R.N. Misra, J.
1. The first two references are under Section 256(1) of the Income-tax Act of 1961 (hereafter referred to as 'the Act ') made by the Income-tax Appellate Tribunal, Cuttack Bench, at the instance of the revenue and relate to assessment years 1962-63 and 1963-64 respectively.
2. On applications of the revenue under Section 256(2) of the Act registered as S.J.Cs. 40 and 41 of 1975, this court directed the Appellate Tribunal to state a case and refer an additional question for opinion of the court in respect of the same two assessment years referred to above.
3. The other three references of 1976 relate to assessment years 1964-65, 1965-66 and 1966-67 and are the outcome of a direction of this court under Section 256(2) of the Act at the instance of the revenue.
4. The assessee, an American Consultancy (hereafter referred to as the ' Corporation ') carried on the business of selling its expertise and technical know-how. It entered into an agreement with M/s. Hindustan Steel Ltd. at Rourkela (hereafter referred to as the ' company') in terms of which the Corporation undertook to provide a team of experts for assisting the compny in the matter of supervising the operation of the hot-strip mill and to train a team of Indian personnel for the purpose. The agreement became effective from 1st June, 1961, and under Article 4, the company undertook to pay to the Corporation:
(i) 5,00,000 U.S. Dollars net free of tax, fee and/or levy; and
(ii) 1,78,000 U.S. Dollars net to be paid in rupees after payment of Indian taxes, fees and levies.
5. Income-tax, if any, was to be borne by the company.
6. The contract was initially for a period of 2 years with effect from June 1, 1961. It was, however, extended up to December 31, 1965. Under the agreement, the Corporation received from the company, the following amounts:
Assessment YearIn Indian CurrencyIn the shape of dollars (when converted into Indian Currency)Total amount
Rs.Rs.Rs.1962-636,37,333.3718,52,250.05 2,48,958.421963-649,69,656.46 2,80,855.4137,78,191.871964-657,17,407.8118,62,612.5125,80,020.321965-66 69,454.4911,10,650.2117,50,104.401966-673,37,032.77 55,890.80 9,31,433.57
7. For the first two years, the Corporation filed returns disclosing income of Rs. 1,24,479 and Rs. 1,88,910, respectively. It filed revised returns for these two years and also filed a consolidated statement of expenses in dollars from March 1, 1961, to November 12, 1965, showing cash expenses exceeding Rs. 18 lakhs. The Corporation also made returns for the last 3 years showing income of Rs. 12,900, Rs. 6,500 and Rs. 1,48,544, respectively.
8. The ITO rejected the accounts of the first 2 years and estimated the net profit on the basis of receipts. The assessing officer accepted the figures of profit returned by the Corporation on the basis of which expenses were claimed so far as payment in rupee was concerned (it worked out at about forty per cent.) and applied a flat rate of 20 per cent. for the assessment year 1962-63 in regard to the dollar part. In the second year, i.e., assessment year 1963-64, he estimated the income at 20 per cent. for both. He then grossed it up by an amount of tax which according to him had been agreed to be borne on such income by the company and estimated the income on which tax demand was raised.
9. These two assessments were subjected to appeal and the AAC directed application of a flat rate of 20 per cent. for determining the net profits in regard to both the rupee and dollar receipts for the assessment year 1962-63 and but for this small modification sustained the assessment of the first two years.
10. In appeal to the Tribunal by the assessee, the Tribunal held that the rejection of accounts was not justified and, therefore, estimate could not be resorted to. It pointed out that the detailed statements filed by the Corporation could have provided appropriate material to the revenue to deduce the correct profit. The Tribunal further held that it was open to the ITO to make appropriate investigation and the assessee could have been called upon to produce further material. There was no justification for insisting on physical production of accounts particularly when the public accountants had certified the statements placed and relied upon by the Corporation before the assessing officer. The Tribunal came to the conclusion that without proper examination of the statements produced by the Corporation, the Revenue was not justified in rejecting the accounts and resorting to estimates. The Tribunal in the cirumstances accepted the accounts. The Tribunal took the view that the undertaking of the company to meet the tax liability was in the nature of a benefit or perquisite contemplated in Clause (iv) of Section 28 of the Act, introduced by Section 7 of the Finance Act of 1964, and for the period prior to the amendment the benefit or perquisite was not liable to be charged to tax under the head ' Profits and gains of business '. The Tribunal thus allowed the appeals of the assessee-corporation' and vacated the assessment. At the instance of the revenue, the following question has been referred to this court for opinion:
' Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the tax liability undertaken by the company was not assessable as profits and gains of the assessee for the relevant assessment years under consideration '
11. The revenue having moved this court under Section 256(2) of the Act, by order dated November 19, 1975, this court directed the Tribunal to refer an additional question namely :--
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that rejection of books of account in the facts of the case was not appropriate and the revenue taking resort to the provisions of Section 145 of the Act was correct '
12. So far as the other three years are concerned, the ITO rejected the accounts and computed the profit on estimate by adopting a flat rate of 20 per cent. of the gross assets.
