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inspecting Assistant Vs. I.C. Gandhi Silk Mills Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Reported in(1986)19ITD320(Ahd.)
Appellantinspecting Assistant
Respondenti.C. Gandhi Silk Mills Ltd.
1. this appeal is directed against the order passed by the commissioner (appeals), surat, in his appeal no. c s(1)/v-16 of 1982-83, the order is dated 12-11-1982. the effective grounds akin are as under : 1. on the facts and in the circumstances of the case and in law, the learned commissioner (appeals) has erred in deleting the addition of rs. 54,80,149. 2. on the facts and in the circumstances of the case and in law, the learned commissioner (appeals) has erred in directing to allow weighted deduction under section 35 of the income-tax act, 1961, in respect of expenses of rs. 12,773 and rs. 59,745.2. the relevant facts and stand of the revenue as found in the order of the commissioner (appeals) are as follows : (a) the appellant company is engaged in the manufacture and sale of.....
1. This appeal is directed against the order passed by the Commissioner (Appeals), Surat, in his Appeal No. C S(1)/V-16 of 1982-83, the order is dated 12-11-1982. The effective grounds akin are as under : 1. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 54,80,149.

2. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in directing to allow weighted deduction under Section 35 of the Income-tax Act, 1961, in respect of expenses of Rs. 12,773 and Rs. 59,745.

2. The relevant facts and stand of the revenue as found in the order of the Commissioner (Appeals) are as follows : (a) The appellant company is engaged in the manufacture and sale of fabrics, especially sarees. The sales are partly in India and partly by exports abroad. The export turnover is substantial and in the account year under appeal the cif value of the goods exported is shown at about Rs. 1.40 crores.

(b) Under the rules and schemes of different Government departments in force an exporter of goods is entitled to claim certain financial benefits. The three main benefits are (i) drawback, (it) cash assistance, and (I'M) replenishment licences. Brief notes regarding each of these schemes are as under : The I AC has written a short note on this point in para 13 of the assessment order. For the sake of convenience the same is repeated below : All goods imported into India attract a levy of customs duty by virtue of the provisions of Section 12 of the Customs Act, 1962 (Act 52 of 1962). Such duty is levied at the rates specified in the Indian Tariff Act, 1934 or any other law for the time being in force. Normally the import levy is intended to be attracted only by the goods that are imported for being used or consumed in India.

Similarly, a large number of goods manufactured within India attract an internal levy in the form of Central excise duty under the Central Excises and Salt Act, 1944 (Act 1 of 1944) and the Central Excise Rules, 1944 framed thereunder. Such duty is also intended to be levied only on goods that are produced or manufactured for being used or consumed within India. The imported duty paid goods may be re-exported out of India in the same form as they were imported ; or they may be used either as raw materials or components of some other articles manufactured in India for being exported to foreign countries. Similarly Central excise duty paid materials may be used in the articles exported out of India, whenever, such duty paid goods are exported out of India, a part of the amount of duty collected either as import or internal levy is refunded to or allowed to be drawn back from the Government by the exporter of the goods. Such refund or drawback of the duty once paid is termed and known as "Drawback".

The I AC has written a short note on this point in para 13 of the assessment order. For the sake of convenience, the same is repeated below : Exporters, registered with the appropriate registering authority as given in Appendix I are eligible for claiming cash compensatory support. The scheme of grant of CCS on exports of specific non-traditional products to make Indian goods competitive in the international market has been in operation since 1966. This form of assistance is given primarily with a view to compensating the exporters for the unrefunded taxes and levies which he has paid on export goods and on the inputs going into the manufacture of the goods. The extent of support available on product to product basis does not normally go beyond 25 per cent of the value added. The products which are given CCS include engineering goods, chemical and allied products, sports goods, plastic goods, processed food goods, fish and fish products, synthetic fabrics and garments, carpets and handicrafts, leather goods, natural silk made ups and garments, etc.

The list of products on which cash compensatory support is given in the tables.

Depending upon the fob value of the goods exported and the nature of the goods, the exporter is entitled, under certain schemes, to claim the issue of import licences to him which entitle him to import only certain category of goods free of import duty. This entitlement to import goods free of duty is also a financial advantage which the exporter gets entitled to as a result of the exports carried out by him.

