MAJMUDAR J. - The Income-tax Tribunal, Ahmedabad Bench C, has referred the following question of law, at the instance of the assessee, for our opinion under s. 256(1) of the Income-tax Act, 1961 :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that in spite of the consistent way in which the assessments were framed in respect of continuing business, a different view could be taken in a subsequent year if the earlier view was found to be incorrect ?'
In order to bring out the real controversy between the parties, it is necessary to reframe the question and the question as reframed will be :
'Whether the Tribunal was right in law in holding that though the value of the closing stock-in-trade for the relevant previous year was shown at the market rate and 80% thereof was shown as the share payable to the Government as entered in the books of the account of the assessee Mandli on the basis of the estimated value, and by the time the ITO completed assessment the said stock-in-trade was sold and the actual figure of the sale price was available, yet 80% share payable to the Government should not be computed on the basis of the actual figure and should be confined to the figure shown in the accounts of the assessee ?'
The facts leading to this reference, shortly stated, are as under :
The assessee is a co-operative society. It takes jungles on royalty from the State Govt. for exploitation. According to agreement with the forest department and the State Govt., the assessee had to make payment of 80% of sale price to the Government as its share. During the relevant assessment year 1970-71, accounting period being year ending September 30, 1969, the assessee took two coupes bearing No. 9/60 and 4/65 for exploitation. They were situated in the forest comprised in Nesu Range of Vyare Division of Surat District. The assessee had executed two agreements in favour of the Government with respect to the contract pertaining to exploitation of trees in both these coupes. During the accounting year, some of the timber extracted by the assessee from these coupes could not be sold and that portion was taken into closing stock. The said closing stock was actually valued by the assessee at the market rate. On the debit side of its profit and loss account for the accounting year, coupe expenses were fully debited and 80% share which was payable to the Government was indicated at 80% of the value of closing stock which was yet to be sold. Thus, it was merely an estimate of 80% royalty which the assessee was liable to pay to the Government so far as unsold stock was concerned. However, after the close of the accounting year the timber that was shown in the closing stock for the accounting year was actually sold by the assessee at a price higher than that at which the closing stock was valued earlier and the accounts were accordingly settled with the Government after the sales. As a result of this settlement and on ascertainment of the actual amount of 80% royalty which the assessee had in fact to pay to the Government pursuant to the aforesaid two contracts, the assessee had to pay some-thing more than what was indicated on the debit side of the trading account as the 80% share of the Government. The assessee claimed that as at the time of assessment and before it was finalised, the actual figure of the amount payable to the Government by way of 80% was available, the net profit should be reduced by the additional share that was paid to the Government as a result of the higher price obtained for the closing stock. The assessee did not of course disturb the closing stock, i.e., the value of stock on the credit side of the trading account was retained at the original lower figure, but the claim of the assessee was that instead of the estimated figure of 80% share of the Government, as the actual figure of 80% paid to the Government was available, the actual figure 80% share payable and paid to the Government should be substituted for the earlier estimated figure and the assessment proceedings deserved to be completed on that basis.
The ITO did not accept the aforesaid request of the assessee and noted that during the accounting year under consideration, the assessee had taken two coupes for exploitation and had actually exploited them. The sales of timber, coal, etc., have been shown at Rs. 5,07,204 and it disclosed a profit of Rs. 9,33,979 which included the royalty of Rs. 7,47,183 payable to the Government. That the assessee had thereafter filed a certificate dated March 22, 1971, from the District Forest Officer, Vyara, according to which, royalty actually payable in respect of the coupes undertaken in 1968-69 amounted in fact to Rs. 10,21,849. In the view of the ITO, the difference between the estimated figure of 80% share which was debited by the assessee in the profit and loss account, viz., Rs. 7,47,183, and the actual amount of 80% royalty which the assessee paid to the Government amounting to Rs. 10,21,849, the difference being Rs. 2,74,667 could not be permitted to be debited to the trading account for the relevant assessment year by substituting the estimated figure of 80% being Rs. 7,47,183, by the actual figure of Rs. 10,21,849 as claimed by the assessee. In the view of the ITO, the sale of timber, etc., took place in the subsequent year and the final account was settled with the forest department on the sale of all the goods. Thus, the liability was determined in the subsequent year and, in these circumstances, the assessees claim for allowing the full royalty during the year could not be entertained.
The assessee took the matter in appeal before the AAC. It was urged that in the past, the entire amount of royalty as finally determined was allowed in the first year of the contract itself and the ITO had changed the basis of assessment without any reasonable cause. The AAC, however, confirmed the order of the ITO on this aspect. He gave some other reliefs to the assessee with which we are not concerned in the present proceedings.
The matter was taken up by the assessee in further appeal before the Tribunal. The assessee contended before the Tribunal that the closing stock of the timber was valued at market rate and the Governments share of 80% was taken by the assessee on estimate basis relying on the market rate on the 1st date of the accounting year; but before the assessment could be completed, the sales had taken place and the actual figure of 80% share of the Government was available and hence it was only proper that the correct amount of Government share as finally determined should be substituted for the earlier estimated figure which, in the context of the actual figure being available, had become unreal. It was further submitted before the Tribunal that this method was followed by the assessee year after year and there was no justification to upset the long standing accounting practice which the assessee had carried on since years and which the department had also accepted over these past years.
The main objection on behalf of the revenue as voiced before the Tribunal was that the closing stock was valued by the assessee in its trading account for the relevant accounting year at the market rate then available and it is only on that basis that the 80% share was debited by way of expenses. Now, thereafter, if during the subsequent years, the said stock was sold at higher price, the increased 80% share of the Government on that basis cannot be shown as expenses during the earlier year when the sale of the closing stock had taken place during the subsequent year. In short, the submission on behalf of the revenue was that the liability to pay the increased amount by way of 80% share of the Government accrued to the assessee only when the closing stock was sold off at a higher price during the subsequent year and hence the increased amount of 80% share cannot be substituted for the figure of 80% share of Government as shown by the assessee earlier on the debit side of its trading account for the relevant accounting year. It was further submitted that if, in the past, there was mistake pertaining to the correct accounting method, the said mistake could be corrected to frame a correct assessment in the subsequent year.
The Tribunal took the view that the question involved before it did not pertain to reopening of the assessment which had become final but the question was whether in the subsequent year, a view different from one taken in earlier years could be taken if the earlier view was found to be incorrect. The Tribunal held that the method adopted by the assessee in the past did not bring to tax the correct profit or loss of the year. In the view of the Tribunal, the payment of 80% share which the assessee had to make to the Government by way of government share could be determined after the close of the year as a result of the actual sale price received when the goods were sold in the market and, consequently, additional amount actually paid by way of 80% to the Government cannot be substituted for the earlier figure of estimated 80% to the Government cannot be substituted for the earlier figure of estimated 80% share of the Government as mentioned by the assessee in its trading account for the relevant assessment year.
As already stated above, the Tribunal on the request of the assessee has referred a question of law for our opinion. At the time when this reference reached hearing before us, it was found that the question did not really reflect the moot question in controversy and was required to be reframed and we have accordingly reframed the question so as to bring out the real controversy between the parties, after hearing both the learned advocates on this aspect, and they also agreed that the question which we have reframed brings out the real controversy between the parties.
In order to highlight the real question in controversy between the parties, it is necessary to have a glimpse of the system of accounts which the assessee has followed over the years and thereafter it will be necessary to have a look at the relevant terms of the contracts which the assessee had entered into with the Government for exploitation of two coupes during the relevant assessment year.
