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income-tax Appellate Tribunal Vs. Jananmandal Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference Nos. 765 of 1975, 432 of 1976 and 834 of 1977
Judge
Reported in(1983)33CTR(All)50; [1983]143ITR228(All); [1983]13TAXMAN424(All)
ActsIncome Tax Act, 1961 - Sections 36(1) and 37
Appellantincome-tax Appellate Tribunal
RespondentJananmandal Ltd.
Appellant AdvocateM. Katju, Adv.
Respondent AdvocateR.R. Agarwal and ;S.R. Misra, Advs.
Excerpt:
- - 43,607 on account of gratuity to workers under the provisions of the working journalists (conditions of service and miscellaneous provisions) act, 1955, and had claimed deduction for this amount for the year 1958-59. the aac, therefore, concluded that this fact clearly showed that the appellant's contention that it consistently followed the cash system of accounting in respect of expenditure as well as receipts was not correct because the gratuity was provided for in the accounts even though it had not been actually paid. that also clearly indicated that the assessee-company followed the cash system of accounting. it was also held that the conditions contained in section 36(1)(ii) of the act as well stood satisfied......the ito and the aac gave a finding that the bills payable had been taken into consideration in the assessee's account books and the additions were confirmed by them. this point again came up in appeal before the income-tax appellate tribunal. it again set aside the order of the aac with a direction whether the bills with regard to the purchases of raw materials were outstanding at the end of any of the previous years involved and were not debited to the purchases account in the years of their purchase. the aac was also directed to examine items of expenditure and the value of stock debited each year in similar manner and decide whether and how far his examination justified the assessee's claim that it should be assessed in respect of receipts by way of sale on cash bills. in the appeal,.....
Judgment:

K.N. Seth, J.

1. These three references may conveniently be disposed of together. I.T.R. No. 765 of 1975 relates to the assessment years 1958-59 to 1970-71. The Tribunal has referred the following common question in respect of all these years :

' Whether, on the facts and in the circumstances of the case, there was any material on the record to sustain the finding of the Tribunal that the assessee-company was maintaining the cash system of accounting '

2. This very question has been referred to in I.T.R. No. 432 of 1976, which relates to the assessment year 1972-73. In I.T.R. No. 834 of 1977 arising out of the assessment year 1972-73, apart from the aforesaid question, which is referred to as question No. (i), two other questions have been referred for the opinion of this court. They are :

' (ii) Whether, on the facts and in the circumstances of the case, the method of accounting employed by the assessee is such that the income for the assessment year 1971-72 could be properly deduced therefrom without adding to the assessee's total income a sum of Rs. 1,44,471,being the difference on account of excess of closing balance of bills receivable over the opening balance of the same ?

(iii) Whether, on the facts and in the circumstances of the case, the payment of special bonus of Rs. 82,307 was allowable under Section 37 of the Income-tax Act, 1961, in view of the specific provisions of Section 36(1)(ii)?'

3. The assessee is a public limited company engaged in the publication of a Hindi daily newspaper, Aaj. The previous year for each of the assessment year ended on 13th April of each year. The main dispute was against the addition of the difference between the outstandings at the beginning of the assessment year and at the close of the assessment year, The addition was made on the ground that the assessee was following the hybrid system of accounting. Various items were added by the ITO to the income returned by the assessee. When the matter came up before the Tribunal it gave a direction to the ITO to check whether the bills paid by the assessee were also taken into consideration. The ITO and the AAC gave a finding that the bills payable had been taken into consideration in the assessee's account books and the additions were confirmed by them. This point again came up in appeal before the Income-tax Appellate Tribunal. It again set aside the order of the AAC with a direction whether the bills with regard to the purchases of raw materials were outstanding at the end of any of the previous years involved and were not debited to the purchases account in the years of their purchase. The AAC was also directed to examine items of expenditure and the value of stock debited each year in similar manner and decide whether and how far his examination justified the assessee's claim that it should be assessed in respect of receipts by way of sale on cash bills. In the appeal, the AAC observed that while the figures of bills receivable had been indicated in the assessee's balance-sheet, there were no figures of bills payable shown as outstanding on the liabilities side. The assessee had made a provision for Rs. 43,607 on account of gratuity to workers under the provisions of the Working Journalists (Conditions of Service and Miscellaneous Provisions) Act, 1955, and had claimed deduction for this amount for the year 1958-59. The AAC, therefore, concluded that this fact clearly showed that the appellant's contention that it consistently followed the cash system of accounting in respect of expenditure as well as receipts was not correct because the gratuity was provided for in the accounts even though it had not been actually paid. The AAC also pointed out that initially, the assessee filed certain statements according to which certain amounts were outstanding on account of bills payable at the end of the year. Subsequently, the figures submitted by the assessee admitted that there were no bills payable in respect of purchases made at the end of the four years under consideration and the appellants contention to the contrary before the Tribunal was not correct. The assessee filed a list of bills payable in respect of salary and wages for the last month of each accounting year, which was actually paid in the first month of the succeeding accounting year. The salary and wages for the last month of the accounting year became payable not on the last day of the relevant accounting year but on the 1st day of the subsequent accounting year. Therefore, the AAC held that the assessee's contention that the assessee did not provide for salaries and wages which accrued during the last month of the relevant accounting year in the profit and loss account of that accounting year is without any substance because, according to the AAC, the liability for payment of salaries and wages for the last month of a particular accounting year accrues not on the last day of the month but on the first day of the subsequent month. On these facts, the AAC held that there was no accrued liability on account of salaries and wages payable for the last month of the assessee's accounting year.

