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Addl. Commissioner of Income-tax Vs. U.P. State Agro Industrial Corporation - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 264 of 1979
Judge
Reported in[1982]133ITR597(All); [1981]6TAXMAN161(All)
ActsIndian Companies Act; Income Tax Act - Sections 10(1), 14 and 145; Electricity Supply Act, 1948
AppellantAddl. Commissioner of Income-tax
RespondentU.P. State Agro Industrial Corporation
Appellant AdvocateR.K. Gulati, Adv.
Respondent AdvocateK.B. Bhatnagar, Adv.
Excerpt:
- - the assessee wants to have the best of both the worlds. considering all these facts this amount clearly represents a portion of the sale, and hence will be added, because as it is not even sure that the assessee has accepted this time the order of the government and will even refund the amount to the hundreds of farmers or would not protest against it further. the same argument holds good for this also. from the letter dated august 5, 1971, from the stc, who was the authority under the contract to fix the ceiling price, it clearly indicates that the assessee charged the amount in excess of the ceiling fixed by it. as such, the assessee was perfectly justified to reverse the entry during the year under appeal for rs. of india, while dealing with the submission made on behalf of the.....seth, j. 1. at the instance of the commissioner of income-tax, lucknow, this court called for and the income-tax appellate tribunal, allahabad, has stated the case and has referred the following question of law for the opinion of this court :' whether, on the facts and in the circumstances of the case, the tribunal was legally correct in holding that the sums of rs. 12,80,428 and rs. 2,23,480 were not rightly included in the total income of the assessee '2. briefly stated, facts giving rise to the present reference are' that the assessee, m/s. u.p. state agro industrial corporation, lucknow (hereinafter referred to as the ' agro corporation '), was set up in march, 1967, as a body registered under the indian companies act. the authorised capital of the agro corporation had been subscribed.....
Judgment:

Seth, J.

1. At the instance of the Commissioner of Income-tax, Lucknow, this court called for and the Income-tax Appellate Tribunal, Allahabad, has stated the case and has referred the following question of law for the opinion of this court :

' Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the sums of Rs. 12,80,428 and Rs. 2,23,480 were not rightly included in the total income of the assessee '

2. Briefly stated, facts giving rise to the present reference are' that the assessee, M/s. U.P. State Agro Industrial Corporation, Lucknow (hereinafter referred to as the ' Agro Corporation '), was set up in March, 1967, as a body registered under the Indian Companies Act. The authorised capital of the Agro Corporation had been subscribed by the Govt of India and the Govt. of Uttar Pradesh. On September 10, 1970, the Agro Corporation entered into a contract with the State Trading Corporation of India (hereinafter referred to as the ' trading corporation ') for the sale of tractors imported by the trading corporation. In that contract, the Agro Corporation was described as a business associate. The business associate was required to dispose of the goods imported through the trading corpa-ration only to the bona fide agriculturists having sufficient land in accordance with the instructions given by the Ministry of Food and Agriculture, C.D. and Co-operative Dept., Govt. of India and/or STC (State Trading Corporation). The business associates were required to deliver the goods to the registered purchasers on the basis of first-come-first served subject to any priority that the Ministry of Food and Agriculture and/or STC may assign and they were not to charge from the customers/purchasers of the goods price more than ceiling price as may be approved by the trading corporation. During the accounting year ending on March 31, 1972, relevant for the assessment year 1972-73, the Agro Corporation sold a number of Zetor Tractors imported through the trading corporation to various customers. The sale price realized by the Agro Corporation from the sale of such tractors exceeded the total amount which it was entitled to realize from its customers in accordance with the ceiling price of the tractors determined by the trading corporation, by a sum of Rs. 15,45,504, The excess realization made by the Agro Corporation, inter alia, represented a sum of Rs. 12,80,428 (finance charges) and Rs. 2,23,480 (assembling charges). On 5th of August, 1971, the deputy marketing manager of the trad-ing corporation wrote to the managing director of the Agro Corporation that an inspection of its record showed that it had, in respect of sale of Zetor Traders, over-charged its customers and that it should refund the excess realisation made by it to its customers within one month from the issue of the letter and to confirm having done so to the trading corporation as also to the Ministry of Food and Agriculture. The Agro Corporation did not, on receipt of the aforesaid letter, immediately refund the excess amount realized by it to its customers. It represented to the Govt. of India, Ministry of Food and Agriculture, justifying its action in realizing from its customers the finance and assembling charges over and above the maximum price determined by the trading corporation. However, at the end of the relevant accounting year, the Agro Corporation debited its sales by a sum of Rs. 15,45,504 showing it as an amount which it had been required to refund to its customers. Consequent to the representations made by the Agro Corporation, the Projects and Equipment Corporation of India, vide its letter dated March 25, 1972, informed the Agro Corporation that under the contract it was not entitled to realize any finance charges from its customers and that it was entitled to realize only a sum of Rs. 507 per tractor as assembling charges instead of Rs. 1,014 per tractor realized by it. Ultimately, after referring to certain correspondence, the Govt. of India in the Ministry of Food and Agriculture, informed the Agro Corporation that it was not possible to accept its request to allow it to realize the finance charges in respect of Zetor Tractors sold by it, and the excess amount realized by it from its customers should be refunded to them immediately under advice to the Ministry.