13. The AAC by a common order upheld the rejection of accounts and the rate adopted by the ITO for determining the profit. In regard to the contention that there could be no grossing up in a case where a third-party undertook to discharge the tax liability, the appellate authority while rejecting the contention said :
'...The appellant and Hindusthan Steel Ltd. were parties to the contract under which the appellant agreed to provide Hindusthan Steel Ltd. with a team of experts and for the services thus rendered, the appellant was to be duly remunerated in accordance with the relevant articles of the contract. The object of the articles of the contract was clearly to place the appellant in a position where it would not be required to pay any tax out of the net profit derived by it from the venture of supplying the Hindusthan Steel Ltd. with the requisite team of experts. Any tax liability that might fall on the appellant as a consequence of the venture was agreed to be borne by Hindusthan Steel Ltd. To the case of the appellant, the ratio laid down by the Mysore High Court in the case of Tokyo Shibaura Electric Co. Ltd. v. CIT : 52ITR283(KAR) clearly applied......'
14. In second appeal, at the assessee's instance, the Tribunal observed:
' ...On going through the assessment orders of the Income-tax Officer, we do not find anything to show that the assessee was specifically asked to provide the books of account within a reasonable time. The Income-tax Officer merely says that the assessee expressed its inability to produce the books of account after the lapse of so many years. But no material was produced before us to show that the assessee did not produce the books of account even after a reasonable opportunity to do so was afforded to it by the Income-tax Officer...'
15. The Tribunal extracted a portion of the appellate decision rendered in respect of the earlier two assessment years and observed :
' ...This direction of the Appellate Tribunal is clear from the last sentence of paragraph 14 of their order wherein they say that the profits arising from the payments received by the assessee were to be computed as directed by them. Considering all the facts and circumstances of the case, we hold that the Income-tax Officer was not justified in rejecting the book results and resorting to the estimate without properly examining the statement filed before him. We, therefore, direct that the Income-tax Officershould recompute the income of the assessee by examining the statement produced before him. He can call for the details of any particular item of expenditure and examine the same but it is not necessary to insist on the physical production of the books from U.S.A. when admittedly certified statements from public accountants are available. We accordingly restore this point to the file of the Income-tax Officer to be disposed of afresh in accordance with law and in the light of our observations above after giving the assessee a reasonable opportunity of being heard in the matter. In view of the above decision, it is unnecessary to go into the reasonableness of the rate of 20% applied by the Income-tax Officer.'
16. So, on this aspect of the matter, no final decision was taken. Dealing witb the question as to whether by the company taking the burden of tax and allowing the Corporation to receive its dues free of tax, the tax amount in the respective years could be taken as perquisite, the Tribunal held:
' ...We find that the Appellate Tribunal considered the terms of the agreement and the relevant law applicable thereto and came to the conclusion that the benefits received by the assessee were not assessable as income because there was no provision in the Act at the relevant time for taxing such perquisites as profits and gains of the business carried on by the assessee. However, for the sake of completeness of the records, the Appellate Tribunal also held that the extent of the tax liability undertaken to be borne by Hindustan Steel Ltd. on behalf of the assessee was only the amount of tax actually due. In other words, the Appellate Tribunal held that the income of the assessee has to be arrived at simply by adding the amount of tax due, to the income from the business and not by grossing up the net income on what is known as tax on tax basis. So far as the first conclusion of the Appellate Tribunal is concerned, we find that there has been a change in the law in the assessment years under consideration in these appeals before us. By Act No. 5 of 1964, Section 28(iv) of the Income-tax Act, 1961, was introduced with effect from April 1, 1964. This section states that the value of any benefit or perquisite whether convertible into money or not arising from business or the exercise of a profession shall be chargeable to income-tax under the head Profits and gains of business or profession. In view of this clear provision which has come into force during the years under consideration, we hold that the benefit or perquisite which arises to the assessee by way of its tax liability having been met by Hindus-than Steel Limited, is taxable as profits of its business.'
