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Calcutta Company Co. Ltd. Vs. Commissioner of Income-tax, (Central) CalcuttA. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Reported in[1953]24ITR454(Cal)
AppellantCalcutta Company Co. Ltd.
RespondentCommissioner of Income-tax, (Central) CalcuttA.
Cases ReferredPeter Merchant Ltd. v. Stedeford
- chakravartti, c. j.-this is a reference under section 66 (1) of the indian income-tax act, made by the calcutta bench of the appellate tribunal and involves a fundamental question of some difficulty. unfortunately, the treatment of the question by the authorities below has been of a somewhat summary character, presumably because it was raised and argued before them in a superficial form. but even if such was the case, there is hardly any justification for the tribunal failing to realise at least what facts were required to be found and stated. the statement of the case is sketchy and bare and like most of the statements we have had to deal with during this session, has hardly any appearance of a case seriously stated.the question referred arises in the following way. the assessee, the.....

CHAKRAVARTTI, C. J.-This is a reference under Section 66 (1) of the Indian Income-tax Act, made by the Calcutta Bench of the Appellate Tribunal and involves a fundamental question of some difficulty. Unfortunately, the treatment of the question by the authorities below has been of a somewhat summary character, presumably because it was raised and argued before them in a superficial form. But even if such was the case, there is hardly any justification for the Tribunal failing to realise at least what facts were required to be found and stated. The statement of the case is sketchy and bare and like most of the statements we have had to deal with during this session, has hardly any appearance of a case seriously stated.

The question referred arises in the following way. The assessee, the Calcutta Co. Ltd., deals has but recently made its appearance in this country. It buys land, develops it so as to make it fit for building purposes and sells it at a profit in plots. The developments undertaken are, in the main, that roads are laid out, a drainage system provided and street lights installed and maintained. The whole of the development is not carried out before the land is sold, nor is the whole of the sale price received in cash at the time of the sales. The procedure followed is that when a plot is sold, the purchaser pays about 25% of the purchase price in cash and undertakes to pay the balance with interest at a certain rate in ten annual instalments which he secures by creating a charge on the land purchased. The company, in its turn, undertakes to carry out the developments within six months from the date of the sale but that time, as was stated before us, is not of the essence of the contract and what the company really undertakes is to carry out the developments within a reasonable time. The undertaking is incorporated in the deed of sale itself, whereas the security is given by the purchaser by means of a separate instrument. Nothing is said in the sale deed as to the cost of the developments.

The assessment year with which the present reference is concerned is 1948-49. In the relative accounting year, the company sold a number of plots and entered in its books a sum of Rs. 43,692-11-9 as receipts on account of those sales. The whole of the sum, however, did not represent cash receipts. It was made up of portions of the sale-prices received in cash, the unpaid balances retained by the purchasers as debts and the interest received or receivable in the year of account under the deeds of charge. The statement made by the Tribunal in its appellate order that the interest amounts were brought into the accounts, as and when received, does not appear to be correct. Against the credit entry of Rs. 43,692-11-9 the assessee made a debit entry in its books of a sum of Rs. 24,809 as the estimated expenditure for the developments to be carried out in respect of the plots which had been sold during the year. No part of that amount represented any expenditure actually made. It was only an estimate of the anticipated expenditure which the company thought it would have to make in future years for carrying out the developments for which it had undertaken a liability during the year of account.

In the course of its assessment to Income-tax for the year 1948-49 the company claimed a deduction of the aforesaid amount of Rs. 24,809 as expenditure wholly laid out for the purposes of its business. The claim was disallowed by the Income-tax Officer on the ground that the expenses had not been actually incurred in the year of account and also on the ground that the estimate had not been proved to be based on a consideration of the real expenses which the company would have to incur. On appeal, the Appellate Assistant Commissioner upheld the disallowance, but did so on the ground that there was as yet no accrued liability and on the further ground that as the developments would be carried out in the future, the expenditure estimated at current price could not be allowed. On further appeal, the Tribunal held that it was by no means certain what the actual cost would be when the developments were carried out certain developments, it could bring expenses into account only when the expenses were actually incurred. As regards the receipts, the Tribunal held that the company had received the full value of the plots and the part of the price unpaid, at the time of the sales, had been advanced to each individual buyer on a mortgage of the plot sold to him.

