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Commissioner of Income-tax, Delhi Vs. Nav Bharat Nirman (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtDelhi High Court
Decided On
Case NumberIncome-tax References Nos. 1 and 2 of 1974 and 38 and 39 of 1979
Judge
Reported in[1983]141ITR723(Delhi)
ActsIncome Tax Act, 1961 - Sections 28, 37 and 256(1)
AppellantCommissioner of Income-tax, Delhi
RespondentNav Bharat Nirman (P.) Ltd.
Cases ReferredPeter Merchant Ltd. v. Stedeford
Excerpt:
direct taxation - allowance - sections 28, 37 and 256 (1) of income tax act, 1961 - assessed incurred expenditure on eviction of tenants - whether disputed sum allowed as deduction from profit - assessed allowed to incur money for development of land - in present case tenant evicted to form society which amounts to development of land - amount spent in eviction of tenant allowed as deduction. - - this clause proceeded to say 'the lessers are responsible for getting this 200 bighas of land vacated from the tenants at their own costs and expenses whenever it is required by the lessees and if the lessers fail to do so they will be liable to pay the lessees all costs and damages incurred by the lessees on account of non-vacation of the land'.however, the compensation to be paid to the.....ranganathan, j. 1. though there are four references, all of them arise out of the assessment of m/s. nav bharat nirman (p.) ltd. (hereinafter referred to as 'the assessed') for the assessment year 1962-63. there was one appeal before the tribunal by the assessed. after it was disposed of, both the assessed and the department applied to the tribunal for referring certain questions to this court. the tribunal referred two questions pertaining to an amount of rs. 2,00,000 out of which the ito had disallowed rs. 40,000. this constitutes the subject-matter of i.t. rs. nos. 1 and 2/74. there was another issue pertaining to a sum of rs. 1,00,000 which had been decided by the tribunal against the assessed. but the assessed's request to have a question referred in regard to that issue having been.....
Judgment:

Ranganathan, J.

1. Though there are four references, all of them arise out of the assessment of M/s. Nav Bharat Nirman (P.) Ltd. (hereinafter referred to as 'the assessed') for the assessment year 1962-63. There was one appeal before the Tribunal by the assessed. After it was disposed of, both the assessed and the Department applied to the Tribunal for referring certain questions to this court. The Tribunal referred two questions pertaining to an amount of Rs. 2,00,000 out of which the ITO had disallowed Rs. 40,000. This constitutes the subject-matter of I.T. Rs. Nos. 1 and 2/74. There was another issue pertaining to a sum of Rs. 1,00,000 which had been decided by the Tribunal against the assessed. But the assessed's request to have a question referred in regard to that issue having been declined, the assessed came to this court in I.T.C. No. 29/74 and this court directed a reference. This is how I.T. Rs. Nos. 38 and 39/79 are before us. Actually since there was only one appeal before the Tribunal and the issue pertaining to a sum of Rs. 1,00,000 was raised only at the instance of the assessed it would have perhaps been sufficient to refer to one of the reference applications while stating a case in pursuance of the directions in I.T.C. No. 29/74. However, the Tribunal has referred to both the reference applications, originally filed by the assessed and by the Department before it, while submitting the statement of the case and that is how two numbers have been given to the income-tax reference before us on this point.

2. Before setting out the questions which have been referred to this court under s. 256(1) and (2), it may be convenient to set out the facts handing to the reference.

3. The assessed-company is a private limited company. The reference relates to the assessment year 1962-63, the previous year being the financial year 1961-62. The assessed is admittedly a dealer in lands. On March 734 bighas in Illaqa Shahdara for a term of 99 years at a price of Rs. 90,000 from M/s. Hindustan Estate Ltd. Soon after, on April 18, 1961, the assessed entered into an agreement with the Delhi School Teachers' Co-operative House Building Society (hereinafter referred to as of 'the society'). By this agreement the assessed agreed to grant leasehold rights to the society in respect of 500 bighas out of 734 biggest taken on lease by its earlier. A sum of Rs. 4,00,000 calculated on the basis of Rs. 800 per bigha, was the consideration for granting the lease. The society was to pay an advance of Rs. 4,000 and to pay a further sum of Rs. 6,000 within a week of the agreement. So far as the balance of Rs. 3,90,000 was concerned, the society was to pay the amount in forty equal Installments and the amount was to be secured by the execution of a mortgage deed in favor of the assessed duly registered. One important clause of this agreement has to be referred to. According to this clause the assessed was to be responsible to obtain the rights from the tenants on the lands in respect of the tenancy rights at its own cost and expense. It may be mentioned here that at the time of agreement it was estimated that the tenants were occupying about 150 bighas of land and by the above clause the assessed undertook at its own cost and expense to have these tenants evicted.

