1. The appeal is filed by the department. The several grounds contested in the departmental appeal are dealt with seriatim below.
2 to 4. [These paras are not reproduced here as they involve minor issues.] 5. Deferred payment of Annuity Policy: In connection with the application of Section 40A(5) of the Income-tax Act, 1961 ('the Act') the ITO included a sum of Rs, 42,000, premium paid by the company towards a deferred annuity policy, in favour of the managing director.
The facts of the case are that the managing director, Shri Rahul Kumar Bajaj, was entitled to commission at a particular rate in addition to his fixed salary and other items of remuneration and perquisites. By a resolution of the Board, the company resolved that the commission payable to Shri Rahul Kumar be spent by the company every year towards the purchase of a deferred annuity policy from the LIC on the life of the managing director to provide for payment of annuity to him for life and upon his death to dependents. A resolution was passed on 5-12-1972 and incorporated in the minutes. The extract from the relevant minutes is as under: The Board considered the purchase of deferred annuity policies on the life of the managing director for the amount equivalent to the commission payable to him for each financial year to provide for the payment of annuity to him. for his life and upon his death to his dependents and the following resolution was passed: RESOLVED that commission payable to the managing director, Shri Rahul Kumar Bajaj, for the financial year ending 31st March, 1973 and thereafter be expended by the company every year towards the purchase of deferred annuity policies from the Life Insurance Corporation of India, on the life of the managing director. Shri Rahul Kumar Bajaj, to provide for the payment of an annuity to him for his life and upon his death to his dependents, such payment to commence from the date of his retirement from the company (or such other date as may be mutually agreed to between the board of directors of the company and the managing director) or from the date of his death, whichever shall occur first: Provided always that no benefit shall accrue to him or to his dependents, as the case may be, nor shall the managing director or his dependents be entitled ta any benefit or have any right, lien or interest under the aforesaid policies, until the date of the first payment of the annuity.
Shri Rahul Kumar Bajaj being interested neither participated in the discussion nor voted on the said resolution nor was he counted for the purpose of quorum.
For the assessment year 1974-75, the amount payable as above was Rs. 39,000. The ITO and the Commissioner (Appeals) considered this amount as the income of the managing director and the purchase of the annuity policy following the above resolution as applicable of the income by the managing director. The Tribunal held that the single premium annuity policy was not the income of the managing director in the year the policy was taken. In so doing the Tribunal followed its earlier decisions in IT Appeal Nos. 2962 and 2963 (Bom.) of 1974-75, 2098 (Bom.) of 1974-75 and 3310 and 3311 (Bom.) of 1977-78. The Tribunal also considered the decisions in IT Appeal No. 537 (Bom.) of 1978-79 in the matter of Shri Amitabh Bachchan in coming to the above conclusion.
For the assessment year under appeal, a sum of Rs. 42,000 was payable as Commission. Pursuant to the board's resolution instead of paying the commission directly to the managing director, the assessee purchased a deferred annuity policy. When the matter came up before the Tribunal, it was felt that the prior decision of the Benches of the Tribunal referred to on this point required reconsideration in the first place and secondly, it did not relate to the employer but to the employee.
The matter, thus, was referred to a Special Bench in view of its importance.
6. The learned departmental counsel has pointed out that this was a clear case of remuneration paid in kind, apart from the alternative question of utilisation of income already accrued. Even if, therefore, the annuity policy as such is considered as not being the income of the employee--assuming for argument sake--the sum of Rs. 42,000 was clearly disallowable even if not treated as the income of the managing director. There is no dispute that the sum of Rs. 42,000 was due to the managing director on account of commission. The commission had accrued, become due and was payable to him. Paragraph 1 of the policy, according to the learned counsel, clearly indicated that the policy was taken for the benefit of the employee and on his behalf. The sum of Rs. 42,000 was clearly a debit in the company's book and the purpose of the debit is the payment on behalf of the managing director. The managing director, who is entitled to the payment, had, according to the learned counsel, shown agreement to the receipt of this amount in modification of the earlier intentions or understandings in this regard. The managing director had rendered services and was entitled to the remuneration. This clearly settled the fact that this was his income.
