Sabyasachi Mukharji, J.
1. In this matter, as the assessee did not appear, we requested Mr. Sumit Chakrabortti, learned advocate of this court, to appear as amicus curiae and help us in answering the question.
2. He has appeared and made his submission. We express our gratitude for the assistance rendered by him.
3. This reference under Section 256(1) of the I.T. Act, 1961, poses for our consideration the following question :
'Whether, on the facts and in the circumstances of the case and on a proper construction of the agreement of sub-leases, the Appellate Tribunal was justified in holding that the estimated value of the assessee's obligations to the landlord and sub-lessees should be allowed as a deduction in computing the income of the assessee-company from the business of sub-leasing in lands ?'
4. The assessee is a private limited company. The reference relates to the assessment years 1958-59, 1959-60 and 1960-61. The assessee-company was formed on 3rd September, 1956, with the object of dealing in and letting out properties. On the 19th October, 1956, which fell within the assessment year 1957-58, viz., an assessment year prior to the relevant assessment year for our consideration, the assessee-company took on 91 years' lease a plot of land more than 7 bighas for the purpose of constructing a mansion on a portion of the land to earn rent therefrom and to sublease the other portion of the land after developing it and dividing it into plots. The assessee-company spent Rs. 67,484 on development of the land which was divided into plots and sub-leased for periods up to 90 years to various sub-lessees. From these sub-leases, the assessee-company had received what was called advance lease rent and salami during the previous years relevant to those assessment years from the various sub-lessees as follows:
Assessment yearAdvance lease rent realisedSalami realisedTotal Rs.Rs.Rs.
5. It was claimed by the assessee-company before the ITO that these amounts were capital receipts and, in any case, against these receipts the assessee-company had undertaken the liability to pay a lease rent of Rs. 9,600 per annum to the lessor and to incur expenses on providing street lights, sweepers, watchmen, maintenance of roads and common passage for the period of the sub-lease, i.e., about ninety years, and since these liabilities together with the development expenses and salami paid to the lessor exceeded the realisations even on a proportionate basis for the area of the land leased out to the total area which had been developed there was actually a loss for each of the three years. It was further contended that the advance rent was received for the entire period of the sub-lease, i.e., about 90 years and, therefore, only about 1/90th of the advance rent could be treated as an income of each year and on this basis also the rent for this year together with the premium received less the lease rent and premium paid and expenses incurred for the development and providing the amenities would result in a loss. The ITO, however, did not accept this contention and treated the entire receipts on account of the advance rent and salami less proportionate cost of land and development expenses as the assessee's income.
6. The assessee went up in appeal before the AAC. He, however, agreed with the ITO and dismissed the appeals.
7. Against these orders of the AAC, the assessee went up again before the Income-tax Appellate Tribunal. After considering the rival contentions, the Tribunal observed that the factual position was that the assessee had obtained a 91 years' leasehold right against the following consideration : (i) by making a lump sum payment of Rs. 40,000, (ii) by agreeing to pay a sum of Rs. 9,600 per year for 91 years, and (iii) by agreeing to construct a mansion on a piece of land and to develop the remaining portion of the land and to lease it out to other persons. The Tribunal also found that the entire plot of land which was about 156 cottahs was developed and after leaving substantial portions for road and the common passage, etc., the developed area was 96 cottahs only, which was divided by the assessee into 32 plots and that the assessee retained a plot of 7 cottahs for itself and sub-leased 31 plots on a total area of 89 cottahs. In the premises, the 'assessee's submission, that whatever might be the estimated cost, the same should be divided in the ratio of 89 : 96 was justified. The Tribunal noted that the assessee had sold a major portion of the aforesaid leasehold right and received in lieu thereof a certain amount. The amount received as salami was more or less the amount paid as salami or payable as lease rent and the development expenses incurred. The rent that the assessee took in one lump sum in advance was much less than the total rent the assessee was to pay to its lessor. The assessee had further taken into account amongst other facts that while it was getting a cash amount on the date of the execution of the lease it was required to pay the lease rent and to incur certain other expenses in 91 years. In any event, there being no suggestion that the transaction was collusive, the Tribunal proceeded on the basis that the assessee acted like a prudent businessman in entering into all these transactions. From this point of view, the Tribunal asked the assessee to explain the reason for entering into such transaction. It was stated on behalf of the assessee that the assessee's plan was to receive cash amount which it would invest in constructing a mansion on the plot of land retained by it and to meet its obligation towards the sub-lease and the lessor out of the rental income derived from the mansion. It was fairly stated on behalf of the assessee, according to the Tribunal, that the assessee was not really the lessor. It was also submitted that the present value of the assessee's future obligation might not be more than the rents to be paid to the lessor. There being no dispute, according to the Tribunal, between the parties about the fact that the assessee was a dealer in land and the assessee had obtained 91 years' lease of the entire plot of land as a commercial proposition that it had leased out all plots, except one, was also a matter of business proposition.
