1. This appeal of the assessee is directed against order dt. 9th Dec., 1994 passed by CIT(A)-III, Ahmedabad, deciding the appeal of the assessee relating to asst. yr. 1990-91.
2. The first ground of this appeal of the assessee relates to addition of Rs. 1,58,568 on account of being uncollected fees by the assessee company from the students, made by Assessing Officer (hereinafter referred to as the AO) and confirmed by the CIT(A) in the following facts and circumstances.
3. The assessee, Noble Institute Private Ltd. is like many other coaching institutes being run in the Ahmedabad City and other towns for imparting coaching to students after their school times. The assessee company is running coaching classes for students of class X to XII for different subjects relating to Science, Mathematics etc. It appears from the record that the assessee was running as many as 5 branches in the previous year concerning to asst. yr. 1990-91 in which as stated by the learned counsel for assessee, there were five thousand students.
The modus operandi of the assessee is that any student who desires to get coaching in Science/Mathematics subject or in any other subject, approaches the assessee and fills up admission form (copy of admission form is appearing on paper book) giving out his name, address and details of the subjects in which he wants to be coached in. Rs. 100 is charged as provisional admission fees and before classes start and mostly in the vacation period of students, the assessee company calculates the amount of fees to be charged from that student and whole of the fees is realised before he is allowed to join the classes. It is also the case of the assessee that some students are not in a position to pay the whole of the amount of the fees at one time and then they are allowed the payment through instalment after making such prayer through application for instalments and after result of the scrutiny that prayer is reasonable one.
4. In the year under consideration, the assessee filed a return of income showing receipts of Rs. 38,04,737 as against receipts of Rs. 33,75,903 in the immediate preceding year. On scrutiny the AO observed that the assessee had not charged fees for the full term from many of the students and that amount of such unpaid/uncharged fees came to Rs. 1,58,565. The AO called upon the assessee as to why this amount should not be added to the total income; then the assessee submitted that many students deposited initial fee of Rs. 100 seeking admission at the time of start of the session but did not pursue the coaching further and sometimes the students who had been given benefit of paying coaching fees through instalments did not complete the coaching for full term and thus that amount remained unpaid. The assessee-company further mentioned that it has got its internal control system to check the students, who are not coming forward to pay the unpaid amount of fees and still some remain as many students did not turn up. The AO considered these submissions but he rejected the same on the main ground that assessee company did not maintain any attendance register nor any other record to show as to which student did not attend the classes for whole of the year or part thereof and made the said addition of Rs. 1,58,565. The assessee came in appeal.
5. The contention of the assessee before the CIT(A) was the same as before AO. It was pleaded that taking attendance was not in the interest of the students and the institute as that will lead to the wastage of time. The assessee further gave out the working adopted by the assessee company to check that all the students who were attending the classes, have paid up the due fees. It was also the case of the assessee that it was not possible for assessee to pursue the balance of unpaid fees when student(s) quit classes in the middle of the year or did not turn up after seeking provisional admission by depositing Rs. 100 only. The learned CIT(A) considered those submissions and rejected by observing that assessee was following mercantile system of accounting and the amount of fees was settled as soon as the students enrolled themselves for coaching and that amount of fees does fall in the category of the accrual of income of assessee. The assessee had all rights to realise all those amounts as students were bound to pay the full amount to the institute. He had also rejected the plea of the assessee that students sometime failed to turn up after depositing of Rs. 100 as fee or quit classes in the middle of the session on the same ground that amount of entire fees became due to the assessee, the moment the students filled up the admission form. Ultimately the assessee's appeal was rejected confirming the said addition. The assessee came in appeal before the Tribunal.
6. The learned counsel for the assessee had taken us through the working of the assessee institute and tried to point out that main basis for AO for making the addition was that the assessee company was not maintaining any attendance register or any other record so as to reveal as to which student did not attend the classes for whole or part of the year. In this connection it was pointed out that taking attendance is not mandatory as in the schools where it is statutory requirement. Secondly, coaching classes are conducted for 2-2.30 hours consisting of 3-4 periods being attended by 60-75 students and if each of the coach starts taking attendance, he will waste 10-15 minutes of the students in each class. It will also be wastage of time of the institute as teachers are being paid by it on the hourly basis and further the period of coaching classes have to be extended. Sometimes students themselves or on account of domestic requirement opt to remain off from the coaching classes. He further pointed out that students used to quit coaching classes on different grounds as sometimes they were not able to clear the examination in which they appeared or sometimes they switched over from science stream to commerce or arts or moved out of the city or their school teacher was able to force them to go for tuition with him or they went to other coaching institute. The contention of the learned counsel was that no doubt attendance register was not being maintained for the solid grounds mentioned above but still assessee company was vigilant by adopting internal checking system to see that each student who joined coaching classes paid the due fees.
