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Bikaner Gypsum Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Civil Reference (Income-tax) Nos. 12 and 13 of 1963
Judge
Reported in[1969]73ITR778(Raj); 1968()WLN242
ActsPart B States (Taxation Concesions) Order, 1950; ;Income Tax Act, 1922 - Sections 10(1), 10(2) and 13; Part B State (Taxation Concesions) (Amendment) Order, 1960
AppellantBikaner Gypsum Ltd.
RespondentCommissioner of Income-tax
Appellant Advocate D. Pal and; Dayalsingh, Advs.
Respondent Advocate S.C. Bhandari, Adv.
Cases ReferredCalcutta Co. Ltd. v. Commissioner of Income
Excerpt:
income tax act, 1922 - sections 10, 12, 13 & 66 accounting system income, profit & loss of an assessee--methed to be employed.;(b) income tax act, 1922 - section 13--'regularly employed'--meaniurg of.;the words 'regularly employed' show that there is the method of accounting adopted by an assessee and that system is being observed with a regularity in all cases of similar nature.;(c) income-tax act, 1922 - section 13--travelling expenses incurred in 1949--amount kept in suspense for two years--whether assessee's liability be decreased--whether a bad debt for the previous year be treated as also in the year of assessment.;the travelling expenses securing the contract was incurred in the year enuing 31st march, 1949. in that year, the income-tax act was not in force, and the income.....d.m. bhandari, j. 1. these two references have been made by the income-tax appellate tribunal, delhi bench 'b', under section 66(1) of the indian income-tax act, 1922 (hereinafter called the act). the assessee in these two references is messrs. bikaner gypsum ltd., bikaner (hereinafter called the assessee-company). the facts of these cases as submitted by the tribunal in their statement of the case are practically the same; therefore, we propose to decide these references by one single judgment.2. the facts giving rise to these references, briefly stated, are these:'the assessee-company is a public limited company incorporated on 7th may, 1947, under the company law prevalent in the erstwhile state ofbikaner. it carries on business of extraction of gypsum from jamsar mines in bikaner.....
Judgment:

D.M. Bhandari, J.

1. These two references have been made by the Income-tax Appellate Tribunal, Delhi Bench 'B', under Section 66(1) of the Indian Income-tax Act, 1922 (hereinafter called the Act). The assessee in these two references is Messrs. Bikaner Gypsum Ltd., Bikaner (hereinafter called the assessee-company). The facts of these cases as submitted by the Tribunal in their statement of the case are practically the same; therefore, we propose to decide these references by one single judgment.

2. The facts giving rise to these references, briefly stated, are these:

'The assessee-company is a public limited company incorporated on 7th May, 1947, under the company law prevalent in the erstwhile State ofBikaner. It carries on business of extraction of Gypsum from Jamsar Mines in Bikaner District. The company sold gypsum so extracted to various persons all over India. The United State of Rajasthan was formed on 7th April, 1949, in which the State of Bikaner was merged. On January 26, 1950, when the Constitution of India came into force, the United State of Rajasthan became a Part B State under the Constitution. The registered office of the assessee-company is situate at Bikaner. During the accounting year ending 31st March, 1949 (assessment year 1949-50), the assessee-company sold 24,291 tons of gypsum to various cement companies and local parties, the sale value of which was Rs. 3,01,479-12-0. In this year, the assessee-company started negotiations with the Government of India for persuading them to use Jamsar gypsum for the Fertilizer Project, Sindri. In this connection the assessee-company incurred expenses to the extent of Rs. 14,914-10-6. These expenses were not shown by the assessee-company in its profit and loss account for that year, but this amount was shown in the suspense account. In this very year, a sum of Rs. 7,000 was also spent for the survey of gypsum deposits. This expense was also not charged to the profit and loss account of that year and was kept in the suspense account.

3. During the next accounting year ending 31st March, 1950 (assessment year 1950-51), the assessee-company secured contracts for the supply of gypsum for the said project. This contract was entered into with the Government of India on 11th February, 1950, for supply of 1,00,000 tons of gypsum. The supply was to commence in March, 1950, and was to be completed not later than 31st October, 1950. The Government of India also agreed to supply the assessee-company some mining and transport equipment on loan basis, the freight of which had to be borne by the company. During the said year, the assessee-company incurred the following further expenses on account of securing Sindri contract and in makingsupplies in pursuance of that contract:

Travelling to Sindri ...Rs. 8,945-14-6Railway freight on rails and tipping wagons on loan from Government of India...Rs. 7,753-11-0Loading yard expenses--Earthwork near Jamsar Railway siding for stocking of gypsum...Rs. 4,199- 3-9Total ...

