1. This is an appeal by the assessee for the assessment year 1979-80 and another appeal toy the revenue for the assessment year 1981-82 involving one common issue, thus they are disposed of by this composite order.
2. The common issue, that is involved in these two appeals, is whether the commission of Rs. 1 lakh on account of serving as sole selling agent of M/s Amausi Textiles Mills Ltd. for the period ending 12th July, 1978, relevant to the assessment year 1979-80, which is not received due to a financial crisis of the principals but received in the accounting period relevant to the assessment year 1981-82, is assessable as income for assessment year 1979-80 or for 1981-82.
3. The other connected issue, which is in the assessee's appeal, is regarding interest @ 12 per cent on Rs. 4 lakhs kept as deposit with the principals for securing the sole selling agency of sale of yarn manufactured from cotton and staple fibre, which is not received and paid by the principals due to financial crisis, the principal itself became a cause of concern for recovery. The learned counsel for the assessee submitted that the assessee entered into an agreement with the principal M/s Aniausi Textiles Mills Ltd., Lucknow by which the assessee was the sole selling agent for sale of the manufactured yarn from cotton and staple fibre. For some time, the agency was working smoothly but during the accounting year relevant to the assessment year 1979-80, the principals were involved in a deep financial crisis and this prevented them from paying any commission to the assessse and there were some disputes also. As a consequence of this interest on deposit and the non-receipt of the commission, the assessee, which was earlier following mercantile system of accounting, changed over to cash system of accounting and this change was intimated to the ITO vide letter dated 8th December, 1978. This was further clarified by means of two letters to the ITO dated 19-11-1981 and 26-12-1981. Along with the letter dated 26-12-1981, a certificate from the principals was also attached wherein it was stated that the assessee was not paid any interest or commission. It was after considerable effort that the assessee was able to realise the commission aggregating to Rs. 1,26,639 and in an effort to realise the deposit of Rs. 4 lakhs, the assessee had to write off an amount of Rs. 4,003. It was submitted that it is in these circumstances that when the account was cleared off in the accounting period relevant to the assessment year 1981-82 that the amount of commission of Rs. 1,26,639 was treated as income of that year. All these facts were placed before the ITO. The ITO as well as the CIT(A) were not appreciative of all these facts and, therefore, wrongly came to the conclusion that the income on account of commission accrued to the assessee for the assessment year 1979-80 and accordingly the amount was taxed in that year. Simultaneously, the notional interest of Rs. 48,000, that is, 12 per cent of Rs. t*4 lakhs was included as income for 1979-80 though for subsequent years the amount of interest so included by the ITO was deleted in the first appeal by the A AC and the department has not come up in appeal before IT AT in either of these periods. The assessee placed reliance on Beni Prasad Sidh Gopal v. CIT [1984] 148 ITR 760 of the Allahabad High Court in the case of the assessee himself for assessment years 1959-60 and 1960-61 and submitted that when the facts indicate that there was dispute between the parties, then the income would become income of the assessee only in the year in which the settlement takes place followed by the receipt of the amount by the assessee. In the instant case, the receipt being in assessment year 1981-82, the commission was taxable only in that year. On the issue of interest, the plea was that in view of the financial crisis of the principals, the assessee was deeply concerned with the recovery of the principal. When the principal itself could become a doubtful proposition, then it would be totally wrong to include as income in the hands of the assessee as notional interest for which the assessee did not make any entries in its books. Reliance was placed on CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572 (Mad.), CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619 (Punj. & Har,) and [1984] 149 ITR (St.) 93.
4. The learned departmental representative, relying on the orders of the authorities below, pleaded that the assessee's system of accounting was mercantile and it is an admitted fact that the assessee had rendered all such services as are required of a sole selling agent, thereby implying that the assessee has become entitled to the commission. Once it is an established fact that the commission is due to the assessee, the system being mercantile, the income has to be included on accrual basis though the amount might have been received at a subsequent point of time. It was, therefore, submitted that it was rightly held as income for assessment year 1979-80. But on the same issue the department is in appeal for assessment year 1981-82 in which year the income on account of commission had been deleted by the first appellate authority on the ground that it was already taxed in 1979-80, the plea raised was that the assessee was entitled to a guarantee commission of Rs. 1 lakh per year and that there being no evidence of termination of the agency, deleting the amount in 1981-82 is wrong. On the issue of interest chargeable he relied on State Bank of Travancore v. CIT [1986] 158 ITR 102 (SO).
5. We have carefully considered the agreements of the parties. The brief facts in regard to the agreement of agency is that the assessee entered into an agreement of sole selling agency for sale of yarn manufactured from cotton and staple fibre from the mills of Amausi by the principals M/s Amausi Textile Mills Ltd., Luck-now. This agreement is dated 19-4-1977 and was effective for two years from 1-8-1976 to 31-7-1978.