The assessee is a co-operative society registered under the Gujrat Co-operative Societies Act, 1961. Its members are labourers who otherwise used to work in forests and carry on cutting operations at the instance of the forest contractors. Now, they have formed a co-operative society and the Government gives them contracts to enable them to work on a co-operative basis and to carry on the task of exploiting contracted coupes, cutting and removing timber and wood of the trees permitted to be cut under the concerned contracts. So far as the relevant accounting year is concerned, as we have stated above, it ends on September 30, 1969. In the balance-sheet as on September 30, 1969, the assessee-society on the liabilities side had shown Rs. 7,47,183.30 as estimated 80% Government share for the years 1968-69 with respect to the timber which had been exploited by the society with respect to the two coupes in question. In its trading account for the year 1968-69, on the credit side, Rs. 5,07,204.16 were shown by the Society as the sale price of wood which could be actually sold by the society during the relevant year. So far as the stock on hand on September 30, 1969, was concerned, Rs. 4,57,562.15 were shown as value of the stock from coupe No. 9/60 while Rs. 3,35,248.91 were shown as value of the stock of coupe No. 4/65. Thus, in all, Rs. 7,92,811.06 was the value of the total stock which remained unsold by the end of the accounting year. On the debit side of the trading account was shown 80% share of the Governement at Rs. 7,47,183.30 and on that basis, trading profit of Rs. 1,86,795.84 was calculated.
In the profit and loss account for the relevant accounting year ending on September 30, 1969, the aforesaid trading profit of Rs. 1,86,795.84 was shown on the credit side. Certain other interest, commission and stray matters were shown on the credit side while on the debit side, various other expenses were mentioned and ultimately on that basis, cutcha profit of Rs. 1,71,199.50 was estimated for the accounting year in question. It is pertinent to note that the assessee had in terms shown this profit as cutcha profit or provisional profit. The ITO has treated this figure of provisional profit as net profit as per the profit and loss account. The assessees contention is that the figure of provisional profit was merely an estimate and was not the final net profit as per the profit and loss account as the actual figure of 80% share of Government was not available by the time the accounts for the accounting year were completed. But they became available before the assessment proceedings were completed by the ITO for that year. The assessee produced a certificate before the ITO issued by the divisional forest officer, Vyara division, Vyara, certifying that the assessee society had to pay the following amount against the 80% Government share in respect of respect of coupes allotted to them in the year 1968-69 :
For coupe No. 9/60
For coupe No. 4/65
The assessees contention before the ITO was that the 80% share of the Government as mentioned in the trading account at Rs. 7,47,183.30 was merely an estimate but final figure by way of the 80% share of Government was available as Rs. 10,21,849 before the assessment proceedings were over and, hence, the ITO was required to take into consideration this actual figure of the 80% share of the Government as compared to the earlier estimate which did not remain effective once the actual figures were available. It was submitted that in the past, over a number of years, this assessee had followed a uniform practice of accounts, viz., for a given accounting year, at the time the accounts were completed and closed an estimated figure of the 80% Government share on the basis of the estimated market value of unsold stock was inserted on the debit side of the trading account. But if before the assessment proceedings for the relevant accounting year were completed, actual figure of the 80% share was available, the assessee used to produce actual figure of the 80% share of the Government before the ITO and these figures were permitted to be substituted for the earlier estimates and, on that basis, assessments for the relevant assessment years used to be completed year after year and at no point of time, any objection was raised by the revenue regarding this uniform accounting practice folowed by the assessee over the years; that the assessee was carrying on this activity of exploding the Government forests on contracts by way of a continuous process spread over the years, of course, confined to different coupes under different contracts taken year after year from the Government.
Earlier orders of the ITO for 1963-64 and subsequent assessment years have been heavily relied upon by the assessee in support of the aforesaid contention. We may only refer to a few of them. For example, for assessment year 1964-65, the assessment order shows that initially net profit as per the statement submitted by the assessee was shown at Rs. 3,662 and to this net profit was added the share of profit payable to the State Government as debited in the trading account at Rs. 29,393. Thus, the net profit was worked at Rs. 33,055. This shows that the earlier estimated figure of 80% share of the Government was added back by the ITO as, by the time he could finalise the assessment, actual figure of 80% share payable to Government was availlable. After adding the aforesaid share of Rs. 29,393 to the net profit figure of Rs. 3,662, the total income came to Rs. 33,055 and from this amount of income was deducted the actual share of profit payable to the Government as per the certificate filed. This of course referred to actual 80% share of the Government paid by the assessee concerning the timber exploited by the assessee during the relevant year as per the concerned contract with the Government. This share of actual profit which was deducted was Rs. 17,916 and that is how the net figure of Rs. 15,139 by way of total income was computed. From this figure is deducted loss of a.y. 1963-64 which is brought forward and having thereafter computed the total income assessable to tax, Rs. 11,331 are brought to tax for the concerned year 1964-65. The assessment order which we have referred to in detail shows that initially when the accounts for the relevant assessment years are closed by the assessee, 80% share estimated to be payable to the Government is in the first instance debited in the trading account but by the time the assessment is finalised for the relevant year, if actual figure of Government share is available and if such certificate is produced, then it is given full effect to by the department and for giving full effect to that actual figure of 80% share, estimated share originally debited is added back to the total income and thereafter actual figure of 80% share of Government as per the issued certificate is deducted. Thus, before finalising the assessment for a given assessment year, actual figure of 80% share of the Government if available, and as reflected by the concerned certificate issued by the Government, was invariably taken into consideration by the ITO for arriving at the correct figure of total income of the assessee during the relevant assessment year which was liable to be brought to tax. Same pattern of accounting was followed for the subsequent years and was accepted by the department.
Mr. Shah, learned advocate for the assessee, drew our attention to the assessment order of the ITO for 1965-66. In the said order also, estimated 80% share of profit as originally debited in the trading account is added back to the total income and the actual figure of 80% Government share as reflected by the certificate available then, is deducted. Same is the position regarding assessment year 1966-67 as seen from the assessment order for that year. For the assessment year 168-69, the assessment order follows the same pattern till we come to the earlier year 1969-70 just preceding the disputed assessment year 1970-71. In the year 1969-70 also, the same method has been followed by the assessee on the one hand and the department on the other. The assessment order for 1969-70 shows that 80% profit estimated as payable to the Government being Rs. 1,61,295 is added back to the total income and thereafter share of profit actually paid to the Government as per the certificate, viz., Rs. 89,026 is deducted. It, therefore, appears clear that the assessee has been following a uniform accounting practice of initially estimating the 80% share of the Government royalty on the basis of the available market value of the closing stock, while closing the account for any accounting year and thereafter if available, producing before the ITO a certificate showing the actual Government share of 80% if such a certificate was available before the assessment proceedings for the relevant assessment year were completed and all throughout the concerned ITOs have accepted the said method of account kept by the assessee and have invariably permitted the actual figure of 80% share as reflected by the concerned certificate to be substituted for earlier estimated figures. It is only during the present relevant assessment year 1970-71 that the ITO who had to deal with the aforesaid assessment proceedings seems to have taken a different view and that is how the present controversy has arisen between the parties.
In the light of the aforesaid factual position which is well established on the record of this case, and about which in fact there is no dispute between the parties, the question which has been posed for our opinion will have to be decided.
Mr. Shah, the learned advocate appearing for the assessee, has urged the followiing submissions in support of his case.
Mr. Shah firstly submitted that an assessee has the full right to follow any given method of accounting and once he has consistently followed that method of accounting, it is not open to the department to ask him to change the same only because at the given point of time, the department thinks that the earlier method of accounting which had been consistently followed by the assessee is not fully scientific or fully accurate. In that connection, Mr. Shah further submitted that while completing the accounts for a given accounting year, the assessee had full authority and discretion to value the closing stock even at cost price or at any other figure on the basis of the available market price as suitable to the assessee and no dispute can be raised by the revenue with respect to such estimate of the value of the closing stock.
Mr. Shah next contended that once it is held that the assessee had full discretion to follow any given method of accounting and to value the closing stock n any manner which suited it best, the actual figure of the 80% share by way of royalty payable to the Government, if available to the assessee, before the assessment proceedings were finalised, can always be pointed out to the ITO by the assessee and the ITO cannot prohibit the assessee from producing this correct figure of the actual 80% share of royalty which the assessee had to pay to the Government and which he had actually paid. In this connection, Mr. Shah submitted that the earlier debited figure of the 80% share of the Government payable by the assessee with respect to the wood exploited under the given contracts for the relevant assessment year was a mere estimate and if by the time the assessment proceedings for that year could be finalised, the assessee had actually paid any larger amount or for that matter even a smaller amount to the Government by way of the Government share of 80% there was nothing wrong in substituting this actual figure for the earlier estimate and in fact that will bring the assessment proceeding within the realm of reality rather than taking them away from it.