(c) The manner in which the total financial effect of each export transaction ought to be recorded in the account books or more particularly the manner in which the financial effect of the right to claim export benefits, which is embedded in each export transaction, ought to be recorded when recording the export turnover of the trade-is the main subject matter of the dispute. The assessee follows the mercantile method of accounting for recording the sale proceeds. The purchasers account is debited and the sales account is credited with the invoice price of the goods as soon as the goods are despatched. The export benefits as at (b)(i) and (ii), however, are taken credit for in the accounts only as and when actually received. For the replenishment licences no entry is passed when the export sale is completed or even when the licences are received. The financial effect of the advantage of receiving the replenishment licence automatically gets reflected in the accounts when the assessee imports goods free of duty because then the debit to trading account is that such loss and the profit reflected is that much more.

According to the IAC when the assessee exported the goods it automatically got entitled to proportionate duty drawback, cash assistance and replenishment licences which will result in the saving of import duty on goods to be imported and the licences to be issued.

Therefore, when the export sales are recorded in the books of account, value of the benefits which the assessee is entitled to as aforesaid should also be included in the income for the purpose of assessment and since this value is not recorded as soon as export sales are effected and recorded only on the basis of receipts of various amounts representing the claims by the assessee in future, the profits disclosed by the assessee do not reflect true profits because method of accounts does not bring to books 'complete trading receipts' of each year. He, therefore, recast the credit side of the trading account as under :4. Drawback applied for in res- Rs.pect of sales of the accounting 27,34,880periodRs. 38,64,336 46,37,193 46,37.193 ----------- Accordingly, he worked out the shortfall of Rs. 89,63,350. As against this, the trading account contained credits aggregating to Rs. 34,84,201. Pertaining to export benefits attributable to exports of current years as well as of earlier years taken into account on cash basis and, therefore, required to be excluded to arrive at the true profits and, therefore, made an addition of Rs. 54,80,149 in the computation of income as concealed income. This amount is the disputed amount.

3. The Commissioner (Appeals) approached the issues involved on the following lines as mentioned in para IV of his order : (a) Now the question to be answered as at para II(a) is whether the IAC is right in his view that the method of accounting followed by the assessee does not reflect the true profits of the business.

That, however, raises the question, what then is the correct meaning of 'true profits' as understood under the Income-tax Act, 1961 ('the Act') as different from the profits revealed by the method of accounting followed (b) It must be noted that the IAC does not say that the accounts are not correct and complete. In that case he would have had recourse to Section 145(2) of the Act but that is not the case. The view taken is that the accounts are correct and complete but the method followed does not reflect the true profits.

(c) This means that the IAC has his own concept about what according to law ought to appear as 'true profits' on these facts and he rejects the method of accounting because he finds that the method does not reflect the figure which is his concept of 'true profits'.

(d) What exactly is the concept of 'true profits' as understood by the 1AC in this regard has been explained by me in detail in sub-paras 'A' to 'N' of para III above.

(e) In short, the view is that the three export benefits are an integral part of the export sale proceeds and when the invoice price is being shown on the credit side on accrual basis, the three benefits receivable must also be shown on credit side on accrual basis in the same year in the accounts. If this is not done, and if, on the other hand, the export benefits are shown in the accounts then the accounts do not show the 'true profits' for any year.

4. He then went on to examine the concept of 'true profits' as developed by the IAC and came to conclusion in para V of his order that (a) if the amount of profits shown over number of years were to be considered, then all the profits whether by way of export sales or by way of export benefits do get reflected over all the years, and (b) in the case of limited companies, since the rates were constant, there is really no revenue gain or loss at stake in the real sense.

5.1 In para VIII, he considered the aspect whether the export benefits form an integral part of trading receipts as observed by the IAC to state briefly his observations are : (/) Any student engaged in the study of the export trade, no doubt, will take into account the export benefits of each lot along with the export sale proceeds of that lot, but that did not mean that the export benefits were part and parcel of the export sale proceeds, (ii) A trader may voluntarily sell goods at a. loss in the hope of earning profit in some other form and department could not insist that in all such cases the benefit that is to arrive as a consequence of the loss will be treated as part and parcel of the sale proceeds. He, therefore, did not agree with the proposition that such benefits must necessarily be included as export sales in the turnover to arrive at 'total trading receipts', (Hi) The correct view is that the export benefits are revenue receipts of the export business, but they did not constitute part and parcel of the export sale proceeds, benefits arise as a consequence of the export sale and not as a part of the sale, they arise from the Government rules and schemes and the export sale is the determining factor which, gave rise to and determine the extent of the benefits.

