SARJOO PROSAD C.J. - This is a reference under section 66(1) of the Indian Income-tax Act (Act XI of 1922 as amended) submitted by the Income-tax Appellate Tribunal (Delhi Bench). The assessee, Mewar Industries Ltd., is a public limited concern (in liquidation), having its registered office at Udaipur. The assessment years under consideration are 1950-51 and 1951-52, the previous years being the financial years 1949-50 and 1950-51. It is admitted that the previous years ended on 31st March, 1950, and 31st March, 1951, respectively. The main point for consideration in this reference is whether certain sums of money admittedly received by the assessee during the financial year aforesaid should be included in the income of the assessee for purposes of assessment.
We feel constrained to observe - and we do so with the utmost deference to the members of the Tribunal - that much of the confusion in this case appears to have arisen because of the manner in which these cases were disposed of on appeal by the Tribunal in a brief and somewhat summary order. The Tribunal was simply content to observe : 'We agree with the Appellate Assistant Commissioner that such commission accrued, and became payable, to the assessee in the two relevant accounting periods as indicated by the Appellate Assistant Commissioner and did not accrue or become payable on March 31, 1949, and March 31, 1950, respectively, as contended for by him. The reasons which the Appellate Assistant Commissioner has given in this behalf appear to us sound.' The confusion was worse confounded when in the statement of case submitted by the Tribunal to this court it further opined : 'Since the amounts under review were being included on accrual basis the occasion for finding whether or not such amounts could be included on receipt basis did not arise.'
A brief narration of the relevant facts in necessary in order to appreciate the points involved. Under a deed of lease dated 15th June, 1936, executed by the assessee company of the first part and Raj Bahadur Bansidhar Dhandania and Rai Bahadur Lok Nath Prasad Dhandania of the second, the assessee company let out all its properties and assets as mentioned in the agreement to the second party to enable them to carry on the business of manufacture and sale of sugar and molasses, etc., in the then Mewar State. In consideration thereof the second party agreed to pay to the assessee 10% of the net profits of the business. Under the terms of the agreement the lessees were also permitted to sub-let or transfer their rights to any other person, subject to the payment of the profits aforesaid to the lessor. It appears that in 1940 the interest in the lease was acquired by the Mewar Sugar Mills Ltd., which stepped into the shoes of the lessee thenceforward, and eventually in September, 1949, the Mewar Sugar Mills Ltd. purchased also the entire assets and liabilities of the assessee company. The assessee company then went into voluntary liquidation on 18th January, 1950, and a liquidator was appointed to take charge of its assets. It is common ground that in pursuance of the terms contained in the lease deed, the liquidator received on behalf of the assessee a sum of Rs. 1,08,205 on February 21, 1950, and Rs. 6,243 on April 4, 1950. It appears that the accounting periods of the lessee company also ended on 31st March every year and in view of the agreement in the lease deed the assessee company became entitled to the above sums on account of 10% of the profits of the lessee company, earned during the accounting periods ending on 31st March, 1949, and 31st March, 1950, respectively. They were accordingly credited in the books of the lessee in favour of the assessee and interest commenced to run on those amounts with effect from the 1st of April following. It is also useful to state here that the assessee, before it went into liquidation, had been closing its accounts on the 30th June, each year, yet the above amounts were not mentioned in its books of accounts as having accrued or become payable to the assessee during the relevant accounting periods ending on June, 1949, and 1950.
The assessee contended that since the sum of Rs. 1,08,205 accrued or arose to the assessee during the previous year ending on 31st March, 1949 (relevant to the assessment year 1949-50), it was not liable to be include in the total income of the assessee for the assessment year 1950-51. In regard to the sum of Rs. 6,143 the assessees stand was that although the amount had accrued and become payable to the assessee during the previous year 1950-51, yet even that sum could not be included in its taxable income on the ground that the assessee company had discontinued its business on the 31st March, 1949, that is, before the appointed day, April 1, 1950, when the Indian Income-tax Act was extended to Part B States which included the territory of Mewar.
The Income-tax Officer did not entertain the above contentions of the assessee. He held that the assessees system of accounting was not mercantile but on the 'cash basis', since it credited the amounts received from the lessee company, not on the date when it became due, but on the date when it was actually realised or near about the date when the amount so payable to the assessee was passed and allowed to be paid by the directors of the lessee company. The above fact also appears to have been admitted before the said officer by the representative of the assessee in a recorded statement dated April 17, 1954, maintained on the filed. Therefore, in view of the above sums having been actually received by the liquidator of the assessee company during the relevant financial year, the Income-tax Officer held that they were assessable income. On appeal, the Assistant Commissioner struck a different note. He did not touch the question whether the system of accounting followed by the assessee was mercantile or cash as held by the Income-tax Officer. He took the view that the amounts received from Mewar Sugar Mills Ltd. by the assessee became payable to the assessee only after the accounts of the sugar mills as aforesaid had been closed an audited and not earlier; and since this could only happen after the 31st March, the end of each accounting year, the amounts in question accrued or became payable to the assessee during the relevant financial years and were as such liable to assessment. This view of the Assistant Commissioner was apparently based on the recitals in clause 3 of the lease deed, wherein it is provided that 10 per cent. of the net profits of the business was payable annually to the assessee, 'on the closing of the accounts and audit thereof'. The deed even recited that the assessee had the right of an independent audit, if it so desired. This view also prevailed with the Appellate Tribunal, who, as we said, in a very brief order, merely endorsed the reasons given by the Assistant Commissioner in support of the order of assessment. The Tribunal was, however, persuaded by the assessee to refer the following question of law for our consideration :
'Whether on the facts and in the circumstances of this case the amounts of Rs. 1,08,205 and Rs. 6,143 accrued or arose to the assessee in the previous years relevant for the assessment years 1950-51 and 1951-52 respectively ?'
