Star India (P) Ltd. Vs. Additional Commissioner of - Court Judgment

Excerpt:

.....of bombay high court in the case of pfizer coipomtion (supra) by submitting that in the case of non-resident, dividend income deemed to accrue under section 9(1)(iv) which provides payment of dividend rather than dividend declared or distributed. thus, it was held that such income could be taxed on actual payment to non-resident. since actual payment was the basis for taxing the same, it was held by the court that right to receive dividend accrued in the year in which rbi approval was granted. accordingly, it was pleaded that order of the learned cit(a) be upheld.16. rival submissions have been considered carefully in the light of materials placed before us and the case law referred to. much has been said on behalf of the revenue regarding change in the method of accounting from mercantile to cash system. such contention of revenue is devoid of force and untenable in view of the clear admission of the assessee that method of accounting continues to be mercantile. we have already extracted note 2 appended to the computation of income in para 5 of our order wherein assessee has admitted that method of accounting continues to be mercantile. even the learned counsel for the.....

Judgment:

1. The assessee as well as the Revenue have filed cross-appeal pertaining to the asst. yrs. 1998-99 and 1999-2000. The assessee has also filed appeal for the asst. yr. 1997-98. These appeals have been heard together and are being disposed of by the common order for the sake of convenience.

First and the major issue, common to all the appeals of the assessee, relates to the date of accrual of commission income arising under the agreement.

2. Briefly stated, the facts are these. The assessee is a resident company engaged in the business of (i) procuring and collecting advertisement revenue on behalf of Satellite Television Asian Region Advertising Sales ("STAR"), BV ("SAS BV"); (ii) producing/procuring and supplying programmes to Satellite Television Asian Region Advertising Sales ("STAR"), Hong Kong; and (iii) acting as a licensee in India in respect of Star Movies pay channel.

3. The assessee entered into an agreement on 31st May, 1994 with Star Advertising Sales BV of Netherland holding exclusive rights in India from Satellite Television Asian Region Ltd. of Hong Kong for television advertising on various television channels under which the assessee was appointed as an agency in India to market television advertising for the channels. This agency arrangement was approved by Reserve Bank of India (RBI) on 22nd July, 1994 and subsequently renewed from time-to-time (pp. 1 to 5 of the paper book). Under Clause 3 of the agreement, the assessee was required to solicit the advertisements in India for the channels at such rates as may be fixed from time-to-time.

After having solicited the advertisement, the assessee was further required by Clause. 6 of the agreement to forward each client's requisition for telecast of its advertisements to its principal and the principal reserved the right to accept or reject the aforesaid requisition. Under Clause 7 of the agreement, the principal was required to send the invoice for advertisements telecast with instructions to the clients to make the payment thereof to the assessee. Further, the assessee was required to collect all sums due from the clients and hold the same in trust for the company till remittance of the same to its principal. Clause 8, which is important for disposal of this appeal relates to the payment of commission to the assessee. This reads as under: The agency shall be entitled to retain 15 per cent (fifteen per cent) of the net invoice amount paid by the clients as commission.

Clause 10 requires the assessee to promptly arrange to remit the net amount of invoice, after retaining the commission to the bank account designated by the principal. Clause 11 of the agreement provides that the assessee shall obtain necessary approval from the RBI to act as an agency of the principal company under the terms and conditions mentioned therein. The assessee was also further required to obtain the necessary permission from the RBI to remit the net invoiced amount to the principal's bank account in Netherland. Other terms and conditions are not relevant for adjudicating the issue before us and, therefore, the same are not referred to in the order.

4. The assessee was following mercantile method of accounting. In the earlier years, the assessee took the accrual of commission income on the dates when the advertisements were telecast by the principal and accordingly, the commission income was offered for taxation in the year in which advertisements were telecast. However, it was subsequently realized that commission income did not accrue on the date of telecast but accrued when the payment was received from the clients.

Accordingly, in the years under consideration, the assessee considered the accrual of commission income on the dates when the money was realized by the assessee from the clients. In respect of asst. yr.

1997-98, the assessee appended the following note to its statement of computation of total income: Note 2 : In the prior year, the company accrued commission income on the sale of time spots in the period during which time spots were aired. During the year, the company has amended this policy to accrue commission based on payments made by the advertisers during the year, to bring it in consonance with Clause 8 of the agency agreement with SAS BV; In the Supreme Court case of Keshav Mills Ltd. v. CIT mercantile system has been explained as one that brings into credit what is due, immediately when it becomes legally due and before it is actually received.

Accordingly, the method of accounting continues to be mercantile, since the commission as per the agency agreement is legally due only upon payments made by advertisers.

Apart from the above note, the auditor of the assessee-company also appended Note 13 to the financial statements as under: 13. Revenues : In the prior year, the company recognized commission income on the sale of time spots in the period during which time spots were aired. During the year, the company has amended this policy to recognize commission income based on the advertisement collections made during the year to appropriately reflect the terms of the agency agreement with SAS BV. Had the company followed the accounting policy used in the prior year, commission income for the year ended 31st March, 1997, would have been higher by Rs. 8,10,11,000 and the net loss for the year would have been net profit of Rs. 52,32,000.

5. The assessee was required to substantiate its claim regarding the change of policy. The explanation of the assessee before the AO was that the commission accrued to the assessee under Clause 8 of the agreement, according to which the assessee was entitled to retain 15 per cent (fifteen per cent) of the net invoiced amount paid by the clients. The contention was that, there was no accrual unless this amount was collected by the assessee from the clients since it could not retain any amount, as per the agreement, prior to the receipt of the amounts from clients.

6. This contention of the assessee was not accepted by the AO for the reasons that under the mercantile system of accounting, an item of revenue is said to accrue or arise when a legal right in respect of it comes into existence. According to him, the assessee had assigned a very narrow meaning to the word "paid" mentioned in Clause 8 of the agreement. He relied on various decisions namely Aziende Colon Nazionali Affini v. CIT , Janatha Contract Co. v. CIT and Neroth Oil Mills Co. Ltd. v. CIT for the legal proposition that wherever accrual of income flows from an agreement in writing, the entire agreement, and not its particular clause, should be read as a whole so as to ascertain its true intention. On the basis of this legal position, the AO was of the view that entire agreement should be read together and not only Clause 8 as contended by the assessee. It was also observed by him that in the past, the assessee had been declaring accrual of income on the basis of revenue payable by the client to its principal in the year in which advertisements were telecast. Since there was no change in the agreement, the new interpretation of clause was not possible.

Accordingly, it was held by him that the income accrued to the assessee on the dates when advertisement were telecast as the assessee had acquired a legally enforceable right against its principal to claim the commission on such dates.

This resulted in additions of Rs. 8,10,11,000 for asst. yr. 1997-98, Rs. 8,30,00,449 for asst. yr. 1998-99 and Rs. 35,48,804 for asst. yr.

1999-2000.

7. The matter was carried in appeal before the learned CIT(A) before whom the stand taken before the AO was reiterated. However, the learned CIT(A) confirmed the orders of the AO by making the following observations: (a) At the time of only part payment being made by the advertiser to the appellant or to SAS BV, it cannot be predicted that the advertiser would not pay the remaining amount later. Accordingly, it cannot be inferred that the commission did not accrue to the appellant on the entire invoiced amount, part of which was not paid later by the advertiser.

(b) The advertiser can pay directly to SAS BV after retaining the commission of the appellant which is paid to the appellant separately. The fact of part payment of the advertising charges to SAS BV, falling in one accounting period and remaining part falling in another accounting period would not affect the accrual of commission to the appellant and has to account for entire commission income in the year of accrual.

(c) When the advertiser pays only partly direct to SAS BV without retaining the commission of the appellant, in one accounting period and remaining part is paid in another accounting period the claim of the appellant is not affected and the commission income has to be accounted for the year of accrual.

(d) No evidence is produced that the part payment not made by the advertisers to SAS BV has been forgone by SAS BV and no efforts are made to recover the same, and any intimation is given to the appellant about variation claim of the appellant towards commission.

(e) As per the agreement the appellant has to collect the entire sum as per Clause 7 of the agreement the advertisers are to make payment of invoiced advertisement charges to the appellant and the appellant has to collect all sums due from the advertisers.

(f) The Clause 7 does not leave any scope for the appellant not to recover any amount from the advertisers thereby meaning that the commission on the entire invoiced advertisement charges accrued to the appellant on the date the advertisement is aired, i.e., when the SAS BV becomes entitled to advertisement charges.

(g) The term "paid" which has been emphasized by the appellant to mean actual payment, has not been defined in the IT Act. However, the Courts had occasion to interpret the word "paid" does not contemplate actual receipt of dividend by the shareholder concerned and the dividend may be said to be "paid" when the company discharges its liability and makes the amount of dividend unconditionally available to the member entitled to: Hon'ble Supreme Court in the case of Punjab Distilling Industries Ltd. v. CIT (1965) 57 ITR 1 (SC), clarified the difference between the expression "paid" and distribution that the distribution necessarily involved the idea of vision between several persons winch is the same as payment to several persons.

Court held that the expression "paid" takes in every receipt of contemplated payments by the employee from the employer, whether it was due to him or not.

In view of the above, it is clear that the payment of commission may become due for payment to the appellant only on collection of advertisement charges by the appellant from the advertisers on payment of advertisement charges by the advertisers to SAS BV, but the commission income accrues to the appellant the moment the advertisement solicited by the appellant on behalf of SAS BV is telecast, I hold that the AO was right in rejecting the changed policy of the appellant for accounting of commission income, This ground of appeal is rejected.

Aggrieved by the same, the assessee is in appeal before the Tribunal for all the years.

8. The learned Counsel for the assessee, Mr. Kaka, at the outset, pointed out that assessee had been following mercantile method of account and there has been no change in such method of accounting in the year under consideration. The dispute, however, has arisen because of wrong interpretation of agreement in ascertaining the point of time of accrual of income. It was submitted by him that in earlier years, accrual of income was taken when the advertisements solicited by it were telecast by its principal. According to him, on correct interpretation of terms of agreement, it was found that time of accrual of commission income was the date when money was realized from its clients. Hence, the assessee started declaring income on the basis that commission income accrued on realization of money from its clients.

Accordingly, it has been pleaded that correct claim of assessee cannot be rejected merely on the ground that in earlier years the assessee declared the income on the basis that commission income accrued on the date of telecast of the advertisement.

9. Proceeding further, on merits, it was contended by him that as per Clause 8 of the agreement, the commission income accures to the assessee only on the date when the money is paid by the clients to the assessee. He drew our attention to the relevant Clauses of the agreement including Clause 8 which reads "The agent shall be entitled to retain fifteen per cent (15 per cent) of the net invoiced amount paid by the clients as commission" and then submits that right to receive the income is acquired only when the money was realized by it from the clients and not prior to such incidence. He emphasized on the words "entitled", "retain", "net" and "paid" appearing in Clause 8 with reference to dictionary meanings. He also drew our attention to cls.

(iv) and (vi) of the approval by RBI which provided (i) that assessee shall not remit the advertisement charges until the advertisement is actually telecast over the Star TV, (ii) that at the time of seeking remittance, the assessee shall submit the invoices obtained from Star TV indicating the dates on which the advertisements were transmitted on the channels on Star TV and the net amount of advertisement charges.

Accordingly, it was contended by him that if the Clause 8 of agreement is read along with the above RBI conditions, then the only conclusion which can be drawn is that the commission accrued to assessee only when he got the right to retain the commission which in turn could not be acquired unless the amount was paid by his clients. He submits that no enforceable debt was created in favour of assessee till the amount was realized from his clients. The receipt of amount from client was the condition for accrual of income and, therefore, it cannot be said that income accrued on the dates when the advertisements solicited by assessee were telecast by its principal.

10. Proceeding further, he drew our attention to the Board's Circular No. 742, dt. 2nd May, 1996 (1996) 132 CTR (St) 9 wherein guidelines have been issued for computation of income of foreign telecasting companies. It was submitted by him that as per the circular, 15 per cent commission is retained by the advertising agents and 15 per cent is retained by Indian agent of foreign telecasting companies of the gross results and balance amount of 70 per cent of gross receipt is remitted to such foreign telecasting companies. Then it was submitted that considering the special features of the business and other complexities, the Board instructed the Revenue officers to assess the income of such telecasting companies @ 10 per cent of the amounts remitted abroad. According to Mr. Kaka, no income accrued to the foreign companies unless the amount was remitted. In this background, it was pleaded that if the income did not accrue to the principal on the date of telecasting, how it could accrue to the assessee. Thus, the contention of Mr. Kaka is that income to assessee cannot be said to accrue unless the amount payable to foreign companies is received by the assessee from the Indian clients inasmuch as right to receive accrued on the dates when right to retain was acquired. So, the aspect of payment of money is most crucial for determining the point of accrual. According to him, the right to receive the commission remained inchoate till the assessee received the money from its clients since neither it could retain its commission nor it could remit the same to its principal.

11. To substantiate the above submission, he relied on the judgment of Bombay High Court in the case of Pfizer Corporation v. CIT , wherein question for consideration of their Lordship related to the accrual of dividend income in the hands of non-resident company. In that case, the Indian company declared the dividend on 31st July, 1975. A part of dividend was remitted on 3rd Sept., 1976 with prior approval of RBI. The accounting year of assessee ended on 30th November. The stand of the Department was that the amount of dividend remitted was taxable in the asst. yr. 1976-77 since it accrued to assessee when the final dividend was declared on 31st July, 1975. The reference was made to Section 8 of the IT Act, 1961. On the other hand, the stand of the assessee was that dividend income accrued to assessee on 3rd Sept., 1976, when the remittance was permitted by RBI and, therefore, was assessable in asst. yr. 1977-78. The Hon'ble High Court held that Indian company's obligation to pay the dividend to the non-resident assessee arose only when RBI permitted the remittance and till then right to receive the dividend was inchoate.