Rs. 20,898-13-3

4. During the said year, the assessee-company also did extensive overburden removal work in expectation of the Sindri contract and incurred an expenditure of Rs. 47,386-15-0 out of which Rs. 7,696-15-9 was charged to the profit and loss account of that year and the balance of Rs. 39,690 being the value of unworked portion of the mines was carried forward to the coming years.

5. During the said year the assessee-company sold 35,405 tons of gypsum the sale value of which was Rs. 2,89,664-6-6. This included 5,792 tons of the value of Rs. 31,133-1-0 supplied to the Fertilizer Project, Sindri, in the month of March, 1950.

6. During the next account year ending on 31st March, 1951 (assessment year 1951-52), the assessee-company sold 1,39,995 tons of gypsum, the sale value of which was Rs. 9,11,599-3-9. Out of this 1,07,497 tons of gypsum of the value of Rs. 6,33,560-13-9 was supplied to the Fertilizer Project, Sindri. This year the assessee-company claimed a sum of Rs. 91,617 as expenses for procuring and execution of the Sindri Fertilizer Project contract. Out of this amount Rs. 82,504 were the expenses which had been incurred by it in the earlier two years and which, as already mentioned, was carried forward by it in the balance-sheet partly in 'suspense account,' on account of supply to the Sindri Fertilizer Project and partly as 'overburden removal expenses'. The assessee-company claimed the entire amount of Rs. 91,617 as deduction under Section 10(1) of the Act or under the general principles of determining the profit and loss of the assessee-company or under Section 10(2)(xv) of the Act. The Tribunal disallowed this sum as it had not been spent in the accounting year ending on 31st March, 1951 (assessment year 1951-52).

7. These facts relate to question No. (1) in Civil Reference (Income-tax) No. 12/63 which is as follows:

'(1) Whether, in the facts and circumstances, the sum of Rs. 82,504 spent by the assessee-company in the earlier years as expense for procuring and execution of Sindri Fertilizer Project first contract and carried forward by it in its balance-sheet partly as 'suspense (on account of supply to Sindri Fertilizer Project)' and partly as 'overburden removal' is allowable as a deduction under the Indian Income-tax Act under Section 10(1) or under the general principles of determining the profit or loss of theassessee or Section 10(2)(xv) of the Indian Income-tax Act '

8. The further facts are that the assessee-company sold gypsum to certain parties in Part A and Part B States during the accounting year ending on 31st March, 1951 (assessment year 1951-52). In paragraph 7 of the statement of the case in Reference No. 12/63, which states the relevant facts regarding these sales, it is stated that gypsum was sold f. o. r. Jamsar, Bikaner. Contracts for the supply of gypsum to the various parties were contracts for supply of unascertained goods. Gypsum extracted by the assessee-company was appropriated towards various contracts by the mines manager at Jamsar. The railway receipts were drawn in the names of the buyers and the goods moved at the buyer's risk. The railway receipts, without any lien of the sellers on them, were then sent in the usual course of business to the buyers through post, but in the case ofsupply to the Sindri Fertilizer Project, the railway receipts were handed over to their representative posted at Jamsar. The total sales of the year amounted to Rs. 9,1-1,599 of which sale to parties residing in Part A States was of Rs. 8.73,568 and to parties residing in Part B States was of Rs. 38,031. Out of this amount, the sum of Rs, 99,272-12-0 was not actually received by the company but was shown as book debts in the books of the company. For purposes of tax concession under Sub-clause (in) of Clause (1) of paragraph 4 of the Part B States (Taxation Concessions) Order, 1950, hereinafter called the Tax Concessions Order, the Income-tax Officer allocated the profits of the assessee-company between Part A and Part B States in the proportion of bills drawn on parties of Part A and Part B States. The Income-tax Officer held that the assessee-company's sales to the extent of Rs. 8,73,568 were effected to parties in Part A States and accordingly taxed the proportionate profits at the full rate of tax without giving any concession under the Tax Concessions Order. The assessee preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner rejected the appeal. The assessee-company then preferred an appeal to the Tribunal. The Tribunal upheld the decision of the Appellate Assistant Commissioner on the ground that profits on the sales of Rs. 8,73,568 had accrued to the assessee-company in Part A State and as such the assessee-company was not entitled to any concession on these profits under the Tax Concessions Order. The following questions Nos. 2 and 3 have been referred by the Tribunal on these facts :

'(1) Whether, in the circumstances of the case, there was any material before the Tribunal on which it could assume and hold that the profit on sales of Rs. 8,73,568 accrued in Part A State ?