4. The agreement was followed by a lease dead dated June 13, 1961. The lease deed substantially proceeded on the basis of the agreement. By the lease deed the assessed agreed to lease out about 500 bighas of land for a period of 78 years in consideration of a total nazrana of Rs. 4,00,000. Clause 1 of the lease deed stated that out of the nazrana of Rs. 4,00,000 the assessed had already received Rs. 40,000. For the remaining sum of Rs. 3,60,000 the society had duly mortgaged without possession the same land in favor of the Lessers by a separate mortgage deed and the clause proceeded to say '... by the manner mentioned about the Lessers have received the total nazrana money of Rs. 4,00,000'. In clause 5 of the lease deed it was mentioned that out of the land leased out nearly 200 bighas was under the occupation of the tenants for agricultural purposes. This clause proceeded to say 'the Lessers are responsible for getting this 200 bighas of land vacated from the tenants at their own costs and expenses whenever it is required by the lessees and if the Lessers fail to do so they will be liable to pay the lessees all costs and damages incurred by the lessees on account of non-vacation of the land'. However, the compensation to be paid to the tenants shall be arranged by the lessees which will be adjusted on the balance of the nazrana money mentioned above.

5. The agriculturist, who were occupying the portions of the land above referred to, did not vacate the land during the financial year 1961-62. The society became apprehensive about the prospects of getting the land vacated and approached the assessed for some redress in the matter. On March 31, 1962, an agreement was executed between the assessed and the society. Clause 4 of this agreement referred to the obligation on the part of the assessed to obtain the tenancy rights in respect of the land measuring 200 bighas. It appears that it had also been agreed by the assessed that some plots of land were not covered by the deed under which the assessed had acquired the leasehold rights from M/s. Hindustan society Ltd., and the lease deed had also provided that the assessed would obtain the necessary assurance in respect of these lands at its responsibility and costs. This was referred to in clause 5 of the agreement. Clause 7 stated :

'7. And whereas in order to fulfill clauses 4th and 5th of this agreement the second party has retained a sum of Rs. 2,00,000 (Rs. two lakhs only) out of the said sum of Rs. 3,60,000 and the 1st party is lawfully entitled to evict and reject the tenants from land measuring 200 bighas and also be fulfillment of the other conditions of this agreement but the amount to be spent on such evictions or compensation to be paid to any tenant, person or other amount to be spent for such evictions will be paid off by the second party to the first party against valid receipts out of the said retained amount of Rs. 2,00,000 and if the 1st party fails to perform his part of the above-mentioned agreed terms within a limit of 3 years then in that case the 2nd party will be entitled to do all such necessary acts, deeds and things for the eviction of the said tenants and persons and the second party will be lawfully entitled to spend all amounts out of the said retained amount of Rs. 2,00,000 and after deducting and defraying of all the legitimate expenses incurred by the second party the balance retained amount will be paid by the second party out of the said sum of Rs. 2,00,000.

The second party further covenants that they will hand over the amounts to the first party against receipt whenever a necessity arises for the same, but the same amount will not exceed Rs. 65,000 in a year and in order to inform the second party, the first party will give four months' notice to the second party for the same. If the second party fails to fulfill the agreed terms of this agreement then the first party will be at liberty to realise and recover the said sum of Rs. 2,00,000 or the remaining amount out of Rs. 2,00,000 in lump sum. Time, as agreed in this agreement, in the essence of this contract. All the expenses of this agreement are borne by the second party.'

