1. to 3. [These paras are not reproduced here, as they involve minor issues.] 4. The second ground relates to the addition of Rs. 9,08,787 being the amount receivable from M/s Bharat Coking Coal Ltd. (hereinafter referred to as BCCL) which was deleted by the CIT (Appeals). In order to decide this ground it is essential to bring out the facts relating to this addition. The assessee had entered into rate contract for transportation work of BCCL. As per letter dated 23-12-1981, which is at pages 24 to 28 of the paper book filed before us in the appeal by the assessee. Due to floods the roads were considerably damaged and the assessee had to engage more lorries, trailers etc. and forced to take alternate longer routes to transport the goods of M/s BCCL to the places of destination. On account of this there was heavy expenditure involved by the assessee for paying towards loading, unloading and lorry freight to other lorry owners engaged for this purpose. The assessee, therefore, due to this heavy expenditure incurred by it on transportation raised bills between September 1982 and December 1982 bearing Nos. BCCL/99/82 to BCCL/124/82 to Rs. 9,08,787. These bills though were made out and raised were not entered into its accounts and this was noticed by the various officers during the course of search under Section 132 on the assessee. It was explained by the assessee to the ITO during the course of assessment proceedings that as per the contract entered into on 23-12-1981 the assessee is only entitled to claim freight charges from BCCL as per rate contract basis though it had incurred more expenses for transportation of the goods of BCCL due to the floods and damaged roads and taking the goods through alternative longer routes to its destination. In order to cover up these additional expenses it has raised the aforestated bills from September 1982 to December 1982. These additional bills raised by the assessee were not accepted by BCCL and not passed, though the assessee has been insisting repeatedly that the same should be paid owing to the above mentioned reasons. The ITO did not accept this explanation and said that since the accounts of the assessee were maintained on mercantile system and the assessee has made out and raised the bills though not entered into the account books yet in law the income accrued to it and particularly when the expenditure in relation to the work carried out in respect of those additional bills raised were debited to the profit and loss account. The ITO, therefore, added the sum of Rs. 9,08,787 to the returned income. During the course of hearing the CIT(Appeals) in order to ascertain the veracity of the claim made by the assessee wrote a letter to the Chief Officer of Coal India Ltd.(CIL), 10, N.S. Road, Calcutta who wrote a demiofficial letter to the CIT( Appeals)-I, Calcutta dated 21-12-1987 enclosing xerox copies of complete records including bills submitted by the assessee to BCCL.
According to the letter of CIL it is seen that a High Power Committee was constituted in 1984 to consider the various claims made by the assessee. The said Committee considered at length the transportation bills of assessee for transporting the goods from September 1982 to December 1982 and bills of the assessee were categorized by it into seven groups. The Committee after due deliberations and considering all the pros and cons of the case of the assessee recommended and sanctioned a sum of Rs. 18,22,990 as against the claims of the assessee as per their bills amounting to Rs. 26,02,950 which is inclusive of disputed amount of Rs. 9,08,787. A xerox copy of the deliberations and recommendations of the Committee has been filed in the paper book which is from pages 29 to 32. This was also communicated by CIL to the assessee through their letter dated 15-9-1987. The relevant portion of the said letter is reproduced below: This is to inform you that your total claim was Rs. 26,02,950.04 against the bills submitted to us during the period from September 1982 to December 1982. We have passed the total sum of Rs. 18,22,990.01 for payment as per recommendation of Committee against your total bills amount of Rs. 26,02,950.04 as your bills were not proper and correct.
We have already paid Rs. 16,75,000 on account in the year 1982 as such the balance amount payable is Rs. 1,47,990.01.
Thus, the assessee was entitled only to Rs. 18,22,990 and not Rs.26,02,950 which as stated above, included the sum of Rs. 9,08,787 in respect of which the addition has been made by the ITO. The assessee had received a sum of Rs. 16,75,000 on account in the year 1982 and the balance amount payable to the assessee was Rs. 1,47,990. The CIT(Appeals) relying on the decision of the Supreme Court in the case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 and in the case of State Bank of India v. CIT [1986] 1571TR 67 deleted the addition on the ground that the said amount of Rs. 9,08,787 did neither accrue to the assessee nor was received by it during the previous year relevant to the year under consideration. It is pertinent to mention here that the CIT( Appeals) also gave an opportunity of hearing to the ITO and placed before him the letter received by him from the Chief Officer of CIL, Calcutta and the xerox copies of the various documents sent to the CIT(Appeals) on the basis of his request. It is mentioned by the CIT(Appeals) that the ITO did not make any particular comment in this regard. The CIT(Appeals), therefore, deleted the entire addition of Rs. 9,08,787 with a further direction to the ITO that he will be justified to consider the excess payment of Rs. 1,47,990 in the year of receipt.