(2) Whether on a correct interpretation of Sub-clause (iii) of Clause (1) of para. 4 of the Part B States (Taxation Concessions) Order, 1950, the Tribunal was right in holding that the assessee-company was not entitled to concessions on profits of goods sold, the sale price of which was not received within the relevant previous year and stood as book debt, at Rs. 99,272'75 in the books of the assessee-company ?'

9. Reference No. 13/63 relates to the year ending 31st March, 1952 (assessment year 1952-53). During this year, the total sales of the assessee-company amounted to Rs. 6,75,376, of which the sales to parties in Part A States was of Rs. 6,34,888 and to the residents of Part B States was of Rs. 40,488. There appears to be some mistake in the figures, but this is not material for the purposes of answering question No. 1 of this reference which runs as follows :

'(1) Whether, in the circumstances of the case, there was any material before the Tribunal on which it could assume and hold that the profit on sales of Rs. 6,34,888 accrued in Part A State ?'

10. The assessee-company had claimed that out of the aforesaid total sale of Rs. 6,75,376 a sum of Rs. 81,686.02 was not received or deemed to have been received in the taxable territories other than Part B States as the amount stood as book debts in the books of the company. This claim was rejected by the Tribunal. These facts have given rise to question No. 2 which runs as follows:

'(2) Whether on a correct interpretation of Sub-clause (iii) of Clause (1) of Section 4 of the Part B States (Taxation Concessions) Order, 1950, the Tribunal was right in holding that the assessee-company was not entitled to concessions on the profits of goods sold, the sale price of which was not received within the relevant previous year and stood as book debt at Rs. 81,686.02 in the books of the assessee-company ?'

11. The third question that has been referred by the Tribunal in this reference runs as follows :

'(3) Whether, in the facts and circumstances of the case, the Tribunal was right in holding that legal expenses amounting to Rs. 7,453 incurred in defending the monopoly right enjoyed by the assessee-company under an instrument of assignment of lease was an inadmissible expense under Section 10(2)(xv) of the Indian Income-tax Act '

12. The facts stated in the statement of the case with regard to this question are as follows :

In the terms of the indenture of assignment of the mining lease dated 11th December, 1948, granted to the assessee-company, it had the first option of refusal for the grant of licence for other deposits of gypsum on terms which were to be mutually agreed upon. Without first offering the new deposit to the assessee-company and without first obtaining the company's refusal of the offer and without any notice to the company, the Tehsildar, Suratgarh, put certain areas under auction and obtained a bid of Rs. 5,600 per year. On this followed a litigation between the assessee-company and the State of Rajasthan. The assessee-company filed a writ petition in the Rajasthan High Court to protect the right it had acquired under the aforesaid lease deed.

13. The assessee-company claimed a sum of Rs. 7,453 in defending the monopoly right enjoyed by it under the aforesaid instrument of assignment of lease as an admissible expense under Section 10(2)(xv) of the Act. This claim was rejected by all the income-tax authorities. The Tribunal has referred question No. 3 on these facts.

14. Notice of these references were given to the parties and elaborate arguments were addressed by the learned counsel for the parties.

15. We first take up question No. (1) of reference No. 12/63. As mentioned above, the assessee-company has claimed deduction of this amount in the year ending March 31, 1951 (assessment year 1951-52), though this amountof Rs. 81,504 was not spent by the assessee-company in that year but was spent in earlier years.

16. Three-fold arguments have been addressed by learned counsel for the assessee-company for claiming this amount as an allowable deduction under the Act. We proceed to discuss the first argument. It is urged that under Section 13 of the Act, income, profits and gains have to be computed for the purpose of Sections 10 and 12 of the Act in accordance with the method of accounting regularly employed by the assessee and it is contended that the method of accounting which has been regularly employed by the assessee-company was that it charged the expenses which had been incurred by it not in the year in which such expenses were incurred but in the year in which the main part of the contract in which connection the expenses were incurred was performed. It is contended that this method of accounting gives a much more realistic picture of the profit and loss incurred by the company in a particular year and that there was nothing wrong in adopting such a method of accounting.