12. Mr. Kaka further relied on the judgment of Rajasthan High Court in the case of Seth Pushalal Mansinghka (P) Ltd. v. CIT (1967) 63 ITR 109 (Raj), which has been approved by the apex Court in Seth Pushalal Mansinghka (P) Ltd. v. CIT (1967) 66 ITR 159 (SC). In that case, the assessee was having mines, factory and head office at Bhilwara (Rajasthan). It was following mercantile method of accounting. It sent the goods processed by it to Kodarma and Girdih villages in Part A and Part C States, as they then were, by railway. The railway receipts were obtained by assessee for self. Thereafter, the assessee tendered the bills to the local branch of the Bank of Rajasthan and received the payment at Bhilwara. As Bhilwara was then part of Part B States, assessee claimed rebate under Part B States (Taxation Concessions) Order, 1950. This claim was rejected by the ITO since ownership in goods continued to vest in the assessee until the actual delivery to the buyers. According to the ITO, the delivery was effected to the buyer when railway receipts were given by the bank to the buyers at Kodarma against payment. In view of the same, it was held that income did not accrue to assessee in Bhilwara or Part B State and consequently no rebate was allowable to assessee. The assessee remained unsuccessful till the stage of the Tribunal and matter reached in High Court. The High Court held that profits in such cases accrued when property in goods was transferred from seller to the buyer. On facts, it was held that profits accrued when the payment was made by the buyers to the broker, i.e., at Kodarma. Consequently, the assessee was not entitled to rebate. This judgment was confirmed by the Hon'ble Supreme Court. On the basis of this authority, Mr. Kaka has pleaded that income accrues on the date of payment even when assessee is maintaining mercantile system of accounting.

13. Lastly, it was argued that in such cases, theory of real income would apply. It was submitted by him that assessee was not even able to recover the various amounts from its clients due to various disputes and there was no point for offering income in one year and claiming deduction for bad debt in next year. Therefore, it would be appropriate, in such cases, to apply the real income theory as enunciated by the Supreme Court in various cases. Reliance was placed on the latest judgments of the apex Court in the case of Godhra Electricity Co. Ltd. v. CIT and in the case of CIT v.Bokaro Steels Ltd. .

14. On the other hand, the learned Departmental Representative vehemently opposed the contentions of the assessee's counsel by submitting that assessee could not change the method of accounting from mercantile to cash system unless there are bona fide reasons for such change. Further, neither there was change in the terms and conditions of the agreement between assessee and its principal nor any explanation from assessee for change in the method of accounting. According to him, the hybrid system of accounting is not permitted now after the amendment of Section 145. Therefore, the assessee could not offer revenue income on receipt basis and expenditure on mercantile basis.

15. Regarding accrual of income, he supported the reasons given by the AO and submitted that all parties involved were only interested in the telecast of advertisement and, therefore, as soon as the advertisements were telecast, the right to receive the commission accrued to assessee.

Proceeding further, it was submitted that once there is accrual of income, its taxability cannot be postponed merely because it is not quantified or is to be realized subsequently. It was also submitted by him that agreement should be read as a whole. If read as a whole, it could reveal that primary job of the assessee is to market and elicit the advertisements for its principal. Therefore, if the advertisements are telecast on Star TV then the job of assessee can be said to be successfully executed. Hence, right to receive the commission would accrue the moment the advertisement is telecast. Clauses 7 and 8 of the agreement are the mere modalities for remitting the amount to its principal. Proceeding further, it was submitted that RBI conditions merely related to the remittance of foreign exchange in accordance with the provisions of FERA and had nothing to do with the accrual of income. Alternatively, the commission could be said to accrue when the invoice was raised by the principal, He also distinguished the judgment of Bombay High Court in the case of Pfizer Coipomtion (supra) by submitting that in the case of non-resident, dividend income deemed to accrue under Section 9(1)(iv) which provides payment of dividend rather than dividend declared or distributed. Thus, it was held that such income could be taxed on actual payment to non-resident. Since actual payment was the basis for taxing the same, it was held by the Court that right to receive dividend accrued in the year in which RBI approval was granted. Accordingly, it was pleaded that order of the learned CIT(A) be upheld.16. Rival submissions have been considered carefully in the light of materials placed before us and the case law referred to. Much has been said on behalf of the Revenue regarding change in the method of accounting from mercantile to cash system. Such contention of Revenue is devoid of force and untenable in view of the clear admission of the assessee that method of accounting continues to be mercantile. We have already extracted Note 2 appended to the computation of income in para 5 of our order wherein assessee has admitted that method of accounting continues to be mercantile. Even the learned Counsel for the assessee has made the statement before us that there is no change in method of accounting and it continues to be mercantile. Accordingly, the arguments made by the learned Departmental Representative in this regard are rejected.

17. On the other hand, the dispute between the parties centres round the date of accrual of commission income. The contention made on behalf of assessee is that under mistaken advise, the dates of accrual was taken by assessee as the date when advertisements were telecast while the correct interpretation of the agreement leads to the conclusion that income accrued to assessee when the money was received from its clients, It is this contention of assessee which needs consideration in the light of the terms of agreement and the case law available on this issue. If the accrual of income relates to the date of receipt of money from its client then claim of assessee cannot be rejected on the alleged theory of change in the method of accounting. If mistake has been made in determining the date of accrual in the past that cannot stop the assessee in adopting the correct dates of accrual in subsequent years.

18. In view of the above discussions, now the question for consideration is whether the commission income, as per the agreement, accrued to the assessee when the advertisement solicited by assessee were telecast or when the sum was realized or collected by the assessee from its clients. Admittedly, the assessee was following mercantile system of accounting and, therefore, the assessee was liable to pay tax in respect of commission income in the year in which such income accrued to the assessee. It is the settled legal position that income accrues when an enforceable debt is created in favour of the assessee.

In other words, income accrues when the assessee acquires the right to receive the same, Reference can be made to the leading judgment of the Hon'ble Supreme Court in the case of E.D. Sassoon and Co. Ltd. and Ors.

v. CIT . However, where right to receive is inchoate it would accrue on the date when such right becomes absolute, i.e., on the happening of the contingency. As per the settled legal position, a liability depending upon a contingency is not a debt either in present or in futuro till the contingency happens. However, where a debt is created, its quantification would not postpone the date of accrual.

Reference can be made to Supreme Court judgment in the case of CIT v.Shri Goverdhan Ltd. .

19. Agency commission is contractual receipt. Under the contract of agency, unless different intention appears, the assessee acquires a right to receive the commission when the services are performed as per the agreement. For example, selling agent acquires a right to receive the commission as soon as the sale is effected by him. However, the parties may agree to the effect that right to receive commission would accrue on the happening of an event. In such case, the right to receive commission would accrue on the date when such event happens. Therefore, the, accrual of commission income would depend upon the terms of agreement in each case.

20. Let us now explain the above view in the light of case law. In the case of E.D. Sassoon and Co. Ltd. (supra), the assessee was the managing agent of a company called "United Mills" and was entitled to receive a percentage of annual profits of that company as its remuneration. The accounting period of that company was the calendar year. During the year 1943, the assessee assigned their office as managing agent and all their rights and benefits under the managing agency agreement to M/s Aggrawal and Co., on 1st Dec, 1943. In the course of assessment proceedings of assessee, the question arose whether in respect of managing agency commission, tax was payable on the entirety of the commission by M/s Aggrawal and Co. or by the assessee or it was liable to be apportioned between the two. The apex Court held that commission accrued only on the completion of the services under the agreement at the stated interval and, therefore, debt was created only at the end of the year. Thus, the entire commission was assessable in the hands of M/s Aggrawal and Co. and not in the hands of assessee. This case is an authority for the proposition that in case of service contract, the income accrues when the entire contractual obligation to perform the service is discharged or completed.

21. The above judgment was considered by the Hon'ble Supreme Court in the case of CIT v. Ashokbhai Chimanbhai . In that The assessee was an HUF managed by Karta--Ashokbhai. Ashokbhai was partner in the firm M/s Amrit Chemicals with a share of five annas in every rupee. Under the partnership deed the accounts of the firm had to be adjusted every calendar year. On 12th Nov., 1955, there was a partition in the family in which Ashokbhai was allotted the five annas share in the firm and he became full owner thereof. In proceedings for the assessment to income-tax of the income of the family for the accounting period 27th Oct., 1954, to 14th Nov., 1955, the question arose whether the whole or any part of the five annas share of the profit of the firm for the calendar year 1955 accrued to the family.

22. On these facts, the Tribunal held that profits from the firm had to be apportioned between assessee and Ashokbhai. Accordingly, the following question was referred to the Hon'ble High Court for its opinion: Whether, on the facts and circumstances of this case, the five annas share of the income of Amrit Chemicals or any part thereof for the year 1st Jan., 1955, to 31st Dec, 1955, accrued to the assessee and whether it could be charged in its hands The High Court agreed with the Revenue authorities that Ashokbhai had become full owner of the five annas share in M/s Amrit Chemicals w.e.f.

12th Nov., 1955, and not before, but upheld the alternative contention that no part of the share of profits which accrued to Ashokbhai on 31st Dec, 1955, was liable to be included in the income of the assessee, because on the date of accrual the assessee had no interest in those profits, and recorded a negative answer to the question referred.

On appeal to the Hon'ble Supreme Court, it was contended by Revenue as under: Counsel for the CIT submitted that the judgment in E.D. Sassoon and Co. Ltd.'s case proceeded upon the special character of a managing agency agreement and did not purport to lay down a general rule that accrual of income depends on quantification, or that right to payment of an ascertainable amount does not arise till accounts are made. Counsel also submitted that in sale transactions of a trading venture, profits accrue to the trader from transaction to transaction and are embedded in each transaction carried on by the trader, and the charge imposed by Section 4(1)(a) is not deferred till settlement of accounts. On that premises, counsel said, that profits dormant or embedded in the transactions carried on by M/s.

Amrit Chemicals accrued from transaction to transaction till 12th Nov., 1955, and properly belonged to the assessee and were liable to be taxed in the hands of the assessee notwithstanding a subsequent disposition of those profits by the assessee.

Such contention was negatived by the apex Court by holding as under: "It is true that E.D. Sassoon and Co. Ltd.'s case related to a managing agency transaction and the Court said that the managing agency being "a service contract one and indivisible" until the entire contract is performed, no right to remuneration arises. But the principle of the case is that unless a right to profits comes into existence, there is no accrual of profits. In the case of a partnership, where by a covenant binding between the partners the accounts are to be made at stated intervals, the right of a partner to demand his share of the profits does not arise until the contingency which by operation of law or under a covenant of the partnership deed gives rise to that right has arisen. In the present case by Clause 11 of the partnership agreement the amounts of the firm had to be adjusted every year, and accounts for the calendar year 1955 were not and could not be adjusted before 31st Dec, 1955. By the covenant in the deed of partnership Ashokbhai was entitled to receive the share of profits at the time when the accounts were adjusted. Before the agreed date, he had, under the deed of partnership, no right, unless the other partners agreed, to claim that the accounts be adjusted. If the profits arose on the settlement of accounts on 31st Dec, 1955, Ashokbhai alone was the owner of those profits and the assessee had no right therein.

The above judgment is, therefore, an authority for the proposition that where right to receive is inchoate and depends on the happening of the contingency, then right to receive the income would accrue when such contingency happens and not before.

The above view is reiterated by the apex Court in the case of Shri Goverdhan Ltd. (supra). At pp. 680 to 681 it observed as under: It is, however, well established that the income may accrue to an assessee without actual receipt of the same and if the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on, on its being ascertained. The legal position is that a liability, depending upon a contingency is not a debt in praesenti or in futuro till the contingency happens.

23. We would like to refer one more judgment of the apex Court in the case of J.P. Shrivastava and Sons (Bhopal) (P) Ltd. v. CIT . In that case, the assessee-company acted as managing agent of New Bhopal Textile Ltd. Clause 2(c) of the agreement provided "such commission shall become due and payable to the managing agents every year immediately on the passing of the audited accounts of the company by the shareholders at a general meeting at each and every year during the continuance of these presents." The accounting period of both companies was the financial year, The financial results for the accounting period ending 31st March, 1952 were passed by the shareholders at the meeting held on 28th March, 1953. The question arose whether commission of Rs. 41,842 due to assessee for the accounting period 1951-52 was assessable as income in asst. yr. 1952-53 or 1953-54. The Hon'ble Supreme Court held that assessee did not have any right to receive the commission till the general meeting of the managed company and, therefore, the same could form part of assessee's profit for the asst. yr. 1953-54.

24. In view of the above judgments of the apex Court, it is clear beyond doubt that normally the commission income would accrue to the assessee when the services are rendered or completed. However, the parties, with mutual consent, may provide that commission would accrue on happening of future contingency. Therefore, in such cases, commission would not accrue until the happening of the contingency and AO would not be justified in assessing the same merely on the basis of completion of services by the assessee. Such contingency may, in certain case, also coincide with date of payment as in the case of Seth Pushalal Mansinghka (P) Ltd. (supra), where transfer of property in goods, which was the basis of accrual of income, coincided with the date of payment. So, the contention of Revenue that date of payment can never be the date of accrual, cannot be accepted. So accrual of income would depend on the terms of agreement in each case.