4. In the appeal before the Tribunal, it observed as follows:

'The finding of the Appellate Assistant Commissioner that bills receivable or sundry debtors were shown on the assets side of the balance-sheet is not correct. It is significant that neither in paragraph 10 nor paragraph 13 of the AAC's order he has mentioned a single item of bills receivable or sundry debtors and, as already pointed out, the departmental representative has admitted before us that no item of bills receivable or sundry debtors are to be found in any of the balance-sheets relevant for 1958-59 to 1970-71 assessment years filed before the Income-tax Officer along with the return of total income.'

5. On the question of liability of salaries and wages, the Tribunal held :

' That the liability for payment of salaries and wages to an employee accrues on the last day of that very month and not on the first day of the succeeding month.'

6. Further, the Tribunal, after examining the expenses on electricity and other bills, came to the following finding :

'We have found as a fact that the salaries and wages payable to the employees of the company for the last month of each of the accounting years were not provided for in the books of account and profit and loss accounts of the company in the last month of each of the accounting years, which shows that the assessee was maintaining the cash system of accounting.'

7. In view of the aforesaid findings, the addition made in each of the years under this head was deleted. At the instance of the Revenue the questions noted above have been referred for the opinion of this court.

8. We have extracted above the findings recorded by the Tribunal. Learned counsel for the Department could not point out any instance where bills receivable or the sundry debtors were shown on the assets side of the balance-sheet. As noted above, the departmental representative before the Tribunal frankly admitted that no item of bills receivable or sundry debtors are to be found in any of the balance-sheets filed before the ITO along with the return of the total income relating to assessment years 1958-59 to 1970-71. The Tribunal was, therefore, justified in reversing the decision of the AAC that in these matters the mercantile system of accounting was being observed by the assessee. With regard to the expenses on electricity and other bills also, the same position existed. As regards the payment of salaries and wages to the employees of the assessee-company, the account books disclosed that these were not provided for in the books of account and profit and loss account in the last month of each of the accounting years. Payments were made and recorded in the first month of the succeeding accounting year. That also clearly indicated that the assessee-company followed the cash system of accounting. The finding recorded by the Tribunal is based on the examination of the relevant documents on record and must be held to be fully justified.

9. For the assessment year 1971-72, the ITO added a sum of Rs. 1,44,471, being difference on account of excess of closing balance of bills receivable over the opening balance of the same. Since the assessee-company followed the cash system of accounting, it was not open to the Department to make the aforesaid addition in order to determine the assessee's total income. This disposes of the second question referred for the assessment year 1971-72.

10. The last question relates to the disallowance of the claim amounting to Rs. 82,307 as bonus paid to the directors and employees of the assessee on the occasion of the celebration of golden jubilee on completion of fifty years of the publication 'Aaj'. The ITO rejected the claim on the reasoning that the celebration of the golden jubilee had nothing to do with the services rendered by the employees and since the assessee was following the mercantile system of accounting, any payment for past services could not be allowed. In his opinion, it was made by way of special reward and as such was an ex gratia payment. The AAC also disallowed the claim. The Appellate Tribunal held that the claim was allowable under Section 37 of the Act. The payment had been made on the occasion of the celebration of the golden jubilee and the consideration was recognition of the past services of the employees. The assessee has kept in view the length of service put in by the different employees and the payment of bonus had been according to the length of service put in by the employees and had varied in the case of the employees of different standing. It was also held that the conditions contained in Section 36(1)(ii) of the Act as well stood satisfied. The payment was by way of special bonus and its reasonable ness with reference to the condition of service could not have been gone into. Its reasonableness with reference In the length of service was certainly a relevant factor. The profits of the business justified the payment and, lastly, no evidence of general practice could have 'been given because the celebration of golden jubilee is not a normal event. It was ultimately held that the disputed payment was for the assessee's business and was allowable under Section 37 of the Ad.

11. It is thus obvious that the Tribunal upheld the claim of the assessee under Section 36(1)(ii) also. The question referred (o us is exactly in the same language as suggested by the Revenue and it does not call for any opinion by this court whether the Tribunal was right in holding that the claim was allowable under Section 36(1)(ii) of the Act. Since the claim has been upheld even under Section 36(1)(ii) of the Act, it is not necessary to answer the question referred as it would serve no useful purpose in the present case.

12. Our answer to questions Nos. (i) and (ii) is in the affirmative, in favour of the assesses and against the Revenue. Question No. (iii) is returned unanswered. The assessee is entitled to costs, which we assess at Rs. 250.


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