After having failed even with the Tribunal, the assessee asked for a reference of the matter to this Court and in pursuance of that requisition, the following question has been referred :-

'Whether on the facts and circumstances stated above, the sum of RS. 24,809 can legally be allowed as an expense of the year under consideration.'

Although the question refers to the 'facts and circumstances stated above', the statement of the case contains few of the facts I have so far recited. Those had to be collected from other sources, some of them not even contained in the paper book.

Before us, Mr. Gupta, who appeared on behalf of the assessee, urged practically two contentions. The first contention was that in determining the profits of the assessee, the deduction claimed by it would have to be allowed on general principles, quite apart from whether or not it was an allowable deduction under Section 10 (2) (XV) of the Act, because, as he put it, it was wrong to think that the allowance of only those deductions which were specified in Section 10 (2) would always give the profits or that those were the only deduction which the Act intended to allow. Secondly, it was contended that the deduction claimed was allowable even under Section 10 (2) (XV) and that real profits of the assesse were to be ascertained from the method of accounting followed by it.

Both the contentions urged by Mr. Gupta raise fundamental issue, but, in my opinion, they do not arise on the facts of the present case. Mr Gupta conceded that if the whole of the sale price was to be taken to have been received by the assessee in the accounting year, it could not claim against it a deduction of any prospective expenses, but his contention was that a part of the receipt of Rs. 43,692-11-9 was not money actually received but only money treated as received on the basis that it was due and receivable. It appears from the order of the Appellate Assistant Commissioner that the cash receipts in connection with the sales made during the accounting year amounted to Rs. 29,392-11-9 so that prima facie it might seem that in the credit entry of Rs. 29,392-11-9, a sum of Rs. 14,300 represented the balance of the price due and payable, but not received. The Tribunal however held, as I have already stated, that the assessee had received the full value of the plots and then advanced a part of it to the purchasers on mortgages of the plots sold to them. Mr. Gupta contested that finding and contended that so much of the price as had not been how it could be said on the facts of the case that the balance of the consideration had not been received by the assessee and that it had been brought into the accounts only as a sum due and expected to be received. The deeds of sale which, we were told, are all in the same form and one of which was shown to us, recite quite clearly that the entire amount of the consideration has been received, though with regard to a part they say that it had been received 'by amount secured under security of even date.' That recital, coupled with the facts that interest was charged and paid on the amount, suggests the nature of the transaction to have been that the assesse received the whole of the purchase price and immediately or simultaneously lent back a portion of it to the purchaser. Unless the money had become the assesses money, was received by it and subsequently dealt with by way of making an advance thereof, the payment of interest cannot, to my mind, be explained. There might not have been any physical receipt of the money, but there was none the less an actual receipt of law. Mr. Gupta contended that there was no such receipt and relied, in support of his contention, on the decision of the House of Lords in Harrison v. John Cronk & Sons Ltd. [1937] A. C. 185. That decision was given on facts of a very peculiar nature and whenever it has been referred to afterwards, it has been sought to be explained away, as by the House of Lords itself in Absaom v. Talbot [1944] A. C. 204. , and Gardner, Mountain and DAmbrumenil Ltd. v. Inland Revenue Commissioners [1947] 1 All E. R. 650. But even taking the decision as it is, I find nothing in it to support Mr. Guptas contention. The facts were that a company was engaged in the business of selling small houses to men of moderate means to who, a building society would advance the whole amount of the purchase price at the request of the company and on a guarantee given by it, the amount being number of instalments. Between the company and the purchaser nothing remained due, but the building society, instead of handing over the entire amount of the purchase money to the company, retained a small sum as a security for the repayment by the purchaser of a part of the loan, treating such sum in the meantime as a deposit by the company and paying interest on it. The question in the case of such transactions being whether the amounts, retained by the building society as deposits, could be treated as receipts of the company as parts of the sale prices in the year of the transactions, the Court of Appeal decided that they could be, but not at their face value. In view of the contingencies to which the amounts were subject, a valuation would have to be made of their worth to the company at the time of the transactions and it was at that value that they were to be