5.2 The next question considered by him was with regard to nature of the receipts by way of export benefits, vide para IX. The stand of the assessee was that duty drawback and cash assistance formed independent and separate sources of income as different from the export business.

This plea was rejected by him relying upon Seth Shiv Prasad v. CIT [1972] 84 ITR 15 (All.).

6. The next question considered in paras is when does the 'income' which is embedded in these revenue receipts accrue to the assessee.

After considering various authorities and for the reasons re corded in paras XII, XIII and XIV, following the decision of the Gujarat High Court in Ahmedabad Mfg. & Calico Printing Co. Ltd. v. CIT [1982J 137 ITR 616, he came to the conclusion that the IAC erred in bringing to tax in this accounting year itself, the estimated amount of the future advantage represented by the duty exemption attached to replenishment licences issued in respect of the export sales of this year.

7. He further went on thus. As regards the drawback duty and cash assistance, the question is the same. The benefits for which the debt becomes due by the Government is created in favour of the assessee only when the Government department sanctioned the drawback or the cash assistance. For this, he drew support from case of Topandas Kundanmal v. CIT [1978] 114 ITR 237 (Guj.), CIT v. Ashoka Lungi Co. [1979] 120 ITR 413 (Mad.) as also decisions in the case of Hindustan Fashions (P.) Ltd. [IT Appeal Nos. 745 and 1405 (Ahd.) of 1980, dated 29-5-1981], Since he held that the cash assistance and drawback accrue only subsequent to sale, he refrained from deciding about the point of time when exactly the cash assistance accrued.

8. In paras VIII to XVII of his order, the Commissioner (Appeals) considered the aspect of cash system of accounting for recording export benefits and after considering the scheme of taxation, viz., Sections 4, 5 and 145 of the Act and relying upon CIT v. E.A.E. T. Sundararaj [1975] 99 ITR 226 (Mad.), he came to the conclusion that the assessee was at liberty to follow a cash system rejecting the stand taken by the IAC to bring a certain business income within the field of taxation of a particular year vide Sections 4 and 5. Reliance placed by the IAC on CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC) was displaced holding that same did not support. After summarising his findings in para XIX, he again clarified that the method of accounting followed by the assessee did reflect true profits of export business for the accounting year in question and the method of accounting cannot be rejected as not reflecting the true profits just because a different method of accounting would have reflected a different figure. The Act did not envisage that for any particular year for a particular business, there can be one and only one figure of true profit, irrespective of any method.

9. The learned standing counsel for the revenue opening his submissions stated that there was no decision of any High Court on the issue involved. The issue involved concerns the invoking proviso to Section 145(1). At this moment, the learned counsel for the assessee Shri K.C.Patel submitted that a Bench of the Ahmedabad Tribunal had rendered a decision in the case of Reshamwala Rayons (Surat) Ltd. [IT Appeal No.2624 (Ahd.) of 1983] following earlier decision in the case of Hindustan Fashions (P.) Ltd. (supra). Besides, even the case of ITO v.Bajaj Auto Ltd. [1984] 8 ITD 296 (Bom.) decided by three Hon'ble Members of the Tribunal governed the facts of the case. After going through the decision in Bajaj Auto Ltd.'s case (supra) the learned standing counsel was of the opinion that the decision was factually wrong because the right to claim drawback of duty is statutory one. He then referred to Central Excise Rules, 1971, consequent to statutory enactment and then submitted that at least drawback accrued to the assessee, the moment export was made. The decision of the Tribunal in the case of Hindustan Fashions (P.) Ltd. (supra) was distinguishable on account of the fact that the claim was dependent upon the sanction of cotton mills federation which is not the case here. He then placed reliance on Rule 3 of the Central Excise Rules and made detailed submissions as follows : 1. The income of the assessee is to be computed under the head 'Profits and gains of business or profession' (section 28 of the Act). There is no dispute between the parties on this point. The assessee is carrying on the business of sale and purchase of cloth as well as manufacturing of fabrics and sarees. Sales are made in the home market as well as in the foreign market.

2. The income referred to in Section 28 is to be computed in accordance with the provisions contained in Sections 30 to 43A of the Act.

3. Profits and gains of business carried on by the assessee-company during the previous year should be brought on record and should include value of any benefit or perquisite, whether convertible into money or not, arising out from such business.

