Judgement

N. H. BHAGWATI J. : This appeal with a certificate under Art. 135 of the Constitution read with S. 66A (2) of the Indian Income-tax Act raises the question as to whether the appellant was entitled to a deduction of Rs. 24,809 in the computation of its profits and gains for the assessment year 1948-49.

2. The appellant deals in land and property and carries on land developing business and in the course of the said business, 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 to be laid out, a drainage system to be provided and street lights installed, and they are to be maintained till the same are taken over by the Municipality. The whole of the development is not carried out before the land is sold, nor 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 per cent, 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 appellant, in its turn, undertakes to carry out the developments within six months from the date of the sale, but this time is not of the essence of the contract and what the appellant under- takes is to carry out the developments within a reasonable time. The undertaking is corporated in the deed of sale itself, whereas the security is given by the purchaser by means of a separate document.

3. In the accounting year relating to the assessment year 1948-49 the appellant sold a number of plots and received a portion of the sale price from the purchasers according to the scheme mentioned above. The appellant maintains its accounts in the mercantile method under which money not actually received but only treated as received on the basis that it was due and receivable is entered in the books of account on the credit side. Even though the appellant did not receive the whole of the price, viz., Rs. 43,692-11-9, it entered in the credit side of its books of account the whole of that sum representing the full sale price of the lands sold during the accounting year though only a sum of Rs. 29,392-11-9 was actually received in cash from the purchaser and the balance of Rs. 14, 300 represented the unpaid balance retained by the purchasers the payment of which was secured by creating charge on the said lands as also the interest received or receivable in the year of account under the deeds of charge. The whole of this sum of Rs. 43,692-11-9 was, however, credited in the books of account by the appellant according to the mercantile system of accounting adopted by it.

4. In so far as under the terms of the needs of sale the appellant had undertaken to carry out the developments within six months from the date of sale it estimated a Sum of Rs. 24,809 as the expenditure for the developments to be carried out in respect of the plots which had been sold during the year and debited the same in its books of account on the ground that the liability for the said sum of Rs. 24,809 had actually arisen, the appellant being bound to provide the facilities it had undertaken to do, even though no part of that amount represented any expenditure actually made during that year.

5. In the course of its assessment to income-tax for the year 1948-49, the appellant claimed a deduction of the said sum of Rs. 24,809 in the computation of the profits and gains of its business. The Income-tax Officer disallowed that claim 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 for the purpose. The Appellate Assistant Commissioner, on appeal, confirmed the disallowance by the I. T. O. on the ground that there was as yet no accrued l