3. For the assessment year 1972-73, the assessee returned its total income at Rs. 23,31,066. A scrutiny of the accounts showed that this figure had been arrived at after taking into account amongst other items the debit in respect of the sums of Rs. 12,80,428 and Rs. 2,23,480 made by the assessee in respect of finance charges and assembling charges mentioned above. In this connection, the ITO observed thus :

' The STC on 31-10-1973 (correct date appears to be 5-8-1971) has written to the assessee that these finance charges cannot be allowed to be realized by the assessee from its customers. Similar orders existed even before the charging of this amount. Thus, the liability of refunding of this amount is contingent and was determined only by this letter dated October 31, 1973. It has nothing to do with the relevant previous year when the assessee in fact realized this amount from various farmers and purchasers as sale price. Merely because that a letter was received in 1971, the contents of which the assessee has not accepted and it cannot be presumed at this time also that even the contents of this letter dated October 31, 1973, he would accept, he cannot debit the sales in 1972. Not only this when hehad such intention of obeying Government orders why he charged this amount at all. The assessee wants to have the best of both the worlds. If he has realized them as finance charges then he should have credited this amount to the interest account. He did not do this also. Considering all these facts this amount clearly represents a portion of the sale, and hence will be added, because as it is not even sure that the assessee has accepted this time the order of the Government and will even refund the amount to the hundreds of farmers or would not protest against it further. If the question of allowability is to be considered, it can only be considered in the year October 31, 1973, or afterwards.'

4. So far as the assembling charges were concerned, he observed thus :

' As far as the assembling charges are concerned he charges them at the rate of Rs. 1,014. The Government has now agreed that he can charge them at the rate of Rs. 700 per piece against the original rate of Rs. 507 per tractor. Therefore, the matter is still open to negotiation and this letter was also received by him on August 28, 1973, which is not relevant for the previous year. The same argument holds good for this also......'

5. In the result, the ITO disallowed the deductions of these two accounts claimed by the Agro Corporation and added the same in the income returned by it.

6. In appeal, the AAC observed that so far as realization of finance charges by the Agro Corporation from its customers as part of the sale price of Zetor Tractors was concerned, it appears that the Trading Corporation had objected to the said charge being made by the Agro Corporation. According to the Trading Corporation, the Agro Corporation should not have charged this amount. There being a dispute between the two corporations (Agro Corporation and the Trading Corporation), the matter was referred to the Government. The Agro Corporation, vide its letter dated May 9, 1972, made a representation to the Government justifying its claim to realize finance charges. The Government, considered the matter and, vide its letter dated October 31, 1973, it turned down the request of the Agro Corporation and required it to refund the amount realized by it from the purchasers. The Agro Corporation had realized the finance charges in accordance with the conditions and terms offered by it to its purchasers--of course, there was a dispute between it and the trading corporation which was referred to the Government. The Government did not decide the dispute in the relevant previous year. The verdict of the Government was given only in the subsequent year. The Appellate Assistant Commissioner rejected the claim with regard to finance charges by making the following observation :

'The decision of the Government of India on this topic was not available during the year under appeal. In the previous year under appeal, there was a dispute between the appellant and the STC which was a sister corporation but there was no decision on this topic by the Government which could have entitled the appellant to write off this amount realized from the purchasers. The appellant is maintaining the mercantile system of accounts and, in my opinion, the write-off or the debit of this amount of Rs. 12,80,428 is not relevant to the year under appeal. This entry is relevant only to be passed on October 31, 1973, when the Government decision was communicated. In my opinion, the appellant was not justified in reducing its profits by Rs. 12,80,428 as far as the year under appeal is concerned. This reduction is relevant only to the date, October 31, 1973, as per reasons mentioned above. The addition of Rs. 12,80,428, therefore, is confirmed.'