Mr. Raval, learned advocate appearing for the revenue, on the other hand, contended that the assessee may follow any permissible method of accounting and may value his closing stock accordingly on the basis of cost price or any other market price available to his. But so far as the 80% share of the Government which was payable by way of royalty by the assessee to the Government for exploiting trees in the forests under the contract was concerned, the liability to pay 80% share actually accrued only on an ascertainment of the net realisation of the sale proceeds of the concerned goods and so long as the concerned unsold stock was not actually sold in the market, and so long as the net realisations thereof after deducting permissible expenses were not ascertained, the liability for payment of 80% share to the Government on the net realisations, in fact, did not fasten on the assessee and, hence, till this eventuality actually happend, the liability remained a contingent liability which crystallised only on the sale and ascertainment of the net realisation therefrom. Mr. Raval, therefore, submitted that as the sale of the unsold stock took place during the subsequent assessment year, the 80% share of the Government on net realisation became ascertained only on the happening of that eventuality. Consequently, the liability on the part of the assessee to pay this 80% share of net realisation to the Government was incurred by the assessee not during the relevant assessment year but during the subsequent year and, consequently, the ITO was justified in refusing the request of the assessee to take into consideration the actual 80% share of profits which the assessee may have paid to the Government on the sale of unsold stock during the subsequent years and the ITO was quite justified in taking the view that this actual figure which pertained to an event which happened in the year subsequent to the accounting year, could not be projected backwards so as to telescope into the earlier figure of estimated 80% share of Government as debited in the trading account for the accounting year ending September 30, 1969.
The aforesaid rival contentions of the parties clearly highlight the limited controversy which survives for our considertion. So far as the first submission of Mr. Shah for the assessee is concerned, viz., that the assessee had every right to follow any permissible method of accounting, there now remains no serious quarrel between the parties. Mr. Shah has invited our attention to s. 145 of the I.T. Act, 1961, in support of his aforesaid contention. Section 145(1) provides :
(1) Income chargeable under the head Profits and gains of business or profession or Income from other sources shall be computed in accordance with the method of accounting regularly employed by the assessee :
Provided that in any case where the accounts are correct and complete to the satisfaction of the Income-tax Officer but the method employed is such that, in the opinion of the Income-tax Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine.'
Mr. Shah contended that the assessee has been following over the years a regular method of accounting and the said method has been accepted and acted upon even by the department year after year as seen from the earlier assessment orders concerning the assessee over a number of years and to which we have also made a detailed reference earlier. Mr. Shah submitted that the proviso to s. 145(1) is out of the picture, as it is not the contention of the ITO that the assessees method of accounting, being correct and complete, cannot be effective in properly deducing the income therefrom. Mr. Shah also drew our attention to the Supreme Court judgment in Chainrup Sampatram v. CIT : 24ITR481(SC) . The Supreme Court in the aforesaid decision had to consider the question of valuation of stock as per the mercantile system and the principles underlying valuation. It was observed (headnote) :
'It is a misconception to think that any profit arises put of the valuation of the closing stock and the situs of its arising or accrual is where the valuation is made. Valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period, and can in no sense be regarded as the source of such profits.'
The Supreme Court agreed with the conclusion arrived at by the I.T. authorities that no part of the profit could be said to have accrued or arisen at Bikaner. But the reasoning of the learned judges of the High Court for arriving at the said conclusion was not approved. In that context, the Supreme Court made the following pertinent observations (p. 485) :
'It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the years trading.'
Therafter, the Supreme Court referred to the report of the committee on Financial Risks Attaching to the Holding of Trading Stocks, 1919, and held that while anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its actual realisation, and, thereafter, the Supreme Court made the following pertinent observations (p. 486) :
'This is the theory underlying the rule that the closing stock is to be valued at cost or market price, whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course such principles have been superseded or modified by legislative enactments, unrealised profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following years account in a business that is continuing are not brought into the charge as a matter of practice, though, as already stated, loss due to a fall in price below cost is allowed even if such loss has not been actually realised.'
Mr. Shah heavily relied upon the aforesaid observations to support his contention that the assessee had full authority to value the closing stock for a given accounting year either at cost price or market price, which ever was lower.
Mr. Shah also invited our attention to a decision of the Madras High Court in CIT v. Chari and Ram : 17ITR1(Mad) . A Division Bench of the Madras High Court took the view that stock-in-trade in hand is an essential item in the computation of the profits for a period. The accepted basis of valuation of stock is cost or market value, whichever is lower, at the date up to which the accounts for a period are made up. The Madras High Court had to consider the question regarding the method of accounting as followed by the assessee in the light of s. 13 of the Indian I.T. Act, 1922, as it stood on the statute book then. We have already referred to the analogous provision in s. 145 of the I.T. Act, 1961. The Madras High Court, with reference to s. 13 of the earlier Act, observed (headnote) :
'Under section 13 of the Indian Income-tax Act, an assessee is entitled to compute the income, profits and gains in accordance with the method of accounting regularly employed by him, and ordinarily this method must be accepted by the department in the absence of anything to suggest that it is improper of patently false.'
Mr. Shah, in support of his aforesaid submission, also relied upon the judgment of the Bombay High Cout in CIT v. Tata Iron & Steel Co. Ltd. : 106ITR363(Bom) . In that case, the High Court was concerned with the provisions of s. 10(1), 10(2)(vii) and 13 of the Indian I.T. Act, 1922. With reference to s. 13 of the earlier Act, it was observed by the Division Bench of the Bombay High Court (headnote) :
'Section 13 of the Act lays down that income, profits and gains must be computed for the purpose of the Act in accordance with the method of accounting regularly employed by the assessee. The Tribunal had rightly stressed the method of accounting followed by the assess and had come to the conclusion that the method could not be said to be unreasonable even if a better method could, perhaps, be visualised.'
The attempt of Mr. Shah in relying upon the aforesaid decision was to submit that it is now well settled that the method of accounting followed by an assessee over a number of years has to be accepted by the revenue even though, according to the revenue, a more scientfic or better method may be available and that by itself was no ground to insist that the assessee must switch over to this so-called more scientific method.
Mr. Shah also invited our attention to the decision of a Division Bench of the Nagpur High Court in CIT v. Bansilal Abirchand . The aforesaid decision also concerns itself with the interpretation of s. 13 of the Indian I.T. Act, 1922. In that connection, it was observed in the aforesaid decision (headnote) :
'The assessee, who had been dealing in stock jobbing business for several years, adopted somewhat special methods of keeping accounts, namely, either to spread the profits or losses over the whole term of years in which transactions occurred or to take final losses or going at the end of the period when the transactions completely ceased.'
The ACC was of the opinion that the assessee should have closed his share account during each of the years and the loss should be claimed every year. In that connection, it was observed (headnote) :
'There was no reason why the assessee should not be allowed to claim the losses in question under the system of account adopted by him when whether the book system of account adopted by the assessee was a desirable one or not, no profits could eventually escape taxation thereunder, although possibly the income-tax authorities might in any particular case have wait a long time before receiving profits.'
In the aforesaid decision, the Nagpur High Court had also an occasion to consider the question whether the ITO having accepted the method of accounting adopted by the assessee in certain transactions could object to it in other transactions of similar nature. In that connection, it was observed (headnote) :
'There was no question of the doctrine of estoppel, as a mere rule of evidence, applying; the doctrine of equitable estoppel necessarily arises.'