The various orders of the departmental officers as also the lease deed form a part of the statement of the case.
The Tribunal had given no finding on the method of accounting followed by the assessee. On the contrary, in this statement of case submitted to us, it has opined that since the amounts in review were included on the 'accrual basis', the occasion for any finding whether they could be included on the 'receipt basis' did not arise. When the matter came to be heard by us at an earlier stage, we pointed out that the method of accounting affected the computation of income and consequent taxation. In a case like the one before us, it has an important bearing, which would influence our answer to the question referred. The method of accounting employed by the assessee was a question of fact and we were unable to agree with the opinion of the Tribunal that the question did not arise. Indeed, the Income-tax Officer had decided the case on the 'receipt basis', namely, that the system of accounting followed by the assessee was on the cash basis and since the amounts had been actually received during the relevant financial years they were liable to be included in the taxable income of the assessee. Accordingly, by our order dated September 13, 1960, we called for a supplementary statement of the case from the Appellate Tribunal. A supplementary statement was submitted by the Tribunal on 24th November, 1960, and copies of the relevant entries in the books of accounts of the assessee and Mewar Sugar Mills Ltd., the lessee company, form annexures to the statement. The sum and substance of the statement is that in the opinion of the Tribunal the assessees system of accounting was a 'hybrid system, it being neither mercantile nor cash'. We have, therefore, now to deal with the case on the above statements. We need hardly mention that after the submission of the supplementary statement, the case was heard afresh in the presence of the learned counsel for the parties and orders were reserved.
Mr. Bhargava, the learned counsel for the assessee, has submitted that the Assistant Commissioner of Income-tax or for the matter of that the Appellate Tribunal fell into an obvious error in holding that the amounts in question accrued or arose as income only after the accounts were passed or audited. On the findings the accounting periods of the lessee company ended on the 31st March each year and the above profits were determined as payable to the assessee for the accounting years ending on 31st March, 1949, and 31st March, 1950. The amounts were accordingly debited in the books of the lessee company and interest became payable to the assessee on the respective amounts with effect from the above dates. As such, the learned counsel argues, the income accrued or arose to the assessee at the close of the accounts of each financial year and not when the accounts were passed and audited. He also sought to make a distinction between actual accrual or arising of the income and the payment thereof; and pointed out that the mere postponement of payment on any account did not in the eye of law affect the accrual of the income itself. He has cited a number of decisions to support his contentions and also to elucidate the meaning of the expression 'accrual' or 'arising' of income as used in the income-tax law. These submissions undoubtedly carry a good deal of force. The profits and losses of a company are determined at the close of the accounts of each financial or accounting period and, therefore, the ten per cent. of the profits, which, under the terms of the lease deed was payable to the assessee, accrued on the date the accounts were closed and the assessee became entitled to the same as its income with effect from those dates. For any delay in payment of the same it also became entitled to interest. The auditing of the accounts or the passing of the order of payment to the assessee by the board of directors were merely incidental factors which did not affect the income already accrued at the close of the accounting period. As a result of audit the profits might be found to be higher or lower than what the accounts showed, but even so the profits determined on audit would relate back to the close of accounts at the end of the financial year concerned and not to the date due to avoidable or unavoidable reasons but that cannot legitimately affect the accrual of the income itself. Similarly, the board of directors while passing the accounts would have no right to withhold payment of the ten per cent. of the profits to which the assessee was entitled under the terms of the agreement and if they procrastinated or delayed payment the assessee would be entitled to recovery of interest on the amounts due, as from the dates the accounts were closed, according to the system of accounting followed by the lessee-company, which in this case was the end of March each year. This would be the obvious result if a suit for recovery of the amount due had been instituted by the assessee; and we see no reason to hold why a different criterion should be adopted for purposes of assessment. It is unnecessary for us to discuss all the various cases cited at the Bar, except the decision of the Supreme Court in Cotton Agents Ltd. v. Commissioner of Income-tax in which it was held that the commission became payable to the managing agents at the end of the financial year as provided by the agreement. We are, therefore, inclined to accept the contention of the learned counsel for the assessee in this aspect of the matter, in disagreement with the opinion expressed by the Tribunal.
