1. This appeal by the assessee is directed against the order of the Commissioner (Appeals) dated 20-7-1980 relating to the assessment year 1979-80. The only issue involved in this appeal is whether, on the facts and in the circumstances of the case, the sustentation of the addition of Rs. 58,720 representing the amount earmarked for expenditure to be incurred by the assessee to discharge its liability by way of post warranty services of the Eicher Tractors dealt in by it, is justified 2. We have heard the parties. The facts which we have to take into consideration for determination of this issue are as under: The assessee Singhal & Co., is a registered firm consisting of two partners, namely, Dharam Chand and Suraj Prakash, having shares in the profits and losses of the firm in the ratio of 70 : 30. The assessee deals in Richer Tractors. After a tractor is sold, there is a period provided for free service by the dealer the expenses of which are reimbursed by the manufacturers. However, there is a period of six months after the period during which free service is provided by the manufacturer when the assessee has to provide services, which is known as "post warranty service". From the day the assessee started dealing with Eicher Tractors, the assessee adopted the following method of incorporating the transactions in its books of account which are maintained on mercantile system of accounting. The assessee's previous year is the financial year. The assessee includes in the sale price of the tractor a fixed sum which in the first fixed period was Rs. 220 per tractor but was later on raised to Rs. 300 per tractor. This amount the assessee charges as a part of the sale price but the amount itself is earmarked, taken out and kept separately for meeting the expenses of the post warranty services. This process the assessee started from 6-8-1977. Up to 31-3-1978, the assessee had received a sum of Rs. 29,700 on account of post warranty service charges. Against these charges, no expenditure had been incurred during the accounting period relevant to the assessment year 1978-79 because post warranty period for the assessment year was to commence from 13-2-1978. The assessee, therefore, carried forward the amount of Rs. 29,700 credited in the post warranty service account.
3. During the assessment year 1979-80, i.e., year under appeal before us, the assessee incurred an expenditure of Rs. 18,406.30 in connection with post warranty service with the result that out of the brought forward amount of Rs. 29,700, there was a balance of Rs. 11,293.70. The assessee transferred this amount to the profit and loss account. During the accounting period relevant to the assessment year 1979-80, the assessee collected an amount of Rs. 88,420 on account of post warranty service charges. Insofar as this amount of Rs. 88,420 is concerned, the first tractor on which post warranty service charge was levied was sold on 3-4-1978. As pointed out supra, for the first 6 months and 7 days, the post sale service is free. Therefore, the post warranty period in respect of this tractor ended on 10-4-1979. In respect of the tractor sold later on, the post warranty period ended even later. Whatever expenses the assessee incurred on the post warranty services up to 31-3-1979 were included in the sum of Rs. 18,406.30 which was deducted from the brought forward amount of Rs. 29,700 which had been received up to 31-3-1980. The assessee, therefore, carried forward the entire amount of Rs. 88,420 in the post warranty service account to the assessment year 1980-81.
4. It may have to be recorded as a finding of fact that the assessee subsequently incurred expenditure of Rs. 82,103.32 in connection with post warranty service with the result that the balance of Rs. 6,316.68 was transferred to the profit and loss account.
5. While making the assessment for the year under appeal, the ITO added Rs. 88,420 to the total income. However, the learned Commissioner (Appeals) has reduced this to Rs. 58,720 in the following manner :Addition made by the ITO 88,420Less : Expenses incurred on post warrantyservices during assessment year 1979-80 18,406.30 Rs. Rs. Rs. 6. The ITO had not objected the assessment for the assessment year 1978-79. However, while framing the assessment for the year 1980-81, he gave credit for the following amounts :Addition sustained in appeal by the Commissioner whiledeciding the assessee's case for 1979-80 58,720 7. In the impugned order, the learned Commissioner (Appeals) made an observation that Rs. 29,700 in fact would be taxable in the immediately preceding assessment year 1978-79, for which the ITO is directed to take necessary action 8. The learned counsel for the assessee argued before us that the assessee from the very beginning had adopted a particular method of accounting and had accounted for all the receipts. The charges levied for post warranty services were earmarked for such purpose and were given a particular treatment and these amounts were carried through the books of account. The surplus, if any, left in the amount, was offered for taxation. It was thus a system followed by the assessee in a regular manner which has been unnecessarily challenged and the assessment of the assessee made on the basis which cannot be justified.
It was contended further that it was after the period of post warranty services that the assessee could take these sums into consideration for the purposes of retaining back to the profit and loss account. For this the assessee had taken the necessary action and offered the amounts as shown in the respective accounts. For this reliance was placed on the Supreme Court judgment in the case of E.D. Sassoon & Co. Ltd. v. CIT  26 ITR 27. On the other hand, the revenue contended relying on the ratio of the Calcutta High Court judgment in the case of Reform Flour Mills (P.) Ltd. v. CIT 4 Taxman 531 that the assessee had given different treatment to a particular transaction than the method followed by it generally which was mercantile. Therefore, the correct measure applied by the authorities below to bring out the position clearly is fully justified. In the rejoinder the learned counsel for the assessee submitted that it is not a particular transaction that the assessee has treated differently but the source with regard to which the assessee had followed a particular system for incorporating the receipts and there was no change noted so as to in any way affect the interest of the revenue adversely.
9. We have carefully considered the rival submissions, the facts of the case and the reasons recorded by the authorities below in their respective orders. It is not controverted that from the day the assessee started dealing in Richer Tractors, the procedure described above with regard to the receipt and disbursement of post warranty service charges was universally followed till the scheme itself was abandoned by the assessee. It is now well settled that the receipt is not the sole test of taxability. Though the assessee had received the amounts in question during the assessment year under appeal, yet they were not free of encumbrances so as to constitute income of the assessee. When the assessee entered in its books of account the sale of a tractor, the sale proceeds consisted of two constituents-the main amount representing the price of the tractor and a nominal amount fixed by the assessee and charged for post warranty services. From the very beginning, the assessee took the latter amount as an amount received with certain conditions to be fulfilled in respect of each tractor after the first period of 6 months and 7 days when free service so provided was over. To this, the assessee has given a particular treatment and, in our opinion, this treatment was not given with a purpose to rob the revenue of its rightful due. The assessee provided for that contingency when it would be required to meet the post warranty service charges which had been received from the customers. An actual expenditure on post warranty services could vary depending upon when the period was over and whether it fell within a particular accounting period. Therefore, to avoid difficulties, the procedure adopted by the assessee to take the post warranty service charges in a separate account so labelled and kept it so against disbursements required for this purpose, was justified on the facts of the case. In our opinion, this method followed by the assessee was in accordance with law and the authorities below erred in disturbing the same. This case also becomes apparent from the fact that subsequently the entire amount practically was spent by the assessee and only a sum of Rs. 6,316.68 which was left unexpended was transferred to profit and loss account in the subsequent year. In this view of the matter, the addition made by the ITO and partly sustained by the Commissioner (Appeals) is unjustified. We delete the entire addition by reversing the order of the Commissioner (Appeals).