taken. The decision of the Court of Appeal was affirmed by the House of Lords, but their Lordships added a rider to the effect that if a valuation of the amounts was found impracticable, they were to be taken as receipts of the company as and when they were released by the building society. Mr. Gupta tried to make use of the rider in order to establish his contention that portions of the purchase price not paid by the purchasers in the present case at the time of the purchases, but undertaken by them to be paid in future with interest, could not be treated as actually received by the assessee in the year of account, but he overlooked the fact that even the case cited by him did not decide against receipt in the year of the transactions, but merely held that the quantum of the receipts should not be taken to be the face value of the deposit amounts. As Viscount Simon pointed out, in referring to the nil, Ltd. v. Inland Revenue Commissioners [1947] 1 All E. R. 650. the decision was 'that sums which were not received by the taxpayer in the year for which his profits were being calculated, should none the less be brought in at a valuation as trading receipts for that year.' It is true that Lord Thankerton who delivered the single speech in the House of Lords was inclined to prefer the view that the deposit amounts should be treated as received only when they were released by the building society, but he observed that he could not say that the view taken by the Court of Appeal was not right and the other learned Lords concurred. Even the view that the unpaid portions of the purchase price should, when retained by the purchasers as debts, be taken at a valuation, has not found general acceptance and it has been pointed out that Cronks case [1937] A. C. 185. was decided on very special facts in that a third party had intercepted portions of the sale price and also that none of the relevant decisions on the points was cited before the House. But assuming that whether a part of the sale price is withheld by the purchaser or withheld by a third party, the principle would be the same, as observed by Lord Russell of Killowen in Absalom v. Talbot [1944] A. C. 204 and that the distinction made by Viscount Simon and Lord Porter in the same case and by Lord Porter and by Lord Simonds in the case of Gardner, Mountain and DAmbrumenil, Ltd. [1947] 1 All E. R. 650 is not material, it is still difficult to hold that when a vendor says in the sale deed that he has received the entire amount of the sale price and takes a separate document from the purchaser in respect of a portion of it which he leaves with the purchaser as a debt, earning interest on it, he does so without receiving the amount. In the case of Absalom v. Talbot [1944] A. C. 204, the facts were that the purchasers from a speculative builder generally paid him only a small portion of the purchase price from their own funds and of the balance, a part was procured by them from a building society upon a first mortgage of the properties purchased and the remainder was advanced to them by the seller upon a second mortgage under which the debt was repayable with interest in instalments. Sometimes a promissory note was also taken. The question being whether the sums agreed to be paid to the seller over a period of years should not be assessed as receipts of the year of contract at their face value, it was held by Viscount Simon that although the position might have been different if no interest was charged, 'when the unpaid lump sum carries a commercial rate of interest until payment, it is the lump sum itself which enters into the calculation of the price.' Lord Porter was also of opinion that the changing of interest made a difference. It is true that the principal contention of the assessee was only that the amounts receivable under the second mortgage were to be taken as the receipts of the year at their actual value at the time of the sales and not at their face value and the House was called upon to deal mainly with that contention. But when Viscount simon and Lord Porter refused to accept that contention and held that the amounts should be brought into the accounts at their full face value as the receipts of the year, they could have done so only on the footing that the amounts had been received, because both conceded the principle that postponement of the payment of a debt diminished its present value. A majority of three against the dissenting two, however, held that the debts were to be taken at a valuation and they appear to have done so on the footing that the amounts of the debts had not been received; that nevertheless, being due and payable, they were to be brought into the accounts of the year on the principles of commercial accounting; but that the credits should not be of the face value of the debts but only of their present value, viz., so much as could be expected at the time to be realised in view of the uncertainty of full realisation attaching to debts payable by persons of slender means in instalments spread over several years. Though such was the view of the majority, even Lord Atkin who made the leading speech on their behalf agreed that in the case of a solvent purchaser, the unpaid portion of the sale price, if fully secured and payable with interest, could be brought into the accounts as its face value.