4. Profits of business are what is gained by the business. The term implies a comparison between the state of business at two specific dates, separated by an interval of a year, and the fundamental meaning is the amount of gain made by the business during the year and can only be ascertained by comparison of the asset of the business at the two dates, the increase shown at the latter date compared to the earlier date representing the profits of the business-CIT v. Ahmedbhai Umarbhai 18 I.T.E. 472 at page 502.

5. There is no controversy in respect of the profits earned by the assessee-oompany in the domestic market. However, the question arises about the profits earned from export and sales made in the accounting period.

(a) It is the department's view that goods sold by export in the accounting period give rise to the following trade proceeds : cif value of goods exported in the accounting period received from foreign buyers, the value is composed of fob value on such goods and freight and insurance thereon.

All these items together constitute complete trading proceeds of the accounting period and they are integrately connected, and they cannot be separated.

(b) The assessee only shows the receipts of cif value of exported goods on the basis of the mercantile system of accounting period adopted by him. According to him, for the purpose of customs drawback, cash assistance and replenishment licences, his system of accounting is cash basis and when he receives the cash income therefrom he shows the same in the relevant assessment year.

The entire export earnings come into existence as a result of export sales of the accounting period. Customs drawback on the goods exported : (a) (Para 12, page 26, of the assessment order shows what is customs drawback) Sections 74 and 75 of the Customs Act, 1962, provide for drawback allowable on re-export of duty paid goods. Under Section 75, if the exported goods are manufactured out of article chargeable to duty and on which duties have been paid, the whole of such duty or such sum as specified under the Rules as the average amount of the duty paid shall be repayable to the exporter by way of drawback. Customs and Central Excise Duties Drawback Rules, 1971 are framed under Section 75 of the Customs Act read with Section 7 of the Central Excises and Salt Act, 1944. Rules 3, 4, 6 and 11 of the above Rules show that as soon as the goods are exported, the exporter is entitled to the drawback.

The object of the same is to pay cash assistance and freight subsidy across the counter soon after each shipment, and optional system of fortnightly payment has also been provided. This scheme also shows that on exports made, the assessee is entitled to cash compensatory benefit. Import entitlement : The replenishment entitlements are determined on the basis of fob value of goods sold by export. Book on Import Policy Chapter XVIII deals with the manner of providing import replenishment of the materials required in the manufacture of products exported. The case law shows that cash assistance and customs drawback have direct nexus with the export of goods and is so connected with export of goods.

In support of above, reliance was placed on Ahmedabad Mfg. & Calico Printing Co. Ltd.'s case (supra) at p. 633, Gwalior Rayon Silk Mfg.

(Wvg.) Co. Ltd. v. CIT[1983] 143 ITR 590 (MP), CIT v. Wheel & Rim Co. of India Ltd. [1977] 107 ITR 168 (Mad.). Kesoram Industries & Cotton Mills Ltd. v. CIT [1978] 115 ITR 143 (Cal.), Jeewanlal (1929) Ltd. v. CIT [1983] 139 ITR 865 (Ca).), Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448 (Cal.), Cochin Co. v. CIT [1978] 114 ITR 822 (Ker.), O.K. Industries v. CIT [1982]42CTR (Ker.) 82, CIT v. Swadeshi Cotton Mills Co. Ltd. [1980] 121 ITR 747 (All.), Hindustan Lever Ltd. v. CIT [1980] 121 ITR 951 (Bom.), Metal Rolling Works (P.) Ltd. v. CIT[ 1983] 142 ITR 170 (Bom.), Kamani Engg. Corporation Ltd. v. CIT [1984] 150 ITR 586 (Bom.), IT AT v. B. Hill & Co. (P.) Ltd. [1983] 142 ITR 185 (All.) and A. Krishnaswami Mudaliar's case (supra).

10. On method of accounting vis-a-vis powers of the ITO, he made the following submissions : Section 145 empowers the ITO to arrive at true profits if the system of accounting does not correctly reflect the same.

Balapur Vibhag Jungle Kamdar Mandali Ltd. v. CIT [1982] 135 ITR 91 (Guj.) and Tara Singh & Co. v. CIT [198l] 127 ITR 819 (Punj. & Har.).

Under the Companies Act, 1956-Under Section 217, the board of directors are required to make a report regarding the state of the company's affairs.

Section 211 of the Companies Act talks of contents of balance sheet and profit and loss account. Schedule VI, Part II talks of the requirement as to profit and loss account.

Clause 3(i)(a) of Part II of Schedule VI may be seen and under this clause, duty is cast to disclose the information in respect of the turnover, i.e., aggregate amounts for which sales are effected by the company.