7. While dealing with assembling charges, the AAC pointed out that the appellant had realized assembling charges at the rate of Rs. 1,014 per tractor. The Trading Corporation had informed the Agro Corporation that it should have charged assembling charges at the rate of Rs. 507 per tractor only. The Agro Corporation did not accept the view-point of the Trading Corporation and the matter was referred to the Government. The Government finally decided, vide its letter dated August 28, 1973, that the Agro Corporation should charge only Rs. 700 per tractor as assembling charges and that the balance amount realized from the purchasers should be refunded. Thus, according to the decision of the Government, the whole amount of Rs. 2,23,480 was not refundable. Even the refund of this part of the amount related to the date August 28, 1973, when the Government decision was made. The write-off of the part of the assembling charges realized was not relevant to the year in question as the Government decision was not available and there was merely a dispute between the two corporations, namely, the Agro Corporation and the Trading Corporation, which was a sister corporation. The write-off of the correct amount was only relevant to the date, August 28, 1972, which fell in the assessment year 1974-75. In the result, the ITO was justified in adding back the amount to the income of the Agro Corporation.

8. The Agro Corporation then took the matter up in appeal before the Income-tax Appellate Tribunal. During the course of hearing of the appeal, it was accepted by both the sides that the Agro Corporation had maintained its accounts in accordance with the mercantile system, and that its income had to be assessed accordingly. The Tribunal scrutinised the terms of the contract entered into between the Agro Corporation and the Trading Corporation and concluded that the Agro Corporation was not entitled to charge any amount as the sale price of Zetor Tractors, over and above the ceiling price fixed by the Trading Corporation. The Agro Corporation was in this regard not only working under the Trading Corporation but it had also to follow the instructions given by the Ministry of Food and Agriculture, Govt. of India. In this connection, the Appellate Tribunal observed thus :

'The letter dated August 5, 1971, by the STC is absolutely clear that the assessee was directed to refund the excess amount realized by it at Rs. 15,99,030.96. The other letters are subsequent to this date. Thus, the assessee having in view the contract with the STC and mercantile system of accounting, could only provide for the amounts, for which it was legitimately entitled according to the contract. From the letter dated August 5, 1971, from the STC, who was the authority under the contract to fix the ceiling price, it clearly indicates that the assessee charged the amount in excess of the ceiling fixed by it. As such, the assessee was perfectly justified to reverse the entry during the year under appeal for Rs. 12,80,428 and Rs. 2,23,480 for finance and assembling charges, respectively.'

9. The Tribunal further opined in para. 29 of its judgment that as the Agro Corporation had been following the mercantile system of accounting, the taxability of the finance and assembling charges recovered by it had to be considered on the basis of their accrual under the contract entered into between the Agro Corporation and the Trading Corporation and that on this point the letter dated August 5, 1971, from the Trading Corporation was quite clear and it indicated that the said amounts did not accrue to the Agro Corporation under the. contract entered into between it and the Trading Corporation. The communications made by the Govt. of India on August 28, 1973, and October, 31, 1973, in this regard were not relevant for the question as to whether or not the said finance and assembling charges had accrued to the Agro Corporation in the relevant assessment year and the aforementioned charges could not be included in the income of the Agro Corporation for the relevant assessment year on the basis of the communications dated August 28, 1973, and October 31, 1973, made by the Govt. of India, While dealing with the submission made on behalf of the revenue that the amounts received by the Agro Corporation were in the nature of trading receipts which should be included in the total income of the Agro Corporation and, if at all, bad debt might have been claimed in respect of the same as and when such amount subsequently became refundable, the Tribunal observed thus :

' So far as the first proposition of the revenue is concerned, that the amount charged by the assessee was in the nature of trading receipts is not in dispute and the assessee has accepted this proposition on the basis of which the assembling and finance charges have been included in itsprofit and loss accounts. The second proposition of the department is that the assessee should have included all the amounts without passing a reverse entry and should have claimed bad debts on the basis of the letter dated August 28, 1973. With the second proposition of the revenue we do not agree on the following grounds :

(i) The first reason is that the assessee sold Zetor Tractors imported under the contract with the STC. The assessee was under obligation according to the terms of contract not to charge higher amount than fixed by the STC. The STC has, during the year under appeal, found that the assessee charged extra amount which it must refund. As such, according to the contract, the excess amount charged by the assessee was not its trading receipt, and the assessee was under obligation to refund it to the customers. As such, the excess amount over the terms of the contract charged by the assessee was not its trading receipts.