The system consists of issuing yellow cards to those students who get provisional admission and pay Rs. 100. If a student pays the whole of the amount then said identity card is replaced by green card and light red cards are issued to those students who use to pay the amount through instalments and that card was also being replaced the moment the amount of instalment is paid up. The learned counsel pointed out further that assessee company had deployed its own staff for frequent and instant checking of identity cards before or after the classes and those students who have not paid up to date are not permitted to attend the classes. The learned counsel has given out the break up of Rs. 1,58,565 which has been added to the total income as under : ------------------------------------------------------------------- Total fees Fees Balance fees to------------------------------------------------------------------Rs. 100 fees paidbooking.
1,13,410 15,800 97,610Fees paid inuncollected 1,17,459 56,514 50,955 ------------ According to him the assessee had shown Rs. 15,800 realised from those students who have not turned up after filling of admission form and depositing Rs. 100 and further received Rs. 56,514 out of those students who had left the classes in the middle of session leaving the unpaid balances which was to be paid by them through instalments. There were so many cases in which students had paid up the whole of the amount and did not attend the classes and still assessee had shown that amount of fees as its receipts. On the basis of all these facts the contention of the assessee was that these were not actual receipt of the assessee as the same were neither receivable nor due from the students and there was no legal right to the assessee to recover the said amount from the said amount.
7. The learned counsel further pointed out that it is not the case of Revenue that said amount has been realised by the assessee and not shown by it in the books but the main case is that it was due to the assessee and not realised. The contention of the learned counsel was that this basis was not correct as unless and until the assessee was not having any right to realise that amount nor the same accrued to him then such amounts cannot be treated as the real income of the assessee even though assessee may be following mercantile system of accounting.
8. Coming to the legal position, the learned counsel placed reliance on the decision of the Bombay High Court in the case of H. M. Kashiparekh & Co. Ltd. vs. CIT (1960) 39 ITR 706 (Bom) in which their Lordships have laid down the true test regarding the principles of real income in the following words : "The two rules that income-tax is annual in its structure, meaning thereby that for computation each year is a distinct self-contained unit, and the other that the income to be taxed is the real income of the assessee are not incompatible or irreconcilable; they permit of harmonious application.
The principle of real income 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 an 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".
The contention of the learned counsel is that this decision of Hon'ble Bombay High Court is binding as at that time Gujarat High Court was not in existence. According to him in examining any transaction, the Court should have more regard to the reality and situation of the case and in the case in hand the circumstance is such that assessee is in the field of business competition as so many institutions are being run. He lured the students to the institute by offering even discount of 5% in the total amount of fees. The students are simply filling up the admission form and that itself will not be giving any right to the assessee to recover the amount. Further the amount to be recovered from the students will be petty and even the expenses for this recovery shall be quite high. If any legal process is adopted, it will bring bad name to the institute and in future most of the students will be scared from the name of the institute itself and it all shows that business expediency is also not in favour of adopting such practice on the part of assessee. The learned counsel pointed out that this reasoning of the Hon'ble Bombay High Court was approved by the Hon'ble Supreme Court in the case of CIT vs. Birla Gwalior (P) Ltd. (1973) 89 ITR 266 (SC) and followed by Patna High Court in the case CIT vs. S. K. G. Sugar Ltd. (1974) 96 ITR 194 (Pat).
9. The leaned counsel further placed reliance on the decision of Hon'ble Supreme Court in the case of CIT vs. Shoorji Vallabhadas & Co.
(1962) 46 ITR 144 (SC) in which their Lordships have dealt with the effect of book keeping entries in the mercantile system of accounting.
Their Lordships have observed that - "Income-tax is a levy on income. Though the IT Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a "hypothetical income", which does not materialise.
Where income has in fact been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable where however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account." 10. The learned counsel on the basis of above, argued that there was no income resulted in favour of the assessee company and no addition was warranted.
11. About accrual of income, the learned counsel also pointed out that no services were rendered by the assessee then question of accrual of income does not arise. Mere filling up of form will not show that assessee had rendered any services to the student(s). Further the AO has also not made any effort to find out from any student who had quit the session in the middle of the session and did not pay the instalment or from that student who simply filled in the admission form and paid Rs. 100, whether he has paid any amount, to verify the correctness of the entries of the assessee.
Accordingly the case of the assessee was that no accrual had taken place nor it was the income of the assessee if the principles of real income are applied to the facts of the case.