17. Two main systems of accounting are the cash system and the mercantile system. The method of accounting adopted by the assessee-company in the instant case is neither the cash system nor the mercantile system. It is, however, contended by learned counsel for the assessee-company that an assessee is entitled to adopt any other hybrid system of accounting of his own and his income, profits and gains are to be computed in accordance with the method of accounting regularly employed by him though such method of accounting may not be any of the recognised methods. In this connection he has relied on Gappumal Kanhiyalal v. Commissioner of Income-tax, [1961] 42 I.T.R. 416, 453, 454. After referring to a number of authorities and more particularly to the observations of Lord Russell in Commissioner of Income-tax v. Chitnavis, [1932] 2 Comp, Cas. 464, 470 their Lordships of the Allahabad High Court observed as follows:

'Therefore the general proposition is true that expenses must be claimed as incurred in the relevant accounting year. But the question still remains as to whether in view of the hybrid system of accounting maintained by this assessee he could claim to deduct expenditure incurred in previous years in the assessment year in question ...... When wecome to Section 13 of the Income-tax Act we find that income, profits and gains have to be computed for the purposes of Section 10(1) in accordance with the method of accounting regularly employed by the assessee. There is a proviso to that section which says that if no method of accounting has been regularly employed, or if the method employed is such that in the opinion of the Income-tax Officer the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made uponsuch basis and in such manner as the Income-tax Officer may determine. It seems, therefore, to follow that if profits are to be computed in accordance with the method of accounting regularly employed by the assessee, then it is to the method of accounting that one must look. And if the method of accounting regularly employed is a method whereby litigation expenditure is, so to say, kept in a suspense account and is brought into the accounts only for the purpose of being claimed as expenditure when the fate of the litigation is clear and nothing can be recovered out of the sum expended then it ought not to matter whether the expenditure which has been kept in the suspense account was actually incurred in earlier years. If according to the regularly employed method of accounting the expenditure is treated as having been incurred in the accounting year, then it should matter little whether the expenditure was actually incurred in years earlier. Of course this does not mean that an assessee would be entitled to the benefits of his accounting system if that were brought into existence for the particular purpose of backing his claim only in the particular year. But if a method of accounting is regularly employed, then the assessee ought to get the advantage and suffer the disadvantage of that system of accounting, provided the accounting system is regularly maintained, and even though it may happen that in a particular year the revenue may gain but in another year the assessee may gain.'

18. We have no hesitation in adopting these observations as enunciatingthe correct law on the point. But this very authority has made it clearthat as a general proposition expenses must be claimed in the relevantaccounting year and it is only when the assessee is keeping his accounts inaccordance with any other method which is regularly employed by it thatthe income-tax authorities must find out the income, profits and gains ofsuch assessee on the basis of the system of accounting regularly employedby him. The question therefore is : what was the method of accountingregularly employed by the assessee-company in this case Neither in thestatement of the case nor in any of the orders of the income-tax authoritiesdo we get any finding to the effect that the assessee-company was regularlyemploying the method of carrying forward the expenses incurred by it tothe subsequent years and then charging those expenses in the year inwhich the contract to which the expenses related was mainly performed.What method of accounting is regularly employed by an assessee is aquestion of fact and that question is to be determined by the income-taxauthorities. There is no finding in favour of the assessee on this point andunless there is such finding on a question of fact in favour of the assessee,we cannot hold that Section 13 of the Act is attracted so as to hold that theexpenses of Rs. 82,504 which had been incurred by the assessee-companyin the earlier years could be validly allowed as deduction under the Act,

19. Learned counsel for the assessee-company has argued that in the order of the Appellate Assistant Commissioner dated 28th January, 1959, the position of over-burden removal account is given as under.

OVER-BURDENREMOVAL EXPENSES :The position of this accountis as under :

Assessment year 1950-51Dr.

Rs.

Cr.

Rs.

Expenses incurred during theyear

47,387

Transferred to mining expenses

7,697

By balance carried over

39,690

47,387

47,387

Assessment year 1951-52Dr.