There is no question of face value or real value in the present case, because the assessee has itself brought the sums into the accounts of the year at their full face value. It has said in the sale deeds that it has received the price in full. It has taken a mortgage for the amounts not received in cash and has been earning interest on them. It has granted instalments, but in doing so it has not computed all the interest that will be payable, added it to the principal and then divided the total amount into ten equal parts, as appears to have been done in Absalom v. Talbot [1944] A. C. 204, but has kept the interest separate, leaving it to accrue and crediting it as and when it is paid or becomes payable. It has thus made a distinction between the amount of the principal which it has treated as receivable. The interest brought into account is always only interest due for the year. Judging by the method of accounting it has followed, it would appear that had it regarded the balance of the consideration also as only receivable, it would not have credited the entire amount in the year of the sales, but would have only credited each instalment as and when it became due whether it was actually paid or not. In view of all the circumstances of the case it must, in my opinion, be held that the amounts of sale price, not received in cash, were also received and for the purpose of earning the receipts the assessee spent, besides giving the lands, nothing more than a promise. Since the whole amount was actually received in the year of account before and without making the promised expenditure, no question of allowing a deduction of any expenditure from such receipts of the year arises.

The above is sufficient for the disposal of the reference, but in view of the sustained argument addressed to us on behalf of the assessee, I shall examine the contentions. The arguments was constructed on the basis that the receipt of the purchase price, as evidenced by the credit entry, was as to the greater part of it, only hypothetical and the conclusion pressed was that in order to ascertain the profit contained in that receipt, hypothesis would have to be balanced by hypothesis and the expenditure, not yet made but undertaken, would have to be deducted. The first contention in the argument was that this deduction was to be made on general principles because of the very nature of the receipt, quite independently of the deductions specifically authorised by Section 10 (2) of the Act and indeed, the making of the deduction belonged to a stage and under what section the deduction would be made, Mr. Gupta replied that it would be made under Section 10 (1) and at the stage of that section, because sub-section (1) with which Section 10 started, required only profits to be brought to charge. The argument is not really open to the assessee, because the deduction was claimed in the assessment only as an expense, as the question referred also states, but I shall examine it. In my view, it is hardly profitable to invoke general principles when the question is determination of income assessable under the Income-tax Act. The Act has its own principles for the determination of the taxable income which do not always accord with general principles and it is only those principles which the Income-tax authorities must apply. It is true that the charge of tax attaches only to profits are to be extracted from the receipts only by application of the rules which the Act prescribes. The scheme of the Act is to divide the receipts according to sources from which they are derived and to take from the receipts from each source what may be left of them after making certain deductions of a specified character. No other method is allowable under the Act. Mr. Gupta contended that the question before us was not one of allowing any deductions, but one of ascertaining the profits and profits, he said, could be ascertained, when to earn an amount of income a certain liability had to be incurred, only by deducting the amount of liability. That indeed is fundamental, but I am unable to agree with Mr. Gupta that the question lies at the threshold of an assessment proceeding, as he seemed to contend, and that it had to be decided before entering upon the stage of considering which of the authorised deductions had to be allowed. Section 10 (1) is not concerned with ascertainment on computation of the profits. Mr. Gupta referred to the construction put in the case of Absalom v. Talbot [1944] A. C. 204 upon Rule 3 (i) of the rules applicable to Cases I and II of Schedule D to the English Act. That rule provides that in computing the amount of profits or gains, no debts except debts of certain kinds must be deducted and with regard to that rule, Lord Atkin, whose observations may be taken as typical, remarked as follows :-

'...... the rule does not purport to state what debts are to be brought into account, but deals only with deductions which may be made from debts that were brought into account. What debts are to be brought into account and at what value, the rule does not say.'