(ii) The second reason is that the assessee was following the mercantile system of accounting. (The revenue cited two cases on this point, the observation of which has been quoted by us in para. 26 above). According to this system, the entry is passed for, the amount which has legally accrued in the hands of the assessee. Here, the income from assembling and finance charges reached the hands of the assessee because of the contract of the STC dated September 10, 1970. According to this contract, the assessee did not charge the amount correctly and, therefore, the incorrect amount charged by the assessee could not be said to have accrued during the year under appeal.'

10. In the result, the Tribunal concluded that the excess amount charged by the assessee was not its trading receipt. Accordingly, the second proposition stated by the revenue was rejected. In this view of the matter, the Tribunal allowed the appeal filed by the Trading Corporation by making the following observation :

' After considering the above facts, we hold that on the basis of the mercantile system of accounting, followed by the assessee and the contract with the STC dated September 10, 1970, the sum of Rs. 12,80,428 and Rs. 2,23,480 were not rightly included as income of the assessee during the year and, therefore, they are deleted. '

11. The observations made by the Tribunal with regard to the nature of the receipts of finance and assembling charges by the assessee, in excess of the charges sanctioned by the Trading Corporation, as admitted before it by both the parties, and the reasons given by it for holding that the same are not taxable, do not appear to be consistent. Whereas according to the admission made by the parties the Agro Corporation received finance charges and extra amount of assembling charges as part of its trading receipts, the Tribunal, having regard to the contract entered into between the Agro Corporation and the trading Corporation ultimately concluded that such charges were not recoverable and could not be considered to be trading receipts that went to constitute the taxable income of the Agro Corporation in the relevant year.

12. The Income-tax Act seeks to tax the income falling under one of the heads A to F enumerated in Section 14 of the Act. So far as the income falling under the head ' Profits and gains of business or profession ' is concerned, Section 145 of the Act lays down that such income is to be computed in accordance with the method of accounting regularly employed by the assessee. The two systems of accounting generally employed by the assessees are the cash and the mercantile system. Sometimes it so happens that an assessee employs a system of accounting which is neither purely cash nor purely mercantile but a system which is a hybrid or a mixture of cash and mercantile systems. (We are, in this case, not concerned with the hybrid system of accounting). The Supreme Court in the case Morvi Industries Ltd. v. CIT : [1971]82ITR835(SC) pointed out that it is well known that the mercantile system of accounting differs substantially from the cash system of book keeping. Under the cash system it is only the actual cash receipts and actual cash payments that are recorded as credits and debits ; whereas under the mercantile system credit entries are made in respect of amounts due immediately they become legally due and before they are actually received ; similarly, the expenditure items, for which a legal liability has been incurred, are immediately debited even before the amounts in question are actually disbursed. Where the accounts are kept on mercantile basis the profits or gains of business are credited though they are not actually realized, and the entries thus made really show nothing more than the accrual or arising of the said profit at the material time and the same is the position with regard to debits made. Again, in the case of CIT v. Shoorji Vallabhdas and Co. : [1962]46ITR144(SC) , the Supreme Court observed that income-tax is attracted either at the time of accural (where the accounts are maintained on mercantile system) or receipt (where the accounts are maintained on cash system) of income, but the substance of the matter remains income. If income does not result at all, there cannot be a tax even though in book keeping an entry is made about an hypothetical income which does not materialise. Where income has, in fact, been received and is subsequently given up, in such circumstances that it remains the income of the recipient, even though given up, the tax is payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income even though an entry to that effect might in certain circumstances have been made in the books of account. Likewise in the case of CIT v. Poonam Chand Trilok Chand : [1976]105ITR618(All) , a Division Bench of this courtopined that under the mercantile system an assessee is entitled to claim deduction as soon as liability for' the same has accrued and even before the expenditure is actually incurred. In this regard, the entries in the books of account are not in any way determinative of income or expenditure. In our opinion, the real ratio behind the observation made in Shoorji Vallabhdas' case : [1962]46ITR144(SC) that, despite an entry being made in the books, the real nature of accrual of income does not change, and in Poonam Chand's case : [1976]105ITR618(All) , that the entries in the books of the assessee are not determinative of accrual of the right or liability that the right to receive the income flows not from the entries made by the assessee in his books, but from the nature of transaction entered into between the concerned parties.