On the contrary, the assessee had a present liability to make the payment of commission. That liability can be discharged by payment in cash or kind or in any other manner, if possible. According to the learned counsel, here was a case of payment in kind. The Tribunal's decisions referred to dealt with cases of employees. The present is a case of the employer. Those decisions, therefore, according to the learned counsel, will have no relevance to the present case at all.
7. Alternatively it is pointed out that as far as the employee is concerned, even if it is not held as salary, the company had definitely expended the money and had made a claim for deduction of the same. What could be the purpose of this expenditure if not payment to the employee? The learned counsel has also pointed out that in IT Appeal Nos. 2962 and 2963 (Bom.) of 1974-75, there was clear indication that the Tribunal proceeded on the basis that there was a perquisite. The purchase of the annuity policy itself results in a benefit to the director. It is a payment of remuneration and being a benefit, it would constitute also a perquisite. Section 40A(5) speaks of expenditure resulting in a benefit. Even indirect payments are included. A deferred annuity is clearly covered by this expression indirect. Whatever is to be done by the company has already been done. Only the payment has been deferred. This, according to the learned counsel, clearly indicated that the employee has already received the payment. No conditions are to be satisfied in the present case as in 53 ITR 71 (SC) (sic). It is also pointed out that the managing director had a vested right in the policy. The mere fact of delay in payment does not take this away from him. The policy itself, according to the learned counsel, is a benefit.
In fact the revenue is concerned with the present right to the future annuity which means in fact that the date on which the policy vests. It is also pointed out that the resolution requires the payment to be made to the employee. If it is a case of the employee giving up his right to receive payment, the company cannot claim the expenditure. Even though cash payment is postponed, there is an assurance of future payment and this is a benefit to the assessee during the year. Reference is also made to the decisions in CIT v. Duncan Bros. & Co. Ltd [1983] 140 ITR 335 (Cal.), CIT v. Lola Shri Dhar [1972] 84 ITR 192 (Delhi) and Gestetner Duplicators (P.) Ltd. v. CIT [1979] 117 ITR 1 (SC). Certain passages at page 124 of Kanga and Palkhivala's commentary on Law of Income-tax are also referred to the learned counsel has pointed out that this is a direct case of receipt of remuneration in kind.
Alternatively it is a perquisite fully covered by the provisions of the Act. If at all there is any limitation that would, at best, indicate a payment after the income has been received by the employee.
8. For the assessee, stress is laid on the Tribunal's orders which categorically held that the employees in each of these cases received no benefit. They were entitled to receive the payment only on the specific dates. The accrual of income, therefore, is clearly relatable to those dates. Referring to the resolution, it is pointed out that the true effect of the resolution passed by the company is to modify the agreement. Such a variation does not require even the permission of the company law authorities. In the present case under the deferred annuity policy, the employee has no interest and no right to receive any amount on the date the policy is taken up--in fact during the previous year he has no right to receive any amount. The first payment would be on 10-12-1977 and as far as the managing director is concerned, it is a limited right conferring no benefit in the accounting year at all.
Reference is made to the fact that the ITO applied during the year the provisions of Section 40A(5) or 40(c) of the Act. The limit is not to the expenditure but for the benefit received by the employee. Even if the premium paid on the deferred annuity policy is treated as expenditure of the company, it cannot be treated as received by the employee or as his income. The purchaser of the policy is the assessee.
The annuitant is the managing director. Specific dates of payment having been laid down under the policy, the employee is not entitled for any amount prior to those dates. The contract to pay under the policy cannot be modified. Even by the variation of the mode of payment, therefore, the employee has no immediate right to payment.
Reference is made to the different amounts to be paid on specific dates which are fixed. This supports the assessee's claim. The assessee also relied on the decisions in Builders Supply Corpn. v. Union of India [1965] 56 ITR 91 (SC) especially at page 95 and Duncan Bros. & Co.
Ltd.'s case (supra).
9. It is also pointed out that the sum paid towards the deferred annuity policy is a clear expenditure which the assessee has incurred.
The assessee parted with that amount for the purpose of its business and is, thus, entitled to a deduction of the same. When the amount falls due, no further expenditure or deduction thereafter would be claimed. The dispute, according to the learned counsel, centres round the premium paid for the policy and not the other ingredients of the transaction.