Mr. Guptas argument was that, similarly, what receipts were to be brought into account did not belong to the province of the rules as to permissible deductions contained in Section 10 (2) of the Indian Act and that, in the present case, the prospective expenditure was to be deducted from the prospective receipts and only the balance was to be brought into account. The rules contained is Section 10 (2) were thereafter to be applied to such balance. In my opinion, the analogy of the English Act is not applicable, because the scheme of that Act is entirely different. The English Act does not contain any express allowance or enumeration of deductions but only enjoins that, in computing the profits and gains, deductions of certain kinds must not be allowed and therefore, outside the prohibited deductions, there is a scope for the application of general principles and indeed it is to those principles that the computation is left. The Indian Act, on the other hand, takes as profits the whole of the receipts, less only such outgoings and liabilities as the Act recognises and carefully defines. The provision contained in Section 10 (2) is that 'such profits and gains shall be computed after making the following deductions, namely :- 'It is clear that under the Indian Act, the profits must be determined by the method of making the statutory deductions from the receipts and any deductions from business receipts, if it is to be allowed, must be brought under one or other of the deductions mentioned in Section 10 (2). There is no scope for any preliminary deduction under general principles. Apart from that general position under the scheme of the Act, it must be remembered that the amount in question in the present case was claimed, as I have pointed out, as expenses and that being so, the assessee could not succeed unless it established that it was an allowable deduction under Section 10 (2) (XV). The first contention of Mr. Gupta must accordingly fail.

The really substantial contention of Mr. Gupta was the second one which undoubtedly involves questions of some difficulty. On the finding I have already arrived at, it does not arise, but assuming that the assessee did not receive the portion of the sale price not physically paid at the time of the sales, the contention was as follows. The assessee keeps its accounts in the mercantile method under which liabilities accrued but not actually met by payment can be brought into the books on the debit side, just as credit entries can be made in respect of amounts which have become legally due and receivable but have not yet been received. It was because of employing that method of accounting that the assessee had brought in on the credit side the unpaid balance of the sale price and, correspondingly, it had brought in on the debit side an estimated amount, representing the liability it had undertaken with respect to the lands sold. The Income-tax Officer did not hold under Section 13 that it was not possible to ascertain the profits of the assessee from the method of accounting employed by it. Mr. Gupta contended that since the assessees method of accounting was accepted by the Income-tax Officer and that method was the mercantile method and since the receipts appearing in the accounts included the unpaid balance of the sale price, it was obvious that in order to determine the profits contained in such receipts, the amount of the liability undertaken by the assessee to earn those receipts had to be deducted, although there had not yet been any actual disbursement. If national receipts were brought into the computation, so must be national expenditure, or the real profits would not emerge. It was true that Section 10 (2) (XV) used the words 'laid out or expended', but in order to give effect to the acceptance of the mercantile method of accounting, it was necessary to construe the word 'expended' as 'expandable' when the section was applied to a business of which the accounts were kept in the mercantile method. Otherwise, recognition of the mercantile method of accounting would be wholly meaningless. Mr. Gupta did not overlook the fact that it was only the profits of the accounting yeat that were being determined and, therefore, only the expenditure of that year would be admissible. But he met that difficulty by saying that the liability for the expenditure had been undertaken in the accounting year and that according to him, made it an expenditure of the year. His argument, is substance, was that if notional receiptsadmissible under the system of accounting employed by the assessee were taken into account as the receipts of a particular year, a determination of the profits of that year would be wholly unreal, if notional expenditure, admissible under the same system of accounting, was not also taken into account where, in order to earn the right to the receipts, the liability for the expenditure had to be undertaken. If, therefore, Section 10 (2) (XV) was the only provision under which a deduction on account of expenditure could be allowed, room had to be found in that section for such anticipated expenditure.

In my opinion, there are several answers to Mr. Guptas contention. In the first place, it is by no means correct to proceed on the assumption that profits for Income-tax purposes must be profits as understood in trade and commerce and as computed by the commercial method from books kept in the commercial system. Te Income-tax Act has its own notion of profits and therefore it is a mistake in method to assume that the Act taxes only what commercial men would regard as profits or what would appear to be profits to common sense and then to adjust the Act to such notions. It is true that generally speaking, 'profits and gains must be ascertained on ordinary principles of commercials trading', as Lord Halsbury said in Gresham Life Assurance Society v. Styles [1982] A. C. 309. but that is only when the Act leaves room for the application of those principles.'No deduction is to be made other than is allowed by hte Income-tax Act'-Naval Colliery Co. Ltd. v. Commissioners of Inland Revenue : The Glamorgan Coal Co. Ltd v. Commissioners of Inland Revenue (1982) 12 Tax Cas. 1017, per Lord Warrington of Clyffe-and 'the nature of liabilities which may be deducted on business and accountancy principles does not accord with the nature of liabilities deductible for Income-tax purposes', Simons Income-tax Service, Vol II, Division 17, Issue No. 11, 2/220.