6. On the part of the assessae, he was expected to promptly clear the yarn manufactured by the principals by placing indents and also to give directions for despatch and delivery of the goods and also to obtain the best price. He was also expected as a condition to keep a deposit of Rs. 4 lakhs during the period of agency on which 12 per cent interest was payable to the assessee.
7. The principals on their part had bound themselves to pay commission @ 1 per cent on all sales of yarn and the principals had further bound themselves of payment of minimum yearly commission of Rs. I lakh. The principals had indicated that the agreement needs the approval of the shareholders in their meeting and in case such approval is not granted, then the agency would be terminated forthwith. In such an eventuality, the principals had committed that they shall refund immediately the deposit along with interest due thereon and also pay them the commission till such date of payment. It was also so specified in the agreement that Mr. M.M. Dayal, the Managing Director of the principals, would provide a personal guarantee in regard to the repayment of the deposits along with interest and the commission as specified in the agreement.
8. Apart from several other routine provisions as are usually contained in any agreement, this agreement also provided for an arbitration in case of dispute arising between the two parties. On 8th December, 1978, the assessee had written a letter to the ITO specifying that it is with reference to assessment year 1979-80, stating therein that in the year under review, they are sole selling agent of Amausi Textile Mills, Lucknow, and that they have not received any commission on sale nor any interest on deposit and, therefore, they are adopting cash system in respect of the same and in consequence of which they have no income for the said year.
9. During the course of assessment proceedings for the assessment year 1979-80, a letter was addressed to the ITO dated 19-11-1981 in which the following statements were made :- That we are sole selling agent of Amausi Textile Mills, Lucknow.
That during the aforesaid year we remain their selling agents, however, neither commission nor interest on deposit of Rs. 4,00,000 has been received due to some dispute, and for this fact we have sought your honor's predecessor's kind permission to change our system of accounting from mercantile basis to cash basis for these heads. The above permission was sought through letter dated 8-12-1978 filed on 14-12-78, vide receipt No. 21809.
That it will not be out of place to mention that in similar conditions in one of our sister concern, M/s Mannu Lal Kishan Gopal (Sugar Agent) in assessment year 1965-66, the learned Income-tax Officer, Circle I(B) Ward, Kanpur, has allowed the said firm to change the system of accounting from mercantile to cash basis. That on appeal in case of M/s Mannu Lal Kishan Gopal (Sugar Agent) the loss as disallowed by the concerned Income-tax Officer for not carrying on business has been allowed. The copy of learned Appellate Assistant Commissioner, Range-I, order dated 3-9-66 is being filed.
In view of the facts stated as above it is requested that the change in accounting system and the loss shown may please be accepted for which we shall feel ever grateful.
Following the above letter, his letter dated 26-12-1987 was received in which in paragraph 3 the following submissions were made:- That as per agreement with Amausi Textile Mills, Lucknow, we are entitled for a commission of Us. 1 lakh and interest @ 12 per cent on the security deposit of Rs. 4,00,000.
However, as the financial condition of the said mill is not good they have neither allowed us any commission nor interest for the aforesaid year (copy of their letter attached) and due to this fact we have changed our system of accounting from 'mercantile' to 'cash method'.
That further it will not be out of place to mention that entire commission has been received in the subsequent year.
That further they are not allowing us interest on the security deposit even till date.
The copy of the certificate dated 22nd December, 1981, issued by the principals which was enclosed along with the letter dated 26-12-1981, reads as follows :- This is to certify that no payment was made by us to M/s Beni Prasad Sidh Gopal (Kanpur), Kanpur against commission and interest on their security deposit during the period 1-7-1977 to 30-6-1978 due to financial losses and crisis faced by us during the said period.
10. The plea of the assessee, as is clear from the various submissions made before the ITO, as well as before us, is that since the amount was recovered subsequent to the accounting year relevant to the assessment year it had adopted or modified the system of accounting from mercantile to cash. It is not the case of the assessee that it had not become entitled to the commission. Rather, the accepted fact is that the assessee had become entitled to the commission. As regards dispute arising between the assessee and the principals, there is no evidence whatsoever on the point. Even the certificate issued by the principals dated 22nd December, 1981, only indicates that they were in some financial crisis. The assessee placed reliance on the AAC's order in the case of another sister concern in which the change over of the accounting of income was accepted by the learned AAC. It was on this basis that the plea raised by the assessee was that the income was assessable in the assessment year 1981-82.
11. In that case of M/s Mannu Lal Kishan Gopal, the learned AAC vide his order dated 3-9-1966 (the case relied upon by the. assessee), was a case of a sole selling agent and that for about four years or so the assessee was not provided with any sales reports which compelled the assessee to take up the matter to the Courts, during the pendency of which the assessee did not receive any selling agency commission. The assessee went on incurring expenses and claimed the expenses as a business loss and that the issue involved primarily was whether it was carrying on the business or not and it was in these circumstances the non-receipt of income, that is, commission was held to be not a primary condition for allowing of the loss and that there was no decision to the effect that whether the income could be accounted for on cash basis or on mercantile basis. There was also no decision as to whether the income had Accrued to the assessee or not. Therefore, this particular case which is relied upon by the assesses, is of no consequence at all.