10. The facts lie within a narrow compass. Shri Rahul Kumar Bajaj as managing director of the assessee-company is entitled to certain payments by way of ready salary and also certain amounts calculated as commission. There is no dispute that the original agreement provided for such payment of commission and if the employee received the commission that would have been his income. On 5-12-1973, the assessee-company passed a resolution, (extracted above) whereunder the commission payable to the managing director is to be spent by the company every year towards the purchase of a deferred annuity policy.
The assessee's claim is that under the terms and in view of the nature of the policy, the assessee parted with a sum of money for the purpose of its business but the employee did not receive any benefit during the previous year relevant to the assessment year. In applying the provisions of Section 40A(5) to the payments, etc., made to this managing director, the ITO included the computed figure of commission paid for taking out a policy as income of the employee. There is a dispute as to whether Section 40(e) applies or Section 40A(5) applies to the position. We have held, following the Special Bench decision of the Tribunal, that Section 40(c) applies but the question as regards the manner in which the sum of Rs. 42,000 commission payable is to be dealt with is the same under both the sections.
11. The principal question which requires consideration is whether the employee's remuneration can be increased by an amount of Rs. 42,000 whether as salary or perquisite in the circumstances of the case. The ITO dealt with the question on the basis that the deferred annuity policy, taken admittedly enuring to the benefit of the employee, was an investment of income already accrued to him. The disallowance was made on that basis. The Commissioner (Appeals), however, followed the earlier Tribunal's decision in the case of certain employees and allowed the assessee's claim. Whether the inclusion is to be considered on this basis of investment after accrual may be relevant but, in our view, there are several other facets to this issue which outweigh giving an answer to this question.
12. In the first place the books of accounts of the assessee-company as well as the trend of the claim made before the ITO and the arguments before us indicate that the money has gone out of the till of the company. The company accepts it as an expenditure and even though the disallowance is made by the ITO by referring to Section 40A(5), the question whether this is an expenditure at all to be deducted is to be considered. On the question of deduction, therefore, not merely the provisions of Section 40A(5) but the very question of allowability would be relevant. Apparently it would be a contradiction to say that the employee has not received an amount but the assessee has spent the same and so should be given the deduction of the amount. The learned counsel for the assessee has got round this difficulty by claiming that the money has gone out of the till of the assessee as a business expenditure. The allowability as far as he is concerned is not to be considered from the point of the receiver but from his own stand point.
Analogically, reference is made to expenditure as such pensionary, superannuation, etc., payments made where the employee does not receive the amount immediately but the employer is allowed a deduction. We may straightway dismiss this claim as not acceptable. Pensionary payments become allowable only when they are paid to a recipient directly or to a recognised fund specifically recognised for such purposes by the authorities.
13. Secondly, the employee-director was entitled to a commission for which the services were rendered and the computation also was made on that basis. The stand taken by the assessee in this regard is that the original agreement to pay the commission has been modified by the resolution of the company and it is under the terms of this resolution that the nature of the payment both in the hands of the company as well as in the hands of the director has to be considered. Apparently there could be no quarrel with this claim. If the original contract setting out a mode of payment has been modified and substituted by another contract with a different mode of payment, certainly the legal effect of the later contract could be considered in dealing with the issue before us. In our view, the latter contract does not in any way alter the nature of the payment by the company or receipt by the employee.
Instead of paying cash across the counter (including crediting to an account), the company has now purchased a policy for the employee for the same amount. There could be no dispute on the point that what the company did in the present case was to make the purchase of a policy.
The policy in the present case is a one time premium payable policy which involves the disbursement of certain amounts over a period subject to certain formulae. The purchase of the policy, the entering into the legal transactions relevant to the purchase, the disbursement of the amounts, etc., are all an integrated package plan to which slight modifications could be made here and there but whose basic structure cannot be altered. Basically what the assessee has gone is to purchase a single premium policy which gives rise to periodic payments, in this particular case, after the lapse of an initial period. As is well-known, policies of insurance can be of various types immediate, deferred, whole life, endowment, single premium, multi-premium, single advantage, multi-purpose and so on. Each of these policies has got its own adjuncts. Both with regard to the payment of premium as well as the obligations incurred by the insurer, there could be variations. Even where a standard contract form is entered into or prescribed by the insurer, slight modifications here and there such as including an additional clause or excluding an existing clause are always made.