6. For the assessment year 1962-63, the assessed declared a net profit of Rs. 5,766. It was found that in arriving at its profits the assessed had taken into account the entire amount of Rs. 4,00,000 which was the nazrana mentioned in the lease deed. This was because the assessed was adopting the mercantile system of accountancy and hence the entire price of land due to it was accounted for though under the original agreement it was payable only in installments and though subsequently there had been certain other restrictions in respect of the assessed's right to actually receive immediately the balance of the sale price. But at the same time the assessed also deducted a sum of Rs. 2,00,000 which, it was claimed, the assessed was liable to pay to the society in view of clause 7 of the agreement dated March 31, 1962. The assessed also deducted from the sale proceeds of Rs. 4,00,000 a sum of Rs. 1,00,000 which is claimed, it was liable to pay to M/s. Nav Bharat Colonisers (hereinafter referred to as 'the brokers'). On April 17, 1961, the assessed claimed to have entered into an agreement with the brokers. The preamble to this agreement recited that the transaction regarding the transfer of leasehold rights of the said land along with the ownership rights thereof had been struck with society though the brokers and that the assessed had agreed 'to pay the commission of the said transaction at 25% (to the brokers) on the total value of the said land'. The agreement proceeded to say that :

'The first party will pay the commission at 25% (twenty-five per cent.) to the 2nd party against the valid receipts within the period of one week on the receipts of the Installment amount of the sale proceeds at various times from M/s. Delhi School Teachers House Building Co-operative Society, Shahdara, Delhi, under the terms and the conditions laid down in their original agreement executed between the 1st party and Messrs. Delhi School Teachers House Building Co-operative Society, Shahdara, Delhi, and the 1st party will have no objection in making the payment of the said amount to the 2nd party as and when the Installments are received by the 2nd party; in case of violation, the 2nd party can realise the same from the 1st party and through court of law.'

7. The assessed had arrived at its net profits after the deducting these two outgoings.

8. At the time of the assessment the ITO questioned the assessed's right, to have a deduction in respect of these amounts. So far as the sum of Rs. 2,00,000 was concerned it was submitted before the ITO that an agreed settlement with the agricultural tenants could not be arrived at. It was stated that in certain land acquisition proceedings which appears to have followed, the tenants had filed claims for compensation ranging generally between Rs. 1,008 per bigha and Rs. 1,078 per bigha and in some cases even as high as Rs. 4,032 per bigha. It was pointed out that the agriculturists had been occupying the lands for a long number of years and that in view of the heavy claims of compensation that were made the assessed feared that the entire sale price receivable by it would not only be wiped out but the company might even become liable to pay something more from its own pocket. In these circumstances, it was contended pending final disposal of these claims that it would be correct for the company to evaluate these claims on an estimated basis. It was stated that the assessed estimated such liability in the sum of Rs. 2,00,000 and debited it in its P&L; a/c. It was submitted that some attempts were being made to get some sort of settlement outside the court but it was argued that in case those attempts succeeded and the compensation figure ultimately was less than Rs. 2,00,000 the difference would be surrendered in the appropriate year the taxation.

9. The ITO did not accept this contention of the assessed. He agreed that the assessed was under a contractual obligation to evict the tenants but that the tenants were entitled to the protection of the Delhi (Urban Area) Tenants Relief Act, 1961, and that, thereforee, the assessed was entitled to deduct the estimated compensation payable to the tenants. He noted that the society had already withheld payment of Rs. 2,00,000 in terms of the agreement dated March 31, 1962, and that the agriculturists had filed claims for varying amounts. But he was of opinion that having regard to the sale price of the land which was only Rs. 800 per bigha and having regard to the fact that the tenants occupied only 200 bighas a reasonable estimate of the assessed's liability would be Rs. 1,60,000. He, thereforee, disallowed Rs. 40,000 observing, however, that if, in the ultimate event, the estimate was found to be at variance with the actual payment, necessary adjustment would be made.

10. So far as the sum of Rs. 1,00,000 claimed by the assessed as commission was concerned, the ITO doubting the genuineness of the transaction and of the firm constituting the broker, disallowed the assessed's claim.