In the second place, it appears to me that the clear implication of the provisions of Section 10 (2) (xv) excludes the contention of Mr. Gupta. He conceded that whatever the true profits of a transaction might be in the sound business sense, if the Legislature had said that, for tax purposes, they were to be computed in a certain manner, then the result of that mode of computation must be taken to be the amount taxable as profits. It appears that Legislature has said that future expenses would not be allowable even when accounts were kept in the meercantile method. Quite obviously, the Legislature had present to its mind the fact that, in certain cases, the accounts might be kept in the mercantile method, but the only provisions it has made to accomodate the peculiar exigencies of that method are contained in Sections 10 (2) (xi) and 10 (5). The former concerns dues or receipts and is not relevant for the present purpose. The latter provides that 'paid' means actually paid or incurred according to the method of accounting upon the basis of which profits or gains are computed under the section. The word 'paid' occurs in clauses (i), (ii), (iii), (iv), (v), (ix), (x) and (xiii) of sub-section (2) and it will appear that it has always been used with regard to accrued liabilities of an ascertained and quantified character which have fixed themselves on the assessee. Thus clause (i) deals with rent, clause (ii) with the cost of repairs under an agreement with the landlord, clause (iii) with interest on borrowed capitalm clause (iv) with insurance premia, clause (v) with the cost of current repairs, clause (ix) with revenue, rates and taxes, clause (x) with bonus and commission paid to employees and clause (xiii) with donations to institutions for scientific research. The present case does not come under any of those clauses and in order to make out its claim to the deduction, the assessee must bring it under clause (xv). There, the words are 'laid out or expended' and with regard to them, the Legislature has added no explanation such as it has thought fit to do in the case of the word 'paid', so that it would appear that in the case of expenditure, not of one of the varieties particularly specified, the Act intends to allow only expenses actually made but not also expenses incurred but not yet paid. Mr. Gupta contended, I think rightly, that the clauses where the word 'paid' occurred were not concerned with expenses of the business operations, but only with payments of an explanation of the word 'paid' and the omission of a similar explanation in the case of the words 'laid out or expended' cannot be ignored and the omission appears to be a key to the intention of the Legislature that in the case of business expenditure proper, nothing except expenses actually made in the year of account were to be allowed.

I shall, however, assume that the Legislature, having provided for the allowance of even liabilities incurred under the clauses where the word 'paid' occurred, if the method of accounting according to which the profits were computed required it, could not have had a different intention in the same way that the word 'paid' had been directed to be read. But the expenditure claimed in the present case does not appear to be allowable even on that basis. It is pertinent to enquire how far the explanation of the word 'paid' goes. As I have already said in passing, even if clauses (i) to (v), (ix), (x) and (xiii) are to be read as covering liabilities about which there is no contingency and which have accrued under settled obligations either in definite sums or in a form under which the actual cost is already ascertainable. None of the clauses is concerned with a floating liability, the measure of which depends upon the will of the assessee and the discharge of which rests only in a promise. Had the development plan been carried out in the present case in the year of account, but the engineers and labourers remained to be paid, an estimated amount of the expenditure might be a proper debit, if the analogy of the clauses where the word 'paid' has been used applies to clause (xv). Or, perhaps, if the deeds of sale had atleast said that the assessee would be bound on it a minimum expenditure of a stated sum, there might be a question whether such sum would not be allowable even before it was spent, though there appear to be reasons for holding that it would not be. But under the agreement in the present case, the expenses are entirely at large and the development work itself nearly so. I am clear in my mind that even the analogy of those clauses of Section 10 (2), where the word 'paid' has been used, would not entitle us to hold that clause (xv) can be so read as to cover the expenditure claimed in the present case.