Rs.

Cr.

Rs.

Opening balance

39,690

Transferred to mining expenses

66,158

Expenses incurred during theyear

26,468

Nil

66,158

66,158

Assessment year 1952-53Dr.

Rs.

Cr.

Rs.

Expenses incurred during theyear

44,031

Transferred to mining expenses

12,027

By balance c/o

32,004

44,031

44,031

Assessment year 1953-54Dr.

Rs.

Cr.

Rs.

Open debit balance

32,004

Credit amount transferred to mining expenses

1,51,570

Expenses incurred during theyear

1,61,817

By balance c/o to next year

42,251

1,93,821

1,93,821

20. He has urged that the very nature of this account shows that the assessee-company had adopted the method of crediting part of the expenditure incurred by it in that very year and carrying forward the balance to be charged as expense in the subsequent years and this method of accounting prima facie shows that the assessee-company is entitled to get its profits assessed in accordance with this method of accounting. What Section 13 requires is that the method of accounting which is regularly employed by the assessee must be taken for computing income, profits andgains. The words 'regularly employed' show that there is a system in the method of accounting adopted by an assessee and that system is being observed with a regularity in all cases of similar nature. As we have already observed there is no finding that this system of maintaining over-burden removal account had been regularly employed by the assessee-company in the previous; years or even in the subsequent years. If this system is adopted in the solitary case of the contract of the Sindri Fertilizer Project, it cannot be said to be a method of accounting regularly employed. What we have said is also true about the travelling expenses said to have been incurred by the assessee in connection with the securing of the contract from the Government of India for supplying gypsum to the Fertilizer Project, Sindri. In this view of the matter, we cannot accept this contention raised by learned counsel for the assessee-company.

21. The second argument is that the assessee-company for the first time secured a big contract from the Government of India and the case of the assessee-company in respect of the profits and losses incurred by the company in this contract must be dealt with on the basis as if the company had undertaken a single venture. The entire expenses of this transaction which might have been incurred in the earlier years could be charged in the year in which the contract was completed. In this connection, learned counsel for the assessee-company has relied on the following observations in Gustad Dinskaw Irani v. Commissioner of Income-tax, [1957] 31 I.T.R. 92, 98 :

'In the case of a single venture the profits become assessable only when that venture comes to an end and in this case the venture came to an end in the year of account. It was only then that the profits could be ascertained and the profits subjected to tax.'

22. This case is quite distinct on facts from the case before us. The assessee in that case was a partner in several firms doing restaurant business in Bombay, He applied for a plot of land to the Bombay Municipality and his application was granted. The assessee assigned his right under the grant for a consideration. It was under these circumstances the court held that the real profits of the assessee could only be arrived at after taking into consideration the expenditure incurred in the prior year. Even though the expenditure may not strictly fall within the ambit of Section 10, yet for the purpose of assessing the real profits credit must be given to the assessee in respect of the expenditure incurred in the prior years. In this view of the matter, the annual ground rent which the assessee paid previous to the year of account was allowed. In the instant case the assessee is carrying on the business of excavating gypsum and selling it in a regular manner though it may be that he was able to secure a highly profitable contract at a particular period of time. It cannot, therefore, be said thatthe assessee-company was entering into a single venture. In our opinion, this contention of the learned counsel for the assessee-company has also no force.

23. The third argument on behalf of the assessee-company is that under Section 10(1) of the Act, tax is payable by an assessee under the head 'profits and gains of business' in respect of profits or gains of any business carried on by him and it is contended that profits and gains cannot be computed without making allowance for the expenditure incurred in connection with any particular transaction which resulted in the profit. In this connection, learned counsel for the assessee-company has placed reliance on the following observations of their Lordships of the Supreme Court in Calcutta Co. Ltd. v. Commissioner of Income-tax, [1959] 37 I.T.R. 1, 8; [1960] 1 S.C.R. 185:

'Apart, however, from the question whether Section 10(2)(xv) of the Income-tax Act would apply to the facts of the present case, the case is, in our opinion, well within the purview of Section 10(1) of the Income-tax Act. The appellant here is being assessed in respect of the profits and gains of its business and the profits and gains of the business cannot be determined unless and until the expenses or the obligations which have been incurred are set off against the receipts. The expression 'profits and gains' has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom--whether 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. '