These, however, do not alter the basic plan of insurance which is a policy taken by the proposer on the life of the annuitant or the propose with specifications as to nomination, etc.
We have explained the details as above particularly to emphasise the fact that whosoever takes out a policy, i.e., the proposer, the obligations of the insurance company could be similar or alterable to some minor extent. Whether the proposer is the company or the proposer is the employee, all those conditions regarding disbursement of money or discharge of obligations of the insurer could be the same. A particular person becomes a proposer only to the extent that he enters into the contract with the insurer and he perhaps furnishes the initial money outlay. Whether the proposer is the company for an insurance on the life of an individual with specific payments or the proposer is the individual himself on his own life with the same specified payments, it makes no difference. In other words, a purchase of this kind of policy could be made by an employer on the life of the employee, the employee himself on his own life or a third party on the said employee--subject of course in all cases to the legal requirement of an insurable interest. This last point is important because there is a difference between types of policy depending on the insurable interest and to whom the benefit enures. If the company were to take out a policy on the life of an employee but with the benefit enuring to itself, the company is the beneficiary of the policy. If the company were to take an insurance policy with no benefit to itself but only to the employee, the latter is the beneficiary. If a third party were to likewise take a policy to enure for the benefit of the employee, here also the employee is benefited. Wherever, therefore, the benefit of the insurance policy enures to the employee, there would be no difference whether the insurance is purchased by the employee himself or a company-employer or a third party. When, as in the present case, the company purchased an insurance policy, a deferred annuity policy, it did exactly what the employee would have done to benefit himself in a particular way and nothing more and nothing less. It certainly is not the case of the assessee that the benefit of the policy enures to the company.
Admittedly, the employees, his legal descendants, etc., are the beneficiaries. The position, therefore, is that while the company has parted with a sum of money, as a matter of fact, it has done so clearly to benefit the employee. Instead of giving the money to the employee in cash and asking him to purchase the annuity under the terms which he wanted to, the company has purchased the policy. There is no difference in principle between the employee after receiving the money from the employer, hands it over to his agent or assistant to purchase the said property for him on the one hand and instead of doing so straightway directs the employer himself, who owes him money, to purchase the same insurance policy on the other. In either case the employee has received the amounts due to him from the employer. If the receipt cannot be (we have no doubts on this also) regarded as a cash receipt, it would certainly become a receipt in kind. Instead of the company handing over the cash, it purchased the deferred annuity policy and handed it over to the employee. Instead of a deferred annuity policy, the company could have as well purchased any other asset such as a motor car or a plot of land or some shares in a joint stock company. Certainly no one could dispute the fact in these latter cases that the company had made a payment in kind. In our view, a deferred annuity policy is an asset and the asset belongs to the employee on the facts of the present case and when he receives the asset, the company having paid out the purchase money for it, he has certainly been paid in kind.
Several facts relating to the purchase of the annuity policy in the present case support our above view. In the first place, there is no dispute that the company had to make payment to the managing director for the services rendered and the liability to make that payment in the form of commission has not been disputed. All that has been done is that instead of paying the cash commission the mode of payment has been modified by a resolution. Secondly, though the proposer is the company, it is not disputed that no benefit enures to the company. After the company has parted with the money, whatever obligations the LIC has to discharge goes to the benefit of the employee only. Maybe there are certain conditions regarding advance mode of payment such as splitting the payment into annuities instead of a lump sum, time of payment, exercise of certain options one way or other or the mode of discharge in the case of contingency, etc., etc. None of these altered the fact that the benefit under the policy clearly belongs to the employee.
Thirdly, the company does not benefit at all under the policy. The position here is not like that of an accident or other policy taken out by an employer to compensate the employer himself when an accident happens to an employee. When once Rs. 42,000 has gone out of the company's resources, it is spent for ever with no further advantage to it than the services already rendered by the employee for which the sum of Rs. 42,000 is the consideration.