12. As against it, the learned Departmental Representative placed heavy reliance on the order of AO as well as that of CIT(A). He pointed out that assessee is following mercantile system of accounting and once the assessee gets duly filled in admission form from any student seeking admission and he enrolled him by getting the registration fee, it was the bounden duty of the assessee company to have completed the account books by crediting whole of the amount as it is a case of company and he became entitled to recover the amount calculated by the office staff in the bottom of the admission form meant for office use and in the mercantile system it became the income of the assessee in view of the system of accounting being followed by the assessee and at the same time it gave right to the assessee to recover the same, because contract is complete as soon as the student is enrolled. The learned Department Representative pointed out that burden was on the assessee company to prove that such and such students had left after payment of Rs. 100 registration fee or left the classes in the middle of the session but nothing has been done by it. Students were not to be examined by AO as argued by the learned counsel but assessee should have produced the same. The learned Departmental Representative was of the view that real income theory will not come into play in the sense as argued by the learned counsel for the assessee. The learned Departmental Representative further pointed put that assessee had not acted as was expected by a businessman. The assessee company was entitled to recover the amount and once that has not been recovered no benefit of non-action on the part of assessee can be extended to the assessee. On the basis of these, the contention was that addition must be upheld.13. The learned counsel for the assessee in rejoinder placed reliance on the earlier arguments and pointed out that there was no question of contract as students were minors and contract with minor is nullity. He further pointed out that there was no accrual of any income nor that amount comes in the theory of real income. Relying upon the arguments of the learned Departmental Representative it was contended by the learned counsel that in case book entries were completed then at the most assessee would have claimed that amount as trading loss and that would have been allowable in view of the decision of Hon'ble Gujarat High Court in the case of CIT vs. Equatorial (P) Ltd. (1994) Tax (3)-82. He further, placed reliance on the decision of Hon'ble Supreme Court in the case of Shoorji Vallabhadas & Co. (supra) in which such an entry, if made in the accounts, would have been showing hypothetical income and would have not resulted any income. In the end contention of the learned counsel was that the appeal is to be allowed.
14. We have carefully considered the submissions of the parties and gone through the material placed before us as well as perused the case laws relied by both the parties. We are of the considered opinion that the theory of real income as propounded by Hon'ble Bombay High Court in the case of H. M. Kashiparekh & Co. Ltd. vs. CIT (supra) do apply to the facts of the case as well as the ratio of the decision of Hon'ble Supreme Court in the case of Shoorji Vallabhadas & Co. (supra) force us to conclude that there resulted no income at all to the assessee.
Undisputedly some of the students had filled in admission forms and deposited Rs. 100 only in each case and later on failed to attend classes for so many reasons as given out by the learned counsel. If any student had failed in the previous examination or he had decided to change the science stream to arts or commerce or moved out of Ahmedabad or joined any other institute in the city, then the assessee company cannot be expected to pursue that case and force the student to join the institute and pay the amount which was calculated by its office staff at the body of the admission form because that calculation alone will not give out any right to assessee to claim the amount from the student if he did not wish to proceed further with the coaching being imparted by the assessee institute. Secondly these facts will not automatically create any right in favour of assessee company to recover the amount from such students nor the same will be resulting in any real income in favour of the assessee even though mercantile system of accounting was being followed by it. In the case of students who were extended the benefit of paying the due amount of fees through instalments and in case they had not turned up after 2-3 months, the amount cannot be recovered from them as they were not getting any coaching also for the remaining period. It is again note worthy fact that if services are not rendered by the assessee then such amount will not be automatically paid out to the assessee. We have gone through the guidance note issued by the Institute of Chartered Accountants of India on Accrual Basis of Accounting and the relevant extract thereof are appearing from p. p. 199 to 211 of the paper book of assessee.
Dealing with Revenue Recognition (AS-9) the said guidance note describes the accounting standard issued by the said Institute in cases relating to sale of goods, rendering of services etc. On page 211 of the same we do find how the amount of tuition fee is to be dealt with and it shows revenue should be recognised over the period of instructions. This again clarifies the whole position of the assessee and method being adopted by assessee. The fact remains that students who were not getting coaching would not be coming forward to pay the amount of fees even then the institute may be following mercantile system of accounting and business expediency also requires that no punitive steps can be taken by the assessee for realisation of the alleged due amount according to the mercantile system of account as once a suit is filed by any institute in any Civil Court for realisation of Rs. 500-1,000 from any student, it will create problems not only to the institute but administration also. This aspect of this type of business cannot be lost sight of because admittedly assessee is dealing with the students and tackling of students now-a-days is being felt by each and one Educational Institution.