17. Having reached this conclusion, the Tribunal proceeded to determine the extent of such benefit and decided that the value of the benefit or perquisite should be limited to the amount of actual tax due. The Tribunal admitted a new contention, namely, whether the perquisite had been recei-ved during the year. Dealing with the question, the Tribunal came to the conclusion:
'......It is true that the tax liability of a particular assessment year isattached to the income of that year and does not depend upon its quantification subsequently. In other words, the tax liability arises as soon as the income was earned. But, this does not answer the point raised by Sri Pal (for the assessee). In a case, where the accounts are maintained according to mercantile system, the income and expenditure are to be accounted from the moment they accrue. But, if the system of accounting is cash, the income and expenditure are to be accounted for not at the time of their accrual but only at the time of their receipt or payment, either actual or constructive. In this case, no doubt, the tax liability accrued during the previous years but its receipt and payment were subsequently made. If, in fact, the assessee was maintaining its accounts on cash basis, then, we find force in the contention that this benefit should be brought to tax along with all other items on cash basis only and not on accrual basis. The Income-tax Officer has given no clear finding as to whether the assessee was maintaining accounts on cash basis or mercantile basis. Similarly, the assessee's claim that the taxes were paid subsequent to the end of the three previous years under consideration has not been verified. In the circumstances, we deem it fair to restore this point to the file of the Income-tax Officer for examining the same in the light of our observations above and deciding it afresh in accordance with law after giving a reasonable opportunity of being heard to the assessee. '
18. At the instance of the revenue, the following two questions had been directed by this court to be stated for opinion of the court :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the value of benefit or perquisite which arose to the assessee by way of its tax liability having been met by the Hindusthan Steel Limited had to be limited to the amount of actual tax due and that in the circumstances the grossing up was not permissible under the provisions of the Income-tax Act, 1961 ?
(2) Whether, on the facts and in the circumstances the case, the Tribunal was right in directing that if the assessee had followed cash system of accounting the benefit should be assessed to tax on receipt basis and not on accrual basis and that if the taxes were paid subsequent to the end of the previous years relevant to the assessment years under consideration, the benefit should not be considered for assessment in the assessment years under consideration '
19. To start with, let us deal with the first two years. Admittedly, the amendment brought about by the Finance Act, 5 of 1964, has no application to these two years as the amendment became operative after the end of thesecond year under consideration. The concept of adding the perquisites in the case of a salary earner was there, from before, in the scheme of the Act. Reference to Sections 16 and 17 of the Act makes the position clear. So far as computation of business income under ' D' category in Chap. IV of the Act is concerned, there was no such provision until the amendment referred to above came into the Act. There is force in the stand taken by Mr. Mohanty for the assessee that in the absence of a provision as introduced with effect from April 1, 1964, there could be no force in the stand of the revenue. Mr. Mohanty has drawn inspiration from the position that Parliament found a deficiency in the statutory provision and brought about an amendment with a view to bringing the amount into the net of taxation. In addition to what has been stated by the Tribunal, we are of the opinion that this feature goes a long way to support the view of the Tribunal in the matter of addability of the amount for determining profits. Whether the method of grossing up would be available or not is another matter, but it could have no footing if the undertaking by the company to pay the tax for the Corporation could not be available to be taxed by way of perquisite by being roped into the net of taxation. In the two years under consideration, there being an 'absence of the requisite statutory provision, we are inclined to agree that the amount was not liable to be added for computation of profit.
20. So far as the accounting is concerned, the Tribunal has taken the view that the materials produced before the assessing officer were adequate for the computation of profits. Though learned standing counsel took the stand that the material was not adequate and as the ITO had discretion to require production of the original material for his satisfaction about the correctness of the accounts, we are inclined to agree with Mr. Mohanty for the assessee that the Tribunal as the final fact-finding appellate authority was entitled to say on considering the material as to whether what had been produced was adequate and it was not necessary to call for the original accounts. In our opinion, the Tribunal has said so and since it has power to come to that conclusion, we do not think, it would be within our province to differ from the Tribunal and agree with learned standing counsel that the original accounts were required to be produced and in the absence of the original accounts it was not open to the Tribunal to say that sufficient accounts had been produced for computing profits for the purpose of assessment. The Tribunal has recorded a finding on the basis of the materials produced that there was no justification for the rejection of accounts and the accounts produced were adequate for the purpose of the ITO. We are not inclined to take a different view.