It appears to me that the same result must follow if we examine the incidents of accounting in the mercantile method. Even under that system of accounting, the expenditure in question would not be a proper debit item. Mr. Gupta began his argument on the footing that the assessee had employed the mercantile method of accounting and referred us to the decision in Shiva Prasad Gupta v. Commissioner of Income-tax, U. P. : AIR1929All819 , for an exposition of that method. Later on, he said that the assessees method was a mixed method and pointed out that Section 13 did not mention any particular method of accounting. All that one had to see in a particular case was whether the profits could be ascertained from the method employed and if they could be; that method would be the 'compulsory basis of computation'-Income-tax Commissioner, Bombay v. Srangpur Cotton . v. Commissioner of Income-tax, Bombay : [1953]23ITR230(SC) , which explains the method in the following words :-

'That system brings into credit what is due, immediately it becomes lagally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed.'

It would seem that debit entries of undisbursed expenditure which the mercantile method of accounting authorities and which are perfected liabilities. Even the mercantile method does not seem to permit the inclusion of debits which concern merely an estimated expenditure, likely to be incurred in carrying out a promise which has been made in connection with a transaction that has brought in certain receipts. What is permitted is a debit in respect of a definite liability which has accrued and about which all preliminary proceedings causing the accrual of the liability in a concluded form have already been gone through, although the actual disbursement has not yet taken place. It may be, though I do not decide the point, that, to that extent, Section 10 (2) (xv) covers liabilities incurred, or rather accrued, though the amount may not actually have been expended and it does so on the footing that the liability being certain, the amount is as good as spent. On that basis, there would be room in the clause for debits which are proper debits under the mercantile system and effect could be given to the acceptance of the mercantile system of accounting in applying it to a case of such accounting. But the present case does not come under the clause even on such an interpretation.

In view of Mr. Guptas contention that Section 13 was not limited to any particular method or methods of accounting. I would also refer in brief to the extent to which liabilities incurred but not yet discharged can be taken into account under general principles in computing the profits of a business for tax purposes. Mr. Gupta contended that the form of business in which the assessee was engaged was a new form to which the orthodox mehtods of profit computation could not be readily applied and therefore adjustments would have to be made. That is true, but it is also true that certain things are fundamental. Whatever the form of a business, it is fundamental that nothing can be an expense of a year which does not either actually deplete the receipts or subject them to a certain depletion to an uncertained or asertainable extent by pressing on them in the form of an accrued liability of which only the payment is postponed. Mr. Gupta relied strongly on the majority decision in Absalom v. Talbot [1944] A. C. 204. That was the converse case of a receipt and was based on the perfectly intelligible principle that when a property has been sold for a stated consideration, the price has come to the seller, notwithstanding that he elects to receive a part of the price in instalments, spread over a number of years, charging a fee for the accommodation. Indeed, the minority held that in such a case, the seller received the full face value of the price and not merely, in respect of the portion allowed to be paid in instalments, its present estimated value. The case of future expenditure seems to be different even under ordinary notions, but even if it be not different, it must be possible to predicate of it the same certainty and a completion of accrual. Mr. Meyer referred us to the three decisions which are always cited in cases of this kind, Edward Collins & Sons Ltd. v. Commissioners of Inland Revenue [1925] 12 Tax Cas. 773 Whimster & co. v. Commissioners of Inland Revenue-3, and Naval Colliery Co. Ltd. v. Commissioners of Inland Revenue-4. The facts of those cases are undoubtedly very different, but it appears from the elaborate discussion of principles to be found in the judgements that except in the case of stock valuation which is a recognised exception, probable or even inevitable loss or expenditure, to be suffered or made in a future year, even though it may be in connection with a transaction entered into during the year of account, cannot be deducted in a computation of the profits, unless the liability has already accrued in the accounting year in a definite form, ony its payment being deferred.

The provisions of the Income-tax Act are sufficient to exclude the deduction of floating liabilities, but apart from those provisions, the reason behind the general principle laid down in the cases is clear. The expenditure must be an expenditure of the year of account, whether actual or constructive. In the latter case, it can be such an expenditure only if it is an accrued liability. Where the expenditure is contingent on the carrying out of a promise, as in the present case, it has not yet been incurred either in fact or in theory and does not really press on the profits of the year. If the promise is broken, the breach will only give rise to a claim for unliquidated damages, as lawrence L. J., pointed out in the Naval Colliery Co.s case-1. Such a claim, as the learned Lord Justice pointed out, is not analogous to a liability for rent or any other fixed annual payment which accrues de die in diem and has of necessity eventually to be paid to the person to whom it is payable. But a liability under a promise which is not a promise to pay a quantified debt but only a promise to do a certain thing at an unspecified expense within a reasonable time and which can be discharged or not discharged in the form undertaken at the will of the assessee or can be postponed to a future year is neither an accrued liability, nor any liability for any determinable sum, nor a liability of the year. The amount of Rs. 24,809 claimed in the present case, is a liability of that nature and it cannot, in my opinion, be allowed as a deduction from the profits of the year of account. There is no injustice at all in disallowing it, because the assessee will be able to claim, and will have to be allowed, any expenditure it makes on the development work in a future year, whenever it may make it.

