courts like that of Gujarat High Court in the case of Ahmedabad Mfg. & Calico (P) Ltd. vs. CIT (1986) 57 CTR (Guj) 151 : (1986) 162 ITR 800 (Guj) of Kerala High Court in the case of CIT vs. Commonwealth Trust Ltd., (1987) 66 CTR (Ker) 126 : (1987) 167 ITR 365 (Ker) and of the Karnataka High Court in the case of CIT vs. Motor industries Co. Ltd. (1988) 173 ITR 374 (Kar), and by following the unan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 9 crores as at the close of business on 30th Nov., 1983, pursuant to a scheme of amalgamation of be approved by the Karnataka High Court. It was also stated in the said connection that the nonresident interest in the equity capital of the assessee-company shall have to be reduced to a level not exceeding 40 per cent by 31st May, 1985. A further stipulation was also provided that till 60 per cent of the capital of the company was allotted to resident Indians, the company shall not declare and pay any dividend without the prior permission of R.B.I. 5. Sri Dastur states that pursuant to the above conditions having been imposed by R.B.I., towards limiting the non-resident interest upto the maximum level of 40 per cent, the assessee-company issued 30 lakhs new equity shares of Rs. 10 each for cash at a premium of Rs. 8 per share. For this purpose a detailed prospectus was issued. In the said prospectus, a specific mention was made about M/s. Eskay Lab having already established a research centre in 1971, which had been recognised by the Govt. of India and was being considered to be one of the five largest research centres in the industry. Sri Dastur places emphasis on this aspect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 81 CTR (Bom) 69 : (1990) 181 ITR 59 (Bom). In the said case Glaxo Laboratories. In the said case Glaxo Laboratories (India) Ltd. had entered into a collaboration agreement with a foreign company and subsequently made an application to the Government for permission to continue on the said agreement. Permission was granted by the Government subject to the condition that share holding of the foreign company be diluted. M/s. Glaxo Company complied with such directions of the Government by issuing fresh capital to Indian public. The Bombay High Court held that fresh capital had been raised for the purpose of running the business and hence the expenditure on raising fresh capital was of revenue nature. Sri Dastur has also relied on a few other decisions in support of his contention in this regard, which are being discussed as below: (i) Shri Meenakshi Mills Ltd. vs. CIT (1967) 63 ITR 207 (SC). It was held by the Supreme Court in this case that the deductibility of expenditure incurred in prosecuting a civil proceeding depends on the nature and purpose of the legal proceeding in relation to the assessee's business and cannot be affected by the final outcome of that proceeding. (ii) Amb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT (1966) 60 ITR 52 (SC). The learned Departmental Representative also relied on certain other decisions to which we shall make a reference in due course. In reply, Sri Dastur stated that the substance of the matter is to be taken into consideration. M/s. Eskay Lab, U.K., and the assessee-company belong to the same group and the main purpose behind issue of the shares was to consolidate the existing business in India. Sri Dastur also pointed out that the Supreme Court itself had remarked in the case of Brooke Bond India Ltd. that if the share issue was for raising working capital, the expense in that connection might be considered as revenue expense. He once more emphasised that the extra fund obtained by the assessee-company out of issue of the share capital was not at all required by it for expanding its project but was merely utilised towards refunding the excess contribution received on account of mammoth over-subscription of the shares. 7. On an examination of the facts of the present case, we are clearly of the view that they are fully distinguishable from those in the case of Glaxo Laboratories (India) Ltd. on which Sri Dastur has placed main reliance. In that particula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng year during which it was formed. The entire issue of share capital, whether to the foreign company or to the Indian public, took place during the previous year corresponding to the year under appeal alone. Hence, all the expenses connected with issue of such share capital must be considered to be related to the capital structure of the company. Whether the assessee was in immediate requirement of the money raised in the process of issue of the shares and whether it kept the said money in the form of short-term deposits for certain period is of no consequence at all in deciding the present issue. The assessee was not carrying on any business, so to say, before issue of the share capital. Hence, the entire business is new to it and acquisition of the business having a close connection with issue of share capital, has got to be considered as related to the capital structure of the company alone. The three decisions in the cases of Sree Meenakshi Mills Ltd. and Ambala Bus Syndicate (P) Ltd. and Delhi Cloth & General Mills Co. Ltd. do not have any connections with the facts of the present case and would not therefore at all be applicable in deciding the present issue before us. 8. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this connection of the judgment of Kerala High Court in the case of Commonwealth Trust Ltd. In that particular case, that assessee, a non-resident company, incurred certain expenditure for professional services rendered in regard to the steps taken by it for complying with s. 29 and other provisions of .the Foreign Exchange Regulation Act, 1973, which was referred to by that assessee as "dilution expenses" for Indianisation of the foreign holding as required under the said Act. The Kerala High Court ultimately held that the expenditure had been incurred for the purpose of changing the capital structure of the company to suit the requirements of the FERA by obtaining shares held by foreigners and transferring to Indian citizens, thereby converting what was a non-resident company into a resident company. The structure, character and status of that company was considered by the High Court as having been changed by the expenditure. The High Court furthermore held that the expenditure was incurred for creating or curing or perfecting title to the share capital of the company in accordance with the requirements of the statute and not for the protection of the business of the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinary shares, was considered to be of capital nature. We have already discussed the facts of the case and found out that so far as the present assessee-company is concerned, the expenditure towards issue of share capital must be considered to have been incurred for acquiring a business undertaking. We have also discussed above that the assessee was virtually able to start its business by acquisition of the above-mentioned business undertaking which itself clearly is a capital asset to the assessee. There was no existing business with the assessee as such. Hence, the expenses under consideration can, in noway be considered to be related to maintenance or carrying on with the existing business of the assessee. We therefore uphold the decisions of the lower authorities in treating the expense to be of capital nature. An alternative argument has been provided by Sri Dastur in this connection. He has brought our notice to the details of expenses claimed in this regard, which are as below: &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; 39,35,824 --------- He claims that although the assessee-company was incorporated as a private limited company, through substantial issue of shares under consideration, its status was changed to that of a public limited company. He thus contends that all the expenses like registration fee, printing charges and other expenses relating to the Memorandum and Articles of Association etc., incurred by the assessee-company for changing its status to a public limited company are clearly allowable as revenue expenses. In support of this contention, he has relied upon the following two judgments. In the case of CIT vs. Modi Spg. & Wvg. Mills Co. Ltd. (1973) 89 ITR 304 (All) it was held that the amount paid to a lawyer for advising a company on amendments in the Articles of Association and for drafting a special resolutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived by way of damages or compensation. The Supreme Court furthermore held that if a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That however does not mean that until and unless the company commences its business, its income from any other source will not be taxed. The Supreme Court furthermore discussed that the company may keep the surplus funds in short-term deposits and earn interest thereon but such interest income will be chargeable under s. 56. In the instant case also, the assessee company earned substantial amount of interest by keeping the surplus money received on invitation of fresh share capital in certain deposits with banks. In accordance with the above-mentioned judgment of the Supreme Court, the interest income has not to be considered as having rightly been taxed by the AO. 13. In an additional ground raised at a later stage before us only, the assessee contends that in any case the interest income did not accrue to the assessee in this year as final and certain and otherwise also it may be considered that there was a diversion of the entire interest income at source and hence the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er or injunction on the assessee restraining its right to enjoy the interest from the bank. The judgment of the Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. would therefore not at all hold good in the present case inasmuch as there was no dispute about the income so far as the present assessment year is concerned. We therefore do not find any merit in the claim of the assessee that interest income should not be assessed in its hand by considering it to be diverted at source. Hence, finally we reject this additional ground taken up by the assessee. 