13. As stated above, according to the mercantile system of book keeping, the taxable income or profit or loss is computed after taking into account all the income and the expenditure relating to the period in question whether such income has actually been received or not and whether such expenditure has actually been paid or not. The criterion in such a case is whether the right to receive such income has accrued and whether the liability to make such payment has accrued.

14. Under the mercantile system of accounting, right to a trading receipt is generally considered to be the income, and the real profits and gains of business which is to be subjected to income-tax have to be computed by deducting the assessee's trading liability from his right to the trading receipt. In a case where during the course of a trade or business, goods are sold, the entire sale price which the seller becomes entitled to receive, is considered to be the seller's trading receipt and income for the purposes of the I.T. Act. In the case of Chowringhee Sales Bureau P. Ltd. v. CIT : [1973]87ITR542(SC) , the Supreme Court had to consider the question as to whether the amount of sales tax collected by a dealer as a part of the sale price of the goods sold by him which he had credited in his books under the head .' Sales tax collection account', was his income or not. In this connection, the Supreme Court made the following observation (p. 548) :

' The fact that the appellant credited the amount received as sales tax under the head ' Sales tax collection account' would not, in our opinion, make any material difference. It is the true nature and the quality of the receipt and not the head under which it is entered in the account books as would prove decisive. If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as trading receipt. We may in this context refer to the case of Punjab Distilling Industries Ltd. v. Commissioner of Income-tax : [1959]35ITR519(SC) . In that case certain amounts received by the assessee were described as security deposits. This court found that those amounts were an integral part of the commercial transaction of the sale of liquor and were the assessee's trading receipt. In dealing with the contention that those amounts were entered in a separate ledger termed ' empty bottles return security deposit account', this court observed : ' So the amount which was called security deposit was actually a part of the consideration for the sale and, therefore, part of the price of what was sold. Nor does it make any difference that the price of the bottles was entered in the general trading account while the so-called deposit was entered in a separate ledger termed ' empty bottles return deposit account', for, what was a consideration for the sale cannot cease to be so by being written up in the books in a particular manner.' '

15. Applying the ratio of the aforementioned observations to the facts of the case before them the learned judges of the Supreme Court found that in the cash memos issued by the appellant to the purchaser, the appellant had been shown to be the seller. The amount realized by him from the purchasers included sales tax. The appellant, however, did not pay the amount of sales tax to the actual owner of the goods auctioned because the statutory liability for the payment of sales tax was his. The appellant also did not deposit the amount realized by it as sales tax in the State Exchequer because it took the decision that the statutory provision creating that liability upon it was not valid. Since the amount of sales tax was received by the appellant in its character as an auctioneer the amount formed part of the appellant's trading or business receipts. Of course, the appellant would be entitled to claim deduction for the amount as and when it paid it to the State Govt. Aforementioned view of the Supreme Court was reaffirmed by it in the case of Sinclair Murray & Co. P. Ltd. v. CIT : [1974]97ITR615(SC) , wherein it was held that the amount of sales tax collected by a trader constituted its trading receipts and had to be included in its total income and that if and when the appellant paid the amount collected to the State Govt. or refunded any part thereof to the purchaser, the appellant would be entitled to claim deduction of the sum so paid or refunded.

16. We find that in the case before us the Agro Corporation had, during the relevant period, collected a sum of Rs. 15,03,908 (Rs. 12,80,428 as finance charges and Rs. 2,23, 480 as assembling charges) from its customers as a part of the price of the tractors sold by it to them. It was accordingly its trading receipt and was includible in the income of the assessee. Of course, the Agro Corporation could in computing its taxable income claim deduction in respect of these two amounts if it could show that it became liable to refund the same to its customers in the same year.

17. Learned counsel appearing for the Agro Corporation contended that inasmuch as the contract entered into between the Agro Corporation and the Trading Corporation disabled the former from charging a price higher than that fixed by the latter and the finance and the assembling charges mentioned above were over and above the maximum price fixed by the Trading Corporation, the Agro Corporation was not entitled in law to charge the same and it was liable to refund the same to its customers. In the circumstances, it can be said that this part of the income never accrued to the petitioner and in any case the liability to refund the same also accrued simultaneously. Accordingly, even though the Agro Corporation had received the amount it could not be said to be its income. In the alternative, it was entitled to adjust its liability for refunding the amount in the same year. In either view of the matter, the finance and the assembling charges realized by the Agro Corporation could not be taken into consideration in computing its taxable income.