21. At the hearing, counsel for both sides cited decisions in support of their respective contentions for the adoption of the method of grossing up. On the view we have taken, we do not think any useful purpose would be served by referring to these decisions. We would accordingly record our answers to the questions referred thus :
22. On the facts and in the circumstances of the case, the Tribunal was justified in holding that the tax liability undertaken by the company was not assessable as profits and gains of the assessee for the relevant assessment years under consideration.
23. On the facts and in the circumstances of the case, the Tribunal was right in holding that the rejection of the books of account in the facts of the case was not appropriate and the revenue taking resort to the provision of Section 145 of the Act was not correct.
24. We shall now deal with the references for the second batch of three assessment years forming the subject matter of S. J. Cs. 153 to 155 of 1976, where two questions have been referred for opinion of the court. The Tribunal has held that the assessee's accounts are on cash basis. This seems to be a pure finding of fact and is not open to challenge before us. On that footing, the Tribunal has further held that the liability to tax with reference to the benefit would arise during the year in which the benefit is received and not in the assessment year to which the benefit relates. It is well settled under the taxing Act that in a case where accounts are maintained on receipt basis, it is the actual receipt that gives rise to liability. Mere provision for conferring the benefit would not indeed bring in liability in a case of the present type until there is actual disbursement of the benefit. The Tribunal has settled this legal position and has left the matter to the ITO for determination. So far as the direction is concerned, we do not find any mistake and the conclusion of the Tribunal is unexceptionable.
25. The next question for consideration is as to whether the direction of the Tribunal that the value of the benefit or perquisite has to be confined to the actual tax demand leviable on the profit of the Corporation or has to be reached by a method of grossing up. Article 4 of the contract stipulated that the payments made under the contract would be free from Indian income-tax. It is for this provision in the contract that the company comes into the picture and has been permitted to defend the tax liability sought to be imposed on the Corporation. The revenue has adopted the grossing up system for determining the tax liability. Out of the total payments made, 20 per cent. has been accepted as profit of the Corporation and keeping the rate of tax applicable to the years in question by a method of grossing up in view, the income has been estimated. Thus, for instance, in the year 1964-65, while the profit of the Corporation hasbeen estimated at Rs. 5,16,004, the income-tax payable has been determined at Rs. 9,51,291.75. In fact, the profit and the tax as referred to above have been joined up for determining the gross income of the Corporation. If the company had not undertaken the obligation of payment of tax, but should have paid Rs. 25,80,020 towards the remuneration of the Corporation, as has been paid in the assessment year 1964-65, the Corporation's profit would have been determined at Rs. 5,16,000 on the adoption of the flat rate of 20 per cent. and the Corporation's liability for tax would have been determined on the sum of Rs. 5,16,000 and not by the method of grossing up. Under Article 4 of the contract, the company had taken up the obligation to pay the tax for the Corporation. Therefore, the tax that would be leviable on the profit in the hands of the Corporation was to be paid by the company. The arrangement entered into between the Corporation and the company did not admit of a system of a tax-on-tax. We are inclined to agree with the view taken by the Tribunal that in the facts and circumstances of the case what was available to be added at the best under the contract keeping the amended statute in view, was addition of that benefit which the Corporation has enjoyed by being free from the liability of income-tax. The conclusion of the Tribunal in the facts of the case seems to be in consonance with common sense. Here again, several authorities had been placed before us but we do not find any one to be directly on the point and we have, therefore, not chosen to refer to any of them.
26. In the facts of the case, our answers to the two questions referred to us, therefore, are:
(1) On the facts and in the circumstances of the case, the Tribunal was right in holding that the value of the benefit or perquisite which arose to the Corporation by way of its tax liability having been met by the company, the same had to be limited to the amount of actual tax due and in the circumstances grossing up was not permissible under the provisions of the Act.
(2) On the facts and in the circumstances of the case, the Tribunal was right in directing that if the Corporation had followed cash system of accounting the benefit should be assessed to tax on receipt basis and not on accrual basis and that if the taxes were paid subsequent to the end of the previous years relevant to the assessment years under consideration, the benefit should not be considered for assessment in the assessment years under consideration.
27. As the revenue has lost, ordinarily we should have awarded costs to the company which was defending on behalf of the Corporation. The company before us is no other than a company wholly owned by the Unionof India. We do not think, any useful purpose would be seved by giving any direction for costs.
P.K. Mohanty, J.
28. I agree