25. Now, let us examine the terms of the agreement in the present case.

We have already set out the relevant terms of the agreement in para 4 of our order. If the entire agreement is read as a whole, we find that parties with mutual consent intended to the effect that the assessee shall be entitled to commission only when the sum due from the clients is received by the assessee-company. Even at the cost of repetition, we would like to refer Clause 8 of the agreement "The agency shall be entitled to retain 15 per cent (fifteen per cent) of the net invoice paid by the clients as commission." This is the only clause which speaks of commission to the assessee. Other clauses speak of the services to be rendered and the modalities for performing of the agreement. The same had already been referred to while stating the facts and contentions of the parties. The perusal of the same clearly shows that a contingency has been provided in the agreement, i.e., payment of net invoiced amount to assessee by its clients. In view of the judgments quoted by us, the assessee had no right to receive the commission till the happening of such contingency because right to retain the commission depended upon the payment of invoiced amount to assessee. Once the invoiced amount is received by the assessee from its clients, the right to retain the commission would accrue immediately irrespective of the remittance to the non-resident. The payments by the clients are a condition precedent for accrual of income which has been placed in the agreement to ensure the recovery of the amount. This condition was deliberately provided in the agreement because the principal of assessee was not only interested in getting the advertisements but also in recovering the advertisement charges. In commercial transactions, the recovery of the money is the major consideration. The principal of assessee did not have any infrastructure in India and, therefore, depended on its agent.

Therefore, to ensure the recovery of the advertisement charges, the implied condition was made in the agreement to the effect that assessee would be entitled to retain its commission @ 15 per cent of the net invoiced amount. It is because of this condition that assessee is required to put its best effort for recovery of the invoiced amount for its clients. Real effect of the Clause 8 is that assessee would never get any commission where the invoiced amount is not paid by the client.

Therefore, contingency provided in the clause must happen before the right to receive the commission accrues. In the absence of payment by the clients, no enforceable debt is created in favour of assessee under the agreement since it cannot move the Court for recovery of the amount from its principal on the basis of telecasting of advertisement. The moment the advertising amount is paid by the clients, the assessee gets the right to retain its commission and consequently would be liable to pay tax in the year in which such amount is received. The date of remittance to the principal would be irrelevant. The claim of the assessee cannot be rejected mainly (merely) because the date of accrual coincided with the date of payment. Accordingly, we are unable to sustain the orders of the lower authorities on this issue.

26. Before parting with the issue, we would like to mention that the decision of the Hon'ble Supreme Court in the case of Seth Pushalal Mansinghka (P) Ltd. (supra), does not help the assessee. This, decision was relied on by Mr. Kaka for the proposition that income would accrue on the date of payment in the case of payment to non-resident. In our opinion, that is not the ratio of that judgment. We have discussed the relevant facts of this case in para 13 of the order and, therefore, need not be repeated. The date of accrual was decided by Their Lordships on the basis of transfer of ownership in goods and not on the basis of the date of payment. This is clear from the following observations of their Lordships at p. 115 of the report: In the context of the facts found in this case, we are of the opinion that profits accrued to the appellant at the place when the orders were effected. In other words, where the property in the goods passed to the purchasers.

Their Lordships noted the facts that (i) consignment was sent to "self" as the railway receipt was taken in the name of appellant, (ii) railway receipt along with bill of exchange was presented by assessee to the bank for collection after endorsing the railway receipt in the name of bank, (iii) the goods were delivered to the buyers only when they paid the price to the bank and obtained the railway receipts endorsed in their favour. In view of the facts, their Lordships held that property in goods remained with the assessee till the payment was made since payment was condition precedent for transfer of property in goods (see p. 166 of the report). So, this judgment is an authority for the proposition that profits accrue at the place where property in goods passes. Merely because in that case payment coincided with the date of transfer of property in goods, it cannot be ruled that profits accrue on the date of payment to nonresident. There may be cases where property of goods may pass even prior to the date of payment and, therefore, in such cases profits would accrue at a place where ownership passed and not at a place where payment was made. This view can be explained by referring to the judgment of apex Court in the case of CIT v. Mewar Textile Mills Ltd. , where assessee sent the goods by rail from Bhilwara but the railway receipt was taken in the name of buyer who was dealer in British India and such railway receipt was sent by post. However, the buyer made the payment to the bank in British India who was banker of the assessee. On these facts, it was held that property in goods passed to the purchaser in Bhilwara and income did not accrue in India. The combined reading of the above two judgments clearly reveals that place of payment was not relevant for deciding the place of accrual of profits. What is important is the place where property in goods passes. In view of the above discussions, the judgment relied on by the assessee's counsel does not help the case of the assessee.

27. We are also unable to appreciate the contention of Mr. Kaka, the learned Counsel for the assessee, that there cannot be accrual of income to assessee unless the income accrues to the principal of the assessee. The obligation of assessee's principal to telecast the advertisement and the obligation of assessee to perform the services are under different agreements and, therefore, accrual of income to assessee's principal would arise on the terms of the agreement under which the obligation of assessee's principal arises. That agreement is not before us. However, the job of the principal is to telecast the advertisement and, therefore, moment such advertisement is telecast, the principal would acquire the right to receive the advertisement charges. That right cannot be equated to assessee's right under the separate agreement. If the assessee's principal does not recover the amount from his clients that would be business loss which can be claimed as deduction as business loss. However, the Board's Circular No. 742, dt. 2nd May, 1996 [(1996) 132 CTR (St) 9} permits to assess the non-resident telecasting companies on presumptive basis on the basis of actual receipts. This relaxation has been provided considering various factors mentioned in the circular. But that does not mean that accrual of income depended on payment. The accrual of income to the present assessee has nothing to do with the accrual of income to assessee's principal. The accrual of income to assessee only depends on the terms of agreement between assessee and its principal. That is why our decision rests only on the interpretation of that agreement.

28. In the course of hearing, Mr. Kaka, had drawn our attention to the letter of approval of RBI regarding appointment of assessee as an agent of non-resident company to point out that assessee could not remit the money without approval of RBI. Accordingly, no income accrued to assessee till the payment to non-resident. We are unable to accept this contention. The approval of the agreement is much prior to the services rendered by assessee. Clauses (iv) and (v) of the approval letter provides that (i) remittance shall not be made to the principal until the advertisement is telecast, (ii) at the time of seeking remittance, assessee shall submit invoices obtained for Star TV indicating the dates on which advertisements were permitted and net amount of advertisement charges. In our considered opinion, these clauses do not come in the way of assessee's right to retain the commission from the payments received from the clients. The conditions prescribed are only with reference to remittance to non-resident. Therefore, assessee's right to commission is not dependant on the RBI's condition and consequently, the judgment of Bombay High Court in the case of Pfizer Corporation (supra) is distinguishable on facts though the ratio of the judgment is relevant on the point of law in as much as it speaks of the legal position that in case of contingency, the accrual of income would depend on the happening of the contingency, 29. The judgment of the apex Court in the case of Morvi Industries v.CIT , heavily relied upon by the learned Departmental Representative also does not help the case of Revenue. In that case, it was held that once income accrues then the postponement of the payment or subsequent waiver of the same would not affect the taxability in the hands of the assessee. This judgment is nowhere in conflict with the judgments cited by us in the earlier part of our order. This judgment cannot be applied to a situation where the accrual itself depends upon the condition, i.e., payment of the amount in respect of which commission is to be received.

30. In view of the above discussions, we hold that in the present case, the income of commission accrued to the assessee when it received the amounts from its clients. Where the payments are directly made to the principal, then in such cases, the date of accrual of income would be the date when such amount is paid by the clients to its principal. The orders of the learned CIT(A) are, therefore, set aside on this issue and consequently, the AO is directed to recompute the income for all the years under consideration in accordance with our order.

31. The next common issue arising from cross-appeals pertaining to asst. yrs. 1998-99 and 1999-2000 relates to disallowance under Section 43B of the Act. This issue has been discussed by the AO at p. 9 of his order for asst. yr. 1998-99. It was noted by him that payments on account of provident fund, pension fund, administrative charges, employees deposit linked insurance charges and employees deposit linked insurance administrative charges amounting to Rs. 7,68,747 were paid on 16th April, 1998 against the due date of 15th April, 1998. According to the AO, the deduction under Section 43B could be allowed only where the payment was made during the previous year. Since the payment was made after the accounting year, these amounts could not be allowed as deduction. Accordingly, disallowance of Rs. 7,68,747 was made.

Similarly, disallowance of Rs. 81,96,460 was made for asst. yr.

1999-2000. It may be mentioned at this stage that assessee had contended before the AO that no disallowance could have been made where the payments were made within the grace period. But this contention was rejected by the AO.32. The matter was carried in appeal before the learned CIT(A), before whom, it was contended that payments were made within the grace period in respect of the asst. yr. 1998-99 and, therefore, no disallowance could have been made in view of the decision of the Tribunal in the case of Hunsur Plywood Works Ltd. v. Dy. CIT (1996) 54 TTJ (Bang) 260 : (1995) 54 ITD 394 (Bang) and in the case of Dy. CIT v. Asher Textiles Ltd. (2001) 73 TTJ (Mad) 727. The learned CIT(A) noted that the assessee himself made disallowance of its own for the sum of Rs. 58,11,980 in respect of PF and Rs. 10,19,118 for pension fund and, therefore, the AO was justified in retaining the disallowance. However, he allowed relief for Rs. 7,68,747 since it amounted to double addition. Consequently, disallowance for asst. yr. 1999-2000 was upheld. For the similar reasons, the disallowance made for the asst.

yr. 1999-2000 was also upheld. Aggrieved by the same, the assessee as well as Revenue are in appeal before the Tribunal for both the years.

For the similar reasons, the disallowance was made for asst. yr.

1999-2000 which was also upheld by the learned CIT(A).

33. The learned Counsel for the assessee has submitted before us that the assessee had challenged the disallowance for asst. yr. 1998-99 in respect of the entire amount notwithstanding the fact that the assessee had disallowed the amount of its own. He drew our attention to the statement of facts in this regard. Hence, the relief could not be restricted to a particular amount. Proceeding further, he relied on the decision cited before the learned CIT(A) for the proposition that no disallowance could be made where the payment was made within the grace period. Proceeding further, it was contended by him that in view of the omission of the second proviso to Section 43B by Finance Act, 2003, no disallowance can be sustained if the payments are made before the due date of filing of the return. This contention is based on the decision of the Tribunal in the case of Addl. CIT v. Vestas RRB India Ltd. (2005) 93 TTJ (Del) 144 : (2005) 92 ITD 1 (Del), wherein, it has been held that the amendment in Section 43B by Finance Act, 2003, was curative in nature and, therefore, the same has to be construed retrospectively. In view of the same, it was held that no disallowance under Section 43B could be made where the payment was made before the due date of the filing of the return. He also submitted that similar view has been taken by various Benches of the Tribunal at Mumbai. In the course of hearing, it was pointed out by the Bench that Delhi Bench of the Tribunal in the case of Gallium Equipment (P) Ltd. v. Dy. CIT (2002) 75 TTJ (Del) 978 : (2002) 81 ITD 358 (Del), has held that there is a distinction between payment of contribution by the assessee as employer contribution and payment as employees' contribution. It has also been held therein that in the case of employees' contribution to the PF, the provisions of Section 2(24)(x) would be attracted and as a result thereof such payments must be made within due date provided in the relevant Act before claiming deduction under Section 36(1)(va). The learned Counsel for the assessee had nothing to say in view of the said decision. On the other hand, the learned Departmental Representative relied on the orders of the AO.34. After hearing both the parties, we are of the view that entire disallowance is not justified. All the Benches of the Tribunal are consistently holding that the payments made within the grace period is an allowable deduction in view of the decision in the case of Hansur Plywood Works Ltd. (supra). Recently, the Delhi Bench of the Tribunal in the case of Vestas RBB India Ltd. (supra), has held that amendment in Section 43B is curative and, therefore, retrospective. It has been further held that disallowance cannot be made in view of the retrospective amendment where the payment has been made before the due date of filing of the return. Apart from this, Delhi Bench of the Tribunal in the case of Gallium Equipment (P) Ltd. (supra) has held that provisions of Section 43B are not applicable in respect of employees' contribution to the PF since such contribution has to be treated as income within the meaning of definition clause, i.e., 2(24)(x) and consequently, the deduction has to be allowed under Section 36(1)(va) which provides deduction where the payment has been made within the due date as prescribed under the relevant Act. These judgments can be applied only after verification of the necessary facts and the date of payments. Accordingly, the orders of the learned CIT(A) are set aside on this issue and the matter is remitted for both the years to the file of AO for de novo adjudication after verifying the necessary factual matrix.

35. The next common issue arising from cross-appeals relates to the disallowance of Rs. 9,03,02,000 for asst. yr. 1998-99 and Rs. 9,38,05,000 for asst. yr. 1999-2000 on account of advertisement expenses. The assessee was asked to explain the purpose for incurring such expenditure. In response to the same, following explanation was given: As submitted earlier, NTVI incurs expenditure for advertisements, which are undertaken to promote channel recall in the viewers minds.

Customers see that advertisements for the channels, thus a demand is generated with the cable operator, who in turn approach NTVI for enabling channel viewing.

36. The AO noted that advertisement expenses were incurred in respect of (i) manufacturing programme for Star TV, (ii) activity of assessee as commission agent for collecting advertisements revenue for Star TV and (iii) activity of cable subscription for Star TV. The AO was of the view that such expenditure was not incurred wholly and exclusively for the purpose of business of assessee and, therefore, could not be allowed as deduction under Section 37. Regarding the manufacturing activity, it was observed by him that assessee was charging 5 per cent additional sum over and above cost of manufacturing TV serials for Star TV and, therefore, there was no reason for assessee to incur any expenditure on advertisement. In respect of commission activity, it was observed by him that there was no necessity to incur any expenditure for such activity. Sample of advertisements showed that the advertisements were in the name of Star TV and not the assessee's own name. Hence, there was no link between the expenditure and assessee's business. According to him, such advertisements and publicity increases the viewership of Star TV and, therefore, is not related to assessee's business. Similar observations were made with reference to cable subscription activity. In view of these observations, he disallowed the claim of assessee for both the years.