Turnover does not merely include net invoice sales but also all sums received and receivable as a result of the company's trade, whether normal or abnormal case.

1951(1) King's Bench 563 was (sic.) relied upon to suggest that the report of the board of directors produced at page 75, wherein it has been mentioned that the company has followed the practice of accounting such benefits and incentives on cash basis and not on accrual basis and, therefore, this system of accounting gives a different picture of the company's performance.

11. The learned counsel for the assessee at the outset brought to our notice the facts found and not disputed, i.e., to say (a) the asses see followed hybrid system in the sense that incentive benefits were shown on receipt basis, since the assessment year 1974-75, (b) book results shown in the aforesaid manner were accepted after scrutiny till the assessment year 1978-79, (c) provisions of Section 145(2) are not applied, and (d) that the replenishment licences were not transferred by the assessee to anyone and no licence was used for import of capital goods. According to him, the material aspects required to be considered were whether income accrued or arose during the previous year and whether it is in the consequence with the system of accounting regularly followed by the assessee. This again shall have to be based after keeping in mind mechanism of various facts of claim pertaining to drawback and cash assistance. With regard to the replenishment licences, it was stated that value or benefit, if any, could be obtained by the assessee only in future and that too only if raw material was imported not otherwise. Therefore, the revenue was seeking to tax national gains which is not permitted. Bringing to our notice, endorsements on various licences under which the goods were imported, it was stated that at various occasions the assessee could not utilise the licences for the purpose of import of goods. Again, the incentives offered by way of duty drawback and cash assistance were not under statute, but only because of policy pronounced by Controller of Imports and Exports from time to time, as stated vide pages 224 to 239 in the assessee's paper book. Dealing with the aspects of how the claims of the assessee were required to be made and processed by the various Government agencies, it was stated thus. First of all relevant authorities could make frequent changes in the rates of incentives as could be seen from the relevant notification issued from time to time and even could withdraw the incentives declared earlier. This was so because the scheme of export incentives is dependent on many factors like availability of funds with the Government, propriety of the scheme in the national interest and foreign exchange reserve of the Government. Dealing with the aspect of CCS various formalities were required to be complied with. First of all goods meant for export is subject to a scheme of inspection by Textiles Committee and after inspection only goods which are passed are eligible for CCS. This is with the purpose to check export of inferior quality fabrics. Then application is required to be submitted to the Regional Licensing Authority within six months of the export, the application is to be made in prescribed forms with various documents. Such applications are scrutinised by joint CCI&E at Bombay and then incentive amount is determined. Again cut off point is the barometer to decide the rate of CCS which does not go beyond 25 per cent of the value added. Again, there is a cut in the percentage of assistance according to the period of delay and applications made beyond three months are considered as time barred. Regarding duty drawback, he drew our attention to pages 268 to 273 regarding supporting evidence. Here, it was suggested that proving of the case by the assessee was necessary because in the case of export of rayon and synthetic fabrics, it is the counterveiling duty which is imposed to protect the indigenous industry and that is refunded as duty drawback, when CVD paid goods are exported. Again, application as to be accompanied by various documents evidencing the proof not only with regard to exports, but also with regard to weight and in the case of difference in weights, the refund claim is allowed only on lower weight and, therefore, there is invariably difference between the amount for which the application is made and amount sanctioned for refund. Only after adjudication of the claim of the assessee, order for refund is passed. Bringing to our notice one instance, where application was delayed by three months by the Textile Committee for issuing the final inspection report, the application was treated as time barred. On appeal, the Appellate Controller also rejected the claim as time barred. This was the unique case where the assessee suffered even because of the lapse on the part of the Government officials. Vide press cutting dated 18-4-1982, it was sought to be argued that withdrawal of duty concession was an instance of unilateral action by the Government without prior notice to the trade.

Again, as per the public notice dated 15-3-1982 no drawback was disbursed for the past six months because the claimants were required to bring the evidence to prove that proper Central excise duty had been paid without protest by the manufacturers and this was an impossible task for the claimants. A notice dated 8-4-1981 appearing at page 234 was pressed into service to support the fact that the capitalised import licence was declared for duty exemption, again the authorities revised the stand and demanded the payment of duty. This will prove that the Government had resorted to demand duties at any time.

Reverting to the factual aspect of replenishment licences, it was stated that the assessee had not utilised some licences either in whole or in part and the licences expired without yielding any benefit to the assessee.