14. Ground No. 5 relates to sustenance of the disallowance by the learned CIT(A) to the extent of Rs. 2.50 lakhs out of the travelling and conveyance expenses. The AO found out that the assessee had debited an amount of Rs. 1,01,66,259 towards expenditure incurred on travelling. He also found out that as per the audit report, an amount of Rs. 2,78,669 was required to be disallowed in terms of r. 6D. He however noted that this amount of disallowance had been calculated with reference to total expenditure of Rs. 4,12,266 only and that the balance amount of Rs. 97,53,993 had not at all been considered in comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses and also entertaining expenses of Sri Arora like cost of drinks and food, etc., on various dates, medical expenses in respect of the family members of Sri Arora, etc., had also been debited to the accounts of the company. The AO discusses thereafter that when such personal expenses were clearly detectible for some of the periods, similar personal expenses must have been debited to the accounts of the company during other periods also for which the details had not been furnished to him. He referred to a decision of the Supreme Court in the case of CST vs. H.M. Esufali H.M. Abdulali 1973 CTR (SC) 317 : (1973) 90 ITR 271 (SC) and drew the inference that he was at liberty to make a judicious estimation of the total amount of similar personal expenses having been debited during other periods. Finally, he made an ad hoc disallowance of Rs. 10,00,000 out of the travelling expenses. 15. In the first appeal, the learned CIT(A) also discusses the facts of the case in detail. He also found that the major chunk of the expenses towards travelling of the company related to its marketing and field personnel. He furthermore discussed that the company was required to employ nearly 500 field ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is not prepared to make a clean breast of its affairs relating to this issue. We are, therefore of the opinion that looking to the huge amount of expenses claimed under this head and taking into consideration the fact that a number of instances of inclusion of personal expenses of the managing director and his family members has been found out, it is quite likely that similar disallowable items of expenses are also included in those portions of expenses for which the details have not been filed. At the same time again, looking to the fact that the company is required to maintain a huge contingent of staff for carrying on its business and thereby to incur considerable amounts of travelling expenses, we would hold that the ends of justice would be met if the disallowance is ultimately sustained at Rs. 1 lakh. We therefore partially modify the order of CIT(A) and sustain the disallowance under this head at Rs. 1 lakh only. 18. In ground No. 6, the AO challenges the order of the CIT(A) in sustaining the disallowance of Rs. 49,075 towards cost of air travel incurred in respect of the wife of the president of the company. Actually it is not the case of the wife of the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd. vs. ITO (1986) 18 ITD 226 (Bom)(SB) In the last named case, the Tribunal, Special Bench, Bombay held as below: "In the modern age, and more so in the western countries, the senior executives are as a matter of social custom accompanied by their wives when they visit, though for business purposes, has necessarily some social aspects also. Under these circumstances, the impugned expenditure was an allowable expenditure." On the other hand, the learned Departmental Representative besides relying on the aforesaid judgment of the Madras High Court in the case of T.S. Hajee Moosa & Co. has furthermore relied on following two decisions of Gujarat High Court also. (i) Bombay Mineral Supply Co. (P) Ltd. vs. CIT (1985) 153 ITR 437 (Guj) and (ii) CIT vs. Shahibag Entrepreneurs (P) Ltd. (1995) 215 ITR 810 (Guj). In the above mentioned three cases cited by the Department, the Madras and the Gujarat High Court had the occasion to consider the allowability of travelling expenses of wives of senior executives of companies etc. The Madras High Court held in the case of T.S. Hajee Moosa & Co. that even assuming that the expenditure (relating to the wife) had a business connection, it ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) discusses in this connection that on perusal of some of the seized materials, it was found that some commission income had accrued to the assessee which was however not reflected in its books during the year under consideration. The assessee-company is an associate of a multinational companies viz., M/s. Smith Kline Beckman Corporation. One of the associate companies viz., M/s. Beckman Instruments International Associates (to be denoted hereafter as BIISA) of Switzerland is in the business of manufacture and sale of high-tech instruments used in research laboratories and hospitals. During the late part of the year 1985, the assessee-company entered into an arrangement with BIISA under which it took up the responsibilities of selling the products of BIISA in India. According to the assessee, it is entitled to a commission of 10 per cent of the value of the order booked by it in respect of the products of BIISA in India. The Department however holds that payment of a further amount of 10 per cent of the value of the order is secretly being made by BIISA to the parent company/associated companies of the said parent company at Philadelphia, USA, on the same sales, thus taking up the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame amount along with a further amount of commission of 10 per cent calculated at US $ 6,930, paid by BIISA to the parent company/associate of the assessee at USA during the relevant period and later on repatriated to the assessee in India on 27th March, 1989, should not be assessed in the hands of the assessee in the asst. yr. 1986-87. The value of the latter amount of US $ 6,930 at the rate of exchange prevailing on 27th March, 1989 was considered by the CIT(A) to be Rs. 1,07,276. The assessee replied by a letter dt. 5th March, 1990 that the commission income in respect of its selling arrangement with BIISA was being accounted for by it under the cash system. In the said letter, the assessee mentioned its two earlier letters dt. 17th March, 1989 and 14th Aug., 1989, alleged to have been addressed to the AO intimating that it was maintaining cash system of accounting in respect of the commission income under consideration. The assessee furthermore stated that the amount of US $ 6,930 was actually received by it after 30th Nov., 1985 and accordingly the same along with all other commission receipts were being shown by it in its accounts and also returned for tax purpose in asst. yr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut the alleged filing of the letter, dt. 17th March, 1989 by the assessee to the AO claiming that it was following cash system of accounting in respect of the commission income. The CIT(A) clearly came to the conclusion that the evidence in this regard was fabricated by the assessee with the view to mislead the Department. The CIT(A) also referred to page No. 281 in file No. S.K.F/A.2 of the seized materials which is actually a telex message received by the assessee from BIISA. The CIT(A) extracted one portion of the said telex message, as follows: "As usual, commission will be accrued at the time of booking and payable upon shipment of the order." The CIT(A) also noted that at p. 289 of the same seized file, exactly similar communication was made by BIISA to the assessee. The CIT(A) thereafter discussed that it was clear from the above telex messages received by the assessee from BIISA that commission actually accrued at the time of booking of the order by the assessee-company and became payable on actual shipment of the order. He held that in the circumstances, the assessee-company was not right in coming up with the plea that it followed cash system of accounting and that com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally held that under the mercantile system, the diverted commission amount will also have to be taxed in the year in which the normal commission is being taxed. Regarding the other issue as to whether the diverted commission amount will have to be converted into Indian rupee terms at the exchange rate prevailing on 27th March, 1989, the CIT(A) held that so far as asst. yr. 1986-87 is concerned, the value of the diverted commission in rupee term would have to be taken exactly at the same amount at which the normal commission received in India is being considered. The further increase on account of exchange rate variation was directed by the CIT(A) to be considered in asst. yr. 1989-90 alone. Ultimately, the CIT(A) enhanced the income by an amount of Rs. 1,72,550, comprising of two amounts of Rs. 86,275 each. 23. In the different grounds of appeal taken up in this regard, and also in the course of Sri Dastur's arguments before us, the enhancement has been challenged from different angles. Firstly, the jurisdiction of the CIT(A) to make the enhancement in the circumstances of the present case is strongly being challenged. The assessee thereafter contends that in any case since the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of certain communications received from the AO. Initially, there was dithering on the part of the learned Departmental Representative to produce the copies of two communications of the AO dt. 22nd Feb., 1990 and 6th March, 1990 addressed to the CIT(A), requesting him to make the enhancement. At this stage, Sri Dastur relied on two decisions to contend that if the Department, does not disclose the materials which it wants to utilise for making assessment/enhancement, the entire proceedings would become invalid. Sri Dastur firstly relied on a judgment of the Supreme Court in the case of Suraj Mall Mohta & Co. vs. A.V. Visvanatha Sastri (1954) 26 ITR 1 (SC) at p 13 in which case the Supreme Court held that inasmuch as there were provisions in sub-s. (4) of s. 5 of the Taxation on Income (Investigation Commission) Act, 1947, and the procedure prescribed by that Act to the effect that the materials tried to be relied upon by the Department, in the course of investigations being carried on by it under the said provisions of that Act need not be divulged to the assessee, this constituted a piece of discriminatory legislation, offending against the provisions of Art. 14 of the Constitution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot disclosed either in the returns filed by the assessee or in the assessment order. The Supreme Court furthermore held that it is therefore open to the AAC to travel outside the record i.e., the return made by the assessee or the assessment order of the ITO, with a view to finding out new source of income