Mr. Shah then drew our attention to two Supreme Court judgments, one of these being CIT v. A. Gajapathy Naidu : 53ITR114(SC) . The question before the Supreme Court in the aforesaid case was as to whether in a mercantile system of accounting followed by the assessee, the income that accrued in a subsequent year could be related back to any previous year by the ITO. The Supreme Court considered the connotation of the words 'accrue' or 'arise' as defined in s. 4(1)(b)(i) of the Indian Act, 1922. It was observed by the Supreme Court (headnote) :
When an Income-tax Officer proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions, namely. (i) what is the system of accountancy adopted by the assessee, and (ii) if it is the mercantile system, subject to the deeming provisions, when has the right to receive accrued If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year he should include the said income in the assessment of the succeeding assessment year. No power is conferred on the Income-tax Officer under the Act to relate back an income that accrued or arose in a subsequent year to another earlier year, on the ground that income arose out of an earlier transaction. Nor is the question of reopening of account relevant in the matter of ascertaining when a particular income accured of arose'
Mr. Shah also invited our attention to another judgment of the Supreme Court in the same voulme at p. 134 in CIT v. Swadeshi Cotton and Flour Mills P. Ltd. : 53ITR134(SC) . The facts in that case were that the assessee had paid a sum of Rs. 1,08,325-9-3 by way of profit bonus to its employees for the calendar year 1947 in terms of an award made on January 13, 1949, under the Industrial Disputes Act. It debited the amount in its profit and loss account for the year 1948, but in fact paid it to the employees in the calendar year 1949. The question was whether this amount could be deductible in the calendar year 1949 relevant to the assessment year 1950-51. The Supreme Court held that it was only in 1949 that the claim to profit bonus was settled by an award of the Industrial Tribunal and the only year to which the liability under the award could be properly attributed was 1949 and that, therefore, the sum of Rs. 1,08,325-9-3 had to be deducted in the calendar year 1949 relevant to the assessment year 1950-51. It was further observed that an employer who follows the mercantile system of accounting incurs a liability towards profit bonus only when the claim, if made, is settled amicably of by industrial adjudication. It was further observed that the system of reopening of accounts does not fit in with the scheme of the I.T. Act. As far as receipts are concerned there can be no reopening of accounts, and the position is the same in respect of expenses.
On the basis of the aforesaid decisions, Mr. Shah contended that it was perfectly open to the assessee to value its closing stock on the basis of cost price or market price, whichever was lower, and it was open to him to follow any suitable mercantile system of accounts and once the assessee had followed a system of accounts over the years and especially when it was accepted by the department over the years, it was not open to the ITO to challenge the said system only during the assessment proceedings pertaining to the relevant assessment year. Mr. Shah submitted that even though it was open to the assessee to value the closing stock for the relevant accounting year at cost price, it valued it at a higher market price and that valuation cannot be challenged by the department. In all fairness, it must be stated that Mr. Raval did not contest this legal position. In that view of the matter, it must be held that the first contention raised by Mr. Shah is well made out, viz., that so far as valuation of the closing stock of unsold timber as effected by the assessee in its trading account for the relevant assessment year is concerned, no grievance can be voiced by the revenue against the said valuation. It may also be recalled at this stage that the reframed question of law for our consideration as mentioned by us in the earlier part of this judgement also centres round the controversy which is reflected by the second submission of Mr. Shah and not by his first submission.
That takes us to the main grievance of Mr. Shah for the assessee, which is covered by his second submission, which we have noted earlier. Mr. Shah contended that during the relevant assessment year, the accounting period for which ended on September 30,1969, while closing its accounts, the assessee, following the earlier practice and method of accounts which had stood the test of years, had prepared its trading account by evaluating closing stock of unsold cut material from the coupes in question. The said valuation was made on the basis of the available market price of cut material and the said amount was shown on the credit side and, on that basis, 80% share of the Government was estimated and shown on the debit side of the trading account at Rs. 7,47,183.30. Mr. Shah submitted that the said figure resulted in a trading profit of Rs. 1,86,795.84, which was reflected in the profit and loss account for the year ending September 30, 1969, and, ultimately, on that basis, a cutcha or provisional profit of Rs. 1,71,199.54 was worked out. Mr. Shah submitted that before the assessment for the relevant year could be finalised, the assessee had to pay to the Government by way of its 80% share, the actual amount of Rs. 10,21,849 as shown by the certificate issued to the assessee on 22nd March, 1971, by the Divisional Forest Officer, Vyara. The said certificate was duly produced before the ITO and it was requested that, as per the settle practice over the years, as the said actual figure of 80% share, which the assessee had to pay with regard to the cut material covered by the two contracts pertaining to the two coupes in question, has been ascertained, the estimated figure on the debit side of the trading account of Rs. 7,47,183.30 be substituted by the actual figure of 80% share amounting to Rs. 10,21,849. Mr. Shah submitted that the ITO rejected this request on a wrong assumption that the profits worked out by the assessee as per the profit and loss account for the year ending September 30, 1969, at Rs. 1,71,199.54 was the net profit while in fact, in terms, it was mentioned as cutcha profit or provisional profit. From the assessment order, we find that the ITO assumed that the figure of Rs. 1,71,199.54, as found in the profit and loss account for the relevant accounting year, was the net profit as computed by the assessee. It, therefore, appears clear to us that the ITO missed the salient fact that the said figure reflected only a provisional profit and not the net profit. It is this error which has resulted in the ultimate conclusion at which the ITO arrived, viz., estimated figure of the 80% share as shown in the trading account of the assessee for the accounting year in question cannot be substituted by the actual figure of 80% share as reflected by the certificate dated 22nd March, 1971, as issued to the assessee by the Divisional Forest Officer. It also appears clear to us that the ITO seems to have bypassed the consistent accounting practice which the assessee had adopted over the years and which a number of predecessors-in-office of the concerned ITO had accepted and acted upon. It must be stated that the main and the substantial grievance against the contention of the assessee, raised by Mr. Raval for the revenue in this regard, is that the certificate in question was issued in March, 1971, by the Divisional Forest Officer to the assessee. Thus, the actual figure of 80% share of the Government in the net realisation of the sale of cut material could be ascertained only during the years subsequent to the assessment year in question. Thus, during the assessment year in question, in fact, no liability had been incurred by the assessee to pay 80% share of the Government and, consequently, the ITO was justified in not permitting the assessee to substitute the actual figure of the 80% share of the Government for the estimated figure which had gone into the trading account and consequently into the profit and loss account and which had resulted in the working out of the provisional profit of Rs. 1,71,199.54. The contention raised by Mr. Raval, for the revenue, therefore, raises the moot question as to when under the contracts with the Government pertaining to the two coupes, the liability of the assessee to pay the 80% share to the Government really arose. If the liability was incurred by the assessee during the relevant assessment year but the actual working out or computation thereof was deferred to later years, it can easily be said that the ultimate computation of the 80% share of the Government was referable to the liability which had already been incurred during the relevant assessment year and would be required to be included as permissible expenses available to the assessee during the relevant assessment year and, in that eventuality, the contention of the assessee will have to be accepted. If, on the other hand, it was found that the liability to pay the 80% share to the Government in respect of the concerned coupes was incurred by the assessee only during the subsequent year when the sale of the cut material actually took place and the net realisation thereof was ascertained, then, in that case, the contention of Mr. Raval for the revenue, will be quite justified. Under these circumstances, it is necessary for us to have a look at certain relevant terms of the agreements entered into by the assessee with the Government for exploiting the coupes in question. At the outset, we have already mentioned that during the assessment year, the assessee had entered into two agreements with the Government to exploit two coupes situated in the forest in Nesu Division, Vyara, and the two coupes were numbered 9/60 and 4/65. The agreements pertaining to these two contracts are one the record of this case and both the agreements are of similar nature and contain identical terms. Hence, for the sake of convenience, we will refer to the first agreement pertaining to coupe No. 9/60. The discussion pertaining to the terms of this agreement will ipso facto apply to the second agreement pertaining to coupe No. 4/65. Both these agreements were entered into by the assessee with the State of Gujarat on 5th November, 1968. The agreement in question was entered into by the assessee as the