24. The appellant in that case 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 appellant in his 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. 29,392 towards sale price of lands, but in accordance with the mercantile system of accounts 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 debited an estimated sum of Rs. 24,809 as expenditure for the developments it had undertaken to carry out, even though no part of that amount was actually spent. The department disallowed the expenditure. The Supreme Court took the view that the sum of Rs. 24,809 represented the estimated amount which had to be expended by the assessee in the course of carrying on his business and was incidental to his business and, having regard to the accepted commercial practice and trading principles, was a deduction which, if there was no specific provision for it under Section 10(2) of the Income-tax Act, was certainly an allowable deduction. The expenditure (sic) was actually incurred or the liability in respect thereof had accrued even though it may have to be discharged at some future date is an allowable expenditure. But it must be noted that the appellant in that case had adopted a well recognised method of accounting, that is, the mercantile method and the receipts appearing in the books of account included the unpaid balance of the sale price of the plot in question and the amount of liability undertaken by the appellant on those receipts was shown as an expenditure in the accounting period. It was held that such an expenditure could be deducted in the year under assessment. This is not the case before us.

25. We do not mean to say that the expenditure incurred by the assessee-company with regard to the travelling expenses of its officers and servants incurred in connection with the securing of the contract or for what has been described as an over-burden removal expenditure was not an allowable expenditure. The real question is in which year it was allowable. Learned counsel for the department has pointed out that the main part of the expenditure of Rs. 14,914 in connection with travelling for securing the contract was incurred in the year ending on 31st March, 1949, and so also Rs. 7,000 for survey was incurred in that year. In that year, the Act was not in force and the income of the assessee-company was not taxable under any law, The assessee-company could have shown this expenditure to have been incurred by it in that year and it would have got no deduction because there was no tax. The assessee-company purposely kept this amount in the suspense account and showed it as an expenditure in the subsequent two years when the Act had come into force so that its liability to pay tax may be decreased. There appears to be some force in this argument. But even if we ignore this aspect, the general rule of law is that allowance for expenditure can be made only in the year the expenses are incurred, the exceptional cases being cases falling under Section 13.

26. In Commissioner of Income-tax v. Basant Rai Takhat Singh, [1933] 1 I.T.R. 197 (P.C.) it has beenheld that under Sub-section (2) of Section 12 of the Indian Income-tax Act,1922, the allowance for any expenditure incurred must be an allowance forexpenditure incurred in the year in respect of which the income, profitsand gains forming the basis of the assessment arose. There can be nojustification for deducting from the profits and gains something in respectof expenditure, whether it be regarded as capital expenditure or not, whichoccurred years before. So also in Commissioner of Income-tax v. S. M.Chitnavis, [1932] 2 Comp. Cas. 464; 59 I.A. 290 it has been held that in assessing the yearly profits and gains ofa business for the purpose of the Act, each year is a self-contained period.

27. A debt which has become a bad debt during the year of assessment can properly be treated as a loss and deducted from the profits, but a debt which had become a bad debt before the year of assessment cannot be so treated. It is only in cases in which the method of accounting regularly adopted by a particular assessee is not the cash system but any other system that a question may arise whether the expenditure incurred by the assessee in the previous year could be charged in the assessment year, or the liability has been inclined by the assessee in the assessment year could be charged as an expenditure in that year.

28. For one reason or the other, the assessee-company did not show the expenditure incurred by it in the year in which the amount was spent nor has it been held by the Tribunal that the assessee-company had regularly adopted a method of accounting under which it could carry forward the expenditure incurred by it in a particular year to the subsequent year. Under these circumstances, we answer question No. 1 of Reference No. 12/63 in the negative.

29. Now we take up question No. 2 of Reference No. 12/63. To answer this question we have to determine whether, in the circumstances of the case, the profits on the sales effected by the assessee-company in the assessment year 1950-51 accrued in Part A State or in Part B State. The relevancy of this will be apparent by noticing some of the relevant provisions of the Tax Concessions Order. The Order was made by the Central Government in exercise of the powers conferred by Section 60A of the Indian Income-tax Act, 1922. The purpose of making this Order was that in some parts of the territories of Part B States, there was no income-tax. In other parts, income-tax was leviable but on a rate different from that prevalent in Part A State. It was thought proper that certain concessions may be granted for a limited period to those persons who had been earning profits and gains in Part B States. The relevant part of paragraph 4 of that Order runs as follows:

4. Scope of the main concessions.--(1) The provisions of paragraphs 5, 6, sub-paragraph (1) of paragraph 11, 12 and 13 of this Order shall--. ......