8. There was also no serious dispute before the Tribunal that the entire amount received by the assessee by way of salami or by way of advance rent from its sub-leases might be treated as a consideration for the plots of land sub-leased out. The Tribunal, therefore, found that the dispute remained about the computation of the assessee's cost of acquiring the leasehold right sold or transferred and whether the assessee was entitled to claim certain deductions from the amount received from the sub-leases for the obligation it took upon itself in the sense of maintaining road, common passages, providing electricity on common passages and to have a durwan and a sweeper, etc., to look after the entire area. The Tribunal overruled the preliminary objection about the consideration which was also not pressed before us. The Tribunal was of the view that there being no dispute regarding the nature of the transaction, viz., that it was a trading transaction and there being no dispute regarding the assessee's obligation to the lessor, and the sub-lessees, the Tribunal went on to consider the computation of the assessee's cost of acquiring the landholding rights pertaining to 89 cottahs of lands sub-leased, as already stated. The Tribunal held that whatever was the cost, it had to be distributed in the ratio of 89 : 96. The Tribunal observed that if the entire sum received by the assessee was treated as a receipt of the year and the obligations retained by the assessee in respect of their leasehold rights were ignored, the profits or losses computed would be absolutely unrealistic. Similarly, if ignoring the fact that what the assessee was paying in terms of its obligation retained was to be paid in 91 years, the sum total of the obligations was deducted out of the amount received on account of sub-leasing the result would be equally unrealistic, if not more. Therefore, having regard to the ratio of the decision, according to the Tribunal, of the Supreme Court in the case of Calcutta Co. Ltd. v. CIT : 37ITR1(SC) , the Tribunal concurred with the assessee's contention that the assessee's obligations in respect of the leasehold right sold could not be ignored and their value had to be estimated, and the Tribunal was unable to accept that the total amount payable in 91 years had to be considered as such. According to the Tribunal, it would be fair and in the interests of justice if the present day value of the assessee's 91 years' obligations to its lessor or sub-lessees paid and added to Rs. 40,000 by the assessee as a lump sum to its lessor and other expenses incurred by it on the development of the land (sic). The Tribunal also observed that the assessee conceded to this proposition. The Tribunal referred to the observations of the Supreme Court in the case of Metal Box Company of India v. Their Workmen : (1969)ILLJ785SC and also referred incidentally to the decision of the Supreme Court in the case of Indian Molasses Co. (P.) Ltd. v. CIT : 37ITR66(SC) for the justification of making an actuarial valuation. The Tribunal found that the assessee's obligation to its lessor and sub-lessees, if divided in the ratio of 89 : 96, would come to Rs. 12,000 per year. This expense was to be incurred by the assessee in 90 years. This gross amount payable by the assessee in 90 years would be Rs. 10,80,000. On an average basis, the assessee was required to pay this sum after 45 years and keeping in view the present rate then this rate of interest for this sum of Rs. 10,80,000, which was payable by the assessee after 45 years, as per Parks on Valuation, would be Rs. 17,01,036 minus Rs. 12,458. In those circumstances, according to the Tribunal, the total cost of the lands would be Rs. 40,000 plus the development expenses plus the aforesaid sum. The ITO was directed to compute the business income of the assessee on purchase and sale of lands by taking the cost of 1 cottah of land at the aforesaid sum divided by 96. Upon these, the question as indicated above has been referred to us.
