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1983 Supreme(All) 128
High Court Of Allahabad
R.M.Sahai, V.K.Mehrotra JJ.
Beni Prasad Sidh Gopal
Vs.
Commissioner Of Income-Tax
Income-tax Reference 185 of 1973, 1231 of 1976 and 108 of 1982
Decided on : May 16,1983
Advocates: R.K.Gaulati, M.Katju
Mere entitlement to income does not result in income. Hypothetical income cannot be taxed unless it materialises.
Headnote:
INCOME TAX - Accrual of income - Entitlement to interest and commission - Whether income accrued in the year in dispute - Whether mere entitlement can result in income - Whether hypothetical income can be taxed - Whether expenditure incurred on litigation and establishment can be claimed as business expenditure - Whether investment under an agreement is stock-in-trade - Whether amount spent for preserving business is allowable as business expenditure.
Fact of the Case:
The assessee, a firm registered and constituted with the object of carrying on business as sole distributors for sale of yarn and cloth manufactured by three textile mills, entered into an agreement with B.R. and Sons, their sole selling agents, on October 26, 1954. The agreement provided for the assessee to invest Rs. 25 lakhs for distribution and sale of products, manufactured by textile mills which amount was always to remain invested. On delivery of goods to the assessee on consignment basis against advance payment, the assessee was entitled to 5% interest from the date of payment till the sale of goods. Assessee was also entitled to 66 2/3 of the expenditure incurred by it on establishment, etc. And on sale of goods it was to get commission of 1 1/2% of sales. The agreement appears to have remained in operation till November, 1958, when B.R. Sons wrote a letter to the assessee complaining that it was not fulfilling its obligation and responsibility under the agreement. Similar letters were repeated on 1st and 9th December, 1958. Ultimately, the dispute was referred to arbitration in 1959. Claims and counter-claims were made. In July, 1964, an award was given directing the assessee to pay Rs. 2,50,000 in full and final settlement.
Finding of the Court:
The Tribunal found that the agreement dated October 26, 1954, between the assessee and its principals came to an end in November, 1958. Further, no credit note was issued by B.R. Sons in favour of the assessee in respect of interest and commission. The Tribunal also found that the principal source of income of the assessee in the years 1961-62 to 1965-66 was interest on money lying with the erstwhile principals. However, the Tribunal held that the income was from other sources and disallowed the assessee's claim for deduction of expenses incurred on establishment, etc., as expenditure wholly and exclusively for business purposes.
Issues: 1. Whether the amount of interest and commission which was not actually realised could be assessed as income on accrual basis? 2. Whether the expenditure incurred on litigation and establishment can be claimed as business expenditure? 3. Whether investment under an agreement is stock-in-trade? 4. Whether amount spent for preserving business is allowable as business expenditure?
Ratio Decidendi: 1. Mere entitlement to interest and commission does not result in income. Hypothetical income cannot be taxed unless it materialises. 2. Expenditure incurred on litigation and establishment can be claimed as business expenditure if it is incurred for the purpose of preserving the business. 3. Investment under an agreement can be stock-in-trade if it is made for the purpose of carrying on the business. 4. Amount spent for preserving business is allowable as business expenditure.
Final Decision: 1. Both the questions for 1959-60 and 1960-61 are answered in the negative, in favour of the assessee and against the Department by saying that the amount of interest and commission which was not actually realised could not be assessed as income on accrual basis. 2. Both the questions are answered in the negative in favour of assessee and against the Department. 3. In view of the answer to the questions referred in I.T.R. No. 108 of 1982, the question has been rendered academic and needs no answer.
R.M. Sahai, J.
1. Claim of allowability of interest and commission in 1959-60 and 1960-61 (ITR No. 108 of 1982), expenditure on litigation and establishment in 1961-62 to 1965-66 (ITR No. 185 of 1973), and bad debt in 1966-67 (ITR No. 1231 of 1976) by the assessee shall principally depend on the construction of the agreement, dated October 26, 1954, entered into between the assessee, a firm registered and constituted with the object of carrying on business as sole distributors for sale of yarn and cloth manufactured by three textile mills, and B.R. and Sons, their sole selling agents, and the award given by the Tribunal of Arbitration, Federation of Indian Chambers of Commerce and Industry, on August 27, 1964, in a dispute between them.
2. Although these references arise out of different orders passed by the Tribunal, they stem out of the same transaction, and therefore, they are being disposed of by this common order. Under an agreement of 1954, the assessee was to invest Rs. 25 lakhs for distribution and sale of products, manufactured by textile mills which amount was always to remain invested. On delivery of goods to the assessee on consignment basis against advance payment, the assessee was entitled to 5% interest from the date of payment till the sale of goods. Assessee was also entitled to 66 2/3 of the expenditure incurred by it on establishment, etc. And on sale of goods it was to get commission of 1 1/2% of sales. The agreement appears to have remained in operation till November, 1958, when B.R. Sons wrote a letter to the assessee complaining that it was not fulfilling its obligation and responsibility under the agreement. Similar letters were repeated on 1st and 9th December, 1958. Ultimately, the dispute was referred to arbitration in 1959. Claims and counter-claims were made. In July, 1964, an award was given directing the assessee to pay Rs. 2,50,000 in full and final settlement. None of these letters are on record nor were they produced by the learned standing counsel despite a specific order of this court on the application of the assessee and grant of adjournments. But as the contents are mentioned in one or the other of the references, it is sufficient for disposal of these references. In assessment year 1959-60, the assessee had debited a sum of Rs. 1,75,509'87 by way of interest to the account of M/s. B.R. Sons and B.R. Kothi in its books of head office and branches and had taken these amounts to its profit and loss accounts. Certain other amounts by way of travelling expenses, insurance and bank commissions, etc., were also shown as recoverable from M/s. B.R. Sons. Consequently, they were debited in the books of the assessee in the account of M/s. B.R. Sons. In the books of B.R. Sons Ltd., a sum of Rs. 2,88,237.77 had been provided towards establishment, brokerage, distributor's commission, interest, etc. Of this, a sum of Rs. 2,88,237.77 was due to the assessee. These various amounts had been debited and charged to the profit and loss account of the company and liability thereof was shown as "Liability for expenses". In the balance-sheet, it was noted, the figure of Rs. 12,79,362-04, includes a provision of Rs. 2,85,266.01 by the company. "Disputed". Thus from the account books of B.R. Sons it is clear that the amount shown as debited in the name of the assessee was not admitted but disputed. When the assessee filed its return for 1959-60 for the period ending June 10, 1959, it showed an income of Rs. 3,07,431, but in January, 1964, the assessee filed a revised return showing loss of Rs. 5,63,087. Along with the revised return a covering letter of January 23, 1964, was also sent to the ITO, Central Area, Kanpur, stating that as a dispute had arisen between M/s. B.R. Sons and the assessee in respect of interest, as also expenses claimed, the assessee did not have any income in the assessment year in dispute but rather had suffered huge losses. The deduction of Rs. 5,90,711 was also claimed as B.R. S