contractor on the one side and the Governor of Gujarat on the other. The assessee had to pay a sum of Rs. 3,00,000 being the provisional price of the contract sum to the State as a consideration for being permitted under the contract to fell and remove timber, firewood and other material as mentioned in cl. (a) of the schedule to the agreement. Clause (a) of the schedule to the agreement refers to the privilege which is conferred on the contractor to remove material from the coupe in question and the said material includes all the timber, marked for felling firewood, bark and charcoal obtained from any unreserved trees, standing or fallen within the limit of the coupe as per the plan attached. In consideration of the aforesaid privilege, the assessee-contractor had to pay Rs. 3,00,000 to the Government for the contract in question. Liberty was also reserved to the assessee to prepare charcoal in the coupe. Out of Rs. 3,00,000, being the contractors sum, one-fourth was to be paid to the Government on or before the time of signing of the agreement and the remaining 3/4ths before any material is removed from the coupe. Thereafter, follows the important condition, being condition No. (c) of the contract, which states that before commencing felling operations and within fifteen days of completion of the agreement in question, the contractor shall proceed with the Divisional Forest Officer or his agent to inspect the boundaries of the coupe as demarcated on the ground by special or other marks and shall satisfy himself that the boundaries are defined clearly and sufficiently upon the ground by the special or other marks and shall give such officer a written certificate that he is so satisfied. Thus, within 15 days of the signing of the agreement, demarcation on spot of the coupe in question had to be made. We may recall here that the agreement in question was executed on 5th November, 1968. Thus, by 20th November, 1968, demarcation of the coupe on spot had to be made. Thereafter, as per clause 1(e) of the contract, he had to fell all trees and shrubs in the coupe except reserved trees and trees, which by the condition contained in the agreement, he was required to abstain from felling and cut all creepers, whether on trees cut or not cut wherever found within the coupe. The contractor had also to fell such trees and shrubs in regular order by sub-coupes or if the Divisional Forest Officer prescribed any other method in writing by such other method. Condition 1(f) provided that immediately on felling trees, the contractor had to clear away the branches which might fall upon or might be encumbering stool, coppice-shoot or seeding and should keep all stools, coppice-shoot and seeding, clear or branches and other felled of fallen material. Thereafter is found condition 1(g) in the contract which provided that the contractor should remove from the coupe not later than March 15, 1969, all the material to which he was entitled and should stamp all timber pieces with his private property mark before they left the coupe. Under condition 1(h), it is provided that the contractor should bring all the timber, firewood and other things which he was entitled to remove from the coupe to a forest depot (the site to which would be fixed and pointed out to him by the Divisional Forest Officer) in order that the same might be measured, counted, registered and branded, if such was deemed by the Divisional Forest Officer to be necessary and should, if so, required by the Divisional Forest Officer, stack and arrange them there for that purpose in the manner prescribed by him. In condition 1(i), it was provided that the contractor should on or before 11th March, 1969, or such later date as the Divisional Forest Officer might by order in writing at his absolute discretion fix in this behalf, remove from the depot or if no depot was fixed under clause I(h), remove from the coupe within the period specified in clause I(g) all his timber, firewood and other things under passes duly filled in all quantities and sums therein specified being stated in words as in figures and in accordance with the schedule of standard classification to be obtained from the Divisional Forest Officer. In para. II of the agreement, it was provided that the contractor, his servants and agents were to abstain from the following acts and cl. (b) thereof prohibits from commencing any felling operations before cl. I(c) had been complied with and from continuing the same after the day of 15th March, 1969. We have already referred to cl. I(c) earlier which gave 15 days time for demarcation, that is, by 20th November, 1968, felling operations could begin and they had to end latest by 15th March, 1969, as provided by para. II (b) of the agreement. Thus, the starting point as well as ending of the work of the contract in question are clearly specified by the agreement. It is further provided by the agreement in question that the contractor had to perform certain conditions as mentioned in the agreement. Various conditions are enumerated. The relevant conditions for our purpose are conditions Nos. (e) and (g). Condition (e) provides that any material remaining within the coupe after the day on which, by the conditions hereinbefore contained, the removal thereof is required to be completed, shall be the property of Government and may be removed from the coupe at the expenses of the contractor in such manner as the Divisional Forest Officer shall decide. Condition (g) provides that any timber, firewood or other things remaining at the depot as aforesaid or anywhere within the limits of the forest, after the day on which by the conditions hereinbefore contained the removal thereof is required to be completed shall be the property of the Government. As per para. 4 of the agreement, the rights conferred on the contractor by the agreement have been enumerated. The said para. provides that the contractor shall have the privilege of removing from the coupe for his own use, advantage and profit, timber firewood and other things specified in item (a) of the schedule to the agreement. The contractor shall also have the privilege of manufacturing charcoal, within the coupe and of removing the same therefrom for his own use, advantage and profit. The aforesaid are the material terms of the agreement. Thereafter follows the Schedule to which we have already made a reference earlier. After the Schedule, are found certain accompaniments to the agreement in question and those accompaniments consist of various slips attached to the agreement. Slip No. 1 is material for our purpose and hence we reproduce the same in extenso :
'(1) The contractor shall remove the fashioned material from coupe to the fixed sale depot. But he shall be required to stack these materials in lots as instructed by the Divisional Forest Officer. The sale of the material stacked on these lots shall have to be made in the presence of the Range Forest Officer authorised by the Divisional Forest Officer for this purpose after fixing the up set price for the same. The sole material, however, shall not be removed unless about 60% of the sale price of the material to be removed is paid into the Government treasury.
(2) As per the formula fixed by the Government after deduction of permissible expenditure from the total realisation of the coupe allotted to the society, the 80% of the net realisation shall have to be paid as Government share falls short on finalisation of accounts, the society shall have to pay the same within 30 days. If the society fails to do so, compound interest at the rate of 6 1/4% shall be recovered from the society. The Conservator of Forests may, if he thinks necessary, increase this rate of interest. On failure to pay this amount with interest it shall be recoverable as per r. 83 or 82 and r. 85 as an arrear of land revenue. On finalisation of accounts if more amount is found to be deposited by the sociery, it shall be refunded to the society.
Addition or omission, if any, in the now formula on which coupes are allotted to the society are applicable to the society as per this agreement. The society shall have to pay the wages at the rates fixed by the wage board for a particular year.'
As per slip No. 6, certain additional conditions are sought to be engrafted to the main conditions of agreement. Additional condition No. 6 is material for our purpose. It provides that the contractor or his authorised agent shall remain present in the coupe till the possession of the coupe is handed over on completion of the work. He shall remain present as and when called for by the Deputy Conservator of Forests. Additional conditon No. 16 in slip No. 6 provides that the contractor shall keep the material of the following dimensions on the depot approved by the local Range Forest Officer for selling them at 40% concessional rate, i.e., at a rate of 60% of the market value of the local adivasis. He shall remove the materials remaining unsold on 15th April to the sale depot before 30th April, on obtaining permission of the Divisional Forest Officer. Thus, by 15th April, 1969, all the coupes had to be cleared by the contractor and the cut material had to be removed. Thereafter, follows slip No. 12, which is of great significance, for deciding the question raised for the revenue by Mr. Raval and hence recitlas in slip No. 12 are produced in extenso :
'The contractor shall be permitted to cut and fashion (fasten) the material in all the three sub-coupes, at a time in rehabilitation coupes. But he shall be permitted to remove the material from sub-coupe No. 2 only after completion of removal of material from sub-coupe No. 1. Similarly, he shall be permitted removal of material from sub-coupe number 3 also. The contractor shall have to give the possession of sub-coupe number 1 on 15-1-1969 of sub-coupe number 2 on 15-2-1969 and of sub-coupe number 3 on 15-3-1969 to the department. If the contractor fails to do so he shall be fined at the rate of 5% of the price shown in the agreement after 16-3-1969.
The coupe has been given to the contractor on recovery of 5% deposit of the approximate sale price of the contract. The security shall be given for the fulfilment of the agreement conditions and they shall be given in the form of Government promissory note, postal orders, cash certifcates, cash, part in cash and part in cash certificates, or national savings certificate or fixed deposit of the schedule banks or bank guarantee given in the name of the Divisional Forest Officer, Vyara.'