12. Referring to the case laws relied upon by the learned standing counsel it was stated that all the cases related to actual receipts of the incentives and some of them with regard to whether trading receipts or not. The decision of the Supreme Court in A. Krishnaswami Mudaliar's case (supra) was distinguishable because of the fact that the issue involved was regarding defect in value of stock-in-trade which was never valued and shown. The decision of the Delhi Tribunal in Indo Asian Switchgears (P.) Ltd. v. IAC I was concerned with claim regarding reward under Section 10(775) of the Income-tax Act and this very case decided the issue regarding replenishment licences in favour of the assessee. Regarding mention in the director's report, it was only to conform to the requirements of Schedule VI of the Companies Act, and concepts under the two statutes were altogether different. For the rest, order by the Commissioner (Appeals) was supported. Various decisions were cited in support of the stand of the assessee, viz., CIT v. North Arcot District Cooperative Spg. Mills Ltd. [1984] 148 ITR 406 (Mad.), Shiv Prasad Ram Sahai v. CIT [1966] 61 ITR 124 (All.), J.K.Bankers v. CIT [1974] 94 ITR 107 (AIL), E.A.E.T. Sundararaj's case (supra), Gemini Pictures Circuit Ltd. v. CIT [1958] 33 ITR 547 (Mad.), CIT v. Western India Engg. Co. [1971] 81 ITR 712 (Guj.), Balapur Vibhag Jungle Kamdar Mandali Ltd.'s case (supra), CIT v. Tata Iron & Steel Co.

Ltd. [1977] 106 ITR 363 (Bom.), CIT v. Nagri Mills Co. Ltd. [1958] 33 ITR 681 (Bom.), Lal Umesh Bahadur Pal v. CIT [1972] 86 ITR 751 (SC), Seth Shiv Prasad''s case (supra), ITO v. N.M. Bhandari [1982] 1 ITD 280 (Bom.), Salig Ram Kanhayna Lal v. CIT [1982] 133 ITR 915 (Punj. & Har.), CIT v. Devi Films (P.) Ltd. [1983] 143 ITR 386 (Mad.), CIT v.Jai Parkash Om Parkash Co. Ltd. [1961] 41 ITR 718 (Punj.), CIT v.Kalicharan Jagannath [1961] 41 ITR 40 (AIL), CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd. [1964] 53 ITR 134(SC), Dhrangadhra Chemical Works Ltd. v. CIT[1977] 106 ITR 473 (Bom.), Ahmedabad Mfg. & Calico Printing Co. Ltd.'s case (supra) and CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC).

13. In reply the standing counsel for the revenue stated that withdrawal of any incentive would only be prospective as per principles of promissory estoppel. On a query from the Bench regarding limitation factor of the time, regarding claim for refund, etc. it was stated that the same could be considered appropriately in future by way of deduction as business loss. The decision of the Gujarat High Court in the case of CIT v. Godhra Electricity Co. Ltd. [1983] 140 ITR 657 was pressed into service to support that the claim of the assessee was backed by law and not backed by contract. In directors' report, there was a binding statement as clarified to the shareholders and this supported the revenue's stand regarding real income theory.

14. We will take first the aspect of integrated or composite business receipts. Reference is required to be made to Clause (iv) of Section 28. The said clause was inserted by the Finance Act, 1964 with effect from 1-4-1964. It reads as under : The following income shall be chargeable to income-tax under the head 'Profits and gains of business or profession',- (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year ;(ii) and (iii) ** ** ** (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.

In our opinion export incentives and benefits will more appropriately fall in Clause (iv). The sale proceeds of export invoices will undoubtedly fall for consideration in Clause (z) of Section 28. This classification will remove the base, if any, for treating the export sale consideration and export benefits to be treated as single composite receipts. This is not to suggest in any way that before the amendment with effect from 1-4-1964 such benefits/receipts were not taxable. They were taxable on receipt basis as revenue receipts or supplementary business receipts or trading receipts as held by various judicial pronouncements. But very fact that so many Court decisions are available, indicates that such export benefits cannot form part of export sales. Some importance is attached to practice, i.e., interpretation placed by the revenue on fiscal laws especially when the practice is in favour of the assessee, it acquires sanctity. It can be inferred that the Legislature is aware of such practice. It can readily be concluded, therefore, that the assessee was entitled to follow any systems of accountancy of its choice. In this case its choice (of cash basis) is accepted by the department in the past and, therefore, the revenue cannot change its stand on system of recording such benefits on accrued basis even if it is assumed that they accrued to the assessee.