11. The assessed preferred an appeal to the AAC challenging the disallowance of the sum of Rs. 1,40,000 out of the deduction of Rs. 2,00,000 claimed by the assessed. The disallowance of the sum of Rs. 1,00,000 was also contested. So far as the first item is concerned, the AAC came to the conclusion that the assessed was not entitled to any deduction at all in respect of the expenses which it may have to incur for the eviction of the tenants. According to him it was open to the assessed to evict the tenants either by proving in a court of law that the requirements of the conditions for eviction specified in s. 3 of the Delhi (Urban Areas) Tenants Relief Act, 1961, were fulfillled or by giving the tenants other lands available with the company for cultivation in lieu of the lands sold to the society. According to him it was not known in the accounting year which of the two alternative would prove effective for eviction of the tenants and thereforee, it was not possible to say that any liability existed or that it stood crystalised to the extent of Rs. 2,00,000. The liability, in his view, would arise only when the matter was finally settled with the tenants. On this reasoning the AAC held not only that the amount of Rs. 40,000 had been rightly disallowed by the ITO but even found fault with the allowance of Rs. 1,60,000, granted by the ITO and after giving notice to the assessed enhanced the assessment to that extent. So far the sum of Rs. 1,00,000 was concerned, the AAC in the first instance remanded the matter to the ITO for further enquiries. In the remand report the ITO conceded that the transaction was genuine and that the firm of brokers was also genuine. The only point that survived for consideration was whether in view of the clause of the agreement with the broker a liability had accrued on the part of the assessed to the extent of Rs. 1,00,000. The AAC was of the opinion that, on the terms of the agreement between the assessed and the brokers, the liability for commission arose only as and when Installments of sale proceeds were received by the assessed from the society. During the year of accounting the assessed had received only Rs. 59,256 from the society and on this basis the AAC held that the assessed was entitled to a deduction of only Rs. 14,814 being (25% of the above amount).

12. The assessed filed a further appeal to the Tribunal in respect of both the issues. So far as the sum of Rs. 2,00,000 was concerned, the Tribunal held that the assessed was entitled to the deduction claimed. A number of cases were cited before the Tribunal on behalf of the two parties and after discussing these decisions in detail and after referring to the provisions of the Delhi (Urban Areas) Tenants' Relief Act, 1961, the Tribunal came to the conclusion that a liability on the part of the assessed to meet the expenses of eviction had accrued during the accounting year. It was pointed out that the tenants had valuable rights under the Tenants Relief Act and it was inconceivable that the tenants would vacate the premises for no compensation whatsoever. It was also noticed that as a matter of fact not a single tenant had been evicted till the date of hearing of the appeal by the Tribunal. In the circumstances, the Tribunal following the principle of the decision of the Supreme court in Calcutta Co. Ltd. v. CIT : [1959]37ITR1(SC) , allowed the assessed's claim to the extent to which it had been allowed by the ITO.

13. It may be mentioned that the Accountant Member and the Judicial Member passed separate orders. The Accountant Member was clear that the assessed should get a deduction only for Rs. 1,60,000. He was of opinion that the estimate made by the ITO had not been shown to be excessive or unreasonable. There is, however, some ambiguity in the order of the Judicial Member because in his order, he refers to a claim of Rs. 2 lakhs and to the Accountants Member having delegated Rs. 2,00,000 from the assessment. He also mentions in his conclusion that the sum of Rs 2 lakhs cannot be included in the assessment. There is clearly a mistake in all this. The Accountant Member had upheld the deduction only to the extent of Rs. 1,60,000. A perusal of the order of the Judicial Member shows that he did not intend to differ from the conclusion of the Accountant Member. He does not discuss specifically in any part of his order any reason for holding that the assessed should get a deduction for the whole amount of Rs. 2 lakhs and that it should not be restricted only to Rs. 1,60,000 as held by the ITO and the Accountant Member. In the statement of case, there is also a reference to a rectification order of the Tribunal in this respect, which unfortunately, is not a part of the record. We have, thereforee, come to the conclusion that both the members of the Tribunal agree with the deduction in respect of the first item in the issue before them was to be restricted only to the sum of Rs. 1,60,000.

14. So far as the deduction of the claim for commission was concerned, the Accountant Member agreed with the interpretation placed by the AAC on the terms of the agreement between the assessed and the broker. Consequently he also agree that the assessed was entitled only to a deduction of Rs. 14,814 as held by the AAC. He rejected the plea of the assessed so far as this point is concerned. Here again there is no specific discussions on this point in the order of the learned Judicial Member. In his order he deals only with the items relating to the claim for Rs. 2 lakhs and does not discuss the item of deduction in respect of commission or express any disagreement with the Accountant Member's view thereon.