15. Another aspect of the matter may be referred to. As pointed out by the learned counsel for assessee, as many as approximately five thousand students are enrolled each year by the assessee company for coaching purposes. The assessee has also furnished the list of such defaulters/drop-out students who had failed to turn up after depositing Rs. 100 or had failed to complete the coaching in the instalment scheme; and failed to pay the remaining alleged due amount and out of them these numbers come to 311 only which is not challenged by the Revenue. If out of approximately 5 thousand students taking coaching, such defaulters are 311, this will be a very negligible percentage which can be overlooked. The assessee has also furnished before us that this is not only feature of this year or in the institute of assessee company but in all such institutions this type of defaulters/drop-outs occur. The learned counsel has pointed out that the details of such amount for asst. yr. 1989-90 which was Rs. 1,40,102 and even in subsequent asst. yr. 1991-92 where this amount on identical ground was Rs. 1,38,209 nothing was done by the Department for asst. yr. 1989-90 on the similar facts. This fact again is relevant that this type of happening is not a new feature for this assessment year but it has been going on regularly from so many preceding years and taking place even after this assessment year.
16. Considering all these facts and circumstances together, we conclude that it was a case of accrual of no real income in favour of assessee and question of any addition was not warranted. The authorities below were not justified in making the addition and confirming the same. As we are going to delete this addition on these facts, we are not taking up the ground No. 8 of the assessee in the grounds of appeal which is nothing but an alternative submission for treating this amount as bad debt in case this amount is being treated as accrued to the assessee on the basis of mercantile system of accounting. The result is that this ground of appeal spread over ground Nos. 3 to 4 and 8 stands disposed of deleting the amount of Rs. 1,58,565 added by AO and confirmed by CIT(A).
17. The second ground which is described in ground Nos. 5 and 6 of the grounds of appeal relates to disallowance of Rs. 36,000 claimed by the assessee out of theft of cash and another claim of Rs. 5,000 on account of professional charges incurred by the assessee for claim of Rs. 36,000.
18. Relevant facts are that the assessee put up a claim of Rs. 36,000 which was allegedly stolen in a theft committed on 30th June, 1988 at 3 P. M. at the residence of Director, Shri C. T. Hindocha of the assessee company. The assessee preferred claim of this amount of Rs. 36,000 with the New India Assurance Company Ltd. with whom assessee company had insured its office premises along with house of Managing Director and others against theft etc. The Assurance Company rejected its claim on 30th March, 1989 and finally vide letter dt. 19th Dec., 1989. The assessee further claimed to have filed a Civil Suit No. 1510 of 1990 in the City Civil Court against the New India Assurance company for the recovery of the amount of claim of Rs. 36,000 and incurred Rs. 5,000 as expenses. The amount of Rs. 36,000 plus Rs. 5,000 were claimed but the AO rejected the claim of the assessee on the ground that there was no evidence to show that Rs. 36,000 cash was lying at the residence of the Director. The claim was disallowed for both the amounts. The matter came before the CIT(A) and he also rejected the claim of assessee vide para 22 of his order on the ground that burglary/theft took place in the previous year relevant to asst. yr. 1989-90 and claim of the assessee cannot be allowed in this year for Rs. 36,000. He has not disposed of the plea of the assessee regarding claim of Rs. 5,000. It is how these two grounds came before us in the appeal of the assessee.
19. The learned counsel for the assessee has argued that no doubt theft took place in the previous year relating to asst. yr. 1989-90 but the New India Assurance Co. has finally refused to compensate the assessee for the claim of Rs. 36,000 on account of theft vide letter dt. 29th Dec., 1989 and that period does fall in the previous year of asst. yr.
1990-91.
He has also placed reliance on the decision of Bombay High Court in the case of Lord's Dairy Farm Ltd. vs. CIT (1955) 27 ITR 700 (Bom) in which their Lordships have laid down that so long as there was any possibility of the amount being recovered from the employee who had embezzled there was no loss to the assessee. It is only when it is clear that the money could not be recovered, that loss is caused. On the same point the learned counsel relied upon the decision of Hon'ble Supreme Court in the case of Associated Banking Corpn. of India Ltd. vs. CIT (1965) 56 ITR 1 (SC) and on the decision of M. P. High Court in the case of CIT vs. Durga Jewellers (1988) 172 ITR 134 (MP). The contention of the learned counsel was that assessee pursued its claim against the New India Assurance Company and its claim was rejected finally on 29th Dec., 1989 and that date should be treated as the date of actual loss. The assessee's counsel had further pointed out that theft had occurred at the residence of Managing Director for which Police Report was filed and in such cases the claim for deduction should be allowed in view of the decision of Hon'ble Supreme Court in the case of Badridas Daga vs. CIT (1958) 34 ITR 10 (SC), in the case of CIT vs. Nainital Bank Ltd. (1965) 55 ITR 760 (SC) and in the case of Ramchandar Shivanarayan vs. CIT (1978) 111 ITR 263 (SC).