The other case, relied upon by the assessee, is 148 ITR 750 of the Allahabad High Court, which is of the same assessee for the assessment years 1959-60 and 1960-61. In this case, the assessee was a sole selling agent and was entitled to certain commission plus establishment expenses. In 1958, disputes arose between the assessee and the principals and the matter was referred to arbitration in 1959. The award of Arbitrator was announced in July 1964. It was in these circumstances that their Lordships of the Allahabad High Court were to consider whether the income had accrued to the assessee both in respect of commission and interest. It was these various facts which prevailed on their Lordships of the Allahabad High Court who held that mere entries in the account books does not by themselves lead to the conclusion regarding accrual of income. They were of the view that since the Arbitrator's award was announced in 1964 only and that the debit entries in the books of the assessee were not supported by any credit entries or credit notes by the principals, it would be wrong to come to the conclusion that interest and commission actually accrued to the assessee in the assessment years 1959-60 and 1960-61.
12. We are afraid even the above case and the ratio laid down by their Lordships would have no application in the present circumstances of the case and for the reasons as already observed that there being no evidence in regard to any dispute between the assessee and the principals. Secondly, the various letters, as submitted by the assessee, only indicate that since he had not actually received the amount, he is resorting to the cash system of accounting. Thirdly, it is not disputed by the assessee that the present system that he had tried to adopt was different from the one hitherto followed by him.
According to Section 145(1), the income that is chargeable under the head 'Profits and gains of business or profession' shall be computed in accordance with the method of accounting regularly employed by the assessee. In other words, once a particular system of accounting had been adopted by an assessee, which had to be in consonance with the very nature of its conducting of his business, then he cannot at a later point of time or for a subsequent year choose to change the method of accounting to suit him or for his own convenience.
That the commission earned by the agents will be paid for each month by the end of its subsequent month and the interest of deposits will be payable quarterly.
This clause also goes to indicate that the principals had agreed to pay the commission on a regular monthly basis and also paid interest on a quarterly basis. This payment on regular basis as per the certificates of the principals dated 22nd December, 1981 indicates, could not be complied with in view of the principals suffering a financial crisis and not for any other reason. Therefore, the claim of the assessee that there was a dispute which is, why they wish to change over to the cash system of accounting, falls to the ground as a baseless argument which is unsupported.
14. We have, therefore, only to come to the conclusion that the income of Rs. 1 lakh on account of commission accrued to the assessee and arose to the assessee in the year and accordingly including it as income for the assessment year 1979-80 is the only proper course. This we uphold.15. As regards the interest on the deposit of Rs. 4 lakhs, the assessee placed reliance on Motor Credit Co. (P.) Ltd.'s case (supra) and Ferosepur Finance (P.) Ltd.'s case (supra). In both these cases, the basic fact which was before their Lordships of the Madras and Punjab and Haryana High Courts were that the principals were in dire difficulties and any realization of even the principal amount was in grave doubt, and it is in these circumstances that their Lordships have come to the conclusion that interest could be accounted for on actual receipt basis. The assessee's argument was also that the special leave petition against the Madras High Court's decision, filed by the Department, was dismissed and, therefore, the assessee could not be taxed on notional basis in respect of interest.
16. While dealing with the issue of commission, we have observed that there was only a certificate from the principals that they were involved in a financial loss or crisis which made them not to abide by clause 14 of the agreement in regard to payment of commission on a month to month basis and the interest every quarter. There is also no evidence that there was an (sic) adduced by the assessee in regard to the claim that the principal itself was doubtful of recovery. As per the agreement between the parties, the assessee was entitled to interest @ 12 per cent which is Rs. 48,000 which had accrued to it in the year and should be treated as income in this year as there is no evidence to support the claim of the assessee regarding dispute between the assessee and the principals, as also the doubtful nature of recovery of the principal amount. The claim that the principal was also doubtful in nature has no legs to stand on as there has been no claim of any bad debt in the assessment year 1981-82 when as per the assessee the final accounts were drawn up between the two parties. We are, therefore, of the view that the income on account of interest of Rs. 48,000 accrued and arose to the assesses in the assessment year 1979-80 and was rightly treated as income.
17. As regards the treatment of commission for assessment year 1981-82, it is not disputed by the revenue that there was culmination of the agency agreement. It is in respect of the same amount of commission which was actually received in the accounting period relevant to the assessment year 1981-82 which was taken as income in this year and deleted by the AAC on the reasoning that this was so included in assessment year 1979-80. While dealing with the taxability of the commission in 1979-80, we have already held that it was income of that year and, therefore, taxing the same income in assessment year 1981-82 would not be proper and, therefore, the AAC was justified in deleting the income in that year and we hold so.