15. Both the assessed and Commissioner sought reference on there from the order of the Tribunal. The assessed sought a reference on there questions, two of them, pertaining to the sum of Rs. 2,00,000 and urging that the entire amount should have been allowed as deduction and the third in regard to the commission payable which, it was claiming, must have been allowed to the full extent. On the other hand the reference sought by the Addl. Commissioner was that no part of liability for the eviction of the tenants could have been allowed as a deduction. After considering the question suggested for reference by the two parties the Tribunal made a reference on the following two question :

As from the assessed

'Whether, on the facts and circumstances of the case, the amount of Rs. 2 lakhs retained by the buyer-society is includible in the total income of the assessed ?' As from the Commissioner 'Whether, on the facts and circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 1,60,000 retained by the buyer-society was an admissible deduction in the assessment of the assessed for the assessment year 1962-63, under the Income-tax Act, 1961 ?'

16. The Tribunal, however, declined a reference regarding the commission claimed by the assessed but subsequently by the order in I.T.C. No. 29 of 1974, this court directed a reference also on the following question :

'Whether, on the facts and circumstances of the case, the amount of Rs. 1,00,000 claimed as a deduction by the assessed is allowable in law ?'

17. Shri K.K. Wadhera, learned counsel for the Department, raises a preliminary objection that the question regarding the sum of Rs. 1,00,000 is not properly before this court. He raises this objection on the short ground that the Judicial Member has not at all dealt with this point in his order and that since only the Accountant Member has decided this issue it cannot be said that there is any order of the Tribunal at all on this point. He also invited our attention to the statement of case made by the Tribunal in I.T. Rs. Nos. 1 and 2 of 1974, where, in para. 30, it was stated 'that the counsel appearing for the assessed gave the Tribunal the impression that he was not pressing this question' and that was why the question was not referred. We are of opinion that these objection cannot be upheld. So far as the first objection is concerned we have already pointed out that the Judicial Member had clearly intended to agree with the conclusion of the Accountant Member. He dealt only with one issue on which he considered it necessary to give separate reasons. His order does not contain any indication that he intended to dissent from the view of the learned Accountant Member either in regard to the quantum of deduction to be allowed in respect of the first item or second item. We have already construed the order of the Tribunal, so far as the first point is concerned, as one upholding the disallowance of Rs 40,000. It is equally clear that both the Members were agreed that the sum of Rs. 1,00,000 claimed towards the commission should not be allowed in full and that the order of the AAC should be confirmed. In our opinion, thereforee, there is a decision of the Tribunal on this point and the learned counsel's objection is not maintainable.

18. In regard to the second objection, counsel for the assessed invited our attention to the papers contained in I.T.C. No. 29 of 1974. At that time it was brought to the notice of the court that though the Tribunal had referred in the statement of case in I.T. Rs. Nos. 1 and 2 of 1974 to the lukewarm stand of the counsel for the assessed, this sentence was not correct and had challenged immediately by a letter written by the counsel in question to the Tribunal. When the matter went back to the Tribunal in pursuance of the order under s. 256(2), Tribunal has not repeated the statement in the earlier reference presumably after due consideration of the latter in question. We are, thereforee, of opinion, that the reference cannot be rejected merely on the ground that it had not been pressed by counsel for the assessed. Both the preliminary objections taken by the Department's counsel, thereforee, fail.

19. Coming to the question referred to us, we think that in principle the allowability of both the deductions claimed by the assessed go together and really raises one issue. One important fact to be kept in mind in deciding this issue is that the assessed is maintaining its accounts according to the mercantile system of accounting and that the entire sum of Rs. 4,00,000, which was the consideration for the transfer of the lands in favor of the society by the assessed, has been taxed as income in the hands of the assessed. It is common ground that the assessed had received in cash only a sum of about Rs. 60,000 during the previous year. But, as it was maintaining accounts according to the mercantile system, the entire sum of Rs. 4,00,000 was taken as having accrued to the assessed. The question that arises for consideration is whether this entire sum of Rs. 4,00,000 can be brought to tax without taking into account the full extent of the liabilities which the assessed had to incur for earning the said sum It may be mentioned here that the assessed had obtained a 99 years' lease of 734 bighas only on March 30, 1960, for Rs. 90,000. The lease deed in favor of the society is dated June 13, 1961, and it gives the consideration in respect of 500 bighas as Rs. 4,00,000. It is obvious that this consideration has been arrived at on account of various other stipulations set out in the lease deed itself. One of the most important considerations on account of which the society agreed to pay a sum of Rs. 4,00,000 was that the assessed had taken upon itself the responsibility of evicting the agricultural tenants who were occupying 200 bighas of the land in question. The Delhi Tenants' Relief Act was assented to on the August 28, 1961. But it was retrospective and contained provisions projecting and guaranteeing the rights of the tenants and for restoration of tenancies to agricultural tenants evicted from their holdings (otherwise than on grounds specified in the Act), at any time after July 1, 1958. In these circumstances, it is clear that the responsibility to evict the tenants, who were occupying almost 200 bighas of land, was an onerous responsibility and it is because the assessed agreed to undertake this responsibility that the society was prepared to offer a price of Rs. 4,00,000. Indeed, when the society found that till March 31, 1962, the assessed had not been able to do anything in the matter, the parties entered into a further agreed whereby the expenses in respect of such eviction by way of compensation to the tenants and otherwise was estimated at Rs. 2,00,000 and the society was permitted to withhold the payment of the sale price to this extent. We have also referred to the fact that as late as 1972, practically none of the tenants had been evicted. On the contrary, several of them had field very exaggerated and fantastic claims for compensation Having regard to these circumstance and the terms of the lease deed and the agreement of 1962, the liability to evict the tenants was in the nature of an inbuilt liability under the lease deed. The assessed was to be entitled to Rs. 2,00,000 only because it undertook that liability and but for doing so the society would not have agreed to pay the sum of Rs. 4,00,000.