5. It is submitted by the learned departmental representative, Sri S.C.Sen, that the CIT( Appeals) heard the case on 21-3-1988 on which day the ITO was also called for his comments on the letter and the materials received by the CIT(Appeals) from CIL and he has also passed the order on the very same day namely 21-3-1988 and, therefore, it cannot be said that reasonable and adequate opportunity was given to the ITO in this regard. It is also submitted by the learned departmental representative that since the assessee had made out and raised the bills though over and above the agreed rate contract between the assessee and the BCCL it amounts to accrual of income to the assessee since it was maintaining accounts on mercantile system. Merely because those bills were prepared but not entered into the account books and no entries were made therein does not mean that no income has arisen or accrued to the assessee and he can escape assessability in respect of that amount. The departmental representative also submitted that since the assessee had taken the benefit of expenses taken by the assessee the sum of Rs. 9,08,787 also should be deemed to have accrued to the assessee and, therefore, the ITO was right in assessing the same. He has relied on the decisions in CIT v. Chunilal V. Mehta & Sons (P.) Ltd. [1971] 82 ITR 54 (SC), State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) and G. Padmanabha Chettiar & Sons v. CIT [1990] 182 ITR l(Mad.).
6. The learned counsel for the assessee, on the other hand, submits that merely raising of the bill without any corresponding entry in the account books does not mean that the assessee has earned the income or the said amount accrued or arose to it for being assessed to tax. The maintenance of accounts on mercantile system cannot be a ground for assuming that though the bills were raised but not passed the amount was the income of the assessee to be taxed. In law he says that it is the "real income" which has to be taxed either on accrual or on receipt basis and not on any hypothetical income which could have been earned.
Merely because the claim has been made does not follow that the same has accrued to the assessee and be brought to tax. He relied on the decisions in CIT v. Hindustan Housing & Land Development Trust Ltd, [1986] 161 ITR 524 (SC), State Bank of India's case (supra) and K.P.Varghese v. ITO [1981] 131 ITR 597 (SC) and, therefore, submits that the CIT(Appeals) was correct in deleting the addition.
7. We have heard both the parties and also perused the material placed before us in the paper book and also referred to the various case law cited by the rival parties. We sec much force in the submissions of the learned counsel for the assessee. Admittedly the assessee raised several bills in respect of transportation work from September to December 1982 over and above the agreed contract rate as the assessee had to engage more lorries and take alternate longer routes for carrying the goods of BCCL to the destination. The purpose, it appears to us, was to have a good bargain for settlement at higher rate with the BCCL over the agreed contract rate for transportation in view of the above factors. Thus, the assessee raised those bills aggregating to Rs. 9,08,787 in respect of the transportation work from September to December 1982. Though the assessee maintains the accounts on mercantile system it cannot be said that the said amount accrued to the assessee for being assessed to tax during the relevant previous year. Under the provisions of the Income-tax Act income-tax is a levy on income and it takes into account two points of time at which the liability to tax is attracted namely, either accrual of income or its receipt. But the sum and substance of the matter is that it should be income. Therefore, if income does not result at all to any assessee there cannot be a tax even whether or not entries are made in its accounts about any hypothetical income which due to various circumstances and reasons may or may not materialise or result at all. Where income results and is received but subsequently given up then in such circumstances also it remains the income of the recipient though he may give up but still he may be liable for payment of income tax under the provisions of the Income-tax Act. But where due to any reasons income does not result at all, as in the present case, then obviously there is neither accrual of income or receipt of the same even though an entry to that effect may have been made or may not have been made in the account books. This is what has been laid down by the Supreme Court in the case of Shooriji Vallabhdas & Co. (supra).
8. Under the provisions of Income-tax Act it is the "real income" and not "hypothetical income" which has to be subjected to tax and as stated above the real income should have either been accrued or received during the previous year. This concept of the real income was also expounded in the decision of Bombay High Court in the case of U.K.Kashiparekh & Co. Ltd. v. CIT [1960] 39 ITR 706. The principle has been succinctly stated in the head note as under : The principle of real income is not to be so subordinated as to amount virtually to a negation of it when a surrender or concession or rebate in respect of managing agency commission is made, agreed to or given on grounds of commercial expediency, simply because it takes place some time after the close of the accounting year. In examining any transaction and situation of this nature the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statutory language.
This decision of the Bombay High Court was also considered by the Supreme Court in the case of Poona Electric Supply Co. Ltd. v. CIT [1965] 571TR 521. As far back as 1954 the Supreme Court in the case of ED. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 considered the question as to the point at which income could be said to accrue or arise to an assessee for the purpose of the Income-tax Act. In the majority judgment delivered by their Lordships N.H. Bhagwati, J. (as he then was) explained that the words "arising or accruing" described a right to receive profits and that there must be a debt owed by somebody.