The aforesaid recitals in slip No. 12 show that the contractor had to perform the act of cutting and fastening the material in all the three subcoupes at a time in rehabilitation coupes. The said slip will have to be read along with slip No. 2 which provides that the coupe in question has to be divided into three sub-coupes. Permission will only be granted to the society for felling in sub-coupe if work in sub-coupe No. 1 will suffice for one week only. In the same way, the society will have to obtain the written permission of the Range Forest Officer before starting felling in sub-coupe No. 3. Similarly, the removal of the material from the coupe will have to be done sub-coupe-wise, i.e., permission for removal of the material from sub-coupes 1, 2 and 3 shall have to be obtained. The aforesaid provision of slip No. 2 when read with slip No. 12 and in the context of other relevant terms of the agreement and the slips, leave no room for doubt that the assessee had to enter upon the concerned coupes by 20th November, 1968, and to finish the entire work of cutting wood from all the three sub-coupes latest by 15th March, 1969, and if the contractor made any default in fllowing this time table the assessee would be fined at the rate of 5% of the price shown in the agreement after March 16, 1969. Thus, cutting operations had to be finished by 15th March, 1969, latest and all cut materials had to be removed to the forest sale depot as provided by slip No. 1, and he was required to stack these materials in lots as instructed by the Divisional Forest Officer. Sale of the cut material had to be made in the presence of the Range Forest Officer authorised by the Divisional Forest Officer. But there was an embargo on the removal of sold material till 60% of the sale price of the material to be removed was paid into the Government treasury. Thus, 60% payment was to be on account. Sub-para. (2) of slip No. 1 makes it clear that ultimately the liability of the assessee was to pay 80%of net realisation as Government share. It was further provided that if on finalisation of accounts, more amount is found to be deposited, it shall be refunded to the society. The aforesaid relevant recitals and terms of the agreement consisting of the main terms as superimposed by slips accompanying the agreement, conclusively shows that the coupes had to be exploited as per the contract with the Government by 15th March, 1969. That was obviously during the relevant accounting year in question. The moment material was cut and removed by the contractor and was stacked, it was to be sold under the supervision of the Range Forest Officer. 60% of the sale price of the removed material had to be paid on account before removal of the sold material and after making final accounts, balances of 20% was also to be paid to the Government being of course, subject to the deduction of permissible expenses and 80% share was to be calculated on net realisation of the sale proceeds. It, therefore, cannot be said, as contended by Mr. Raval for the revenue, that the relevant terms of the agreement do not create any incurred liability for the assessee to pay 80% on net realisation of the sale proceeds to the Government during the relevant assessment year. The liability to pay 80% of the net realisation from the sale proceeds of cut material was clearly incurred the moment the assessee acting upon the contract cut the trees standing in the coupe and removed the cut material to the sale depots. These terms of the agreement show that it was a sort of labour contract which the Government had entered into with the assessee, which was a co-operative society of labourers to exploit these coupes, the contractor, that is, the assessee-society had to pay Rs. 3,00,000 and in addition thereto, 80% of the net realisation of the sale proceeds had to be parted with in favour of the Government. Towards the share of the society, only 20% of the net realisations were earmarked. That represented their labour charges. Thus, under the scheme of this agreement, liability of the society which was of the contractor to pay 80% of the net realisation to the Government arose the moment the contract was acted upon and the coupe was exploited, and the material was cut and removed to the sale depot. Actual sale may take place later on. The liability to pay 80% of the net realisations of sale price the Government fastened on the assessee the moment the trees were cut and removed from the coupes and materials were stacked in the depot. Out of 80% also 60% on account were to be paid to the Government before removal of the goods. The rest was to be paid after the accounts were finalised. Thereafter, exact figure of 80% payable to the Government could be crystallised. But it cannot be said that liability to pay 80% of Government share did not fasten on exploitation of the forest as per the terms of the agreement. Mr. Raval for the revenue submitted that para. 2 of slip No. 1 showed that out of total realisation of the coupe allotted to the society, permissible expenditure was to be deducted and thereafter net realisation figure would be arrived at and on that basis, 80% had to be calculated and that would be Government share. Mr. Raval submitted that till that eventuality occurred, the liability remained a contingent liability and it became a fastened one or accrued liability only when net realisation was ascertained. Against the background of the entire setting of the relevant terms of the agreement to which we have referred, it is not possible for us to accept the said submission of Mr. Raval. It appears clear to us that under the terms of the contract, the moment possession of the coupe was taken by the assessee for exploitation and the moment they finished it by 15th March, 1969, the contractual liability of the assessee to carry out all the terms of the agreement became fully crystallised. Once the assessee exercised its rights and privileges under the agreement fully, all corresponding liabilities flowing from various terms of the agreement became squarely fastened on the assessee. It may be that actual computation of 80% of net realisation of sales of cut material may take place later. But it is a matter of detail. Computation may take place later on. But the liability was incurred the moment necessary labour was bestowed by the assessee in the said exploitation and materials were removed and stacked in the sale depot for the purpose of sale under the supervision of the forest officer. We, therefore, find that, as per the terms of the contract in question, the liability of the assessee to pay 80% share to Government from the net realisation of the cut material was incurred in the relevant assessment year itself. Actual computation of net realisation may take some time and may be made in any subsequent year. But when the computation is made, actual payment of 80% share as found at the foot of the account will have direct nexus with the contractual liability to pay this amount to Government which had fastened on the assessee on account of the contractual obligation which the assessee had incurred during the relevant assessment year. It is not as if that liability to pay 80% share was contingent upon the happening of an uncertain event of the sale of cut material. Computation of 80% of net realisation was deferred but the liability to pay the same was not deferred by the terms of para. 2 of slip No. 1. On the contrary, the last three sentences of para. 2 of slip No. 1. show that on finalisation of accounts, it may be possible to find out in a given case that more amount may have been paid by the assessee on account and then, the assessee would be entitled to a refund from the Government. Thus, computation of 80% of net realisation of sale proceeds is in the realm of ascertainment of actual share payable to Government. But it is not in the realm of the creation of a liability of the assessee to pay the same. Liability is incurred by the very act of exploitation pursuant to the terms of the agreement and not on account of actual calculation which may take place at a convenient time later on. Under these circumstances, it must be held that during the relevant assessment year, the assessee had become liable to pay 80% of net realisation of sale proceeds to the Government after finalisation of its accounts, which mentioned only an estimated amount of 80% for arriving at its tentative profits and, for that purpose, its trading account and profit and loss account were prepared. But it cannot be said that merely because cutcha profit or provisional profit was computed on this basis, actual payment by way of 80% share to Government cannot be taken into consideration while arriving at the real profit earned by the assessee pit of the contract in question which was fully acted upon during the assessment year. The assessee requested the ITO to consider the fact that it has been able to get the figure of actual 80% share and that figure was required to be taken into consideration while arriving at the net profit of the assessee during the relevant assessment year. The ITO refused the said request of the assessee. We find that the said refusal on the part of the ITO was quite unjustified, firstly, on account of the settled accounting practice for earlier years which the assessee had followed and which the department, year after year, had accepted. Secondly, the ITO has wrongly assumed that Rs. 1,71,119.54 was the net profit of the assessee when, in fact, it was a cutcha profit, that is subject to proper verification of account and the actual figure being worked out on the basis of the proper data available prior to finalisation of the assessment for the relevant assessment year. WE do not find that the assessee had made an unreasonable request to the ITO to permit it to substitute the actual figure of 80% share of Government from the net realisation of the sale price of the cut material in place of the earlier estimate which it had referred to and relied upon while closing its accounts for the relevant accounting year.
In this connection, it is necessary to have a look at two judgments of this court. The first judgment is in CWT v. Kantilal Manilal : 88ITR125(Guj) . A division Bench of this court had to consider the question whether the WTO was entitled to look into the actual figure of the amount of tax payable by the assessee during the relevant year when the earlier figure given by the assessee in the return underwent a change subsequently. The question of law which was considered in the aforesaid decision was :
'While determining the net wealth of an assessee for a particular assessment year, liability for income-tax, wealth-tax or gift-tax for that assessment year or any earlier assessment years is undoubtedly to be deducted as a debt owed by the assessee on the relevant valuation date, even though it is not assessed until the relevant valuation date, but how is it to be computed ?