(iii) in the case of any other assessee who is not resident in the previous year in the taxable territories or in the taxable territories other than Part B States, to so much of income, profits and gains included in his total income as accrue or arise in any Part B State and are not deemed to accrue or arise, or are not received or deemed to be received within the meaning of Clause (a) of Sub-section (1) of Section 4 of the Act, in the taxable territories other than the Part B States.'

30. For the assessment year which are under consideration by us in both these references paragraphs 6 and 6A are applicable in the case of the assessee-company. The relevant parts of these paragraphs run as follows :

'6. Income of a previous year which does not fall under paragraph 5.--The income, profits and gains of any previous year ending after the 31st day of March, 1949, which does not fall within paragraph 5 of this Order shall be assessed under the Act for the year ending on the 31st day of March, 1951, or on the 31st day of March, 1952, as the case may be, and the tax payable thereon shall be determined as hereunder :

In respect of so much of the income, profits and gains included in the total income as accrue or arise in any State other than the States of Patiala and East Punjab States Union and Tr a vancore-Cochin-- ......' '6A. Income, profits and gains chargeable to tax in the assessment years 1952-53, 1953-54 and 1954-55.--The income, profits and gains of any previous year which is a previous year for the assessment for the year ending on the 31st day of March, 1953, 1954 and 1955, shall be charged to tax at the Indian rates of tax, provided that from the tax so computed, there shall be allowed in each year, rebate at the percentage thereof specified hereunder :

In respect of so much of the income, profits and gains as accrue or arise--

(a) in the States of Saurashtra, Madhya Bharat or Rajasthan, to any assessee, at the rate of 40 per cent., 20 per cent, and 10 per cent., respectively, for the assessment for the year ending on the 31st day of March, 1953, 1954 and 1955;..........'

31. Under paragraph 6, tax is payable only in respect of profits and gains included in the total income as accrues or arises in any Part B State other than the State of Jammu and Kashmir and the States of Patiala and East Punjab States Union and Travancore-Cochin. The Tribunal has taken the view that in Part A State in the year ending on 31st March, 1951 (assessment year 1951-52), the profits on the sale of Rs, 8,75,568 accrued to the assessee-company. The question as framed is whether there was any material before the Tribunal for taking this view.

32. The assessee-company was carrying on business of excavating gypsum and selling it to its customer. The working of excavating the gypsum was confined to an area which formed part of the erstwhile Bikaner State. The business of selling gypsum extended to parties who not only resided in Part B State but also to the residents of the Part A State. The statement of the case in paragraph 7 mentions the nature of contract and the method and manner adopted by the assessee for the performance of those contracts. It may be summarised in the following manner :

(1) Contracts for the supply of gypsum were the contracts for supply of unascertained goods.

(2) Gypsum raised by the assessee-company was appropriated towards various contracts by the mines manager of the company at Jamsar.

(3) Gypsum was sold to parties in both Part A and Part B States f.o.r. Jamsar, Bikaner.

(4) The railway receipt was drawn in the name of the buyer and the goods moved at the buyer's risk.

(5) The railway receipts without any kind of seller's lien on them were sent in the usual course of business to buyers through post, and in the case of Sindri Fertilizer Project, the railway receipts were handed over to its representative posted at Jamsar.

33. In our opinion, under these circumstances, the property in the goods passed to the buyer at Jamsar and it must, therefore, be held that the profits on such sales accrued to the assessee-company at Jamsar. In this connection we may refer to the case of Commissioner of Income-tax v. Mysore Chromite Ltd., [1955] 27 I.T.R. 128, 135; [1955] 1 S.C.R. 849:

'Placing of the goods on board the steamer named by the buyer under a f. o. b. contract clearly discharges the contractual liability of the seller as seller and the delivery to the buyer is complete and the goods may thenceforward be also at the risk of the buyer against which he may cover himself by taking out an insurance. Prima facie such delivery of the goods to the buyer and the passing of the risk in respect of the goods from the seller to the buyer are strong indications as to the passing also of the property in the goods to the buyer but they are not decisive and may be negatived, for under Section 25 the seller may yet reserve to himself the right of disposal of the goods until the fulfilment of certain conditions and thereby prevent the passing of property in the goods from him to the buyer.'