and the power of enhancement under s. 31(3) is restricted to the source of income which have been the subject-matter of consideration by the ITO from the point of view of taxability. The Supreme Court went on discussing that in this context, "consideration" does not mean "incidental" or "collateral" examination of any material by the ITO in the process of assessment, but that there must be something in the assessment order to show that the ITO had applied his mind to the particular subject-matter or the particular source of income with a view to judging its taxability or to its non-taxability had not to any incidental connection. Thereafter Sri Dastur drew our attention to the fact that in the case of Sterling Construction & Trading Co. vs. ITO (1975) 99 ITR 236 (Kar) the Karnataka High Court had the occasion to examine the question of power of the AAC to cause enhancement under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellate authority while hearing the appeal against the order of a subordinate authority could allow either of the parties to raise a completely new ground which was not there before the ITO at all. Sri Dastur argues in this connection that inasmuch as the Supreme Court did not at all decide the issue relating to the power of enhancement of AAC in the case of Jute Corpn. of India Ltd. and since the case of Nirbheram Daluram the Supreme Court arrived at a decision with regard to the power of enhancement of AAC simply by following the earlier decision in case of Jute Corpn. of India Ltd. without noticing that there existed a clear decision of the Supreme Court on the relevant issue itself in the case of Rai Bahadur Hardutroy Motilal Chamaria, the decision of the Supreme Court in the case of Nirbheram Daluram has got to be considered to be per incuriam. Sri Dastur furthermore argued that in any case, the judgment of the Supreme Court in Rai Bahadur Hardutroy Motilal Chamaria's case, had been delivered by three Judges, whereas the contrary judgment in the case of Nirbheram Daluram was delivered by bench of two Judges only, and hence even the earlier judgment delivered by the bench of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondas Manordass vs. CIT (1957) 31 ITR 909 (Bom) In this particular case the Bombay High Court has held that the power of AAC was not confined to the matter in respect of which the assessee had appealed but that he had power to revise the whole process of assessment once an appeal had been preferred, and the order remanding the case was not invalid in law. It has got to be stated in this connection that this particular judgment was delivered by the Bombay High Court prior to passing of the judgments by the Supreme Court in the case of Rai Bahadur Hardutroy Motilal Chamaria and even in the case of Shapoorji Pallonji Mistry. So far as therefore this judgment is concerned, it is not in conformity with the ratio decidendi laid down by the Supreme Court on the relevant issue in its above-mentioned two judgments, and it has got to be held as not stating a good law. Again, although the learned Departmental Representative argues that this judgment was approved by the Supreme Court in the case of CIT vs. McMillan & Co. (1958) 33 ITR 182 (SC), we find that the said approval was with regard to the method of accounting adopted by the assessee and not in respect of the point at issue before us n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time of assessment. In this connection, the learned Departmental Representative strongly relies on a judgment of the Madhya Pradesh High Court in the case of Dr. (Mrs) Bimla Gulati vs. AAC (1987) 64 CTR (MP) 68 : (1987) 165 ITR 296 (MP) in support of his contention that the office notice can be considered to be a part of the assessment order and the CIT(A) would be having power of enhancement with regard to a subject-matter mentioned in the office note. The facts of this particular case are that for the asst. yr. 1980-81 Dr (Mrs.) Bimla Gulati filed a return showing a total income of Rs. 25,305 out of which the income from her medical profession was shown at Rs. 24,000. The ITO, however, estimated the income and completed the assessment. The AAC issued a notice of enhancement under s. 251(1)(a) of the IT Act, 1961 asking the assessee to show cause why the income arising in the name of a nursing home be not included in her income. The assessee challenged the said notice by filing a writ petition before the Madhya Pradesh High Court. The High Court however found out that the assessee had been required by the ITO to show cause why the income from the nursing home should not be tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r on motion by the assessing authority to examine whether the assessment made is justified and proper and if it is pointed out by the assessing authority that a lapse or omission has occurred in making the assessment, it is the duty, of the CIT(A) to advert to the same and dispose of the matter in accordance with the law. The learned Departmental Representative has also strongly contended in this connection that once the CIT(A) is seized of jurisdiction to make enhancement, he could take into consideration even subsequent events to arrive at the actual quantum of enhancement to the made. In this connection a judgment of