Unless an actual "debt due" by somebody is created in favour of the assessee it cannot be said that he had acquired a right to receive the income or that the income has accrued to it. It, therefore, follows that mere making of a claim without any corresponding right either as per contract or as per law is not a debt due to the assessee by the other party on whom a claim is made and, therefore, there is no income accrued or arose to the assessee at all and, therefore, not liable to tax. Thus there must be something tangible, something in the nature of a debt or something in the nature of an obligation to pay an ascertained amount to an assessee and till then we are of the opinion that it cannot be said that the income had accrued or arisen to a person. Indeed, it would be harsh and inequitable to tax an assessee in respect of an income which has neither arisen nor accrued to him or is received by him. Merely because a claim for a higher amount is preferred by the assessee over and above the agreed or contracted amount for the work carried out or done does not mean that income was accrued or was resulted to the assessee. It would also be a strange that the liability to tax is attracted on income which has neither arisen to the assessee nor has been received by him. This has been observed by the Supreme Court in the well-known case of K.P. Varghese (supra) at page 605. The revenue's case is that since the assessee has raised the bills, though against the terms and conditions of the contract, and since the accounts were maintained on mercantile system it amounts to accrual of income. We do not find much force in this argument of the learned departmental representative for the simple reason that mere making a claim or filing of a suit does not result in accrual of income. The Calcutta High Court in the case of CIT v. Burlop Commercial (P.) Ltd. [1988] 173 ITR 522 while considering a matter regarding claim for damages for breach of contract where assessee filed suit claiming damages which was following mercantile system of accounting. It observed as under: If, in law, the cause of action does not arise, it cannot be said that the liability to pay has accrued. In the mercantile system of accounting, the amount in question could be included on the credit side as income only if it had accrued, either in fact or in law.
Mere effort on the part of the assessee company to realise the amount by sending the bill or filing a suit for its recovery, will not, in law, make it an income which has accrued in the year in question. If the effort succeeded, then it could be said that the amount the assessee has actually received would be liable to be treated as its income during the year in which it was received. In such a case, the receipt would not be on the basis of any right vesting in the assessee company under the contract, but on the basis of its actual receipt. It would be liable to be brought to tax in the year the money was actually received.
Since the right to this amount did not arise or accrue at all, it could not be held that merely because the assessee followed the mercantile system of accounting, the income accrued in the year in which the breach of contract took place.
The principle of real income was also reiterated by the Supreme Court in its subsequent decision in the case of State Bank of India (supra) which has been relied by the CIT(Appeals) also and also in the case of State Bank of Travancore (supra). The learned senior departmental representative also relied on this very decision of the Supreme Court.
But on the facts of the case this decision squarely supports the case of the assessee rather than that of the department. We have perused the Supreme Court decision in the case of Morvi Industries as Chunnilal V.Mehta & Sons (P.) Ltd.'s case (supra) relied on by the learned departmental representative and we find that the same does not apply to the present controversy. The decision of Madras High Court in the case of G. Padmanabha Chettiar& Sons v. CIT [1990] 182 ITR 1 also does not support the case of the revenue as the facts therein were in respect of adoption of basis for receipt and payment of interest having regard to the mercantile system of accounting employed by the assessee during the assessment year in question where the assessee wanted to adopt mercantile basis for payment of interest by it and claimed the benefit of the cash system in respect of interest receivable by it. Therefore, this case has no application to the facts of the present case.
9. In view of the above discussion we are of the opinion that the sum of Rs. 9,08,787 did not accrue to the assessee during the previous year relevant for the assessment year under consideration and it cannot be subjected to tax for that amount. However, since the High Power Committee constituted by CIL had passed the claim of the assessee to the extent of Rs. 18,22,990 the same is said to have accrued to the assessee during the previous year relevant for the assessment year 1983-84 and since the assessee has already received a sum of Rs. 16,75,000 from BCCL the balance sum of Rs. 1,47,990 should be assessed to tax for this assessment year as according to us, the same has accrued to the assessee though not received. The assessee thus gets a relief of Rs. 17,60,797 (Rs.9,08,787 - Rs. 1,47,990).
10. It is represented by the assessee's counsel that till to-day the assessee has not received the sum of Rs.1,47,990 from CIL though more than seven years have passed and, therefore, it will not be justified to subject it to tax on Rs.1,47,990 also. We, therefore, direct the ITO that if the assessee is unable to receive or recover the said amount of Rs.1,47,990 from either BCCL or CIL and satisfies the ITO to this effect, the ITO should allow the assessee to write off or set off the said sum of Rs. 1,47,990 against its profits in subsequent assessment years in accordance with law.
11. to 13. [These paras are not reproduced here as they involve minor issues.]