18. The submission made by the learned counsel that as under the contract entered into between the Agro Corporation and the Trading Corporation, the former was not entitled to charge anything in excess of the price determined by the latter for the sale of tractors and that the amount realized by the Agro Corporation over and above the price fixed by the Trading Corporation never accrued to the former, does not, in the circumstances of the present case,' appeal to us. The amount of price which the Agro Corporation was entitled to receive from its customers was to depend upon the contract which it entered into with its customers. It did not depend upon the contract which the Agro Corporation had entered into with the Trading Corporation. There is no dispute that the Agro Corporation had during the year in question contracted with its purchasers to sell tractors at a price which exceeded the maximum selling price fixed by the Trading Corporation, by the amounts of finance and assembling charges. The purchasers were, as a result of the transactions of sale, bound to pay, for the tractors purchased by them, the entire sale price which included the finance and the assembling charges to the Agro Corporation. Accordingly, the entire sale price realized by the Agro Corporation was its trading receipt and the income which had accrued to it, and was includible in its total income. It is true that the Agro Corporation had entered into an agreement with the Trading Corporation that it would not sell tractors at a price higher than that fixed by the latter, but then it actually did enter into transactions for sale of tractors at a higher price. Learned counsel for the Agro Corporation could not bring any law to our notice whereunder the purchasers of the tractors could tell the Agro Corporation that they would, because of the latter's contract with the Trading Corporation, not to pay the price which they had agreed to pay to theAgro Corporation or that they were not liable to pay the price as agreed upon by them to the Agro Corporation. The right of the Agro Corporation to realize the price of the tractors from its customers flowed not from the contract which it had entered into with the Trading Corporation but it flowed from the contract which it entered into with the customers. Breach of contract which the Agro Corporation had entered into with the Trading Corporation, if any, did not affect the right of the Agro Corporation to receive the price of the tractors from its customers in accordance with the agreement which it had entered into with them. Accordingly, the incidence of the price received by the Agro Corporation from its customers was not affected by anything contained in the contract entered into between the Agro Corporation and the Trading Corporation and the entire amount of price for which the tractors were sold continued to be the trading receipt or income of the Agro Corporation and was liable to be included in its total income.

19. We now proceed to deal with the second submission of the learned counsel appearing for the Agro Corporation, that because of the contract entered into between the Agro Corporation and the Trading Corporation, the former became liable to refund the excess realization to its customers and as such the finance charges and the assembling charges were liable to be excluded in computing the Agro Corporation's income. For the reasons already stated above, we are not impressed by the argument that because of the existence of the contract between the Agro Corporation and the Trading Corporation that the former will not sell tractors at a price higher than that fixed by the latter, the purchasers could either insist that they would not pay the price agreed upon by them or that they would claim refund of the excess price. We are, accordingly, not satisfied that the Agro Corporation was liable to refund the excess realization made by it because of the existence of the contract entered into between it and the Trading Corporation.

20. Learned counsel appearing for the assessee then invited our attention to a letter dated August 5, 1971, addressed by the Trading Corporation to the managing director of the Agro Corporation whereby the former had brought it to the notice of the latter that the Agro Corporation had charged for the sale of tractors a price higher than that fixed by the Trading Corporation, and that it should refund the excess amount to the customers. He contended that in any case this letter by the Trading Corporation had created a liability upon the Agro Corporation to refund finance and assembling charges to its customers. This liability having accrued as a result of the letter dated August 5, 1971, it was immaterial whether the Agro Corporation had in fact returned the excess amount to its customers or not.

21. The liability to refund having accrued, the Agro Corporation was entitled to make the reverse entries in its books and to claim that the amount representing the price charged in excess of the price fixed by the Trading Corporation be excluded in computing its total taxable income.

22. We are unable to accept the aforesaid submission. In the case of New Victoria Mills Co. Ltd. v. CIT : [1966]61ITR395(All) , his court observed thus (head note) :

' Though under the mercantile system of accounting all items of credit are brought into credit immediately they become legally due and before they are actually received, and all expenditure is debited, for which a legal liability has been incurred before it is actually disbursed, yet before a credit or debit entry can ligitimately be made in the accounts it must be shown that a certain enforceable liability has accrued or arisen. Such liability must be one that has been ascertained and capable of being enforced by the person in whose favour the debit has been raised. The mercantile system can never be ' stretched' to embrace all sorts of provisional, notional or contingent payments which the assessee considers that he might ultimately be called upon to pay.'