34. In that case the contracts themselves required the buyers to open a confirmed irrevocable bankers' credit for the requisite percentage of the invoice value to be available against such documents and this was taken to be a clear indication that the buyers would not be entitled to the documents, that is, the bill of lading and the provisional invoice, until payment of the requisite percentage was made upon the bill of exchange. Under the contract, it was not obliged to part with the bill of lading which was the document of title to the goods unconditionally. It may also be mentioned that bill of lading was issued in the name of the assessee in that case.

35. In the case before us, the property in the gypsum passed to the buyers at Jamsar, in any case at Jamsar railway station when the goods were loaded. The railway receipts were drawn in the name of the buyers and from Jamsar the goods moved at buyers' risk. The railway receipts were handed over unconditionally to the buyers. The assessee-company reserved no lien on the railway receipts. With the handing over of the railway receipt, the property in the gypsum passed to the buyer. Thus profits on all the sales accrued to the assessee-company at Jamsar and there was no material before the Tribunal to hold that profits to the assessee-company accrued in Part A States.

36. It has been urged by learned counsel for the department that the basis of assessment by the Appellate Assistant Commissioner was receipt of the sale price and he has contended that the matter of receipt of sale price is material for assessment for the assessment year 1951-52, in view of the provisions contained in paragraph 4(1)(iii) of the Concessions Order because paragraph 6 is not applicable unless the provisions contained in paragraph 4 are satisfied. We have scrutinised question No. 2 and it is clearly confined to seek our opinion on the question whether in the circumstances of the case the Tribunal was right in holding that the profits on the sales accrued in Part A States. We need not, therefore, make any pronouncement whether because of the provisions contained in para. 4(1)(iii) the assessee-company will not be entitled to get the concession granted in para. 6 for the assessment year 1950-51. If this point is raised before the Tribunal, it shall determine it. At present, we are not concerned with this point. Our answer to question No. 2 in Reference No. 12/63 is in the negative. In view of our answer to question No. 1, we do not think it necessary to answer question No. 3.

37. Now we take up questions raised in Reference No. 13/63. In the light of our observations in connection with question No. 2 of the Reference No. 12/63 we answer question No. 1 of this reference in the negative. We may further point out that paragraph 4 of the Taxation Concessions Order has no application to the assessment year 1952-53. It is paragraph 6A which would govern the concessions to be granted to the assessee in this year. In view of the answer given by us to question No. 1 of this reference we need not answer question No. 2 of this reference.

38. We take up question No. 3. On a careful perusal of the judgment of the Income-tax Appellate Tribunal, it appears that the litigation in connection with which the expenses were incurred was that the petitioner by filing a writ petition sought to restrain the State of Rajasthan from granting lease of certain plots of land on the basis of Clause (8) of the lease deed executed in favour of the assessee-company. Clause (8) of the lease deed runs as follows:

'8. If at any time during the term of the lease hereinbefore mentioned, any deposit of gypsum, other than that delineated in the maps and plans annexed to the schedule, be found in any part of the State the licensees shall have the first option for refusal for the grant of licence for such deposits on terms to be mutually agreed upon.'

39. The Appellate Tribunal has taken the view that, in filing the writ petition, the assessee-company was trying to defend its right to any asset which was being employed by it for the purpose of carrying on its business. But if the Government of Rajasthan was to grant the lease to the assessee under this clause, it would be a new asset. In these circumstances, expenditure incurred by the assessee was hold to be a capital expenditure. In our opinion, in undertaking the litigation the assessee-company was paving a way to secure contract of lease of other plots of land to ward off the competition and to earn further profits. Under these circumstances, we do not think that the view taken by the Tribunal was wrong. The question is answered in the affirmative.

40. As a result of our aforesaid discussion in Reference No. 12/63, the following answers are given to the questions :

Question No. 1 is answered in the negative.

Question No. 2 is answered in the negative.

Question No. 3 need not be answered.

41. In Reference No. 13/63 the questions framed by the Tribunal are answered hereunder:

Question No. 1 is answered in the negative.

Question No. 2 need not be answered.

Question No. 3 is answered in the affirmative.

Parties to bear their own costs in these references.


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