9. Before we proceed further, we may observe that the ratio of the decision of the Supreme Court in the case of Calcutta Co. Ltd. v. CIT : 37ITR1(SC) , has to be understood in its proper light. There, an assessee had bought I ands and sold these in plots for building purposes undertaking to develop these 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 development within six months, but time was not of the essence of the contract. In the relevant accounting year, the assessee had actually received in cash only a sum of Rs. 29,392 towards the sale price of lands bat in accordance with the mercantile system of accounting adopted by it, it credited in its account a sum of Rs. 43,692 representing the full sale price of the lands. At the same time, it also debited an estimated sum of Rs. 24,809 as expenditure for the developments it had undertaken to carry put even though no part of that amount was actually spent. The department disallowed this expenditure. It was held by the Supreme Court that 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 and the party bound itself absolutely to carry out the same. That undertaking imposed a liability on the assessee 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 the accounts maintained in the mercantile system of accounting which was to be actually disbursed. The difficulty in the estimation thereof, did not convert an accrued liability intoa conditional one because it was always open to the ITO concerned, the Supreme Court noted, to arrive at a proper estimate and, therefore, the Supreme Court found that the sum of Rs. 24,809 represented the estimated amount which would have to be expended by the assessee in the course of carrying onits business and was incidental to the 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 Indian I.T. Act, 1922, was certainly an allowable deduction in arriving at the profits and gains of the business of the assessee, under Section 10(1) of the Act, which was then prevailing. In our opinion, though the facts of that case were entirely different, the essential point to be remembered is that if there was an accrued liability and an estimated expenditure which would be incurred in discharging the same, then the same could be deducted from the profits and gains of the business. Keeping this principle in mind, it appears to us that, as the Tribunal has mentioned that there are three obligations undertaken by the assessee, viz., (1) making a lump sum payment of Rs. 40,000, though this payment was for a lease of 91 years, the obligation to make this payment under the mercantile system arose in the year in which the sub-lease was entered into, that is to say, in the relevant assessment year 1957-58. Therefore, the accrued liability which had arisen in the year prior to the year in question, in our opinion, could not be spread over and it would not be in accordance with good accounting principle. So far as item No. 2 of the consideration, viz., the payment of Rs. 9,600 per year for 91 years is concerned, it is indisputable that this can and should be allowed. As a matter of fact, learned advocate appearing for the revenue fairly conceded that it should be so. So far as the third item is concerned, that is to say, agreeing to construct a mansion on the piece of land and to develop the remaining portion of land and lease it out to other persons for a period which was not more than the period of lease, it would depend on whether by the terms of the lease which was entered into on the 19th March, 1956, the liability had accrued for incurring that expenditure at the time of entering into the agreement or on a construction of the lease that liability accrued on the actual construction of the mansion or in the year in which the expenditure had to be incurred. If that is found as a fact, which unfortunately was not gone into by any of the parties concerned, then an estimated expenditure made on an actuarial basis can be allowed as an outgoing against the income in the year in question. Our attention was drawn to several authorities in aid of the proposition that just as an assessee is not obliged to arrange its affairs in the manner so as to attract the maximum tax liability, so also an assessee is not to get the benefit of tax liability if it arises as a consequence of law simply because it is inequitable to do so if it arranges its affairs in a particular manner. It was also emphasised on behalf of the revenue that whatever might be allowed as a good accountancy might not necessarily follow as a sound principle of law and the question whether an expenditure would be allowable or not would depend on the actual legal consequence or proposition of law. Reliance in this connection was placed on the observations of the Lord President Clyde in the case of Edward Collins & Sons Ltd. v. IRC  12 TC 773 , where the Lord President observed as follows:
'But, as it appears to me, this only serves to make it plain that what they are seeking to do is to put against the actual ascertained receipts from their business in one period a loss which is neither suffered nor incurred in that period. I know of no justification for this, either under the rules or principles of the Income Tax Acts, or in ordinary commercial accounting. We are told that the circumstances of the years in question--those of 1920 and 1921--were exceptional. I can readily believe that they were, unusually difficult years for commercial undertakings.'