Is it to be taken at the figure computed on the basis of the return submitted by the assessee or is it to be taken at the figure determined on assessment, where the assessment has taken place after the relevant valuation date but before the computation of net wealth in the wealth-tax assessment ?'
Answering this question in favour of the assessee, Bhagwati C.J. (as he then was), on behalf of the Division Bench, held (headnote) :
'The liability to pay income-tax, gift-tax is a debt owed by the assessee on the relevant valuation date within the meaning of section 2(m) of the Wealth-tax Act, 1957. The liability which exists in praesenti on the relevant valuation date is the liability to pay tax on total income as determined in accordance with the provisions of the Income-tax Act or tax on gift in accordance with the provisions of the Gift-tax Act or tax on net wealth determined in accordance with the provisions of the Wealth-tax Act. The liability is not ascertained on the relevant valuation date and has to be quantified. For the purpose of quantification of liability a machinery of assessment is provided by each relevant statute. The process of assessment is nothing but a process of quantification of the tax liability and nothing that is done or may be done in the process of quantification can be regarded as a contingency.'
It was further observed (headnote) :
'When an assessment is rectified because there is mistake apparent from the record what happens is that an error in quantification of the liability to tax is corrected. Where, therefore, an assessment is rectified before the completion of wealth-tax assessment, the amount of tax as rectified, which represents the correct quantification of the tax liability existing in praesenti on the relevant valuation date, should be taken into account and not the erroneously quantified tax liability or the liability in accordance with the returns submitted by the assessee. So also where assessment of liability to income-tax, wealth-tax or gift-tax is reopened and fresh assessment is made, the amount of tax as reassessed must be taken into account in the computation of net wealth. Where a reassessment has been made, the amount of tax determined on such reassessment must, therefore, be deducted in computing the net wealth of the assessee where the reassessment has taken place before the wealth-tax assessment is finally concluded.'
Thus, in the aforesaid decision, it is in terms laid down by this court that when the assessee had filed a wealth-tax return, his liability to pay income-tax was not finally crystallised and a mere estimate was made. If before finalisation of the wealth-tax assessment, actual figure of tax payable by the assessee was available, it had got to be taken into consideration. Mr. Shah submitted that in the present case also before the assessment for the relevant year was finalised by the ITO, the assessee was in a position to submit a certificate issued by the Range Forest Officer to the assessee showing the actual 80% share of the Government payable by the assess pursuant to the contract in question. Thus, the earlier figure of estimate was required to be substituted by the actual figure of 80% share of Government on the net realisation of sale proceeds and the ITO was required to take into consideration the said actual figure of the Government share of 80% share of the Government share of 80% instead of insisting on the unreal figure of earlier estimate which, in the light of the actual figure, had no independent existence and was ipso facto substituted by the actual figure of 80% Government share.
Mr. Shah also invited our attention to the later judgment of this court in CIT v. Sayaji Mills Ltd. : 94ITR26(Guj) . The question before this court in the aforesaid decision was whether the assessees claim for development rebate was rightly disallowed by the ITO. The facts in the said case were that in the assessment of the assessee-company for the assessment years 1959-60 and 1960-61, the ITO found that the assessee would be entitled to the development rebate of certain amount in respect of certain machinery, but in the assessment order the ITO did not allow deduction of those amounts for the reason that the machinery was sold in 1961, before the end of ten years from the end of the year in which it was acquired or installed and consequently, the assessee was not entitled to the deduction by virtue of prov. (b) to s. 10(2)(vib) of the Indian I.T. Act, 1922. The ITO rejected the assessees contention that under s. 10(2)(vib) he was bound to allow the rebate in the first instance and that he could, if necessary, rectify the mistake later on under s. 35(11). This court held that the officer was justified in rejecting the claim of the assessee for development rebate. Thus, the reality of the situation has got to be kept in view by the taxing authorities.
Mr. Shah submitted that in the present case also, all that the assessee requested the ITO to do was to keep the reality of the situation in view rather than insist on the figure of the estimated 80% share of Government which in retrospect had become unreal.
Mr. Shah also invited our attention to the case in CIT v. Nagri Mills Co. Ltd. : 33ITR681(Bom) . Mr. Shah placed emphasis on the observations of the Division Bench of the Bombay High Court, speaking through Tendolkar J., as found at p. 684 of the report which read :
'We have often wondered why the income-tax authorities in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different years is different ; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53, or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953-54, should be a matter of no consequence to the department; and one should have thought that the department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the department appears to delight in raising points of this character which do not affect the taxability of the assessee or the tax that the department is likely to collect from him whether in one year or the other.'
Mr. Shah invited our attention to the aforesaid observations in the context of the fact that in the present case also, the liability to pay tax was not going to be seriously affected one way or the other. Even the Tribnunal has noted that if actual figure of 80% share taken by way of Government share is substituted for the estimate for the assessment year in question, profit for that year would come down to that extent and for the succeeding year, wherein in fact the material was sold, profit to that extent would mount up. Thus, in the view of the Tribunal, it would result in artificially reducing the profit for the year in question and inflating profit for the succeeding year. Mr. Shah submitted that thus there would be no question of the assessee escaping the provisions of tax for the amount of profit for all time to come. It was merely a result of adopting and following a given system of account that necessity arose to substitute the actual figure if available for the prior estimate with the result that over the years, the net effect would not at all be adverse to the revenue. It is in this context and especially in the light of the observations of the Tribunal in paras. 7 and 8 of the judgment that Mr. Shah submitted that this was really an academic fight or a storm in a tea-cup. The Tribunal in para. 7 of its judgment has noted this submission of Mr. Shah for the assessee and has observed :
'Again Shri Shah stated that there was no harm to the revenue if the system was not changed; however, on the same arguments it could be urged that the assessee also would not suffer if the system was changed.'
Thus, it was merely an academic figure as submitted by Mr. Shah and it is in this context that Mr. Shah heavily relied upon the aforesaid observations of Tendolkar J. in Nagri Mills case : 33ITR681(Bom) .
Mr. Raval, the learned advocate for the revenue, in his turn, has drawn our attention to certain Supreme Court judgments to which we may now turn. In Calcutta Co. Ltd. v. CIT : 37ITR1(SC) , the Supreme Court had an occasion to consider the question regarding accrual of liability in the context of ss. 10(1), (2)(xv) and 13 of the Indian I.T. Act, 1922. In the case before the Supreme Court, the assessee had bought lands and sold them in plots fit for building purposes undertaking to develop them by laying out roads, providing a drainage system and installing lights, etc. When the plots were sold the purchaser paid only a portion of the purchase price and undertook to pay the balance in instalments. The assessee in its turn undertook to carry out the developments within six months but time was not of the essence of the contract. In the relevant accounting year, the appellant actually received in cash only a sum of Rs. 39,392 towards sale price of lands, but in accordance with the mercantile system of accounting adopted by it, it credited in its accounts the sum of Rs. 43,692 representing the full sale price of lands. At the same time, it also debited an estimated sum of Rs. 2,809 as expenditure for the developments it has undertaken to carry out, even though no part of that amount was actually spent. The department disallowed the expenditure. The question was whether that expenditure was allowable to the assessee. The Supreme Court, while holding in favour of the assessee, held (headnote) :
'The undertaking to carry out the developments within six months from the dates of the deeds of sale (which, in view of the fact that time was not of the essence of the contract, meant a reasonable time) was unconditional, the appellant binding itself absolutely to carry out the same. That undertaking imported a liability on the appellant which accrued on the dates of the deeds of sale, though 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 be deducted from the profits and gains of the business, and the amount to be expended could be debited in accounts maintained in the mercantile system of accounting before it was actually disbursed. The difficulty in the estimation thereof did not convert the accrued liability into a conditional one, because it was always open to the income-tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case.'