37. The matter was carried in appeal before the learned GIT(A), before whom, it was contended that advertisements were inextricably linked with the business activities carried on by it. It was pleaded that expenses were incurred to promote the programme aired on the channels which results in creation of greater demand for the programmes and channels which in turn ensures that assessee has buyer willing to purchase successful programmes. Further, publicity facilitates the soliciting and marketing of advertising easier and, therefore, has direct impact on assessee's revenue. It was also contended that commercial expediency should be judged from the point of view of businessman and not the taxing Department. Reliance was placed on various judgments reported as CIT v. Panipat Woollen and General Mills Co. Ltd. , (P) Ltd. v. CIT (1965) 56 ITR 52 (SC).

38. The learned CIT(A) noted that assessee collected the subscription income of its own and not on behalf of Star India (P) Ltd. Therefore, advertisement expenses for such business deserves to be allowed.

Regarding manufacturing activity, he was of the view that such advertisements only benefited Star TV. Since assessee was manufacturing only programmes for Star TV, it was Star TV which was required to expend on advertisement and not the assessee. Regarding agency business, it was observed by him that though such advertisements benefit Star TV yet assessee also needs advertisements for its own activity. Similarly, for cable subscription activity, assessee is required to incur such expenses. Accordingly, it was held by him that entire expenditure could not be disallowed. Accordingly, he allowed 20 per cent of such expenditure. Aggrieved by the same, the assessee as well as Department are in appeal before the Tribunal.

39. The learned Counsel for the assessee reiterated the arguments taken before the learned CIT(A). In addition, he has relied on the decisions reported as Sarda Plywood Industries Ltd. v. CIT and CIT v. Aluminium Industries Ltd. (1995) 126 CTR (Ker) 150 : (1995) 214 ITR 541 (Ker). On the other hand, the learned Departmental Representative relied on the order of the AO.40. After considering the rival submissions, we are of the view that no disallowance of expenditure on advertisement was warranted in law.

There is no dispute that expenditure was incurred on advertisement. The disallowance was made by AO on the ground (i) that advertisements by assessee only increased the viewership of Star TV and, therefore, it was neither obligatory nor necessary for the assessee to incur such expenditure, (ii) that advertisement had no nexus with assessee's activity since advertisements were in the name of Star TV. In view of these grounds, the AO held that expenditure was not incurred wholly and exclusively for the purpose of business. Such grounds taken by AO are in conflict with the settled legal position as explained by the apex Court in the case of Sassoon J. David and Co. (P) Ltd. v. CIT . In that case, it was held that no disallowance could be made on the ground that it was not necessary for the assessee to incur such expenditure or it benefited the third party. Accordingly, the AO was not justified in considering these factors for the purpose of disallowance. The only relevant factor is whether incurring of expenditure was for the purpose of assessee's business. The assessee was carrying on its business activity exclusively for Star TV and, therefore, survival of its business depends on the success of programmes transmitted by Star TV. assessee was required to solicit the advertisements for Star TV channel. No person would give advertisement unless he is sure of large viewership of programmes on Star TV.Therefore, if assessee incurs expenditure on advertisement with a view to increase the viewership of Star TV, in our opinion, such expenditure would be in the interest of assessee's business though it may also benefit its principal. Accordingly, no disallowance was warranted in law. The order of the learned CIT(A) is, therefore, modified and disallowance sustained by him is hereby deleted.

41. The next issue arising from cross-appeals pertaining to asst. yr.

1998-99 relates to disallowance of loss on account of bad debts.

Briefly stated, the facts are that the assessee claimed deduction of Rs. 1,08,15,000 by debiting the P&L a/c under the head "Bad debts". The assessee was asked to justify its claim. The assessee, vide letter dt.

25th Jan., 2001, submitted as under: During the subject assessment year, NTVI has collected revenues from cable operators ('subscription revenues') under agreements executed with Satellite Television Asian Region Limited ('Star Ltd.') and Indian Sky Broadcasting Limited ('ISkyB'). Copies of these agreements were filed with your office vide our letter dt. 4th Jan., 2001.

As per the agreements, NTVI has been granted the right to collect subscription-revenues on its own account. As you will note, the agreements do not require repatriation of any amounts, on account of the subscription business, to Star Ltd., or ISkyB. We respectfully submit that the income earned and the expenses incurred by NTVI with respect to the subscription business are on its own account and not on behalf of any other company.

Given the above, any bad debts suffered by NTVI with respect to the subscription business are on its own account.

42. The AO noted that bad debts had been claimed against the head "Programming" for Rs. 83,15,000 and against subscription Rs. 25,00,000.

The AO disallowed the claim of the assessee by observing as under: It is well known fact by this time that in programming the assessee gets 5 per cent additional sum on the total expenditure incurred from Star TV. Thus the assessee has not included these sums in his income of the past years as only buyer of its programme is Star TV. Otherwise also all cost including cost of bad debts is to be borne by Star. As per agreement assessee has to get 5 per cent additional sum over and above all cost of programmes. Therefore claim of bad debts of Rs. 83,15,000 is not admissible.

Apart from the above reasons, it was also observed by the AO that conditions prescribed under Section 36(2) of the Act were not satisfied.

43. The matter was carried in appeal before the learned CIT(A), before whom it was submitted that the conditions provided under Section 36(2) were fully satisfied, Apart from this, it was submitted that the claim was allowable also under Section 37(1) of the Act in view of various judgments reported as CIT v. Mysore Sugar Co. Ltd. , CIT v. Rohtas Industries Ltd. , Travancore Tea Estates Co. Ltd. v. CIT and CIT submitted before the learned CIT(A) that this amount actually represented the refundable security deposit given for acquiring premises on leave and license basis for the purpose of its business and, therefore, the claim was allowable as deduction under Section 37.

44. The learned CIT(A) found that the sum of Rs. 15,06,400 related to current year in respect of sponsorship of programmes and there was nothing, to show that the debt had become bad. According to him, each and every debt could not be allowed as deduction unless it was shown that' the debt was bad. Accordingly, he confirmed the disallowance of Rs. 15,06,400 out of the sum of Rs. 49,29,736, which was found to be relatable to sponsorship income. Rest of the amount aggregating to Rs. 34,23,363 was allowed as deduction. Regarding the sum of Rs. 3,85,489 found pertaining to advance given to production companies for supply of software programme, the learned CIT(A) observed that this amount was never disclosed as income in the accounts and, therefore, the same could not be allowed as "bad debt" under Section 36(2). The claim under Section 37(1) was not entertained as according to him, advances did not constitute the expenses. Accordingly, this disallowance was confirmed.

Regarding sum of Rs. 25,00,000, it was held by him that the same could not be allowed as deduction on account of "bad debt", as this amount had never been disclosed as income of the assessee. It was also noted by him that the assessee had been consistently claiming as "bad debt" and only in the course of appellate proceedings, it was stated that this amount represented security deposit for acquiring premises on leave and license basis. It was observed by him that attempt was deliberately made to camouflage the claim under the guise of "Bad debt". Apart from this, it was observed by him that the expenditure was on account of capital and, therefore, disallowable. Aggrieved by the same, the assessee as well as Revenue are in appeal before the Tribunal.

45. After hearing both the parties, we feel that the matter has not been examined in the right perspective by the lower authorities. The learned CIT(A) has allowed deduction of Rs. 15,06,400 under Section 36(2) of the Act without giving any reason. On the other hand, the claim of the assessee under Section 37(1) of the Act has been rejected by the learned CIT(A) on surmises and without giving reason, as to how the claim could not be allowed. Accordingly, the entire issue needs fresh examination of necessary facts and material on record. The order of the learned CIT(A) is, therefore, set aside and the entire matter is restored to the file of AO for fresh adjudication after collection of necessary material on record and considering the legal position with reference to Sections 36, 37 and 38 of the Act.

46. The last issue relates to disallowance of depreciation on motor car which was acquired on hire-purchase basis. The assessee had claimed depreciation in respect of Opel Astra Car of which purchase value was Rs. 7,62,158. This car was acquired under hire-purchase agreement.

The AO, following the decision of the Special Bench of the Tribunal at Nagpur, in the case of Bhilai Engineering Works v. Dy. CIT (1997) 63 ITD 223 (Nag)(SB), held that depreciation was not allowable since the assessee was not the legal owner of the car. On appeal, it was contended that depreciation was allowable in view of Delhi High Court judgment in the case of Addl. CIT v. General Industries Corporation . Reliance was also placed on Circular No. 9 dt. 23rd March, 1943. The learned CIT(A) examined the hire-purchase agreement.

After examination of the agreement, it was observed that ownership remained with the party who gave the asset on hire-purchase till the last instalment was paid and the assessee exercises the option to purchase the vehicle. Thereafter, it was observed by him that assessee was entitled to. claim depreciation on such part of the cost which is included in the instalment payment. The remaining amount paid could be claimed as hire charges or interest. It was further observed that the assessee had not furnished complete details about the element of cost embedded in the hire-purchase instalments. However, he allowed the interest element of Rs. 97,796 as deduction. The disallowance in respect of depreciation was confirmed. Aggrieved by the same, the assessee is in appeal before the Tribunal.

47. After hearing both the parties, we find merit in the appeal of the assessee on this issue. The Board's Circular No. 9, dt. 23rd March, 1943, is still in force and the same was taken into consideration by the Hon'ble Delhi High Court in the case of General Industries Corporation (supra) wherein it was held that assessee was entitled to depreciation with reference to the cost element embedded in the payment made by the assessee under the hire-purchase agreement. Therefore, in principle, the claim of the assessee cannot be disallowed. However, it is pertinent to note that depreciation is allowable only with reference to the cost element embedded in the payment till the end of accounting year. It is not clear whether the entire payment was made by the assessee till the end of accounting period. Accordingly, this issue is restored to the file of AO with the direction that he shall ascertain the cost element in the hire-purchase payments made by the assessee upto the last day of accounting year and then allow depreciation on such amount.

48. The assessee has also taken the following grounds in respect of asst. yrs. 1997-98 to 1999-2000: On the facts and in the circumstances of the case and without prejudice to the other grounds of appeal, where the income of the appellant is a profit, the appellant ought to have been allowed to deduction under Section 80HHC of the Act in respect of films/TV serials, etc. produced by it and exported 49. The learned Counsel for the assessee submitted before us that this ground could not be taken earlier as the decision of the Tribunal in the case of Nadiadwala was against the assessee. Subsequently, the decision of the Tribunal has been reversed by the Bombay High Court, since reported as Abdulgafar A. Nadiadwala v. Asstt. CIT . In view of the Bombay High Court judgment, the claim of the assessee under Section 80HHC of the Act is allowable as deduction. Accordingly, this ground has been taken. The learned Departmental Representative has opposed the admission of this ground since it was not taken in the earlier proceedings. In our opinion, this ground has to be admitted in view of the judgment of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT . Accordingly, this ground is admitted. On merits, the matter is restored to the file of AO to consider the claim of the assessee after verification of the material which may be placed before him for consideration.

50. In the result, the appeal of the assessee for asst. yr. 1997-98 is allowed while the appeals of the assessee for the asst. yrs. 1998-99 and 1999-2000 are partly allowed. On the other hand, the appeal of the Revenue for the asst. yr. 1999-2000 is dismissed and appeal for asst.

yr. 1998-99 is partly allowed.

1. I have gone through the proposed order of the respected JM and have also discussed the issue with him. I am in full agreement with his views on all issues except two issues; one, the issue relating to the accrual of commission earned by the assessee in terms of agency agreement with Satellite Television Asian Region Advertising Sales BV; and the common issue relating to disallowance of advertisement expenses incurred by the assessee at Rs. 9,03,02,000 and Rs. 9,38,05,000 for asst. yrs. 1998-99 and 1999-2000, respectively. It is with this considerable regret that I feel constrained to write a separate dissenting note expressing the reasons for not being able to agree with him in spite of my profound respect for his views.

The ground of appeal relating to the first issue of point of accrual income from commission to the assesses common in all the appeals of the assessee reads as under: Based on the facts and circumstances of the case, Star India (P) Ltd. (hereinafter referred to as the 'appellant') respectfully submits that the learned Commissioner of Income-tax (Appeals) [CIT(A)] has erred in upholding the assessment under Section 143(3) of the IT Act, 1961 ('Act'), on the following ground: 1. By not accepting the change in the accounting policy made by the appellant during the financial year ended 31st March, 1997 with respect to the recognition of commission earned under the agency agreement executed with Satellite Television Asian Region Advertising Sales BV.2. The genesis of controversy lies in the qualified report given by the auditor's showing understatement of profits by Rs. 8,10,11,000 as a result of change in accounting policy shifting the point of time for recognition of commission as revenue, The assessee also appended a note to the computation of total income citing reasons for amendment in the policy of recognizing accrual of commission on the basis of payments made by the advertiser during the year to bring it in consonance with Clause 8 of the agency agreement with principal. The assessee also stated in the said note that there was no change in the method of accounting because as per the agency agreement, the commission was legally due only upon payments made by advertisers. It may, at this stage, be useful to elaborate the factual background for better appreciation of issues involved.

(i) There is no dispute that the assessee followed mercantile or accrual system of accounting. Being a company registered under the Companies Act, the assessee had no choice in the matter in that it was required by law to record its income and other transactions on the basis of accrual system of accounting. The assessee is, therefore, under legal obligation to recognize both the Revenue and the expenditure on accrual basis and not on cash basis.