Both the Appellate Tribunal and the Appellate Assistant Commissioner have treated the present case as falling within the principle of the decision in Peter Merchant Ltd. v. Stedeford-1. That was a case of a claim by a catering company to deduct the estimated expenditure for replacements of cutlery, crockery and utensils which had been supplied to it by owners of factories for whose establishments it catered and which it had undertaken to maintain by its contracts with those owners. The contracts were originally for twelve months, but were thereafter to continue on a yearly basis, if satisfactory to both parties, and in fact continued. The cutlery, crockery and utensils, necessary for the business were placed at the disposal of the catering company by the factory owners to whom they belonged and the contract provided that they were to be 'maintained in their original quantity and quality' by the caterers. Thefts and breakages occurred, but owing to the scarcity and the high price of the equipment, the company found it impossible to make all the necessary replacements. In its accounts for each year, the company charged as expenses not only the amounts actually spent on replacements but also amounts which the company would be liable to spend in making the remaining replacements, when the equipment became available. The latter amounts also were computed at current prices. In computing the profits and gains of the business in a year for purposes of Income-tax, the former amounts were allowed as deductions, but the latter were disallowed. It was held by the Court of Appeal that, under the contract, the company was not bound to make good losses in the year in which they occurred, but only to account for the equipment at the termination of the contracts and their liability being a liability to the factory owners in the event of their being unable to make all the replacements in the meantime, it was only a contingent liability. That liability might never arise, because all the necessary replacements might be made at a lower cost than the current prices would entail, as the prices might fall. It was accordingly held that since there was no accrued liability of the amount claimed, the sum entered in the accounts as the estimated expenditure for future replacements could not be allowed as a deduction.

In my opinion, the authorities below were right in holding that the principle of the decision applied to the present case. Referring to it in a recent case, I observed that the only contingency was about the amount, but on reading the judgements more closely. I find that another contingency also was held to exist. But, essentially, the position in the present case is the same. Here also, a liability to the purchasers will accrue only upon the failure of the assessee to carry out the development within a reasonable time and even if the work is carried out as promised, it will be carried out in a future year and may cost less than the amount estimated as the probable expenditure. There was thus no accrued liability in the year of account and certainly no liability of the money-value and in the sum estimated. It is instructive to notice that in Peter Merchant Co.s case [1948] 30 Tax Cas. 496. Tucker, L. J., who delivered the leading judgement, observed that the accounts of the company 'might have been prepared in accordance with the principles of sound commercial accounting without being permissible deductions before arriving at the profits in a particular year.' and the judgement shows further that in the opinion of the learned Lord Justice, it was not even sound commercial accounting to enter as a debit item the estimated expenditure, at current prices, on the discharge of an obligation which the company was not bound to discharge within the year.

To sum up, the whole of the sale price for the sales made during the year of account having been received by the assessee, no question of allowing a deduction of an estimated amount of future expenses arises. Even assuming that a portion of the sale price had not been received but was only brought into the accounts because the mercantile method of accounting was followed, the amount was still not allowable because Section 10 (2) (XV) of the Income-tax Act does not permit the deduction of future expenses and because even assuming that accrued liabilities are admissible under the section, the amount in question did not represent an accrued liability much less a liability of the particular sum and it would not be a proper debit even under the mercantile system of accounting.

The answer to the question referred must therefore be in the negative. The Commissioner of Income-tax will have the costs of the reference.

Certified for two Counsel.

LAHIRI. J. - I Agree.

Reference answered in the negative.

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