Fourthly, the several clauses in the policy as stated earlier are only options which the employee would like to have in any type of policy.
The fact that the policy is proposed and paid for by the company does not alter the nature of the options. This clearly means that what the company has done is what the employee would have allowed anyone to do for himself.
Fifthly, a point was made out that the employee would receive the benefit not during the year of account but in a subsequent year. From the very nature of things, this is the prime purpose of a deferred annuity policy or for that matter any policy of insurance. If a person unconnected with an employee-employer relationship or other contractual or other attachments takes out a sum of Rs. 42,000 from his own till, purchases the same deferred annuity policy as in this case, the liability of the insurance company to pay him annuities would be spread over a period with an initial postponement of payment of first annuity itself. Having paid out the money to the insurance company, this person cannot recover any amount except in accordance with the terms of the policy. The first payment, therefore, he would get after a period or if the conditions are so stipulated only his heirs will get it. It would be preposterous to hold that when such a person has purchased a policy for Rs. 42,000, the policy ceases to be his asset and the sum of Rs. 42,000 goes out of his net wealth. Extending the analogy further, there are several situations where persons enter into financial transactions, purchases, sales, etc. where a deferred benefit alone is obtained. It would be equally preposterous to hold that wherever an asset is acquired with certain benefits postponed, the asset ceases to have been acquired. Even in the case of purchase of an immovable property like a residential house, if the house is not available for occupation, or even the tenant therein does not pay the rent, could it seriously be contended that the house has not been purchased and does not become an asset of the purchaser? We have, therefore, no doubt that the present case is clearly one of acquiring an asset either with the money received from the employer or purchased by the employer himself in lieu of the payments to be made to the employee. In either case the employee has received the amounts and there is a full and complete discharge of the liability of the assessee-company to pay the commission of Rs. 42,000 to its managing director for this year.
Sixthly, though a claim has been made that under the policy, amounts are receivable by the employee only after a time, the policy as well as the obligations of the insurer thereunder vests in the employee immediately the policy is purchased. There is no postponement of the vesting at all. Only the obligations accepted by the insurer are so devised as to postpone payments and make payments of annuities at specified period.
The employee, thus, has received the remuneration or commission due to him and in a form where he can regard himself as the owner of the asset and even deal with it. The employer having no rights in the policy once purchased and all benefits thereunder enuring to the employee only, the latter could certainly deal with this particular item of property as any other item he owns. If the employee wants to transfer or assign the benefits under this policy to anyone, we see no legal objection to his doing so. He would be doing exactly what he would have done in such a case had he purchased a deferred annuity policy himself. This is a clear case, thus, of the employee receiving remuneration, if not in cash, certainly in kind.
14. For the above reasons, we have no hesitation in holding that the value of the assets comprised in the deferred annuity policy is not only accrued income but an actual receipt in kind in the hands of the employee. While applying the provisions of Section 40(c) or Section 40A(5), the value of this asset has to be considered not necessarily as a perquisite or advantage to the employee, which it certainly would be, but actually as a payment in kind which would be of the same nature for tax purposes as a payment in cash.
15. In the alternative, as pointed out above, the payment for the purchase of the annuity cannot be said to have been incurred for the purpose of the assessee's business at all if it does not enure instantly on the purchase to the benefit of the employee. The assessee-company is entitled to the deduction only if the expenditure is relatable and spent for the purposes of the business. We are aware that such expenditure need not be limited to the immediate purpose of earning income but must be given a broader connotation--vide the Supreme Court's observations in the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140--but even so if it was only to purchase a deferred annuity policy not to benefit an employee immediately during the previous year or to benefit the company at any time in future, it cannot be allowed as an expenditure incurred for the business at all. The two alternatives, therefore, are to disallow the entire payment of Rs. 42,000 as not pertaining to the business at all or if the stand of the assessee is accepted to treat it as an addition to the remuneration of the employee. There is no third alternative. In our view, in view of the positive benefits which the employee gets from the deferred annuity policy and in view of the fact that all benefits thereunder go to him and arise to him only from services rendered, the second alternative would represent the correct legal position.