20. Though the matter has been discussed at great length by both the Members of the tribunal, we are of the opinion that this case is clearly governed by the decision of the Supreme Court in the case of Calcutta Co. Ltd. v. CIT : [1959]37ITR1(SC) , earlier referred to. In that case also the appellant was a dealer in land and property and carried on land developing business. In the accounting year, relevant to the assessment year 1948-49, the appellant sold number of plots. Normally the procedure was that when a plot of land was sold the purchaser was asked to pay 25% of the purchase price and give an undertaking to pay the balance with interest in a number of Installments spread over a number of years securing the same by creating a charge on the land purchased. The appellant in its turn undertook to carry out the development within 6 months from the date of the sale but time was not of the essence of the contract. This undertaking was incorporated in the deed of sale itself. The assessed maintained its accounts according to the mercantile system and in respect of the plot sold the entire amount of price was entered on the credit side of the books though only a part of the same had been received by the assessed during the previous year. On the same basis the assessed deducted in its books an estimated sum as the expenditure for the developments to be carried out in respect of the plots which had been sold during the year, even though no part of that amount had actually been expended during the accounting year. The ITO and the AAC were of the opinion that as no expenses for development had been actually incurred in the year of account, the claim for expenditure could not be allowed The Tribunal also dismissed the assessed's appeal holding that though the assessed had undertaken to carry out certain development, the expenses incurred thereon could be brought into account only when they were incurred actually. The High Court agreed with the view taken by the Tribunal and the matter was taken by the assessed to the Supreme Court. The question before it was set out by the Supreme Court in these terms (p. 4) :

'The question which really arises for our determination in this appeal is whether having regard to the fact that the appellant's method of accounting viz., the mercantile method, was accepted by the Income-tax Officer and the receipt appearing in the books of account included the unpaid balance of the sale price of the plots in question, the amount of liability undertaken by the appellant to earn those receipts was to be deducted even if there had not been actual disbursement made by it during the accounting year. Put in other words, the question was whether in view of the fact that the sum of Rs. 43,692-11-9 had been entered on the credit side in the books of account even though it was not money actually received but only money treated as received on the basis that it was due and receivable, the sum of Rs. 24,809 which had been entered as debit, being the liability of the appellant undertaken by it to earn those receipts, should be deducted in determining the taxable profits and gains of the appellant.'

21. The question was answered by the Supreme Court in the affirmative. After referring to the decision in the case of Keshav Mills Ltd. : [1953]23ITR230(SC) explaining the nature of the mercantile system of accounting the Supreme Court pointed out that in view of the undertaking for development recorded in the deed of sale there was certainly a liability undertaken by the appellant to carry out the developments within a reasonable time. The case of Peter Merchant Ltd. v. Stedeford [1948] 30 TC 496 (CA) was distinguished by pointing out that in that case the liability under the contract was contingent and not actual and after quoting a passage from Simon's Income Tax, the court as follows (p.6 of 37 ITR) :

There is no doubt that the undertaking to carry out the developments within six months from the dates of the deed of sale was incorporated therein and that undertaking was unconditional, the appellant binding itself absolutely to carry out the same. It was not dependent on any condition being fulfillled or the happening of any event, the only condition being that it was to be carried out within six months which in view of the fact that time was not of the essence of the contract meant a reasonable time. Whatever many be considered a reasonable time under the circumstances of the case, the setting up of that time-limit did not prescribe any condition for the carrying out of that undertaking and the undertaking was absolute in terms. If that undertaking imported any liability on the appellant the liability had already accrued on the dates of the deeds of sale, that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could very well be deduction from the profits and gains of the business.