15. The approach of the revenue is erroneous, gets reflected it viewed from another angle also. Under the contract for sale there are only two parties, namely, the assessee and the importer. The Government, disbursing the export benefit on basis of fiscal policies, cannot be a part to the agreement. The scheme framed by the Government only provides one more factor to be considered by the assessee while evaluating the pros and cons of trading in international market together with other factors to be considered. Therefore, sale consideration as per the invoices cannot embrace the benefits flowing from consideration extraneous to sale contracts. That is why usually rebates/discounts, etc. (not as per terms of contract but as per practice) are shown by the traders only on receipt basis.

16. The theory of integrated business receipts cannot find place in science of recording transactions known as accountancy though it forms part of vital cord of business economics. For it will be impossible to forecast and envisage and also evaluate incidental gains of export sales because at a relevant time it will not even be known by the traders what benefits in totality would accrue and materialise, not to talk of evaluation in money terms, e.g., amount of reduction in tax incidence on account of lower rate of tax such as found in Section 80HHC of the Act with amendments from time to time. There may even be similar incentives offered by the Government of the country of the importer because of preferential or favourable treatment in respect of Indian goods. Who is going to enumerate such benefits from export transactions so as to determine and include the value together with the export business receipts The income sought must be capable of being processed as was held in B.M. Kamdar, In re [1946] 14 ITR 10 (Bom.).

17. This needs thinking about propriety of the system of accountancy (in relation to benefits). A reference is required to be made to the guidance note or opinion of the expert committee or research committee of the Institute of Chartered Accountants of India. According to the Institute of Chartered Accountants of India as can be gathered from at least two opinions expressed in 1963 and 1983 published in 'Compendium of opinions'" such benefits should be recorded on basis of receipts and in cases where it is necessary, mention regarding expected amounts from such benefits be made in the directors' report attached to the audited accounts so as to give comprehensive picture to the shareholders, is advised. But such mention cannot be decisive to invoke proviso to Section 145(1).

18. Again, no amount can be included in income unless it accrues, arises or received. The slippery words here are 'accrues', meaning thereby that a debt gets created in favour of the assessee. Accrual of income presupposes vesting of right. A right gets vested on production of proof of exports accompanied by claims as prescribed under the respective Rules. The proposition is well settled by the Supreme Court in decision of E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27. The proposition can be understood by various ways, e.g., whether enforceable right is created in favour of the assessee Whether there is absolute obligation on part of prayer to make payments Whether the receiving of income is conditional or unconditional Whether right to receive income is clearly settled or not 19. As soon as export is made the 'source' gets divided and income to be received flows from different sources ; one main and other supplemental to main. In one form the exporter receives the sale consideration and in another form he obtains 'bundle of rights' to claim export incentives in various forms. Former one is income having accrued as the debt is created on basis of invoice and latter one is income taxed when the right of claim is exercised by offering proof of export, as per the terms of export incentive scheme.

Accounting and accountancy are often synonymous terms ; the latter, of less frequency in the literature, may refer to the entire body of theory and practice ; 'accounting' is usually an all-inclusive term ; but, when used adjectively, it may have a restricted area of reference : as, the field of accountancy, a school of accountancy, a journal of accountancy ; but the profession of accounting, an accounting system, a course in accounting, an accounting supervisor.

The principles, methods and procedures relating to the incurrence classification, recording and reporting of the transactions of an organization.

2. Hence the process of operating, testing and accumulating, under such a system, in accordance with controlling internal administration policies, and with any regulatory requirements of higher authority.

3. The books, records, vouchers, files and related supporting data resulting from the application of the accunting process ; accounting records.

20.2 In the above context, proviso to Section 145(1) gives power to the ITO to determine the income in his own way provided he gives a finding that the 'method' employed is such that the income cannot properly be deduced. This would require him to evaluate and appraise the trading results reflected depending upon 'method of accounting'. Here the word 'method' is used to denote 'technique' so as to reflect financial data properly to facilitate computation of income. The meaning of the word used here is not synonymous to 'system' (mercantile, cash, etc.) nor it refers to classification of systems. System of accountancy may be proper but the 'method' for the purpose of taxation may not be proper, to facilitate computation of income. For example, considering the nature of business where different percentages of gross profits on various activities/such as percentage on trading, percentage on consultancy and percentage on job work are obtained and where the assessee has maintained only consolidated account of 'sale and receipt' wherein innumerable transactions are taken credit of and from where necessary details cannot be analysed, such a situation would fall for proviso to Section 145(1), though here system of accountancy is proper.

