1. By this reference under Section 256(1) of the I.T. Act, 1961, the Income-tax Appellate Tribunal, Indore Bench, has referred the following questions of law to this court for its opinion :
' 1. Whether, on the facts and in the circumstances of the case, the Tribunal failed to exercise its discretion judiciously in declining to allow the assessee to raise additional ground at the hearing at the Tribunal's stage in respect or legal expenses and fees paid to auditors and others amounting to Rs. 7,250 and claimed as a permissible deduction from assessee's income?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of Rs. 81,108 claimed by the assessee-firm as deduction from its income was neither admissible under section 10(1) nor under section 10(2)(xi) nor under section 10(2)(xv) of the Income-tax Act, 1922 '
2. The material facts, as set out in the statement of the case, giving rise to this reference briefly are as follows : The assessee is a partnership firm and the assessment year in question, is 1956-57. In the return filed by the assessee, a claim for deduction of a sum of Ks. 7,250, on account of legal expenses and fees paid to M/s. R. D. Joshi & Co. and others for legal advice, was made. The ITO disallowed that claim. The assessee did not, contest this disallowance in the appeal filed by the assussee before the AAC. The ground was not also taken in the appeal filed before the Tribunal. The assessee sought Ieave, by its application dated 16th May, 1973, submitted before the Tribunal, to raise the ground that legal expenses incurred by the assessee was an allowable expenditure. The Tribunal did not allow the assessee to raise that contention on the ground that the assessee had not kept alive its claim for the deduction in question before the AAC. That is how the first question, referred by the Tribunal at the instance of the assessee, arises out of the order of the Tribunal. The second question arises out of a deduction of Rs. 81,108 claimed by the assessee. The assessee-firm, was holding the managing agency and sole selling agency of Hukumchand Mills Ltd. under two separate agreements dated 16th January, 1950, appointing the firm for a period of 20 years as its managing agent and sole selling agent with effect from 1st January, 1948. On account of the coming into force of the Companies Act, 1956, the assessee relinquished the office of the managing agents with effect from 8th March, 1956, and agreed to forgo and relinquish the managing agency commission and office allowance with effect from 1st January, 1956, with a stipulation that lor all practical purposes their agreement would be deemed to have come to an end with effect from Ist January, 1956. The assessee-firm also resigned with effect from 31st March, 1956, its sole selling agency by letter dated 22nd March, 1956, addressed to the company. On the same date, i.e., 22nd March, 1956, an agreement was drawn up between the partners of the firm terminating the partnership agreement dated 16th January, 1950, except to the extent of continuing their guarantee given to the State Bank of India in the name of the assessee-firm for the cash credit account; of Rs. 50 lakhs advanced by them to the Hukumohand Mills Ltd. Thus, the partnership was terminated with effect from 22nd March, 1956, except to the limited extent of continuance of guarantee as indicated above. However, the books of account of the assessee continued to be written up to 2nd November, 1956, and a journal entry way passed on 30th October, 1956, debiting bad debt account with Rs. 2,96,356 and crediting the same amount to the account of provision for bad debts with a narration ' Amounts are due from the following parties and suits have been filed ; therefore, provision is made for the amount'. This deduction was claimed by the assessee on the basis of a letter dated 31st March, 1956, written by Hukumchand Mills Ltd. to the assessee informing it that the parties referred to therein had not paid for the goods sold to them and that as per the terms of the selling agency agreement the assessee was responsible for the amounts due 'from the parties. The ITO held that there was no justification for allowing the deduction either under Section 10(1) or under Section 10(2)(xi) or Section 10(2)(xv) of the Indian I.T. Act, 1922, hereinafter referred to as the Act. Against the order of the ITO, the assessee preferred an appeal before the AAC, who upheld the decision of the ITO. The assessee then preferred an appeal before the Tribunal. On behalf of the assessee, the amount claimed by way of deduction was reduced and only a sum of Rs. 81,108 was claimed by way of deduction. As regards two items amounting to Rs. 20,592, the Tribunal upheld the order passed by the ITO and the AAC for want of particulars about the nature of transactions and of the liability incurred by the assesses and the year in which it could be . properly written off. With regard to the amount of Rs. 60,516, the Tribunal, after considering the terms of the sole selling agency agreement, came to the conclusion that no liability had accrued in the accounting year under consideration. In this view of the matter, the Tribunal found that the claim of the assesses could not be entertained under Section 10(1) of the Act. The Tribunal further held that the deduction could not also be claimed under Section 10(2)(xi) or Section 10(2)(xv) of the Act. That, is how the second question of law, referred to this court for its opinion, arises out of the order of the Tribunal.
3. As regards the first question, learned counsel for the assessee contended that the Tribunal erred in holding that it had no jurisdiction to allow the assessee to question the disallowance of legal expenses by the ITO as the assessee had not questioned that disallowance before the AAC. The contention cannot be accepted. In CIT v. Karamchand Ptemchand P. Ltd. : 74ITR254(Guj) , a Division Bench of the Gujarat High Court has held that when, in an appeal to the AAC against an order of assessment, the assessee has not questioned the decision of the ITO in respect of a claim for deduction made by the assessee, and the AAC in his order has also not considered that point, the assessee is not entitled to question the decision of the ITO on that point in an appeal to the Tribunal against the order of the AAC and the Tribunal is not entitled to allow the assessee to agitate that question. This decision was followed in Panchura Estate Ltd. v. Govt. of Madras : 87ITR698(Mad) and by the Gujarat High Court in Arttndkati Balkrishna v. G. M. Singhvi, HO : 103ITR763(Guj) and again in CIT v. Steel Cast Corporation : 107ITR683(Guj) . We may usefully refer to the following observations in CIT v. Steel Cast Corporation : 107ITR683(Guj) .
