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Seth Chemical Works Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 337 of 1977
Judge
Reported in(1981)21CTR(Cal)274,[1983]140ITR507(Cal)
ActsPayment of Bonus Act, 1965; ;Income Tax Act
AppellantSeth Chemical Works
RespondentCommissioner of Income-tax
Appellant AdvocateS.R. Banerjee, Adv.
Respondent AdvocateB.K. Bagchi, Adv.
Cases ReferredState of Kerala v. Vijaya Stores
Excerpt:
- .....of the same item. thus, there was an order for deleting rs. 1,00,004 as an expenditure of the year on cash basis. 8. as stated earlier, there was a further appeal before the tribunal by the assessee. it is contended by mr. banerjee that the department did not choose either to file an appeal or to file any cross-appeal against the order passed by the aac and the claim before the income-tax appellate tribunal was whether the sum of rs. 1,19,944 should be allowed as a deduction under the i.t. act, 1961. according to mr. banerjee, while hearing the said appeal, the income-tax appellate tribunal chose to nullify the deduction of rs. 1,00,004, which had already been allowed by the aac, which in fact was not disputed before the income-tax appellate tribunal at all. now, mr. banerjee.....
Judgment:

Sudhindra Mohan Guha, J.

1. This reference is under Section 256(1) of the I.T. Act, 1961, at the instance of the assessee. The assessee had been paying the bonus under the Bonus Act to its employees on cash basis in the past. It maintained accounts on the mercantile system. But it was only in respect of bonus that it followed the cash system. In the year of assessment, being 1971-72, the assessee paid a bonus of Rs. 1,00,004 in cash to its employees. The cash payment of bonus was in respect of the liability for the assessment year 1970-71. The assessee made a provision for the payment of bonus in accordance with the provisions of the Bonus Act, 1965, for the assessment year 1971-72, and also claimed both the cash payment for the assessment year 1971-72 and the provision for the assessment year 1971-72 as a deduction. The ITO disallowed both the claims of the assessee.

2. In appeal, the AAC held that the assessee could not claim the deductions for the preceding year, and on mercantile system in the year under consideration. He was of the view that as in the past the assessee was entitled to the deduction of the bonus paid in cash for the preceding year, He, therefore, directed the ITO to allow the cash payment of bonus of Rs. 1,00,004 but sustained the disallowance of the provision for bonus of Rs. 1,19,944.

3. There was a further appeal to the Tribunal. It was submitted on behalf of the assessee that it had been paying bonus on cash system in the past and that in the year under consideration it changed the cash system into mercantile system, as it was considered advisable to follow the mercantile system also in respect of bonus. He, therefore, urged that the assessee was entitled to the deduction of the provision for bonus of the year under consideration and also for the payment of bonus in cash for the preceding year, as that amount had actually been paid, as an expenditure in the year under consideration. He further submitted that in the subsequent years the assessee consistently followed the method of mercantile system in respect of bonus. The departmental representative highlighted the reasons given by the revenue authorities in support of their orders.

4. The Tribunal considered the contentions of both the parties and observed that the assessee had followed the cash system in respect of payment of bonus up to the assessment year 1970-71. It changed the system in respect of bonus into the mercantile system and on account of that change made a provision for payment of Rs. 1,19,944 in the relevant year. It was pointed out that the AAC had not found any mala fide on the part of the assessee in changing the cash system into mercantile system. In respect of other matters the assessee had already been following the mercantile system. In the circumstances, the Tribunal was of the opinion that the assessee was entitled to claim the provision for bonus as a deduction on account of the change in the method of accounting in respect of the payment of bonus and on that account the assessee was entitled to a deduction of Rs. 1,19,944. As the assessee did not follow the cash system in the year under consideration, it was not entitled to claim the payment of bonus of Rs. 1,00,004 in the year under consideration. Thus, as the assessee was entitled to the deduction of Rs. 1,19,944 and as it was already allowed a deduction of Rs. 1,00,004, it was further entitled to a deduction of Rs. 19,940 in the year under consideration.

5. The 'Tribunal, therefore, directed the ITO to allow a further deduction of Rs. 19,940 in addition to the deduction allowed by the AAC.

6. In the above facts and circumstances, the following question was referred to this court by the Tribunal:

'Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in not allowing Rs. 1,00,004 as a permissible deduction in the assessment year 1971-72 ?'