In the present case also, we have already found that the liability had already accrued to the assessee to pay 80% of the net profits on sale to the Government pursuant to the contract entered into by the assessee with the Government and the liability accrued during the assessment year in question when the contract was fully acted upon and the coupes were fully exploited pursuant to the contract. It was not a contingent liability as Mr. Raval submitted for the revenue. Thus, the aforesaid decision of the supreme Court is really of no assistance to the revenue in the present case. On the contrary it supports the case of the assessee.
Mr. Raval then invited our attention to another judgment of the Supreme Court in Karam Chand Thapar and Bros. P. Ltd. v. CIT : 74ITR26(SC) . In that case, the appellant-company before the Supreme Court, had carried on business as managing agents, dealer in shares and stocks, stores and spare parts of machinery and acted as insurance agents and manufacturers of carbon dioxide. It also worked certain coal mines. The company obtained a prospecting licence for a colliery and after prospecting for coal sold the colliery and earned a profit. The question was whether the profit was in the nature of revenue and, therefore, liable to tax. The Supreme Court noted that the appellant sold its dey ice factory at Lahore in September, 1948, and the purchaser took over the factory on October 1, 1948, and the purchaser took over the factory on October 1,1948, but price was finally settled in December, 1949. By the sale, the company suffered a loss of Rs. 34,891 which was disallowed on the sale ground that the business of the dry ice factory was not carried on in the relevant year of account ended March 31, 1950. On these facts, the Supreme Court, held (headnote) :
'Assuming that the dry ice factory was a separate business and was not a part of the business carried on by the company, loss did not accrue or arise to the company until December, 1949, when the price was settled. The loss was suffered in the accounting period 1949-50 and was plainly allowable under section 24(1) of the Income-tax Act 1922.'
The aforesaid decision proceeded on its own facts and it was found as a fact that till the price was settled, regarding the sale of the ice factory, no loss had occurred to the assessee.
Mr. Raval also invited our attention to the decision of the Supreme Court in CIT v. Indian Mice Supply Co. P. Ltd. : 77ITR20(SC) . In that case, the assessee-company which was engaged in mice mining, was the sub-lessee of a mice mine. The lease expired on March 31, 1943; and though under the terms of the lease, the lessee had an option to renew the lease for a further period of 20 years, the lessor refused to renew it. The lessee sued the lessor for specific performance and a compromise was arrived at, to which the respondent was a party, whereby the lease was to be renewed with retrospective effect from April 1, 1943. The respondent company had to pay during the relevant previous year a sum of Rs. 42,473 being rent from April 1, 1943, to March 31, 1953, out of which the AAC allowed the sum of Rs. 2,341, being the rent for the previous year, and the question was whether the balance of Rs. 40,132 was deductible as business expenditure in computing the respondents profit. The Tribunal held that after the expiry of the lease on April 1, 1943, and the refusal of the lessor to renew it the respondent was in the position of a trespasser particularly after the dismissal of the suit for specific performance by the trial court, and until the suit was compromised in the High Court in 1953, it could not be said that the respondents liability had become ascertained. Under these circumstances, it was held that the payment of the entire sum of Rs. 42,473 represented revenue expenditure. The Tribunal and the High Court rejected the application of the Commissioner for a reference. The Supreme Court thereafter in the aforesaid decision, agreeing with the conclusions which the High Court and the Tribunal had reached, held that it was only as a result of the compromise that the respondent became entitled to remain in possession of the demised land. Its liability also became ascertained only at that point of time, and, consequently, it was rightly held as entitled to the deduction of the payment as revenue expenditure. Thus, on these facts, it was found that liability to pay rent accrued to the assessee only after compromise was arrived at before the High Court in the specific performance suit. Thus, liability to pay rent accrued and was ascertained during the relevant assessment year. It was on the basis of these facts that the aforesaid view was taken by the supreme Court.
Mr. Raval then took us through the decision of the Supreme Court in Cotton Agents Ltd. v. CIT : 40ITR135(SC) . The question before the Supreme Court in the aforesaid decision was as to when commission accrued to the managing agents. Clause 3 of the managing agency agreement provided : 'The commission shall become due to the managing agents at the end of each financial year or other period for which the accounts to the company are to be laid before the general meeting and shall be payable and paid immediately after such accounts have been passed by the terms of clause 3, it was held that even though the transaction of sale had taken place before the end of the financial year, the commission accrued or arose on the sale proceeds at the time of each transaction of sale and had become due at the end of the financial year only. Thus, it was on the peculiar terms of clause 3 of the managing agency agreement that the Supreme Court came to the aforesaid conclusion. We have already referred to the peculiar terms of the contracts in the present case and on these terms, we have already referred to the peculiar terms of the contracts in the present case and on these terms, we have come to the conclusion that liability to pay the 80% share to the Government was incurred during the relevant assessment year.
Mr. Raval then invited our attention to the decision of the Madras High Court in R. G. S. Naidu & Co. v. CIT : 53ITR559(Mad) , wherein Madras High Court, following the aforesaid decision of the Supreme Court in Cotton Agents case : 40ITR135(SC) , has taken the same view.
We were then taken to the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT : 82ITR363(SC) . In that case, the assessee company which followed the mercantile system of accounting, incurred a laibility of Rs. 1,49,776 on account of sales tax determined to be payable by the sales tax authorities on the sales made by it during the calendar year 1954, the previous year relevant to the assessment year 1955-56. The sales tax demand was raised pending the income-tax assessment year. The ITO rejected the assessees claim for deduction of that amount on the ground (i) that the assessee had contested the sales tax liability in appeals, and (ii) that it had made no provision in its books with regard to the payment of that amount. The appeals to higher authorities or courts taken by the assessee contesting its liability to pay the sales tax ultimately failed. Thereafter, the assessee approached the Supreme Court and the Supreme Court allowed the appeal and held (headnote) :
'The moment a dealer made either purchases or sales which were subject to sales tax, the obligation to pay the tax arose. Although that liability could not be enforced till quantification was effected by assessment proceedings, the liability for payment of tax was independent of the assessment. The assessee which followed the mercantile system of accounting was entitled to deduct from the profits and gains of its business liability to sales tax which arose on sales made by it during the relevant previous year.'
Thus, even on the basis of the aforesaid decision, it appears clear that computation of liability is entirely different from the question of incurring the liability. In the present case, incurring of liability did take place during the relevant assessment year as we have found on facts. Actual computation and working out of the liability may take some time and in fact, it did take some time, as the certificate was issued to the assessee later on by the Divisional Forest Officer.
Mr. Raval therefore drew our attention to the decision in CIT v. Pretty Cycle Industries . The Punjab and Haryana High court in the aforesaid decision observed that in the mercantile system of accounting, a loss is deductible at the point when it accrues and its allowance need not be postponed till it is actually paid. However, two conditions have to be satisfied. Firstly, that the loss or liability should have accrued in the relevant previous year and, secondly, it should be an ascertainable liability. If, in a given case, the liability which has accrued is not ascertainable, the loss cannot be claimed during the assessment year in which the loss or liability accrued. In the present case, we have shown the liability to pay 80 % share to the Government on the net realisation was incurred by the assessee during the relevant year when the coupes were exploited. It cannot be said to be liability which was not ascertainable. In that view of the matter, the aforesaid decision cannot be of any assistance to Mr. Raval for the revenue.
In the light of the aforesaid setted legal position and especially when viewed against the background of facts which clearly emerge on the record of this case, it appears clear that the ITO as well as the higher authorities including the Tribunal were not Justified in insisting that the actual figure of 80 % share of Government cannot be substituted for the estimated figure which the assessee had earlier resorted to while closing its accounts and preparing its trading account as well as profit and loss account. It was all tentative and if before the assessment proceedings for the relevant assessment year were over, the assessee could get hold of the actual figure of 80 % of net realisation, the ITO ought to have permitted the assessee to get this figure substituted for the earlier estimate.
As a result of the aforesaid discussion, it must be held that the reframed question which has arisen for our consideration is required to be answered in the negative, that is in favour of the assessee and against the revenue. The Commissioner will pay the costs of this reference to the assessee.