(ii) The assessee, namely, Star India (P) Ltd. entered into an agency agreement on 31st May, 1994 (hereinafter referred to as 'agreement') with Satellite Television Asian Region Advertising Sales, Netherlands (hereinafter referred to as "Principal"), a non-resident company, whereby the Principal appointed the assessee as non-exclusive independent agent in India to sell television advertising on various television channels of Star TV. (iii) The Principal, a non-resident, was holding exclusive rights in India from Satellite Television Asian Region Limited, Hong Kong (hereinafter referred to as the "Owner") for television advertising on Star TV channels. Thus, the Principal was working for the Owner and it is in pursuance of this that the Principal appointed the assessee as an agent in India to sell television advertising for the various television channels of Star TV. (iv) It is not in dispute that all the aforesaid entities are interlinked and interconnected with each other either directly or indirectly.

(v) In earlier years, the assessee, based upon the same Agreement dt. 31st May, 1994, had treated the advertising commission as accrued at the time when time spots were aired. The aforesaid method of accounting was consistently followed by the assessee ever since the Agreement was entered into till the asst. yr. 1996-97, It is evident from the grounds of appeal taken by the assessee that the assessee changed its accounting policy for the first time in the year ended 31st March, 1997 and sought to link the accrual of income with the payment by the clients of the amount due to the Principal by giving a new interpretation to same Clause 8 of the same agreement.

(vi) The effect of change in the accounting policy for recording the accrual of commission income as effected by the assessee during the assessment year under consideration on the profits of the year was reported by statutory auditors of the assessee-company and they qualified the financial results shown by the assessee-company, which have already been reproduced by respected JM in his proposed order.

(vii) The AO took note of the aforesaid observations of the statutory auditors. After due consideration of all the relevant aspects of the case, the AO rejected the change in accounting policy with regard to the accrual of commission income on the ground that the sole objective of such change was to reduce the tax liability for the assessment years under consideration.

(viii) On appeal, the learned CIT(A) confirmed, for the detailed reasons given in his appellate order, the order of the AO in this behalf.

4. With respect to the issue of accrual of income from commission, as per my understanding, following aspects are required to be considered: (i) Whether commission to the assessee accrued only upon payment of net invoiced amount by the clients in terms of provisions of Clause 8 of the Agreement between the assessee and its Principal (ii) Whether point of earning of commission income in terms of provisions of the Agreement is sufficient to recognize the same as revenue in terms of the provisions of Section 145 of the IT Act, 1961 and Accounting Standards notified by the Central Government thereunder and in the light of the judgment of the Hon'ble Supreme Court in the case of E.D. Sasoon and Co. Ltd. v. CIT and hence it should be taxed in the assessment years when such income is earned as against the concept of accrual based upon acquisition of right to receive (iii) In case, if it is held the income from commission accrued only upon payment of net invoiced amount by the clients, further question that arises for consideration is whether, the expenditure directly attributable to such commission should be claimed and allowed as an expenditure only in the period in which such commission is recognized as revenue following the well accepted accounting principle of matching of costs against revenue and concept of taxation of real income only 5. Admittedly, the, assessee, only on the basis of Clause 8 of the Agreement, has claimed that the commission income accrued when the amounts were paid by the clients. The Revenue, on the other hand, has on the basis of entire Agreement including the same Clause 8 thereof has held that income from commission accrued to the assessee at the time of telecast of advertisements. It is also a settled judicial principle that wherever the accrual of income or liability to tax flows from an agreement in writing, the entire agreement, and not its particular clauses by part, should be read as whole so as to ascertain its true intention. It is, therefore, necessary to reproduce the following provisions of the Agreement hereunder in the activity-wise sequence wherever necessary, along with my observations thereon to draw appropriate inferences therefrom.

This Agreement is made on this 31st day of May, 1994 between Star Advertising Sales BV, i.e., a company being incorporated in accordance with the laws of Netherlands and having its principal office at Graff Wichmanlaan 46, 1405 HB Bussum, The Netherlands (hereinafter referred to as "the company" which expression shall, unless it be repugnant to the meaning or context thereof mean and include its successors and permitted assigns) of the one part and News Television (India) (P) Ltd., a company incorporated in accordance with the Companies Act, 1956 and having its registered office at 47/53 Asgar Manzil, Janmabhoomi Marg, Fort, Bombay 400 001 (hereinafter referred to as "the Agent" which expression shall, unless it be repugnant to the meaning or context thereof mean and include its successors and permitted assigns of the other part.

Whereas the Company has the exclusive rights in India from Satellite Television Asian Region Limited, a company incorporated in accordance with the laws of Hongkong and having its principal office at 12th Floor, Hutchison House, 10 Harcourt Road, Hongkong (hereinafter referred to as "STAR"), for television advertising on various television channels (hereinafter referred to as the 'said channels').

And whereas the Company is desirous of appointing a non-exclusive independent agent in India to sell television advertising for the said channels.

And whereas the Company and the agent are desirous of recording the terms and conditions on which the agent shall work for the Company.

Now, therefore, this Agreement witnesses, and it is hereby agreed by and between the parties hereto as follows: The Company hereby appoints the agent as its non-exclusive independent agent in India to market television advertising for the said channels, and the agent unequivocally accepts such appointment.

From the perusal of the above, it is clear that the Principal was desirous of appointing non-exclusive independent agent in India only to sell television advertising for the channels for which Principal had exclusive rights in India from Owner and to achieve this very objective, Principal appointed assessee as its agent to market television advertising for the said channels and assessee unequivocally accepted such appointment. Thus the appointment of the assessee was for the limited purpose of selling the television advertising for said channels and for no other purpose.

5.2 Clause 3 Rate. The agent shall solicit the advertisements in India for the said channels at such rates as the company may fix from time-to-time.

(a) The agent shall strictly follow the Company's procedures, and standard terms and conditions, and its instructions issued from time to time for soliciting advertisements from the clients in India.

(b) The agent shall not accept any requisition from the clients unless they have assented to the terms and conditions prescribed by the Company from time to time.

After having solicited the advertisements as above, the agent shall forward, by facsimile or telex, each client's requisition for telecast of its advertisements to the Company and the Company reserves the right to accept or reject the aforesaid requisition at its sole discretion.

From the combined reading of these clauses, it is further demonstrated that the assessee is required only to solicit the advertisements in India for the said channels, in accordance with the procedures, standard terms and conditions and instructions issued by Principal and at such rates as fixed by Principal from time to time. After having solicited the advertisements on the terms and conditions of Principal duly accepted by clients, the assessee forwards each client's requisition for telecast of advertisements to Principal, who, at its sole discretion accepts or rejects the requisition sent by assessee.

Thus, the functions of assessee qua its Principal are independent of the obligations of its Principal towards clients and client's obligations towards its Principal because the obligation of Principal to telecast the client's advertisement would be discharged as per the terms and conditions between Principal and client. The cumulative effect of these provisions of the Agreement is that the contractual obligations of the assessee comes to an end and once the client's requisition forwarded by assessee is accepted by Principal, at, this very point, assessee becomes eligible for its commission, i.e., a legally enforceable debt has been created in favour of assessee because the sale of time spots is completed, and the commission receivable by assessee is also ascertainable on the basis of number of time spots sold at the rate accepted by the Principal and the client. For a moment, even if it is assumed that exact amount of commission may, depending upon the number (of) actual telecast of advertisements, vary either positively or negatively but that by itself would not make any difference because if it is a debt the fact that the exact amount has to be ascertained does not make it any less a debt if the liability is certain and what remains is only a quantification of amount; debitum in praesenti solvendum in futuro. This proposition is well supported by the decision of Hon'ble Supreme Court in the case of CIT v. Shri Goverdhan Ltd. wherein the Hon'ble Court held as The argument was, however, stressed on behalf of the respondent that in any event the share of the profit of the assessee from the partnership business for the period from 1st Oct., 1950, to 31st March, 1951, was not known to the assessee before its annual general meeting on 17th May, 1951. It was pointed out that for the first time the ITO was intimated on 11st Aug., 1953, that the share of the profit of the assessee in the partnership was to the extent of Rs. 70,895 and should be included in its assessment. After receipt of the intimation the ITO rectified the original assessment made on 29th Feb., 1952, and included the said amount of Rs. 70,895. In our opinion, there is no warrant for the argument put forward on behalf of the respondent. It is conceded in this case that the annual general meeting of the assessee was held on 17th May, 1951, after the close of the accounting year of the Indian Steel Syndicate. It is true that the actual profits of the assessee from its partnership business were ascertained after the close of the accounting period, i.e., 31st March, 1951. It is, however, well-established that the income may accrue to an assessee without actual receipt of the same and if the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on, on its being ascertained. The legal position is that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happens. But if it is a debt the fact that the amount has to be ascertained does not make it any the less a debt if the liability is certain and what remains is only a quantification of the amount : debitum in praesenti, solvendum in futuro. Reference may be made in this connection to the decision in IRC v. Gardner Mountain and D'Ambiumenil Ltd. The assessee in that case carried on the business of underwriting agents, and entered into agreements with certain underwriters at Lloyds under which it was entitled to receive as remuneration for its services in conducting the agency, commissions on the net profits of each year's underwriting. The agreements provided that 'accounts should be kept for the period ending 31st December, in each year and that each such account shall be made up and balanced at the end of the second clear year from the expiration of the period or year to which it relates and the amount then remaining to the credit of the account shall be taken to represent the amount of the net profit of the period or year to which it relates and the commission payable to the company shall be calculated and paid thereon.' The accounts for the underwriting done in the calendar year 1936 were made up at the end of 1938, and the question that arose was whether the assessee was liable to additional assessment in respect of the commission on underwriters' profits from the policies underwritten in calendar year 1936, in the year in which the policies were underwritten or in the year when the accounts were thus made up. The assessee contended that the contracts into which it entered were executory contracts under which its services were not completed or paid for, as regards commission, until the conclusion of the relevant account; the profit in the form of commission was not ascertainable or earned, and did not arise, until that time and the additional assessment which was made in the year in which the policies were underwritten should accordingly be discharged. The Special Commissioners allowed the assessee's contention and discharged the additional assessment. The decision of the Special Commissioners was confirmed on appeal by Macnaghten J. in the King's Bench Division of the High Court. The Court of Appeal, however, reversed this decision and a further appeal was taken by the assessee to the House of Lords. The House of Lords held that on the true construction of the agreements, the commissions in question were earned by the assessee in the year in which the policies were underwritten and must be brought into account accordingly and confirmed the decision of the Court of Appeal. At p. 96 of the report Lord Wright observed: I agree with the Court of Appeal in thinking that the necessary conclusion from that must be that the right to the commission is treated as a vested right which has accrued at the time when the risk was underwritten. It has then been earned, though the profits resulting from the insurance cannot be then ascertained and, in practice, are not ascertained until the end of two years beyond the date of underwriting. The right is vested, though its valuation is postponed and is not merely postponed but depends on all the contingencies which are inevitable in any insurance risk, losses which may or may not happen, returns of premium, premiums to be arranged for additional risks, reinsurance, and the whole catalogue of uncertain future factors. All these have to be brought into account according to ordinary commercial practice and understanding.

But the delays and difficulties which there may be in any particular case, however, they may affect the profit, do not affect the right for what it eventually proves to be worth.

It is clear to me that the commission is wholly earned in year 1 in respect of the profits of that year's underwriting. If so, I should have thought that it was not arguable that that commission did not accrue for income-tax purposes in that same year, though it was not ascertainable until later.

On the basis of ratio of the aforesaid decision, it can be safely stated that once a debt is created the uncertainties attached thereto regarding quantification or realization would not alter its character though the amount of profit may change depending upon the realization, the delays and difficulties which may arise in particular case. In the present case, a debt in favour of assessee was created as soon as the assessee performed its part of contractual obligations and the quantification of commission based upon the contract with the clients at the stage of acceptance of soliciting advertisements by Principal could be done. Therefore, there is no limitation as such to account for the income from commission at this very point. It also emerges from the perusal of the above decision that the future uncertainties, difficulties and delays, etc. would not affect the right to receive the income, therefore, even if one assumes a situation that the telecast of solicited advertisements does not take place for any reason whatsoever, the assessee would remain entitled to receive the commission from Principal in respect of such cases also on the basis of requisition accepted by Principal. If the assessee does not claim commission in such cases, it would amount to relinquishment of income after its accrual. Thus, if the assessee does not recognize the income from commission in such manner, it would simply amount to postponement of recording of income which had already accrued to the assessee upon creation of debt and not that the income had not accrued to the assessee.

The aforesaid conclusions result into a situation where I am of the opinion that the assessee's obligation under Agreement are performed and the assessee becomes eligible to receive the consideration for the services rendered by him at the time of acceptance of solicited advertisement by Principal. However, the assessee, by its own conduct in past, accrued commission on the sale of time spots during the period in which such time spots were aired. This practice of recognition of commission income was also accepted by the Department. In this situation, if I go with my views it may involve the recomputation of income of the assessee for past and subsequent years and other complexities may also arise in the process. Further, principle of consistency also demands continuity of accounting policy from one accounting period to another accounting period and this principle of consistency has also been statutorily recognized as per Expln. 6(c) of Accounting Standard notified by the Central Government under Section 145(2) of the Act. Thus, after having held that commission accrued, both in law and on facts, to the assessee when the solicited advertisements were accepted by the Principal, I would still prefer not to disturb the accounting policy under which commission income was recognized in the period in which the advertisement solicited by the assessee were telecast and find it more appropriate to hold that the assessee should have continued to record its commission income on telecast of advertisement, particularly when the Agreement remaining the same as in the earlier years.

The agent shall not make any profit under this Agreement other than by means of the commission from soliciting advertisements under this Agreement As per this clause no other profit can be made by assessee except the commission from soliciting advertisements. Thus, in true sense, this is the consideration clause which again links the earning of commission with the soliciting of advertisements and it also leads to the rejection of the contention of the assessee that except Clause 8, there is no other clause in the Agreement which directly or indirectly deals with the aspect of commission to be earned by the assessee for rendering of services.