Inasmuch as the liability which had thus accrued during the accounting year was to be discharged at a future date the amount to be expended in the discharge of that liability would have to be estimated in order that under the mercantile system of accounting the amount could be debited before it was actually disbursed.'

22. It was also pointed out that a difficulty in estimation would not convert an accrued liability into a conditional one. The Supreme Court also pointed out that, quite apart from the question whether the amount was allowable as an accrued liability, the claim of the assessed fell within the purview of s.10(1) of the Indian I.T. Act, 1922, corresponding to s. 28 of the 1961 Act. It was well settled that the expression 'profits and gains' had to be understood in a commercial sense and that there can be no computation of such profits and gains until the expenditure which is necessary for the purposes of earning the receipts is deducted there from where the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date, After referring to a number of decisions of the Supreme Court laying down this principle, the Supreme Court pointed out that the sum of Rs. 24,809 represented the estimated amount which would have to be expended by the appellant in the course of carrying on its business and was incidental to the same and that, having regard to the accented commercial practice and trading principles, it was a deduction which had to be allowed whether or not it was covered by a specific provision contained in s.10(2) of the 1922 Act.

23. It appears to us that the facts of the present case are on all fours with those in the case before the Supreme Court. Here also the assessed is a dealer in land. The entire sale proceeds of Rs. 4,00,000 have been taken into account notwithstanding the fact that only a portion of it is immediately receivable and the balance is to be paid in a large number of Installments and in spite of the fact that under the terms of the agreement of 1962 a specific portion of the unpaid purchase price is being retained by the vender to ensure the discharge of the obligations of the assessed under the lease deed. The lease deed itself contains a clear and unequivocal undertaking on the part of the assessed to take steps to evict the tenants at its own cost and expenditure. This undertaking is unconditional, it does not depend upon any condition being fulfillled or any event happening though the quantum of expenditure may vary in respect of different plots of land depending upon the attitude of the tenant in occupation of each plot. In these circumstances, the position is no different from that considered by the Supreme Court in the case of Calcutta Co. [1959] 37 ITR 1. In our opinion the Tribunal was right in holding, applying the principle in the Calcutta Co.'s case, that an estimated amount in regard to the assessed's liability for evicting the tenants was allowable as an expenditure.

24. Learned counsel for the Department referred to the decision of the Supreme Court in the case in the case of Indian Molasses [1959] 37 ITR 66. But this decision does not in any way affect the principle laid down in the Calcutta Co.'s case. In the case of Indian Molasses Co. It was found that the amount in respect of which a deduction was claimed was only a contingent liability and that there were certain circumstances in which the trust contemplated to be set up would fail and there would be a resulting trust in favor of the assessed itself. In the present case, having regard to the terms of the agreement as well as a realistic assessment of the legal position in the legal position in the light of the Delhi Tenants' Relief Act there is absolutely no doubt that the assessed must have to incur substantial expenditure to evict the tenants from the land. Indeed, it does not appear that it has succeeded in doing so to any considerable extent; at least till 1972 none of the tenants had been evicted. There was, thereforee, a clear liability that had accrued and the only question was that of quantifying that liability. But this difficulty in quantification, as pointed out by the Supreme Court, will not preclude the assessed being entitled to a deduction. The case of M. S. P. Senthikumara Nadar & Sons v. CIT : [1957]32ITR138(Mad) , referred to by the learned counsel for the Department, also stands on the same footing. In that case the assessed had committed certain defaults in the performance of its Obligations under a contract entered into with the Coffee Board. The contract also contained certain provisions for the assessed being made liable to a penalty or liquidated damages for breaches of contract. During the relevant accounting year the branches made by the assessed had not been discovered by the other party. There was even every possibility that such breaches might not have been noticed at all. Later on, the Coffee Board discovered the breaches on the part of the assessed and ultimately the assessed had to pay substantial amount by way of damages. The assessed claimed this as a deduction in the year in which the branches had occurred, a point of time when the other party to which the breaches had occurred, a point of time when the other party to the contract was not even aware of their existence. The Madras High Court was only a contingent liability and that it could be said to have become an accrued liability only when the Coffee Board discovered the lapses and made up its mind as to which of the remedies available to it under the contract should be enforced against the assessed. The facts in this case and the decision therein are not helpful in the present case.