the Supreme Court in the case of Pasupuleti Venkateswarlu vs. Motor & General Traders AIR 1975 SC 1409, has been relied upon. In that particular case, it was held that in a proceeding under Rent Control Act by landlord for permission to evict tenant, subsequent event disabling the landlord from seeking eviction is to be taken note of by the High Court in deciding the issue. The learned Departmental Representative thus argues that in the instant case, it was completely within the jurisdiction of the CIT(A) to have considered the matters arising out of assessment pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... note was not at all contemporaneous. We are however unimpressed with these arguments of Sri Dastur trying to find out minor faults and discrepancies in the office note. We are of the opinion that the office note along with the tax calculation memo form nothing but the part of the assessment order itself. It may be that the office staff did not comply with some of the instructions of the AO. But that by itself cannot lead to the conclusion that the office note was non-genuine. Furthermore when the office note and the assessment order bear the same date, we must conclude that the office note must also have been prepared and signed by the AO during the ordinary course of his business i.e., at the time of passing the assessment order itself, especially when there are no compelling evidences to the contrary. 27. We fully agree with Sri Dastur that the judgment of the Supreme Court in the case of Rai Bahadur Hardutroy Motilal Chamaria being one passed by a bench of three Judges has got to be followed in preference to that passed by a bench of two Judges in the case of Nirbheram Daluram. It is also found that the Karnataka High Court held in the case of Sterling Construction & Trading C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That assessee had received on 20th July, 1946, a sum of Rs. 40,000. In the proceeding for asst. yr. 1946-47, this came to the notice of the ITO. Since the receipt fell within the accounting year relating to the asst. yr. 1947-48, the ITO did not assess the amount, making a note "the question will however be considered again at the time of 1947-48 assessment". In the return filed in the asst. yr. 1947-48, this amount was not shown by the assessee. The ITO also over-looked the note at the end of his order in the back year assessment, with the result that this item was omitted. The assessee appealed to the AAC against his assessment for the year 1947-48. While the appeal was pending, the ITO wrote a letter to the AAC intimating him that he would like to be present, and also requesting him to assessee the amount of Rs. 40,000. The AAC, after issuing notice, assessed the amount and included it in the original assessment. In the proceeding that subsequently came before the Supreme Court, the Supreme Court did not find any special significance of the office note and considered that the matter was beyond the assessment records for the year under consideration. The Supreme Court finally hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completely separate business for the assessee. The assessee is stated to be normally engaged in the business of manufacture of pharmaceutical items. The business of selling the products of BIISA has got nothing to do with the normal business of the assessee and hence the said business, according to the assessee is required to be treated as a separate business and the source of income also as a separate source of income. It has been pointed out by Sri Dastur that the transaction relating to earning of commission stated taking place towards the last part of the accounting year corresponding to asst. yr. 1986-87 only viz., in the month October 1985 for the first time. Sri Dastur argues that since beginning, so far as the commission earning is concerned, the assessee has been following cash system of accounting. He also contends that there are no specific identifiable expenses with regard to earning of commission. He strongly contends that it is upto the assessee for following a different system of accounting viz., cash system in respect of this new source of income viz., commission income. He says that various Courts have held that in a suitable case the business man can even switch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from other source can properly be deduced therefrom by the taxing authorities, in that event its income from other source must be computed in accordance with the cash system of accounting and, therefore, interest on a loan which is not received, cannot be included in the relevant accounting year. (6) CIT vs. Citi Bank, N.A. (1994) 119 CTR (Bom) 383 : (1994) 208 ITR 930 (Bom)- In this particular case, the assessee-bank was following a hybrid system of accounting inasmuch as it was generally following mercantile system of accounting for most of its transactions but was keeping separate account for problem loans and that the interest on problem loans were being credited only on actual receipt. The system of account had also been accepted by the IT authorities in earlier years. The Bombay High Court held that interest on problem loans was not assessable on the basis of accrual. (7) Shapoorji Pallonji & Co. (Rajkot) (P) Ltd vs. ITO (1994) 