(a) The Company shall send the invoice for the advertisements telecast, to the clients and a copy to the agent, within thirty (30) days from the date on which the advertisement is so telecast, with instructions to the clients to make the payment thereof to the agent.

(b) The agent shall, without any charge to the Company, collect all sums due from the clients and hold the same in trust for the Company pending remittance as hereinafter provided.

Clause 7(a), clearly demonstrates the fact that Principal itself is sending the invoices directly to the clients and instructing them to make the payment to the assessee. As per Clause 7(b), the assessee is required to collect all sums due from the client and hold the same in trust for the Company pending remittance of the same to principal. Once the principal has instructed the clients to make the payments to the assessee, obviously as a natural corollary of these instructions, the assessee would receive the same in trust for Principal to remit money to Principal in accordance with and subject to other provisions of the Agreement. It is relevant to mention that no contractual obligation has been cast upon the assessee to make efforts to realize the amount from clients as it would have cost implications and the assessee is not getting any money from principal on this score, therefore, it leads to an obvious conclusion that the role of assessee is limited to receive the amounts paid by the clients. In nutshell, the assessee is under no obligation to realise the amount from clients.

(a) The agent shall maintain an account of the advertisement bookings made by it and shall furnish to the Company a weekly statement of such accounts.

(b) If any dispute arises regarding the statement of accounts, the same will be scrutinised by the accountants appointed by the Company and their decision shall be final and binding on the agent.

As per this clause, the assessee is required only to maintain an account of advertisement bookings made by it and to furnish the same on a weekly basis to Principal. There is no provision in the agreement whereby the assessee is required to maintain the data of invoices raised by Principal, or any other Information pertaining to realization of money from the clients.

The agent shall maintain a list of actual and potential clients, with particulars, and supply a copy of the same to the Company upon request.

As per this clause, the assessee is required to maintain a list of actual and potential clients with particulars and supply a copy of the same to Principal upon request, which again shows that the assessee's role is essentially of a marketing agent and not of a collection agent.

5.7 It transpires from the aforesaid observations that the assessee was appointed for soliciting television advertising. The preamble to the Agreement and other clauses in the agreement like, appointment clause, the consideration clause, the invoicing clause, etc., point out that the assessee was appointed to solicit television advertising for Star TV channels and for no other purpose and that it was to be paid for the aforesaid services only, at the rates specified in Clause 3 of the Agreement. The assessee was, under the Agreement, only a selling or marketing agent, as rightly mentioned in the Preamble to the Agreement.

All other clauses in the Agreement corroborate the aforesaid fact. The right to receive the commission would accrue, under the Agreement, to the assessee on sale of time spots. The assessee has, however, placed strong reliance on Clause 8 of the Agreement, which reads as under: The agent shall be entitled to retain fifteen (15 per cent) of the net invoiced amount paid by the clients as commission.

On bare perusal of aforesaid clause, the fact which readily emerges is that sole purpose of Clause 8 is to provide for rate, mode and mechanism for payment of commission to the assessee in consideration of its having solicited television advertisements for the Principal by authorizing the assessee to retain 15 per cent of net invoiced amount paid by the clients as commission. It seeks to pay what the assessee has already earned and which the assessee was entitled to receive and enforce in a Court of Law and not vice versa. It is only in pursuance of the assessee's right to receive the consideration after it had earned the commission that Clause 8 conferred the right on the assessee to retain the commission out of the money paid by the clients to the Principal through the assessee. Thus Clause 8 does not, in any way, dilute the right of the assessee to receive the commission which has already accrued to the assessee upon its having solicited the advertisements for the Principal. Having stated so, a closer look at the language employed in the Clause 8 would also confirm the aforesaid conclusion. The most important word used in this clause is "retain".

The general meaning of the word "retain" is "to continue to hold, have, use, recognize, etc." or "to keep possession of". Thus, this word employed in this clause, clearly depicts the intention of the parties in the sense that assessee can retain, i.e., keep or continue to hold or possess what is already due to it or for which it has already acquired legal entitlement, because one can retain only what is already possessed. The word 'retain' is wholly inappropriate for the purpose of confirming a fresh obligation/duty rather it contemplates a continuation of an existing right or entitlement. The right to commission has already been acquired by assessee at the point of rendering of his services of soliciting advertisements and such entitlement for commission is converted into money at the stage of payment of net invoiced amount by the clients. The use of word "retain" is not inadvertent, it has been deliberately used so as to indicate the intention of the parties that the commission had accrued earlier to the payment of net invoiced amount by the clients as evidenced by the scope of responsibilities of assessee in the preamble and other clauses of the agreement. In nutshell, Clause 8 prescribes only for mode of distribution of money between the assessee and the Principal realized from the advertisements and it has got no co-relation with the accrual of commission and to hold that the commission accrues to the assessee when the amounts are paid by the client is to merge the statutorily recognized "idea of accrual of income" with the other distinct statutorily recognised "idea of receipt of income and realization of profits". Further, "right to retain" is entirely different from "right to receive" in a sense that "right to retain" flows from the "right to receive" and not vice versa, and, therefore, new interpretation of Clause 8 is not correct. Thus, on the basis of analysis of various clauses (including Clause 8) of Agreement, the change in accounting policy relating to point of time of accrual of commission is not correct and, hence liable to be rejected.

5.8 Although from the discussion hereinbefore, it is established that the commission to the assessee accrued at the time of acceptance and sale of time spots in the period of telecast, even then, with a view to further establish the same, I consider it relevant to mention the fact that a new Representation Agreement was signed between Owner and assessee on 1st April, 1999 (copy placed on record) whereby responsibilities of assessee have been defined not only to solicit television advertising for the Owner but also to collect and remit advertisement charges. Further, entitlement to commission has also been restricted on the amounts actually collected by assessee or received by Owner directly though such advertisement were solicited by assessee.

The relevant provisions of the Representative Agreement between Owner and assessee are reproduced below to bring out the major differences between the present Agreement dt. 31st March, 1994 and Representative Agreement dt. 1st April, 1999 to further confirm the conclusions already arrived at: Excerpts from Representation Agreement between Star and assessee dt.

1st April, 1999.

Whereas Star telecasts various channels, namely Channel (V), Star World, Star Plus, Star News, Star Movies and such other channel(s) as may be added in the future, forming the 'Star TV Network' (hereinafter the 'said channels' of the 'Star service').

And whereas Star is desirous of appointing a non-exclusive independent representative in India (the Territory) to solicit television advertising for the said channels and collect and remit advertisement charges.

And whereas Star and representatives are desirous of recording the terms and conditions on which representative shall work for Star.

Now therefore, this agreement witnesses, and it is hereby agreed by and between the parties hereto as follows: Representative is hereby appointed as the non-exclusive independent representative in the territory to solicit television advertising for the said channels and to collect and remit advertisement charges to Star and representative unequivocally agrees such appointment.

Representative agrees that it is authorized only to solicit television advertisements in the territory and that any other solicitations (including those that encompass the territory but which are deemed to be regional or global) are reserved for Star and its assignees.

1. Star will make available for soliciting by representative, advertising time in the Star Service Programme. Star may from time to time change at its decision, the commercial format of each programme included in the Star service and the amount of advertising time in each programme available to representative for soliciting advertisers.

2. Representative shall not solicit any exclusiveness, entitlements or other sponsor identified packages without prior written approval from Star.

Star shall invoice for the advertisements telecast and provide advertising affidavits with respect to the telecast of the advertisement within thirty (30) days from the date on which the advertisement is so telecast with instructions to the advertisers to make the payment thereof to representative where such payment is to be made by the advertisers in Indian rupees and directly to Star where such payment is to be made by the advertisers in US dollars.

Representative shall be responsible for delivering the invoices to the advertisers on timely basis.

1. Representative shall use its best efforts to ensure the collection of all net advertising amounts in accordance with the terms of Star's invoices and shall cause the advertisers to pay all amount to Star as follows: (i) An advertiser may pay directly to Star in US dollars in such manner and in such location as Star directs. In such instance, the advertiser shall pay Star after deducing from gross billed advertising amount any allowable agency commission and the representative commission and pay each directly and separately in Indian rupees and advertiser shall also deduct withholding tax imposed by the Government of India.

(ii) In the alternative, an advertiser may pay to representative in Indian rupees the net billed advertising amount. Upon receipt, representative will deduct its commission and, subject to necessary Reserve Bank of India (RBI) approval and Sub-clause (iii) hereinbelow, immediately (but in no event later than forty-five days from receipt of funds from the advertiser, and excluding time taken for approvals from the RBI provided that representative takes the steps referred to in Sub-clause (iv) below relating to collection of papers and makes best efforts for speedy RBI approval remit such amount to Star directly in US dollars by wire transfer in accordance with instructions provided by Star.

1. Commission : Subject to the other provisions of this Section representative shall be paid commission of fifteen per cent of 'net billed advertising' actually collected by it or received by Star for advertisement solicited by the representative during the term of this agreement.

2. Expenses : All expenses such as salaries, rent and travel within the territory involved to the solicitation of advertising by representative for Star shall be paid for by the representative and not reimbursed by Star.

3. Identification of commissionable transactions : Advertising orders on which representative shall be eligible to a commission shall be those solicited by representative in the Territory even though obtained in collaboration with Star's personnel or its promotional activities. For the avoidance of doubt, no commission shall be payable on orders derived from multinational entitles in which the ultimate decision for releasing the advertising order was made outside of India. No commission will be paid to representative on any transaction which Star determines to have been initiated and communicated by anyone other than representative.

4. No commission shall be due to representative against amounts not received. Representative will use its best efforts to ensure the receipt of unpaid amounts by Star.

(a) Establishing a team of qualified persons, whose activity throughout the term of this agreement, shall be substantially and directly devoted to co-ordination and performance of representative's obligations pursuant hereto.

(b) Soliciting advertisements on the Star service at such terms as Star may declare from time to time and forwarding the advertisement orders to Star for acceptance; (c) No seeking advertisement (either directly or indirectly) for soliciting television advertising beyond the territory; (d) Pursuing vigorously any ideas with which Star provides representative; (e) Submitting to Star periodic reports on the market and representative's advice with regard to the market; (g) Collecting all sums due from the advertisers where such payments are to be made by the advertisers in Indian rupees and holding the same in trust for Star pending remittance as hereinafter provided and using its best effort to ensure that Star receives all sums due to Star under this agreement but does not guarantee the payments thereof; .

(h) Rendering to Star such information advisory and supervisory services in matters of research and promotions as may be practicable and reasonable for representative or its research and promotion organization to perform, and (i) Co-operating fully with Star in promoting and advancing its standing as a television advertising medium.

1. Each month, representative will provide Star with a written statement detailing for the prior month the commissions received by the representative, any amounts collected by representative (broken down by advertiser invoice number and amount paid) the status of payments made directly to Star by advertisers, the status of amounts in respect of which applications are pending with RBI, and any other information reasonably requested by Star.

2. Each month Star shall inform the representative of amounts received by it directly from advertisers (broken down by advertisers, invoice number and amounts paid).

On bare perusal of the aforesaid clauses of the Representative Agreement, it is amply clear that the scope of responsibilities has been materially altered and widened in the Representation Agreement than that of Agreement existing at the material time. The responsibility of collecting of advertisement revenue from clients has been specifically included in the scope of work and other duties in this regard like maintenance of records regarding amount due from clients, periodical reporting of the same to Owner have also been included in the new Agreement. The invoices are being sent to the clients through assessee as against the present practice of sending invoices directly by Principal to clients. In the new Agreement, assessee has been assigned with the duties to conduct credit investigations of advertisers, to put in best efforts for the realization of all sums due from the clients and prepare various reports in this regard and submit the same to Principal, while in the existing Agreement no such responsibilities have been assigned to the assessee. Therefore, once no such responsibilities existed in the Agreement dt. 31st March, 1994, it can be safely stated assessee was not liable for the realization of the amount from the clients and in substance the only role assigned to assessee was to receive money from the clients as per instructions of Principal and remit the money to Principal which are nothing more than incidental/ancillary tasks. Most importantly, in the new Representation Agreement it has been specifically provided that no commission shall be due to representative (assessee) against amounts not received which communicates the intention of parties in absolutely clear terms that in spite of rendering of; services of soliciting of advertisements the assessee would be entitled to commission only on amounts realized in respect of such advertisements. In view of above discussion, change in the accounting policy relating to point of time of accrual of commission income in the years under consideration is not in accordance with the Agreement and thus it is not legally valid.

5.9 The change in accounting policy relating to accrual of commission is liable to be rejected on the following grounds as well, (i) It was contended on behalf of the assessee that the accrual of commission was dependent on the contingency of the payment, i.e., if the payments were not made by the clients, no commission would accrue. This argument deserves rejection for three main reasons; one the agreement does not provide so. Two, the advertisements are solicited as per the standard terms and conditions formulated by Principal and accepted by the respective clients which provide for a credit period to the clients after the date of telecast with the purpose of regulating the mode of payment and settlement of dues and not for creating a contingency upon which the commission income would accrue to the assessee. Three, the income which had already accrued to the assessee could not be defeated on the basis of uncertainties involved in the receipt of money from clients, If such an interpretation as suggested by the assessee is accepted, the concept of mercantile method of accounting based on fundamental accounting assumption of accrual would collapse. Further a reference can be made to pp. 47 to 49 of this order where the decision of the Hon'ble High Court of Justice (Kings Bench) in the case of IRC v. Gardiner Mountain D'Ambrumenil Ltd. again to show that once a right is vested then the same would not be affected in spite of the fact that not only the valuation of which is postponed but also the same depends on all the contingencies which are inevitable in carrying out the business and which may or may not happen and the whole catalogue of uncertain future factors and for a moment if the payment by the clients after the telecast is assumed as a contingency even then the ratio of the above decision squarely demolishes this contention of the assessee for deferring the point of time for accrual of commission. In view of above discussion, the assessee's contention to defer the point of recognition of revenue in respect of income from commission on the plea of realization of payment being a contingency is devoid of basis, both legal and commercial.