7. Mr. S. R. Banerjee, the learned advocate for the assessee, draws our attention to para. 7 of p. 20 of the paper book, whereby the AAC disposed of the appeal preferred by the assessee, against the order passed by the ITO disallowing Rs. 1,00,004 bonus for 1969-70 and Rs. 1,19,944 bonusfor the relevant year. According to the appellant, the entire claim of the two bonuses totalling Rs. 2,19,948 should have been allowed. The AAC, however, opined that the appellant-firm could choose to follow one practice of accounting in respect of a particular expenditure. So long, the appellant had been following the mercantile system of accounting for all items, except the payment of bonus which was entered in the books of accounts on cash basis. In the opinion of the AAC, the appellant would not be allowed to have two debits in respect of the same item. Thus, there was an order for deleting Rs. 1,00,004 as an expenditure of the year on cash basis.

8. As stated earlier, there was a further appeal before the Tribunal by the assessee. It is contended by Mr. Banerjee that the Department did not choose either to file an appeal or to file any cross-appeal against the order passed by the AAC and the claim before the Income-tax Appellate Tribunal was whether the sum of Rs. 1,19,944 should be allowed as a deduction under the I.T. Act, 1961. According to Mr. Banerjee, while hearing the said appeal, the Income-tax Appellate Tribunal chose to nullify the deduction of Rs. 1,00,004, which had already been allowed by the AAC, which in fact was not disputed before the Income-tax Appellate Tribunal at all. Now, Mr. Banerjee contends that the Tribunal was not right in disallowing the sum of Rs. 1,00,004 which had already been allowed by the AAC, which was not the subject-matter of appeal.

9. It would transpire from the application filed by the assessee under Section 256(1) of the I.T. Act, 1961, that the assessee suggested two questions for reference to the High Court. Question No. 1 was to the following effect, viz. :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in disallowing the sum of Rs. 1,00,004 which had already been allowed by the Appellate Assistant Commissioner of Income-tax and was not the subject-matter for decision before it ?'

10. The Tribunal refused to refer this question, but referred question No. 2 which has already been mentioned earlier. In the above facts and circumstances of the case, Mr. Banerjee should not be allowed to reagitate the question which had already been rejected by the Tribunal. His argument should be confined or restricted to the question already referred to this court.

11. Thus, we are only to find whether the Tribunal was justified in not allowing Rs. 1,00,004 as a permissible deduction in the assessment year 1971-72.

12. Both parties cited a number of decisions as to the scope and jurisdiction of the appellate court. Reliance is placed by Mr. Banerjee on the decision of this court in the case of CIT v. Calcutta Discount Co. Ltd. : [1971]82ITR941(Cal) . The word 'thereon' in Section 33(4) of the Indian I.T. Act, 1922, was found to be restricted to the subject-matter of the appeal before the Tribunal and the subject-matter of the appeal consisted of the memorandum of grounds of appeal for the additional grounds, if any, allowed by the Tribunal and the grounds, if any, urged by or on behalf of the respondent to support the order under appeal. Next reference is made to the decision of my Lord, Sabyasachi Mukharji J., in the case of R. L. Rajgharia v. ITO : [1977]107ITR347(Cal) of the report, my Lord observes that the Tribunal has authority and jurisdiction to pass such order as the Tribunal thinks fit on the appeal before it. The amplitude of the power of the Tribunal is only circumscribed by the subject-matter of the appeal. Next reference is made to the decision of the Bombay High Court in the case of New India Life Assurance Co. Ltd. v. CIT : [1957]31ITR844(Bom) . In this case also, their Lordships of the Bombay High Court accepted the principle that the expression 'thereon' restricted the jurisdiction of the Tribunal to the subject-matter of appeal and that the subject-matter of the appeal was constituted by the grounds of appeal unless, with leave, the subject-matter was expanded or increased by adding a new ground after the leave had been given by the Tribunal. Mr. Banerjee next cites the decision in the case of Kanan Devan Hills Produce Co. Ltd. v. CWT : [1968]67ITR823(Cal) . In this case also, the expression 'thereon' has similarly been explained and the power of the Tribunal, according to their Lordships, is confined to deal with the subject-matter of the appeal and the subject-matter of the appeal is constituted by the grounds of appeal preferred by the appellant. Last of all, reference is made to the decision of the Supreme Court in the case of State of Kerala v. Vijaya Stores : [1979]116ITR15(SC) ; [1978] 42 ITR 418. The Supreme Court at p. 19 of the report enunciated the law on the point as follows :

'Apart from statute, it is elementary that if a party appeals, he is the party who comes before the Appellate Tribunal to redress a grievance, alleged by him. If the other side has any grievance, he has a right to file a cross-appeal or cross-objections. But if no such thing is done, the other party, in law, is deemed to be satisfied with the decision. He is, of course, entitled to support the judgment of the first officer on any ground open to him, but he is not entitled to raise a ground so as to work adversely to the appellant and in his favour.'