If the real point in controversy between the department and the assessee, namely, the assessment of the amounts in question during the relevant previous years had been correctly and adequately brought out in the question as framed, we would have answered the question in the negative. But the frame of the question in our opinion limits the points of investigation and reflects only one aspect of the controversy, namely, the one set up by the assessee. It fails to take into account certain important facts of the case which had and important bearing on the assessability to tax of the disputed amounts. In examining any transaction one has to pay more regard to the reality and speciality of the situation rather than to the purely theoretical and doctrinaire aspect of it. Emphasis has to be laid on the business aspect of the matter as a whole when that can be done without any violence to the language of the statute. It is beyond controversy in this case that the amounts in question were received on behalf of the assessee as income during the relevant previous years. It was, therefore, for the assessee to show that in spite of the amounts having been received during those years, they were not liable to taxation. Had the assessee proved that its accounts were maintained on the mercantile basis, the amounts would have been liable to assessment, when the income accrued; but this the assessee has failed to do. It is also clear that although the books of accounts of the assessee were closed in June each year, these amounts find no mention in those accounts. The Income-tax Officer, therefore, was justified in assessing these incomes when they were actually received on behalf of the assessee. This he was entitled to do under section 4 read with section 13 of the Indian Income-tax Act. The method adopted by the Income-tax Officer was far more in consonance with the law than the illegal or doctrinaire assumptions made by the Assistant Commissioner or by the Appellate Tribunal who without questioning adopted his reasonings. We, therefore, propose to reframed the question in this form :
'Whether, on the facts and in the circumstances of this case, the amounts of Rs. 1,08,205 and Rs. 6,143 received on behalf of the assessee were liable to assessment as income during the previous years relevant for the assessment years 1950-51 and 1951-52 ?' and answer the question in the affirmative.
Another submission of the learned counsel for the assessee which requires notice is that the transaction between Mewar Sugar Mills Ltd. and the assessee company was in the nature of a joint business venture and the position of the assessee was merely that of a partner. Therefore, the profits payable to the assessee under the terms of the agreement became due to it as soon as it was entered in the books of Mewar Sugar Mills Ltd. and credited in favour of the assessee. Thus, the income so accrued to the assessee could not be assessed as income during the relevant previous years under consideration. It is submitted further that the fact that the assessee was entitled merely to 10 per cent. of the net profits could not form the premium for a lease, which is usually a fixed premium and not a fluctuating figure as in this case, which depended also upon the contingency of Mewar Sugar Mills Ltd. earning profits. Reliance has been placed by the learned counsel in support of his submissions on the topic upon the dictum of the Privy Council in Indian Radio and Cable Communications Company Ltd. v. Commissioner of Income-tax, at page 278, where the Judicial Committee observed that where the premium is fluctuating it is not rent. Attractive as the arguments are, there are two obvious difficulties in accepting them. In the first place the point that it was a case of joint business venture was never raised at any stage earlier and the departmental officers or the Appellate Tribunal were never called upon to apply their mind to this aspect of the matter. The point required the investigation of certain facts about the relationship of the assessee vis-a-vis Mewar Sugar Mills Ltd. This court is not a court of appeal and in the exercise of its advisory jurisdiction under section 66 of the Income-tax Act it cannot permit a new question of fact to be raised so as to open up a new line of inquiry and even necessitate fresh findings of fact by the Tribunal. We are unable to agree with the learned counsel for the assessee that the entitled to raise the point, since it was an integral part of his case. As suggested either in the order of the departmental officers or in that of the Appellate Tribunal. The point of law in order to merit consideration ought to specifically and properly arise on the order of the Tribunal and the order should indicate that it was urged or must have been urged before the Tribunal and the same had applied its mind to the question. We are fortified in the above view by the decision of the Supreme Court in New Jehangir Vakil Mills Ltd. v. Commissioner of Income-tax and in Bansilal v. Commissioner of Income-tax. Secondly, the arguments on the point run counter to the whole tenor of the deed of agreement dated 15th June, 1936, which governed the relationship of the assessee with Mewar Sugar Mills Ltd. Even a casual perusal of the document would show that it was a deed of lease and that the assessee had no other interest in the business excepting this ten per cent. of the net profit. At every material place the recital is that of a lease and the relationship that of lessor and lessee. That appears to be the reason why at all earlier stages the contentions of the assessee proceeded on the footing that it was a deed of lease and the premium payable was by way of use and occupation of the premises and other properties of the assessee. It is, therefore, too late now to raise any such contention before this court.
For the above reasons the reference has to be answered in the affirmative as stated earlier. Although the assessee has succeeded in showing that the reasons given by the Assistant Commissioner and the Tribunal are erroneous, in substance, the assessee has failed. We, therefore, direct that parties will bear their own costs of this reference. We regret the unavoidable delay in deciding this matter.
Reference answered in the affirmative.