49 ITD 479 (Bom)- In this particular case also it was held that in view of the fact that the assessee followed some method of accounting regularly, which was also a recognised one, the Department, was bound by assessee's choice of method which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e receipt of commission income should be treated on cash basis. He also pointed out that even in asst. yr. 1987-88 also, the accounting method was stated to be mercantile both in the return and also in the certificate issued by the auditors under s. 44AB. The learned Departmental Representative also argues by referring to the statement of the managing director of the assessee company Sri Arora given under s. 132(4) offering certain additional income for the three years, that had the assessee been actually following cash system of accounting in respect of this particular source of income there would not have been any question of offering any extra income. The learned Departmental Representative also refers to the two telex messages (to which we have already made a reference) to the effect that commission will be accrued at the time of booking and payable upon shipment of the order. The Departmental Representative argues in this connection that since the assessee must be considered to be maintaining its accounts under the mercantile system, the commission income would accrue to it immediately on booking of the order by the assessee. He furthermore argues that even so far as receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the account of the assessee in the books of the Indian company amounted to receipt of the royalty by the assess and it was accordingly taxable. The Supreme Court further more held that it was immaterial when that assessee actually received the royalty amount in the UK and the method of accounting adopted by the company was irrelevant. However, the special facts in this particular case are required to be taken into consideration while trying to understand the decision of the Supreme Court. In arriving at the above mentioned decision of the Supreme Court had relied on its earlier decision in the case of Raghava Reddy vs. CIT (1962) 44 ITR 720 (SC). In that particular case, there was a special agreement to the effect that the Japanese company desired that the assessee-firm in that case should open an account in the name of the Japanese company in their books of account, credit the amounts in that account, and deal with those amounts according to the instructions of the Japanese company. The Supreme Court had held in that case that till the money was so credited there might be a relation of debtor and creditor, but after the amounts were credited, the money was held by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee transactions pertaining to the assessment year under consideration and stated to be received by it on 15th April, 1986, in the month of April 1986, as a part of the receipt of the total amount of $ 27,806.38 corresponding to rupee value of 3,46,281.20, received as a whole on 15th April, 1986. Thereafter, the assessee further received a total amount of $ 70829.28 (Rs. 8,85,366) on 21st July, 1986. This amount was also actually credited to the ledger account of the assessee in that every month. Factually therefore, we find that the assessee has been maintaining its accounts with regard to receipt of commission income from BIISA on cash basis. We completely agree with the arguments of Shri Dastur that whether m the return of income or in the audit report, the system of accounting is mentioned as "mercantile" without specifying that in respect of commission income, cash system of accounting is being followed, that would not detract from the factum of the assessee actually maintaining the accounts in this regard on cash basis. Sri Dastur has tried to argue in this connection that the source being a new one in this year and the transactions coming towards the fag end on the year, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenses other than actual disbursement of its expenses during the year under consideration. The salary to employees is stated to be payable towards the end of the relevant month. We find sufficient force in the argument of Sri Dastur. All the expenses pertaining to the Instrument Division appear to be of the nature of expenses actually incurred and also disbursed. Hence, there is no difference between cash system of accounting and mercantile system of accounting so far as the expenses are concerned. We are therefore of the view that the Department, cannot argue that inasmuch as the expenses were accounted for on mercantile basis, the assessee would not be permitted to account for the commission receipts on cash basis. Furthermore, Sri Dastur relied on a judgment of Tribunal, Bombay Bench 'B' dt. 12th June, 1998-in the case of Vernoniea Trading Ltd. (formerly known as Bhowmik Investments & Trading Co. (P) Ltd.). IT Appeal No. 7546 (Bom) of 1990 asst. yr. 1986-87. In that particular case, the Tribunal considered the applicability of the judgment of Madras High Court in the case of G. Padmanabha Chettiar & Sons and held as below: "The decision of the Madras High Court quoted befo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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