13. Mr. B. K. Bagchi, learned advocate for the Revenue draws our attention to the decision of the Supreme Court in the case of CIT v. A. Gajapathy Naidu : [1964]53ITR114(SC) . Herein it is laid down how an ITO is to proceed before passing an order of assessment. In doing so, he should ask himself, inter alia, two questions, viz., (1) what is the system ofaccountancy adopted by the assessee, and (ii) if it is a mercantile system of accountancy, subject to the deeming provision, when such right to receive the amount 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. It further lays down specifically that no power is conferred on the ITO under the Act to relate back an income that accrued or arose in a subsequent year to another earlier year on the ground that the said income arose out of an earlier transaction. As we would mention later on, this was the main ground why the Tribunal rejected the claim for earlier years for deduction of Rs. 1,00,004, viz., for the year 1970-71. The assessee followed the cash system in respect of payment of bonus up to the assessment year 1970-71. As we have mentioned earlier, it changed the system in respect of bonus to mercantile system and on account of that change made a provision for payment of Rs. 1,19,944. As the assessee did not follow the cash system in the year under consideration, according to the Tribunal, it was not entitled to claim the payment of bonus of Rs. 1,00,004 in the year under consideration. As to the power of the appellate court, Mr. Bagchi next refers to the decision of the Supreme Court in the case of CIT v. Manick Sons : [1969]74ITR1(SC) . It is observed by the Supreme Court that the power conferred by Section 33(4) of the Indian I.T. Act, 1922, is wide but it is still a judicial power which must be exercised in respect of matters that arose in the appeal and according to law. The Tribunal, in deciding the appeal before it, must deal with the question of law and fact which arose out of the order of the assessment made by the ITO and the order of the AAC. It cannot assume powers which are inconsistent with the express provisions of the Act or its scheme. Lastly, Mr. Bagchi refers to the decision of the Delhi High Court in the case of CIT v. Edward Keventer (Successors) P. Ltd. : [1980]123ITR200(Delhi) . In that case it is observed that the subject-matter of the appeal should be understood not in a narrow and unrealistic manner but should be so comprehended as to encompass the entire controversy between the parties which is sought to be got adjudicated upon by the Tribunal. It is further observed that in a case where there are inter-connected grounds of appeal and they have an impact on the same subject-matter, the scope of the appeal should be broadly considered in the correct perspective. While the appellant should not be made to suffer and be deprived of the benefit given to him by the lower authority where the other side has not appealed, equally the procedural rules should not be interpreted or applied so as to confer on the appellant a relief to which he cannot be entitled if the point decided in his favour on the same matter by the lower court are also considered as requested by the respondent. The subject-matter of appeal before the Tribunal was whether the bonus which was not allowed by the AAC should be allowed by the Tribunal. In order to decide the question it is necessary to decide whether, according to the system of accounting followed by the assessee, the assessee was entitled to any relief. Therefore, the ground of appeal was intimately connected with the question of allowing the appellant to follow a particular method of accounting. Looked at from the point of view, the real question was what system of accountancy was allowed to be followed by the assessee. And, if so, under that what are the allowances or deductions the assessee is entitled to.

14. In this view of the matter, the Tribunal while considering the allowability of deduction of the bonus paid by the assessee considered the fact that the assessee changed the system in respect of bonus into mercantile system and in pursuance of such change made a provision for payment of Rs. 1,19,944 in the year under consideration. In respect of other matters, the assessee had already been following the mercantile system. Thus in deciding the question of allowability the system of accountancy was interlinked. Under the provisions of the Act, no power is conferred on the ITO to relate back an income that accrued or arose in a subsequent year to another earlier year on the ground that the said income arose out of an earlier transaction. Naturally the Tribunal was justified in rejecting the prayer for claim of Rs. 1,00,004 which related to the year 1970-71. The claim for Rs. 1,00,004 was refused only on the ground that the assessee did not follow the cash system in the year under consideration. The system of accountancy was thus so interlinked that while allowing the claim for Rs. 1,19,944 in the year under consideration the Tribunal had no other alternative but to reject the prayer for deduction of Rs. 1,00,004. In this view of the matter, the Tribunal appears to be amply justified in allowing a further deduction of Rs. 19,940 in addition to the deduction allowed by the AAC. Thus we answer the question in the negative and in favour of the Revenue.

15. There will be no order as to costs.

Sabyasachi Mukharji, J.

16. I agree.


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