23. Liability to pay back an amount may either arise under a statute or it may arise as a result of a contract. Such liability to pay back would be there only if as a result of some statutory provision or contract the person to whom the refund is to be made can claim it from the assessee as of right. As already stated, merely because the Agro Corporation charged a price higher than that fixed by the Trading Corporation in derogation of its contract with the Trading Corporation, the purchasers who had agreed to purchase the tractors from the Agro Corporation at a higher price were not entitled to claim refund of the excess price from the Agro Corporation. The letter dated 5th of August, 1971, did not improve the situation in favour of the purchasers at all. By the said letter the Trading Corporation merely invited the attention of the Agro Corporation to the fact that it had acted in derogation of the contract entered into with it and called upon the Agro Corporation to refund the excess amount. But then it does not mean that because the Trading Corporation had called upon the Agro Corporation to refund the excess amount, the purchasers could enforce the direction contained in the letter and claim refund of the excess price paid by them. If, to begin with, there was no legal enforceable liability to refund the amount, the same certainly was not created by the letter dated August 5, 1971. No other material was brought to our notice whereunder such a liability to refund the amount had been created in the year in question.

24. The Agro Corporation was not satisfied with the direction given by the Trading Corporation in its letter dated August 5, 1971, and it made arepresentation to the Central Govt. The Central Govt. wrote back on March 25, 1972, and October 31, 1973, informing the Agro Corporation that it could retain assembling charges up to Rs. 700 per tractor instead of Rs. 507 as mentioned in the contract with the Trading Corporation, but then it had to refund to its customers assembling charges collected over and above Rs. 700 and the entire amount of finance charges collected by it from its customers. It is not necessary for us to go into the question whether any liability was created because of these govt. letters or not. However, if the same was created it was created in the years subsequent to the assessment year 1972-73, with which we are concerned. It may be that as held by the Supreme Court in Chowringhee Sales Bureau's case : [1973]87ITR542(SC) , the Agro Corporation may be entitled to claim deduction in respect of the amount after it has refunded the same to its customers, but then as no such refund has been made in the year in question, it is not necessary for us to say anything about it in this judgment.

25. Learned counsel for the Agro Corporation strongly relied upon a decision of the Supreme Court in the case of Poona Electric Supply Company Ltd. v. CIT : [1965]57ITR521(SC) . In that case, the assessee, Poona Electric Supply Company, carried on the business of distribution of electricity under a licence issued by the govt. under the provisions of the Electricity Supply Act, 1948. The statutory provision imposed a duty on the licensee to adjust its rates for the sale of electricity by periodical refund in such manner that its clear profits in any year did not, as far as possible, exceed the amount of return. If the clear profit in any year of account was in excess of the amount of the reasonable return 1/2 of such excess amount had to be either distributed in the form of proportional rebate on the amounts collected from the sale of electricity and meter rentals or carried forward in the accounts of the licensee for distribution to the consumers in future in such manner as the State Govt. might direct. During the relevant accounting years, the assessee had set apart certain sums and credited them to the consumer's benefit reserve account and claimed deduction of those sums in computing its profits liable to income-tax. While dealing with the question of admis-sibility of the claim made by the assessee, the Supreme Court observed that Under Section 10(1) of the I.T. Act, tax shall be payable by an assessee under the head ' Profits and gains of business ' in respect of profits and gains of any business carried on by him. The said profits and gains are not profits regulated by any statute, but profits in a business computed on business principles. They are business profits and not statutory profits. The real profit of a businessman under Section 10(1) of the I.T. Act cannot obviously include amount returned by him by way of rebate to the consumers under statutory compulsion. It is as if he received from the customers the original amount minus the amount he returned to them. In substance there cannot be any differencebetween the businessman collecting from his constituents a sum of Rs. 'Y' in addition to Rs. ' X ' by mistake and returning Rs. ' Y ' to them and another businessman collecting Rs. ' X ' alone. The amount returned is not a part of the profits at all. The court further observed that income-tax is a tax on the real income, that is, the profits arrived at on commercial principles subject to the provisions of the I.T. Act. The real profit can be ascertained only by making the permissible deductions. There is a clearcut distinction between the deductions made for ascertaining the profits and distributions made out of the profits. In a given case whether the outgoings fall in one or the other of the heads is a question of fact to be found on the relevant circumstances having regard to business principles. Another distinction that shall be borne in mind is that between the real and statutory profits, that is, between the commercial profits and statutory profits. The latter are statutorily fixed for specific purposes. All that has been held in this case is that in order to compute the taxable profits under the provisions of the I.T. Act the amount set aside for returning to the customers by way of rebate cannot be included in computing the taxable profits as such rebate does not form part of the profit as understood in the commercial sense. Further, where a businessman collects from his constituents a sum in excess of what he ought to have collected and returns the excess amount to the constituents such excess amount would not go to form part of the profit. It may be that the part of the sale price which has to be returned to a customer as rebate or that which has been collected by mistake and has to be returned to the customer does not form part of the profit in the commercial sense. But, then the same thing cannot be said where persons deliberately enter into an agreement to sell and purchase certain goods at a price which is in excess of the price which a seller can charge under contract with another person. Charging of such price in its entirety would be trading receipt for the excess neither represents the rebate admissible to the constituents nor the part of the price which has been wrongly charged which has got to be refunded to the constituents. We are, accordingly, of opinion that the facts of Poona Electric Supply Company's case : [1965]57ITR521(SC) and the law enunciated therein does not help the submissions made on behalf of the Agro Corporation.