(ii) It was also contended by the assessee that the change in accounting policy relating to accrual of income from commission was necessitated during the year under consideration due to non-realisation of commission from its Principal in some cases and such unrealised amount had to be claimed as bad debts. Thus, recognition of income from commission during the period of telecast resulted into taxation of unreal income. Although concept of consistency demands continuation of same accounting policy from one period to another accounting period, but accounting policy can be changed if the circumstances so require. The change in the accounting policy is an exceptional situation which must arise out of exceptional circumstances or bona fide reasons and the concept of consistency is a major roadblock/hurdle which has to be crossed necessarily. The concept of consistency is not only binding on the Revenue but is also binding on the assessee. "Doctrine of Estoppel" is also applicable to the present case because the assessee has right from the beginning when the Agreement was entered into adopted the accounting policy of accrual of commission at time of sale of time spots in the period during which time spots were aired and by its own conduct the assessee is precluded from making a change in the accounting policy particularly when the assessee has accepted the fact of understatement of profit mentioned by auditors in their report for purposes of compliance with all provisions of the Companies Act, 1956. Further, Accounting Standard (AS) 2 notified by the Central Government under Section 145(2) of the Act permits the change in the accounting policy, provided it is required by statute or if the adoption of different accounting policy results in more appropriate preparation or presentation of the financial statements.

Admittedly, there is no statutory requirement warranting such change. Also such change cannot be said to have resulted in more appropriate preparation or presentation of the financial statements as compared to earlier year for the reason of understatement of profit as reported by the auditors. Thus, change in such accounting policy is neither motivated by bona fide reasons nor it satisfies the tests laid down by the statute/judicial decisions for change in accounting policy.

(iii) It was also contended that the change in accounting policy was made to offer to tax only real income because inclusion of unrealised commission from Principal on invoiced remaining unpaid/part paid into income as per earlier practice resulted into taxation of unreal income as the same had to be claimed as bad debt subsequently. Bad debts are business reality. Simply because the assessee might have suffered some bad debts which it can subsequently claim as bad debt or business loss, that by itself would not authorize it to change the accounting policy. There may also be cases of intentional non-payments by the clients to the Principal but in such situations, if the assessee does not get commission from the Principal, then he can pursue the Principal to make the payment and if such persuasion does not bear the fruit, then, assessee can take legal action and even then if the amount is not realised, then the assessee would be entitled to claim it as bad debt/business loss. But, if the assessee does not take any legal action for the recovery of the commission then, in such cases it would merely amount to relinquishment of income after accrual and in such situation the unrealized commission would neither be a business loss nor bad debt but it would merely be a loss of capital. It is also a settled proposition that after accrual, non-charging of tax on the same, because of certain conduct based on the ipse dixit of a particular assessee, cannot be accepted and once the accrual takes place on the basis of conduct of parties subsequent to the year of closing, an income which has accrued cannot be made 'no income', (iv) The assessee, in order to justify the change in accounting policy on the ground of correct interpretation of the Clause 8 of the Agreement, also contended that due to such change the assessee would be liable to pay more tax in subsequent years because of change in tax rates in those years, but that by itself cannot justify the change and more so after considering the effect of change on the tax liability of the current year. It may be more appropriate for the assessee to pay lower taxes by avoiding the change in accounting policy. The AO has categorically observed that the change in accounting policy has been made merely to reduce the tax liability of the year under consideration and this contention of the assessee rather supports the view of the AO.6. With respect to the second aspect, the discussions are made as under: 6.1 Although, from the discussions made hereinbefore it is established that legally enforceable debt for commission income was created in favour of the assessee at the time of acceptance by Principal of the advertisement solicited by assessee and this is in total conformity with ratio of the Hon'ble apex Court in the case of E.D. Sasson and Co.

Ltd. (supra), however, concept of "accrual" needs further elaboration so as to understand the meaning of the same in the contemporary environment.

6.2 Before proceeding further, it is pertinent to mention that the assessee has heavily relied on the decision of Hon'ble Supreme Court in the case of E.D. Sasson and Co. Ltd. (supra) in support of its contention that no income from commission accrued until the clients made payment of net invoiced amount. In this regard it is very important to note that in that case Hon'ble apex Court dealt with the issue of concept of accrual for the purposes of IT Act in the settings of peculiar facts of the case wherein in addition to rendering of services, completion of a contract for a definite period was a condition precedent to receive remuneration or commission stipulated thereunder which was not met. The relevant para of the order is reproduced as under: If, therefore, on the construction of the managing agency agreements we cannot come to the conclusion that the Sassoon had created any debt in their favour or had acquired a right to receive the payments from the companies as at the date of the transfers of the managing agencies in favour of the transferees no income can be said to have accrued to them. They had no doubt rendered services as managing agents of the companies for the broken periods. But unless and until they completed their performance, viz., the completion of the definite period of service of a year which was a condition precedent to their being entitled to receive the remuneration or commission stipulated thereunder no debt payable by the companies was created in their favour and they had no right to receive any payment from the companies. No remuneration or commission could, therefore, be said to have accrued to them at the dates of the respective transfers.

6.3 From the perusal of the facts of the case, it emerges that there were twin conditions required to be fulfilled, i.e., performance as managing agent and working as managing agent for a definite period.

However, the managing agency contract was not completed for the agreed duration of the contract and, therefore, the Hon'ble Court came to the conclusion that no right to receive the payment in the form of enforceable debt was created. However, in the present case, the right to receive the income is not dependent upon the completion of contract for a definite period and if the contract is terminated as per the provisions of Agreement, whatever services are rendered by assessee till then, it would be eligible to receive the income from commission thereon. Therefore, the case is not only distinguishable on facts but also the terms and conditions governing accrual of income are different in a sense that no overriding conditions have been imposed over the rendering of services of soliciting of advertisements. To further substantiate this, a reference can be made to the Representation Agreement effective from 1st April, 1999 wherein it has been specifically mentioned that no commission shall be due to representative, i.e., assessee against amounts not received, therefore, in such cases assessee would not be entitled to receive the commission even though the assessee rendered services of soliciting such advertisements.

6.4 Further, in the aforesaid judgment of Hon'ble Supreme Court, their Lordships observed that the word "earned" was not used in Section 4 of the Indian IT Act, 1922. The relevant para of the said order is being reproduced as under: The word 'earned' has not been used in Section 4 of the IT Act. The Section talks of 'income, profits and gains' from whatever source derived, which (a) are received by or on behalf of the assessee, or (b) accrue or arise to the assessee in the taxable territories during the chargeable accounting period. Neither the word 'Income' nor the words "is received", 'accrues' and 'arises' have been defined in the Act.

Thus, in my humble understanding, Their Lordships after observing that the term "earned" was not used in the Act and the term "accrued" was not defined in Act, differentiated the term "earned" from the term "accrual" in the context of the peculiar facts of that case only because these terms, in general, are used to indicate the generation of income in a commercial sense. The situation would have been entirely different if the term "accrual" was defined in the Act when the aforesaid judgment was rendered. The statutory changes made thereafter, have to be taken note of and from the following discussion, it would emerge that the concept of accrual has to be viewed differently in view of statutory changes made incidentally from asst. yr. 1997-98 and now there is no difference between "accounting thought on accrual" and "judicial thought on accrual.

6.5 Accrual is one of the postulates of both accounting and taxation.

It is a concept, which seeks to stratify the mirage of "real income" which has eluded the "accountant", "the taxpayer" and tax gatherers.

The term 'accrual' is neither a term nor a code. It is only a concept.

This concept is not static but is dynamic. Hence it is in the constant state of evolution and development as new circumstances and situations arise. This concept must be consistent with other fundamental accounting principles implicit in the entire scheme of company accounts and taxation of income under the IT Act. It is a concept which must be synthesized with other valid concepts, principles and practices and more particularly with the statutory framework for computation of income under Sections 4 and 5 r/w Section 145/145A of the IT Act. What is required is not a dogma but a practical view based on the commercial facts, circumstances and business practices. By its very nature, it develops and evolves and this is possible only if a fixed view is not taken. Thus, the concept of accrual is of paramount importance because it is the general perception that there is a difference between an accounting thought on accrual and judicial thought on accrual.

Generally, as per judicial decisions income for the purposes of the IT Act, accrues only when the legally enforceable right to receive is vested in the recipient and once such right to receive is vested, accrual of income under the IT Act is not postponed merely because' its quantification depends upon subsequent events such as making of accounts, etc. Thus, as per traditional judicial thought, "accrual", in essence, is based on the concept of "right to receive" and "liability to pay", while as per accounting thought on accrual, generally, income is accrued when it is earned. Therefore, accounting thought on accrual is wider than judicial thought on accrual. However, from the discussion hereafter, it would emerge that there is no difference between accounting thought on accrual and judicial thought on accrual.

6.6 For proper appreciation of the issue, it is pertinent to reproduce the relevant portions of the definition of the term 'accrual' as per AS 1 issued by the Institute of Chartered Accountants of India, Section 5(1) of the IT Act, 1961 and AS 1 notified by the Central Government under Section 145 (2) as under: Revenue and costs are accrued, that is recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the period to which they relate.

As per this definition, it would appear that the revenue and cost are recognized as they are earned or incurred and not as money is received or paid.

(b) AS 1 relating to disclosure of accounting policies as notified by the Central Government under Section 145(2) reads as under: 1. All significant accounting policies adopted in the preparation and presentation of financial statements shall be disclosed: 2. The disclosure of the significant accounting policies shall form part of the financial statements and the significant accounting policies shall normally be disclosed in one place.

3. Any change in an accounting policy which has a material effect in the previous year or in the years subsequent to the previous years shall be disclosed. The impact of, and the adjustments resulting from such change, if material, shall be shown in the financial statements of the period in which such change is made to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the accounting policies, which has no material effect on the financial statements for the previous year but which is reasonably expected to have a material effect in any year subsequent to the previous year, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted.

4. Accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state, of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. For this purpose, the major/considerations governing the selection and application of accounting policies are the following namely: (i) Prudence : Provisions should be made for all known liabilities and losses even though the. amount cannot be determined with certainly and represents only a best estimate in the light of available information.

(ii) Substance over form : The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form.

(iii) Materiality : Financial statements should disclose all material items, the knowledge of which might influence the decisions of the user of the financial statements.

5. If the fundamental accounting assumptions relating to going concerns, consistency and accrual are followed in financial statements, specific disclosure in respect of such assumptions is not required. If a fundamental accounting assumption is not followed, such fact shall be disclosed.

(a) "Accounting policies" means the specific accounting principles and the methods of applying those principles adopted by the assessee in the preparation and presentation of financial statements; (b) "Accrual" refers to the assumption that revenues and costs are accrued, that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate; (c) "Consistency" refers to the assumption that accounting policies are consistent from one period to another; (d) "Financial statements" means any statement to provide information about the financial position, performance and changes in the financial position of an assessee and includes balance sheet, P&L a/c and other statements and explanatory notes forming part thereof; (e) "Going concern" refers to the assumption that the assessee has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the business, profession or vocation and intends to continue his business, profession or vocation for the foreseeable future.

6.7 Section 145(1) of the IT Act, 1961 was amended w.e.f. 1st April, 1997 to require an assessee to maintain books of account either on cash or mercantile system of accounting for computation of income under the head "Profit and gains of business or profession" and "Income from other sources". It is also pertinent here to mention that assessee, being a company, is required to maintain books of account on accrual basis of accounting only as per the provisions of the Companies Act, 1956. Section 145(2) was inserted w.e.f. 1st April, 1997 which empowered the Central Government to issue Accounting Standards to be followed by any class of assessees or in respect of any class of income. In pursuance of such powers, Central Government notified AS 1 relating to disclosure of accounting policies and AS 2 relating to disclosure of prior period and extraordinary items and changes in accounting policies. The said notification came into force w.e.f. 1st April, 1996 and hence these Accounting Standards are applicable for asst. yr. 1997-98 and onwards.

6.8 Section 4 is the charging Section Section 5 of the IT Act, 1961 effectually mandates of the Section 4 of the Act. Section 145 lays down the method of computation of income and thus, it serves to the purpose of both Sections 4 and 5. Section 5 and Section 145 of the IT Act are complimentary to each other and provide for the taxation of correct income. The changes in Section 145(1) of the Act w.e.f. 1st April, 1997 and Accounting Standards issued under the provisions of Section 145(2) of the Act effective from the same date have been made to bridge the gap between the accounting thought on 'accrual' and the judicial thought on 'accrual' and this has been achieved by para 6(b) of AS 1 notified by the Government which defines the accrual so as to have the same meaning as defined in AS 1 issued by the Institute of Chartered Accountants of India.

6.9 It is crystal clear on bare perusal of "accrual" as given in Accounting Standards issued by ICAI and Central Government under Section 145(2) of the Act, that revenues and costs are accrued, i.e., recognized as they are earned or incurred. Thus, the word "earned" used with reference to "accrual" means that at the very moment, when income is earned, the same shall stand "accrued" or to put it differently the income would be recognized at the point of time when it is earned. The term "earned" as used in the Accounting Standard notified by the Central Government has not been defined in the said Standards or in the IT Act. However, one of the meanings given to the word "earn", which is closer to the purpose in hand, at p. 775 of the First Volume of "The New Shorter Oxford English Dictionary" (1993 Edn.) is as follows ; "1.