' In our opinion, the Jegal position has to be considered ultimately in the light of the decisions in Hukumchand Mills Ltd.'s ease : 63ITR232(SC) and Mahalakshmi Textile Mitts Ltd.'s case : 66ITR710(SC) . First, it. must be found out what is the subject-matter of the appeal and that can be determined only by finding out what the Appellate Assistant Commissioner expressly or impliedly decided. We must emphasize again that by implied decision, we mean that though a point might have been raised before the Appellate Assistant Commissioner, in his final order the Appellate Assistant Commissioner might not have dealt with that point and thereby impliedly rejected it. That is an implied decision of the Appellate Assistant Commissioner and a party may be aggrieved by an express decision of the Appellate Assistant Commissioner or by an implied decision of the Appellate Assistant Commissioner. The subject-matter of of the appeal before the Tribunal can only be the decision express or implied of the Appellate Assistant Commissioner and the jurisdiction of the Tribunal is restricted to the subject-matter of the appeal. Once the subject-matter of the appeal is determined, the Tribunal has very wide powers to deal with all questions of fact, and law pertaining to that subject-matter of appeal and it can allow a new question of law to be raised in support of the same claim for relief. On the facts found, if a new aspect of law can be applied, it can allow it to be urged even though that aspect of the law was not urged either before the Income-tax Officer or the Appellate Assistant Commissioner. The Tribunal is not restricted to the very grounds of appeal on which originally the decision of the Appellate Assistant Commissioner was sought to be challenged when the appeal was filed. It has wide powers to allow the party to add to or alter the grounds of appeal subject, of course, to the opportunity being given to the other side of being heard on this new ground of appeal. These are the restrictions and limitations within which the Appellate Tribunal can function and can exercise its jurisdiction but it must be emphasised that the jurisdiction of the Tribunal which is restricted to the subject-matter of the appeal must not be confused with the powers of the Tribunal to deal with an appeal within the four corners of its jurisdiction. The Tribunal cannot transgress the limits of that jurisdiction even though, in the exercise of that jurisdiction, its powers are plenary and very wide.'
4. We respectfully agree with the aforesaid observations. In the instant case, the order passed by the ITO disallowing the claim of the assessee for deduction of legal expenses was not the subject-matter of appeal before the Tribunal as that was not the matter expressly or impliedly decided by the AAC. The Tribunal was, therefore, right in holding that it had no jurisdiction to allow the assessee to raise the ground in respect of the claim for deduction of legal expenses.
5. Our answer to the first question referred to us is in the negative and against the assessee.
6. As regards the second question, learned counsel for the assessee confined his argument to the question as to whether the Tribunal was right in holding that the deduction claimed by the assessee was not admissible under Section 10(1) of the Act. Learned counsel for the assessee contended that the Tribunal was wrong in holding that the assessee had incurred merely a contingent liability under the sole selling agency agreement which could arise after the mill company had failed to realise the price of the goods.
7. Now, the relevant clause of the selling agency agreement which, according to the assessee, gave rise to its liability to pay for the price of goods reads as follows:
' The firm shall be responsible to the company in respect of indents secured or contracts made by the company through the firm as follows:--
(i) For payment of the price of goods delivered on the due date to .buyers under or by virtue of every such indent or contract.
(ii) For payment of the price of goods delivered after due date to buyers under or by virtue of every such indent or contract, but not for the payment of any interest, insurance, godown rent and other charges, but the firm shall render all possible assistance to and do their best on behalf of the company to recover from such buyers such interest, insurance and other charges.'
8. It is true that the Tribunal was not right in holding that the liability of the assessee was contingent. But the Tribunal has found that no liability had been incurred by the assessee in the accounting year 1955-56. The letter dated 31st March, 1956, sent by the mill company to the assessee, on which reliance was placed by the assessee, after reciting that a sum of Rs. 1,60,054-15-0 was due from the 17 parties referred to in the letter as those parties who had not till then paid for the goods sold to them, informed the assessee as follows ;
' As per the terms of selling agency agreement with you, you are responsible for the amounts due from the parties mentioned above. As desired by you we have taken legal action against the parties as stated above. In the meantime we would be debiting the amount to your account and in case any amount is recovered from the debtors we shall give you the credit in respect of such recoveries.'
9. The aforesaid letter does not throw any light on the question as to when the liability was incurred by the assessee. The liability of the assessee accrued, in terms of the selling agency agreement, when the amount became due from the parties to whom goods were sold. No material was placed on record by the assessee to show that the liability of the assessee had accrued in the accounting year in question. In these circumstances, the Tribunal was right in holding that the assessee was not entitled to claim that the deduction was admissible under Section 10(1) of the Act.
11. For all these reasons, our answer to the second question referred to us is in the affirmative and against the assessee.
12. Parties shall bear their own costs of this reference.