Similarly, an assessee carrying on business in number of commodities where trading results give rise to various percentages of gross profits with wide variations and separate trading account of each commodity having not been kept and it being not possible also to get the relevant details, the ITO will have discretion, may duty bound, to resort to option. Therefore, class or system of accountancy is a matter of choice of the assessee, decision in respect of the manner (or method) to deduce the correct income is left with the ITO and that is only when the 'method' does not permit deducement of income properly. In case before us, admittedly such cannot be the position. There is no dispute regarding the proper system of accountancy followed by the assessee, i.e., hybrid. Even on the aspect of method also, there cannot be dispute because the income sought to be combined emerges from two categories specified in Clause (i) and Clause (iv) of Section 28, flowing distinctively from different direction, for which two different systems of accountancy, mercantile for sales and cash basis for benefits are adopted, the choice of which is entirely with the assessee.

21. To elaborate on time of accrual, the same having not been decided by the Commissioner (Appeals), the assessee made out the case indicating number of constraints including the process of adjudication of the claim required to be undergone before the order for refund is passed, i.e., claim gets accepted. On the top of this, an instance is also cited where because of delay on the part of officials in the office of the Textile Commissioner, the refund claim got time barred and even on appeal, it was decided as such. With these facts, we are unable to appreciate the support drawn by the revenue (probably referring the case of Motilal Padmpat Sugar Mills Co. Ltd. v. State of Uttar Pradesh [1979] 118 ITR 326 (SC) regarding promissory estoppel coming into operation. We may clarify that this principle is made fluid by subsequent decision of the Supreme Court in Jit Ram Shiv Kumar v.State of Haryana AIR 1980 SC 1285. It is accepted fact that various notifications so as to give effect to decisions and changes therein are issued from time to time, based on policy decisions on account of various factors like amount of subsidies to be disbursed, changes in fiscal policies, foreign exchange reserve, export trade of India, vis-a-vis imports, etc. These decisions are taken by those concerned with policy regarding imports and exports trade. Even if it is accepted for the sake of argument that the assessee is entitled to refunds no sooner the export sales are effected, the same is required to be valued after ascertaining whether such refund is certain or not, and even if certain, what amount of variation in the value is likely to be, depending upon what will be the period of time of receipt, amount of efforts required to be put in by the assessee, administrative hardships, hazards, etc. It is not the case of an instant refund, like instant incentive such as deduction under Section 80C of the Act. To give an analogy again from the statute like the Act, the claim would be in the nature of interest on refund of advance payment of tax under Section 214 of the Act. It is common experience that even if as per the return of income, the assessee claims excess amount of tax paid or to take an extreme case even if assessment order is passed to refund excess tax, unless and until order for the grant of interest on excess tax paid is passed, which is usually after reminders, no interest is treated to have accrued and that is why the same is taxed on receipt basis as per the practice of the department. The cases where such interest is never received by the assessee are not very few.

22. Keeping in mind, the ratio of decision that, may be another view of law is possible, but law is not mere mental exercise as was laid down in CIT v. Balkrishna Malhotra [197l] 81 ITR 759 (SC) at page 762, the dectrine of approbate and reprobate so far as applicable to the conduct of parties in litigation should go against the revenue, even though there is no estoppel against provision of statute. Because the receipt basis of taxing the benefits is accepted in the past.

23. It is worth remembering by all concerned, the wisdom in following utterances by Shri Krishna Iyer, J. in the case of Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC) : We dare say that achieving greater simplicity and clarity in statute law will be taken up by the draftsman of the legislative bills to avoid playing linguistic games in Court and promotion of interpretative litigation. Lawyers and legislators must stop confusing each other and start talking to their real audience-the people-so that communication problems may not lead to prolific forensic battles. ...(p. 800) 24. Having added as above, we do not see any reason to interfere with the order passed by the Commissioner (Appeals), on this ground and, therefore, the same is upheld.25. The second ground is in relation to allowance of weighted deduction under Section 35B of the Act in respect of expenses of Rs. 12,773 and Rs. 59,745.

26. In our opinion, the Commissioner (Appeals) has rightly allowed the claim of the assessee and, therefore, we do not see any reason to interfere with the decision taken by him.

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