20. As against it, the learned Departmental Representative has pointed out that it is a case of assessee company and nothing has been brought on record by it to show that the company had passed any resolution to the effect that the Managing Director was permitted to keep cash at his residence and in the absence of any such resolution it is really difficult to infer that amount of alleged theft actually belonged to the assessee company or it actually belonged to the Managing Director.
It was the duty of the assessee to prove the same and that has not been done by it. Regarding maintainability of the alleged claim of the assessee in the assessment year under consideration, the learned Departmental Representative pointed out that assessee had filed suit against the Assurance Company on the basis of hopes to recover the amount and thus within this assessment year it cannot be taken for granted when assessee should be treated to have lost hopes to recover the whole amount otherwise he should have not filed the suit.
21. After considering all the facts we are of the opinion that assessee's claim is not tenable. It may be relevant to mention that assessee was duty bound to prove that amount allegedly stolen in theft/burglary at the residence of Managing Director on 30th June, 1988 actually belonged to assessee company. Nothing has come from the side of assessee to link that money except a statement showing the cash position of assessee company in different months and dates and a certificate of Chartered Accountants appearing at p. 26 of paper book to the effect that Rs. 37,431.62 was the cash at Navrangpura Branch of assessee on 30th June, 1988. It was not proved from the side of assessee that Managing Director was authorised to take money from office to his residence and/or he was generally taking the same to his residence and further the certificate of the C. A. also does not help the assessee as it simply shows that cash balance of one branch of the assessee company on 29th June, 1988 and not to the effect that this amount was taken by Managing Director to his residence on 29th June, 1988. A handwritten calculation is also given at the end of this certificate of C. A. appearing at p. 26 in which attempt has been made to show that Rs. 37,431.62 was shown at the residence of the managing Director. If this is taken as true then why the burglars will take only Rs. 36,000 and will not take Rs. 37,431.62. It shows that this attempt of assessee is not yielding any result rather going against it.
22. Further the first claim of the assessee was rejected by New India Assurance Co. on 30th March, 1989 as evident from copy of letter appearing at. p. 20 of paper book. This should have taken as last letter of rejection of the claim and it happened in the previous year relating to asst. yr. 1989-90 and the assessee should have claimed that amount in that year as subsequent letter dt. 19th Dec., 1989 which is being made basis for claiming that amount in this assessment year is nothing but reiteration of earlier letter dt. 30th March, 1989. Even the case law does not help the assessee as hope of recovery of the amount is still existing and that is why suit was filed by assessee and nothing has been stated by assessee about the result of that suit filed in 1990 while we are at the fag end of 1995. So these factors are sufficient to reject the claim of the assessee and we dismiss this ground of assessee for Rs. 36,000 and restore back ground No. 6 to the CIT(A) who has not disposed it of.
23. Ground No. III - This ground of assessee contained in ground No. 7 of appeal relates to claim of the assessee about depreciation.
24. The AO during assessment proceedings has observed that assessee has claimed depreciation @ 33.33% on electric installation, air coolers, water cooler, office equipment and furniture and fittings which were added to the assets of the assessee through purchases for Rs. 78,339 in the year under consideration. The claim for depreciation @ 33.33% was rejected treating that these are part of office premises and depreciation @ 10% was found allowable.
In appeal the CIT(A) allowed the claim of the assessee so far as depreciation @ 33.33% on benches, blackboards, cupboards/shelves, partitions, tablestools, desks, selty and show case but depreciation at normal rates was ordered to be granted to water cooler and office equipments and electrical installations. The assessee is in appeal.
25. The contention of the learned counsel for the assessee is that costs of some of the articles out of fans, air cooler and office equipments was below Rs. 5,000 and 100% depreciation on such item should be allowed under first proviso to s. 32(1)(ii). The other plea of the assessee is that a revised claim of depreciation was submitted in which some articles were claimed to be plant and machinery in view of the different decisions of Hon'ble Supreme Court but the AO has not decided that controversy. The learned Departmental Representative supported the orders of authorities below.
26. After considering the rival submissions it is pointed out that articles costing below Rs. 5,000 attract 100% depreciation and matter stands restored back to AO to decide this issue afresh in view of the revised claim of depreciation submitted by assessee which remained undisposed of and AO shall consider the legal position regarding claim of the assessee on each and every item after affording an opportunity of being heard to assessee.