26. Learned counsel appearing for the Agro Corporation also relied upon the case of CIT v. Shoorji Vallabhdas and Company : [1962]46ITR144(SC) , wherein the assessee-firm was the managing agent of two shipping companies and under the managing agency agreement it was entitled to receive as commission 10% of the freight charge. During the period relevant to the assessment in question the assessee became entitled to receive certain amount from the managing company by way of commission. Subsequently, for certain reasons the assessee agreed to accept only 2% as commission from the two managing companies and gave up the remaining amount of its commission earnings during the relevant year. The department sought to assess the amount given up by the assessee on the ground that the commission of 10% had already accrued to the assessee in the relevant accounting year and the fact that the assessee gave up a portion of that income subsequently, did not alter its position. The Supreme Court, after considering the agreements entered into between the assessee-company and the managing company, came to the conclusion that the effect of the subsequent agreement whereby the assessee-company gave up its claim for commission over and above 21/2% was that it had altered the rate of commission in such a way as to make the income which really accrued to the assessee different from what had been entered in the books of account. This was not a case of a gift by the assessee to the managing company of a portion of the income which had already accrued, but an agreement to receive a lesser remuneration than what had been agreed upon. The assessee had in fact received only the lesser amount in respect of the entries in the account books and this lesser amount alone was taxable. It appears that in this case the Supreme Court construed the subsequent agreement as superseding the earlier agreement and as if the provisions contained in the subsequent agreement were enforced from the very beginning. In the case before us, there is no such subsequent agreement entered into either between the Agro Corporation and its customers entitling them to receive back certain amounts or between the Trading Corporation and the Agro Corporation for the return of such amount to the customers. As already stated, there is nothing on record to indicate that the Agro Corporation has, in fact, refunded this amount to its customers or that any enforceable liability has been created against it to refund that amount. The facts of the case cited by the learned councel for the Agro Corporation are quite distinguishable and are not similar to the facts of the case before us.

27. In the result, we find that none of the arguments raised on behalf of the Agro Corporation for excluding the amount of finance and assesmbling charges collected by it as part of the price of the tractors sold to its customers is liable to be excluded in computing the total income of the Agro Corporation, has any substance. The Tribunal in our opinion was clearly in error in holding that the income from the assembling and finance charges reached the hands of the assessee because of the contract of the Trading Corporation dated September 10, 1970, and that as that contract did not authorise the assessee to charge the aforementioned amount the said charge could not be said to have accrued as income to the Agro Corporation during the relevant year. The right to receive the price accrued to theAgro Corporation not because of the contract which it had entered into with the Trading Corporation on September 10, 1970. It accrued because of a subsequent and independent contracts which the Agro Corporation entered into with its customers at the time of the selling the tractors. In law, notwithstanding the contract between the Agro Corporation and the Trading Corporation, the former was entitled to receive from its customers the entire price for which it had agreed to sell the tractors to them.

28. In view of the aforesaid discussion, we answer the question referred to us in the negative and in favour of the Commissioner who shall be entitled to his costs which are assessed at Rs. 250.


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