10. Similarly, our attention was drawn to the observations of Lord President Clyde in the case of J.H. Young & Co. v. IRC  12 TC 827, where it was observed by the Lord President as follows :
'But it is obvious that for all practical purposes the re-arrangement made with the sellers of the yarn made no substantial change in the relations of purchaser and seller, debtor and creditor, subsisting between the appellants and them, unless indeed to the extent that part of the cash due on delivery was payable in one month and part in seven days instead of all of it being payable in one month and possibly that the appellants got a slightly extended time within which to accept delivery. Moreover, anticipated loss in a future year or period, however, inevitable it may be thought to be, is not, and cannot be, a loss on the trading of the present year, upon which it has not in fact fallen.'
11. We respectfully and fully concur with the aforesaid observations, made in the said two decisions. But the question is about the applicability of the principles in the facts and circumstances of the case. Our attention was similarly drawn to the observations of the Court of Appeal in the case of Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd. : 11ITR10(Cal) . Reliance was placed on the observations appearing at pp. 15, 16 and 17 of the I.T. Reports.
12. Our attention was drawn to a case in aid of the submission that normally in a transaction of this nature the receipts are set off against the disbursements actually made. Reliance was also placed on certain observations of the Privy Council in the case of CIT v. Basant Rai Takhat Singh  1 ITR 197, where Lord Tomlin observed as follows (p. 201):
'The question, therefore, is, whether the allowance which the High Court have considered a permissible allowance is in fact justified by the terms of Section 12. In their Lordships judgment it is not. Under Section 12, Sub-section (2), is specified what may be allowed as an ' allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains, provided that no allowance shall be made on account of any personal expenses of the assessee'. In their Lordships' view, on the true construction of that sub-section, the allowance for any expenditure incurred must be an allowance for expenditure incurred in the year in respect of which arise the income, profits and gains forming the basis of the assessment. Upon that footing, therefore, there can be no justification for deducting from the profits and gains something in respect of expenditure, whether it be regarded as capital expenditure or not, which occurred many years before.'
13. Learned advocate for the revenue emphasised, as was observed by Lord Morris in the case of B.S.C. Footwear Ltd. v. Ridgway  83 ITR 269, that the company's methods might make a considerable inroad upon the broadly accepted principle that neither expected future profits nor expected future losses were to be anticipated. But, whatever merits there might be in the company's accountancy methods for the purpose of its internal affairs, his Lordship was not prepared to accept that these findings were acceptable for income-tax purposes. Our attention was also drawn to the observations made in the case of CIT v. Eastern Spinning Mills Ltd. : 126ITR686(Cal) . But that decision was rendered on an entirely different set of facts. Similar view was expressed by the Supreme Court in the case of Kedar Nath Jute . v. CIT : 82ITR363(SC) .
14. In the view we have taken and in the light of the principles enunciated by the Supreme Court in Calcutta Company's case : 37ITR1(SC) , we would answer the question by saying that the estimated value of the assessee's liability to the landlord and sub-lessees should be allowed after a consideration of the terms of the lease, if in the years relevant for our present purposes those obligations had actually accrued in those years and could be properly estimated; and the Tribunal will reconsider the matter in the light of the observations made aforesaid. It is only to that extent that the same should be flowed. We have already held that the first item should not be allowed and so far as the other two items are concerned, as we have indicated, the revenue will consider only the third item mentioned in para. 6 of the order of the Tribunal that requires to be looked into by the Tribunal in the manner indicated above.
15. Each party will pay and bear its own costs.
Sudhindra Mohan Guha, J.