16. Certain decisions of the Tribunal were cited before us. As correctly pointed out by the learned counsel for the department, these decisions relate to the assessment of the benefits or the value of the policy in the hands of the employee. They are, therefore, not directly applicable to the present case. The assessee's case, therefore, does not get any further support from those decisions.
The question of purchase of the deferred annuity policy in lieu of payments to be made to the employee was considered in those appeals.
The decisions went also mainly on the question of receipts or accrual during the year of the annuity payments. The 'annuities' arising under the policy may or may not accrue during the year and where the cash system for professional services is followed, it may not for that reason be assessable during the year but the learned Members of the Division Benches, whose decisions were quoted before us, have not considered the question of the entire policy purchased by the company only to benefit the employee and as a package and a payment in kind to the employee for services rendered. The question is also not merely one of considering certain benefits to be treated as perquisites but one of payment in kind for services rendered. Our discussions detailed above indicate that the position in these cases is also the latter.
Irrespective, therefore, of the position of the annuities arising and payment under the deferred annuity policies, the package represented by the purchased asset, viz., the policy itself has to be included in the total income of the employee. For the reasons stated in detail above, therefore, we would respectfully hold that these decisions do not represent the correct position either as a matter of fact or in law.
The order of the Commissioner is vacated on this point and the ITO's order is restored.
17 to 30. [These paras are not reproduced here as they involve minor issues.] 31. (10) Drawback and Cash Assistance - The company, a manufacturer and seller of scooters, makes substantial sales in the foreign market, thus becoming entitled to receive certain duty drawback and cash assistance.
On account of the sales made in the export market during the financial year relevant to the year under appeal, the assessee was entitled to receive such drawback and assistance to the extent of Rs. 8,43,989. The assessee maintains its accounts on the mercantile basis and till the year of appeal, had been showing such assistance and drawback receipts on the above basis. During the year of account, the assessee claimed that in respect of this item it has bona fide changed its method of accounting to the cash basis in view of certain difficulties. The ITO did not accept the claim but added the sum of Rs. 8,43,989 in the total income of the assessee.
32. On appeal, the Commissioner deleted the addition. He came to the conclusion that the assessee had changed the method of accounting in respect of this item for all times to come and it was not a temporary or casual change for the year. The assessee, according to the Commissioner, had the right to decide the proper method of accounting and so long as the correct income was represented by the accounts, the department could have no objection nor was there, according to the Commissioner, any need to seek an approval for the change. Holding the change in accounting to be bona fide, the Commissioner deleted the addition.
33. In challenging this part of the Commissioner's order, the learned departmental counsel has pointed out that the assessee for several years has been following consistently the mercantile system. Not only for this item but for all items, therefore, the company is bound by that system and it could change it if at all only on an overall basis.
The assessee's claim that the cash method was followed from this year onwards, according to the learned counsel, resulted in loss of revenue apparently through this manipulation. For a person holding on to a method of accounting from year to year on a regular basis, the change can at best be allowed if a proper adjustment with regard to the quantum of income for the year is made. The learned counsel has relied on the decisions in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC), CIT v. Confinance Ltd. [1973] 89 ITR 292 (Bom.), 132 ITR 134 (sic) and Garden Reach Workshop Ltd. v. CIT [1981] 132 ITR 814 (Cal.).
34. For the assessee it is pointed out that the change in method was necessitated by practical and technical considerations and to remove difficulties. It was bona fide and there was no loss to the revenue on this account. Cash assistance and drawback were amounts to be fixed by the Government after taking into account the assessee's performance and also their own evaluation of such performance. The relief is granted not on a statutory basis which the assessee can enforce but on a gratuitous basis. It would not, therefore, be proper for the assessee to take into account the relief on an accrual basis. In practice every year the assessee received the refund from the Government irregularly and often very late. It was also difficult in view of the varying policies adopted by the Government to even fix correctly the amount of cash assistance and drawback the assessee was entitled to. The rates were also decided by the Ministry from time to time. The determination of rates involved several complicated issues such as the change in structure of the excise duty in relation to import duty rates, the change in material inputs, alteration in design of product and the variety in items of themselves. It was, therefore, according to the learned counsel, difficult if not almost impossible to ascertain in advance the rates of duty or the amount of assistance the assessee was entitled to. The outstanding cash assistance and duty drawbacks were not settled promptly partly on account of the difficulty in quantifying them and partly for other reasons and often years lapsed before the assessee could receive the amounts. On the contrary, the accounts had to be finalised within a short period after the end of the year and the assessee was in fact taking a risk in taking these receipts into account while computing the profit at the time of Annual General Meetings and fixing dividends on the basis. It is also pointed out that the entire amount receivable being brought into account as and when received, there was no loss to revenue. Decisions in Indo-Commercial Bank Ltd v. CIT[ 1962] 44 ITR 22 (Mad.) and 74 ITR 420 (sic) are cited in support of the claim.