25. We do not think it is necessary to elaborate further as, in our opinion, the matter is clearly governed by the decision in Calcutta Co.'s case : [1959]37ITR1(SC) . The principle or doctrine of real income which has also been referred to in Calcutta Co. 's case and subsequently reaffirmed in a series of decisions of the Supreme Court also shows that it will not be in accordance with the law for the Department to seek to tax the sum of Rs. 4,00,000 without allowing the assessed a corresponding deduction for the liabilities which it has to incur under the contract in order to become entitled to that sum of Rs. 4,00,000. There are a series of decisions on the doctrine of real income but it will be sufficient to refer to those in H. M. Kashiparekh & Co. Ltd. v. CIT : [1960]39ITR706(Bom) , CIT v. Shoorji Vallabhdas and Co. : [1962]46ITR144(SC) and Poona Electric Supply Co. Ltd. v. CIT : [1965]57ITR521(SC) .

26. For the reasons above discussed, we are of the opinion that the assessed is entitled to deduction in computing its total income of the amount of its liability for the eviction of the tenants. On this issue there is also a dispute regarding the quantum. The ITO had disallowed Rs. 40,000 and this was upheld by the Tribunal. In our opinion, there is no reason to interfere with this conclusion of the Tribunal as it is essentially one of fact. As we have already pointed out, the assessed is clearly entitled to a deduction of its liability for the eviction of the tenants but since the exact liability is not known it has to be estimated. The assessed's estimate of Rs. 2,00,000 had no doubt been arrived at on its assessment of the situation. We may point out that this sum was retained in respect of the obligations referred to in clauses 4 and 5 of the agreement dated March 31, 1962, and we have before us only the liability allowable in respect of one of these obligations. That the ITO has given goods reasons for restricting the allowance to Rs. 1,60,000 He has pointed out that according to the sale deed the sale proceed of a bigha of land was Rs. 800 and that in respect of 200 bighas on which there were tenants, the sale price itself came to only Rs. 1,60,000. If in the circumstances the ITO thought that, without fuller details regarding the expenses incurred by the assessed or which it was liable to incur in future, at best the sale price pertaining to 200 bighas could be written off, it cannot be said that the conclusion is incorrect. As pointed out by the Tribunal this was a fair and equitable conclusion arrived at by the ITO and since it was only a question of estimate with which the Tribunal has agreed, we have no grounds to interfere.

27. In the result we answer the two question referred to us in I.T. Rs. Nos. 1 and 2 of 1974 by stating that the assessed was entitled to a deduction of Rs. 1,60,000 for the assessment year 1962-63.

28. Coming to I.T. Rs. Nos. 38 and 39 of 1979, the position it appears to us, is exactly similar. In respect of the liability to evict the tenants the assessed had incurred the liability but had to discharge it in future. The same position prevails even in regard to the commission. Under the deed of agreement dated April 17, 1961, the assessed was liable to pay to the brokers commission (a) 25% on the total value of the said land, namely, Rs. 1,00,000. The subsequent clause of the agreement on which Mr. Wadhera laid considerable stress was only a Claus regarding the payment. The assessed was liable to pay a commission of Rs. 1,00,000 but it was to pay that amount from time to time as and when the sale proceeds were received. If the Department is bringing to tax only the amount of sale proceeds actually received then the assessed would have been entitled to the deduction only in respect of the commission relatable to such sale proceeds. But, in the present case, when the entire sale price of Rs. 4,00,000 is being taxed, the assessed is entitled to deduct the entire sum of Rs. 1,00,000 which it was liable to pay as commission. In principle, we see no difference between the claim for commission and the claim for the sum of Rs. 2,00,000 dealt with earlier. We thereforee, answer the question referred to us in these two references also in the affirmative and in favor of the assessed.

29. As the assessed has succeeded, it will be entitled to its costs of this reference. Counsel's fee Rs. 500, one set.


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