35. On a consideration of the facts, we find no reason to interfere with the order of the Commissioner. It is settled law that the assessee is entitled to adopt a method of accounting and even change it. It has also been held that where the assessee followed the same method of accounting from year to year, the profit of the business from year to year can be correctly computed. This applies to the method of accounting but this latter involves several ingredients which require separate attention by itself. Thus, matters like closing stock valuation taking into account of a particular receipt or expenditure depending on its nature, etc., are items which require attention as forming part of the method of accounting. Keeping in view the general principles in this behalf, what we have to see is whether in respect of any of these matters the assessee can change the method of taking them into consideration for working out his annual profit. It also should keep in view the fact that by making any particular change, even bona fide made, the assessee should not get an advantage at the cost of the revenue. In our view, therefore, prima facie, the change should be bona fide which would require a straight approach to the issues and a bona fide decision on them. Secondly, the change should not result in any advantage being taken of the revenue. If the latter is secured, the change should not be objectionable to the revenue if whatever taxable income which would on account of the change, especially tax, is given up for taxation.
36. Analysing the present claim against the above principles, we have to hold that the assessee's claim for duty drawback and cash assistance is not primarily a statutory claim. It is extended by the Government under executive dispensation as incentives for export promotion. While it may reasonably be presumed that a Government would not change its policy arbitrarily and may not discriminate between one exporter and another, where the matter is partly one of a gratuitous payment, recipient of such largesse could take the precaution of not incurring extra liabilities anticipating such receipts. In our view, there would be as much justification for not taking such receipts into account for computation of the profit as taking into account unrealised profit on account of stock valuation. Both as a prudent businessman and as a careful taxpayer, the assessee could very well not take into account a gratuitous receipt for the purpose at least of paying tax. It would be more difficult for the assessee to pay tax, subject himself to all the consequences such as diminution in the cash balance, etc., following from it and then if he does not get the relief, to claim the refund after a long time. On the contrary, it would be more equitable for him to pay the tax after the assistance or due drawback has been quantified and he becomes sure of receiving it. It has been claimed that such quantification and payment takes substantial time. By not taking the 'accrued' duty drawback and cash assistance ior the year, for the point of view of method of accounting, it cannot be stated that any taxable amount will go untaxed. Afterall even the Government has yet to decide whether to pay this amount to the assessee and how much. We cannot, therefore, hold that the change made by the assessee is not bona fide in the first place. We cannot also hold that he has not acted as a prudent businessman or taxpayer. The extreme inequity, if we accept the stand of the department, would be clear if we think of a case (God forbid) where a businessman having made an export and becoming entitled to a duty drawback or cash assistance pays the tax on this on the 'accrual' basis, but unfortunately is forced to close down the business later--in which case the tax having been paid on an amount he did not actually receive, he cannot even get the refund of the same. We uphold the Commissioner's order on this point.
37. (77) Expenditure on Goregaon Property - The ITO disallowed expenditure totalling to Rs. 19,766 in respect of the Goregaon property on the ground that this was not a business asset for a long time. The Commissioner having allowed the expenditure, the matter is before the Tribunal.
38. The expenditure incurred covers four items, viz., water charges Rs. 193, electricity Rs. 760, rates and taxes Rs. 10,252 and legal and professional fees Rs. 8,561. The property had been held as a business asset earlier but for some time was not utilised for the actual conduct of the business, This item appears as an asset in the balance sheet having been continued as such from the earlier times.
39. Having heard the parties, we agree with the Commissioner that no reason exists to treat this asset as not the property of the business which the assessee is carrying on. In a business often several assets of business do not receive ready user from year to year or even day-to-day. This depends on so many current factors. Merely for this reason we cannot treat any asset as not belonging to the business during this period. Any expenditure incurred for or in connection with such assets naturally constitute an expenditure of the business of which these items form assets. In the present case the first 3 items clearly relate to the current expenses on these assets, while the last item legal and professional fees represents expenses for the preservation of these assets in the business. All the items of expenditure, therefore, are correctly allowable items for the purpose of business. The Commissioner's order is upheld on this point.
40. (12) Stock Exchange Listing fees: Rs. 4,375 - The ITO disallowed a sum of Rs. 4,375 as above on the ground that it was not a business expenditure. Apparently the view was that advantages accrued to the assessee-company as a result of listing the shares in the stock exchange and this was an item of capital expenditure. The Commissioner accepted the assessee's claim.
41. After hearing the parties we find that the Commissioner's order should be supported. Apart from the fact that listing in the stock exchange is a matter closely intertwined with the company and its business, it has got a high relevance also with the Act. Insofar as the status of a company is one in which the public are substantially interested or not depends to some extent on its listing in the stock exchange. The business of the company also carries better prestige and a better status when listed in the stock exchange. It will not be even incorrect to say that such listing adds several advantages to the business carried on by the assessee, particularly in the matter of confidence of the customers, loyalty of the employees, a large advertisement value, etc.
42 to 48. [These paras are not reproduced here as they involve minor issues.] 49. (15) Interest under Section 216 - The ITO charged interest under Section 216 of the Act amounting to Rs. 1,99,025. It was claimed before him that there was no default since Section 216 applies only where there was a deliberate and wilful underestimate of the advance tax payable. In fact in the draft assessment order issued under Section 144B of the Act, there was no direction for charging interest under Section 216 at all. This item was not mentioned even in the proceedings under Section 144B before the IAC or in his directions to the ITO. The ITO levied the interest only at the time of finalising the assessment order. This technical objection raised by the assessee was found by the Commissioner as acceptable. The Commissioner also found on merits that estimate made was reasonable and based on available data. Elaborate discussion on this point obtains at paragraph 65 of his order.
50. The learned counsel for the department has pointed out that the technical objection made out cannot be accepted insofar as the levy of interest, penalty, etc., in an assessment order comes in subsequent to the computation of the income and consequences which flow from it. It is, therefore, not necessary. In fact according to the learned counsel, it is almost impossible either for the ITO or for the IAC to envisage levy of interest at the stage of Section 144B proceedings. The powers of the ITO to levy the interest and the tax and all other consequential imposts are not taken away by the provisions and procedure of Section 144B.51. Having heard the learned counsel for the assessee, we find substance in the contention of the learned counsel for the department.
The levy of interest, levy of penalty and other consequential or subsequent demands do not figure and cannot figure in and cannot be regarded as part and parcel of Section 144B proceedings in which the IAC figures. It may be even difficult to claim that if consequent to any assessment to be made an interest is to be levied or a penalty is to be levied, an opportunity to the assessee should be granted under Section 144B, whatever other opportunities he may have to be granted in that connection. The requisites and the limits of Section 144B proceedings are clearly laid down within the precincts of that section itself and cannot be extended to other provisions of the Act. We, therefore, do not accept the technical objection raised by the assessee on this point. The Commissioner's order on this aspect of the question is reversed.
52. We, however, agree with the Commissioner on the facts that the levy of interest is not justified. The assessee prepares monthwise profit and loss account for its own purpose. That the negotiations with workmen would have affected the final profit for the year is clear from the details given in the Commissioner's order. The estimate filed by the assessee, therefore, cannot be said to be unreasonable. The assessee made an estimate of Rs. 100 lakhs on 15-9-1974, Rs. 150 lakhs on 15-12-1974 and Rs. 240 lakhs on 15-3-1975. On the facts of the case, there is no evidence of understating of advance tax.
The Commissioner's order is upheld on this point. We have in coming to this conclusion considered the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 also.