Receive or be entitled to (money, wages, etc.) in return for work done or services rendered; bring in as income; obtain or deserve in return for efforts or merit." The term "earn" has been defined in Black's Law Dictionary (7th Edn.) at p. 525 to mean "1. To acquire by labour, service or performance. 2. To do something that entitles one to a reward or result, whether it is received or not." (Emphasis, italicised in print, supplied). Thus, earning of income takes place as soon as one performs his services or carries out his part of the contractual obligation regardless of whether he is paid for, it immediately or in future. Actual receipt of earned income by the recipient has nothing to do with the earning of income. In the present case, the assessee earned the commission income as soon as it solicited the advertisements and forwarded them to the Principal for approval. Any other interpretation of the term "accrual" would defeat the legislative intent as expressed in Section 145(2) and the Accounting Standards notified by the Central Government in pursuance thereof. In this view of the matter, the assessee's contention that no accrual of commission income took place until the amounts were paid by the client deserves outright rejection being contrary to the plain provisions of Section 145 (1) and (2) r/w Expln. 6(b) of the AS 1 notified by the Central Government. Thus, the commission income, in my humble view, ought to have been recognised by the assessee and also taxed by the Department at the time when it was earned by the assessee, i.e., when the advertisements solicited by the assessee were accepted by the Principal.

On the basis of aforesaid discussion also, it can be safely concluded that once the services of soliciting advertisements are rendered, commission income thereon has been earned by the assessee in accordance with the provisions of Section 145(2), the same has also "accrued" to the assessee. In my humble understanding, the decision given by the Hon'ble Supreme Court in the case of E.D. Sassoon and Co. Ltd. (supra), which was rendered under the specific settings of that case although applied subsequently in general is applicable only where earning of income itself cannot be said to have occurred and not otherwise and more so particularly in view of statutory change brought in Section 145 of the Act and notification of Accounting Standards thereunder which have resulted in the convergence of accounting thought on accrual, taxman's thought on 'accrual' and judicial thought on accrual.

Accordingly, assessee's contention that no accrual of income took place until the amounts were paid by the clients is not valid.

7.1 The concept of "accrual" encompasses two aspects; one, it recognizes the income when it is "earned"; two, it recognizes the expenditure when it is incurred. Both the aspects are like two sides of same coin. These have to go together. Assuming for the sake of argument that the income from commission is held to have accrued upon receipt of net invoiced amount from the clients and is recognized as revenue at that point, then, expenditure relating to receipts of commission not recognized as revenue for want of realization of money from the clients, should be treated as work-in-progress and charged to P&L a/c of the period in which such commission receipts are recognized as revenue because matching of cost incurred with revenue earned during accounting period is implicit in the "concept of accrual". The fundamental difference between the cash basis of accounting and mercantile basis of accounting lies in the matter of time when the income and expenses are recognised. Accountants often describe the process of periodical net income determination as a proper "matching" of revenue and expenses by period. This is achieved by the accrual basis of accounting.

7.2 Under accrual basis of accounting, the expenses are recognized by the following approaches: (i) Identification with revenue transaction costs directly associated with the revenue recognized during the relevant period (in respect of which whether money has been paid or not) are considered as expenses and are charged to income for that period, In many cases, although some costs may have connection with the revenue for the period, the relationship is so indirect that it is impracticable to attempt to establish it, However, there is an identification with a period of time. Such costs are regarded as "period costs" and are expensed in the relevant accounting period, e.g., administrative expenses such as salaries of general staff, telecom, travelling, depreciation on office building, etc.

Similarly, the costs, the benefits of which do not clearly extend beyond the accounting period are also charged as expenses of that accounting period. Thus, there is a direct nexus between income recognition and expense recognition and which is in total conformity with the concept of taxation of real income. Therefore, an attempt must be made to identify the costs with revenues and vice versa. If the income is recognised at the time of receipt of payment from the clients and all expenses are claimed as period costs then such accounting methodology is essentially hybrid system of accounting which is not permissible both under the provisions of the Companies Act, 1956 and the IT Act, 1961. 7.3 Admittedly, it is not the case of the assessee that the concept of matching of cost with the Revenue is not applicable to its case. The matching concept is not a one-way process in a sense that only the cost should be matched to the revenue but it also applies otherwise, i.e., if the cost are being charged to the P&L a/c of a particular period correspondingly the revenue related to such cost should also be credited in the P&L a/c of the period. In this view of the matter, the assessee's conduct of claiming the cost related to such commission in the period under consideration also obliges the assessee to account for the revenue in relation to such cost in the same period. The assessee has not done so, resulting into distortion of results by way of understatement of profits which fact has also been pointed out by the statutory auditors. All these factors lead to the irresistible conclusion that such change is not guided by bona fide considerations. The bona fides of the change could have been established if the assessee would have simultaneously deferred the expenditure incurred in relation to income from commission not recognised as revenue to the period when such commission was recognized as revenue. It is also a settled judicial principle that the assessee, has of course to satisfy the IT authorities, i.e., he is doing so in good faith and revenue is not likely to be defrauded.

The AO has given a categorical finding that the sole objective behind change in accounting policy is to reduce the tax liability of the assessee for years under consideration, which in the light of above discussion deserves to be upheld. However, in case it is felt that commission income should be recognized in some other year then the expenses pertaining to earning of such commission should also be considered for allowance in the same year.

8. Thus, in view of discussion in foregoing paras, I hold that the commission accrued to the assessee at the time of acceptance of the solicited advertisement by Principal but for the reasons mentioned in para 5.2 at pp. 50 and 51 of this order, the same would be recognized as revenue of the period in which telecast takes place. Accordingly, I uphold the decision of the Revenue authorities in this regard and this ground of the assesses is rejected for all the years under consideration.

9. The second issue is connected with the disallowance of advertisement expenses incurred by the assessee wherein both assessee and the Revenue are in appeal and the grounds taken by them in their appeals for asst.

yr. 1998-99 read as under: By granting a deduction for only part of the expenses incurred by the appellant on advertisement and publicity during the financial year 1997-98.

On the facts and in the circumstances of the case and in law, the learned CIT(A)-XI, Mumbai has erred in deleting the addition made of Rs. 1,80,60,400 out of advertisement expenses.

9.1 For better appreciation of the issue, I feel it pertinent to briefly narrate the relevant facts as under: (i) The assessee is a resident and is acting as agent of principal (a non-resident) holding exclusive rights for television advertising in India for Star (another nonresident assessee). The Star is owner of the channels and is a foreign telecasting company. Principal is having exclusive rights in India for television advertising from Star under a separate agreement (copy not placed on record). The assessee is also having separate activities for manufacturing programmes for Star and earning income on such programmes @ 5 per cent of the cost of such programmes (copy of agreement not placed on record) and Cable TV operations. All the parties are interlinked and Star is holding approximately 69 per cent of shareholdings of the assessee.

(ii) The assessee is getting commission at the rate of 15 per cent of net invoiced amount from Principal. The commission earned by Principal from Owner for the service rendered by Principal to Owner is not known as the agreement between two has not been placed on record. However, total gross revenue to both Owner and Principal is 85 per cent of the advertisement revenue. Thus, maximum revenue is being taken by Owner and Principal.

(iii) There is no direct obligation on the part of assessee in terms of agreement with Principal to incur any expenditure on advertisement. The assessee has incurred activity-wise advertisement expenses in the financial year 1997-98 relevant to asst. yr. 1998-99 as under: Manufacturing programmes for Star TV Rs. 162.05 lakhs Commission agent for collecting advertisement Rs. 654.06 lakhs revenue for Star TV Cable subscription Rs. 86.90 lakhs (iv) The assessee claimed before the AO that these expenses were incurred to promote channel recall and other activities of its business. The AO rejected the claim of the assessee and disallowed the expenditure in total on the following grounds: (a) The appellant charges 5 per cent additional sum over and above the cost of manufacturing TV serials from Star TV. Therefore, the cost of advertisement should also be recovered from Star TV with additional 5 per cent amount, (b) The advertisement for TV serials manufactured on behalf of Star TV would benefit Star TV and not the appellant. Therefore, there is no reason for the appellant to incur cost on advertisement for manufacturing TV serials.

(a) The appellant collects advertisements revenue on behalf of Star TV and charges 15 per cent commission on ad-revenue so collected.

(b) Being an agent for collecting advertisement revenue, the appellant is not required to incur expenditure on advertisement.

(c) The advertisement and publicity shall increase the viewership and popularity of channels of Star network which shall be beneficial to Star network and not to the appellant. The appellant only gets 15 per cent commission on ad-revenue collected.

(d) The specimen of advertisements produced before the AO did not bear the name of appellant and all advertisements were in the name of Star.

(e) The Star TV holds 69 per cent shareholding of appellant. On the advertisement revenue Star TV/SAS-BV pays tax as per Circular No. 742. The income is deemed to be 10 per cent of net remittable amount to foreign telecast companies implying that all expenses related to ad-revenue stand allowed.

(a) The advertisement by the appellant would increase the demand of channels of Star TV and thereby result in higher collection for Star pay channels. This would not be beneficial to the appellant.

(b) The assessee claimed before the CIT(A) that the publicity of the programmes facilitated soliciting and marketing of advertisement easier and had a direct impact on the revenue of the assessee. It was also claimed that the channel recall, as a result of advertisement and publicity, promoted the programme recall and thereby resulted in more subscribers and higher television rating points (TRP) and which consequently increased demand for advertisement on channels and higher revenue for appellant. It was also contended that though there was no contractual obligation to incur such expenses, appellant decided to advertise the TV programmes based upon the commercial expediency which had to be judged from the businessman's point of view and not of Revenue authorities. It was also submitted that advertisement expenses on the manufactured programmes were not recovered from Star because advertisement expenses were not part of production costs.

With regard to subscription business, the assessee contended that merely because the expenditure benefited the business of Star, the claim of the assessee could not be disallowed.

With regard to advertisement sales business, the assessee contended that promotion of the programmes of Star TV network resulted into improved marketing and promotion of 'Star' brand which was the objective and, therefore, non-mentioning of name of the appellant in the advertisement should not be a reason for disallowance particularly when there is no express provision regarding the mandatory appearance of the name of the assessee in the Act for allowance of advertisement expenses.

9.2 The learned CIT(A) after considering the submissions made by the assessee and the cases cited by the assessee was of the opinion that the expenses had a bearing on the business of the assessee and accordingly allowed 20 per cent of the advertisement expenses.

9.3 On this fact and background, the moot questions, which requires consideration are as follows: (i) Whether the expenditure incurred on advertisement can be termed as incurred by assessee wholly and exclusively for the business purposes of the assessee and is allowable on the ground of commercial expediency or not (ii) Whether the reasonableness of the expenditure can be looked into where the incurrence of expenditure is not in doubt (iii) Whether on the facts and circumstances, can it be said that whether the expenditure was the primary obligation of the assessee and it merely benefited the third parties rather than it was an obligation of all the parties concerned where the assessee should have derived collateral benefits as third party.

In Section 37(1) of the Act, the word "wholly" refers to quantum of expenditure and the word "exclusively" refers to motive, objective and purpose of the expenditure and gives jurisdiction to taxing authorities to examine these matters. The term 'exclusively' used in Section 37(1) also means as "to the exclusion of others". No doubt, ordinarily it is the assessee who has to decide whether any expenditure should be incurred in the course of its business or not.

But the allowability of an expenditure under Section 37(1) of the Act is not unfettered and unqualified because not only the conditions specified therein have to be met but also the other provisions of the Act such as Section 92 of the Act as it stood then, dealing with the situations of the present case. Further, the expenditure should also qualify the tests laid down by the judicial authorities. Accordingly, if the expenditure incurred by the assessee is excessive or unreasonable having regard to the legitimate needs of the business or profession of the assessee or the benefits derived by or accruing to him, so much of the expenditure as is so considered to be excessive or unreasonable shall not be liable for deduction. In a number of judicial decisions, it has been held that the Revenue authorities can certainly look into the aspects of "wholly" and "exclusively" for the purpose of business because it is an essential condition for the allowance specifically put by the legislature and within the ambit of these aspects, the reasonableness can also be examined. Thus, the contention of the assessee that where the incurrence of the expenditure is not in doubt, the reasonableness of the same cannot be examined, is rejected.

9.5 With regard to the aspect of commercial expediency, it is worthwhile to mention that the term commercial expediency cannot be defined for universal application and it will have to be examined on the facts and circumstances of each case. Admittedly, the assessee is engaged in the business of mass entertainment. Entertainment is one of basic requirements of human life; therefore, people themselves look for opportunities of entertainment. The assessee has contended that advertisement resulted into programme recall and higher TRP. This contention is liable to be rejected for the reason that programme recall resulting into higher TRP solely depends on quality and contents of programmes and not on advertisement. There have been several instances of resounding successes without much advertisement and notable failures in spite of vigorous advertisement campaigns.

Resounding successes may include serials like "Ramayan", "Maha Bharat", "KBC", "Kyonki Saas Bhi Kabhi Bahu Thi", etc. Similarly, notable failures, though the list may be long include, " Kahin Naa Kahin Koi Hai", "Sawaal Dus Karor Ka", "Jeeto Chhappar Phad Ke", "Kamjor Kadi Kaun" where not only big names like Madhuri Dixit, Anupam Kher, Govinda, Farida Jalal were associated but a good deal of advertisement was also done but plausibly nothing worked. Thus, these examples clearly demonstrate that there is no nexus between programme recall and advertisement.

9.6 Further, the assessee has merely attempted to justify the incurrence of advertisement expenditure on account of commercial expediency, but has not demonstrated that there was a direct and exclusive nexus between the expenditure incurred and increase of revenue/business volume of the assessee and there would have been no increase in the business but for advertisement expenditure. It has also been contended that advertisement expenditure has helped the assessee in marketing and soliciting of advertisements but again no material has been placed to establish conclusive nexus between the two. In the absence such nexus, mere fact of increase in revenue/business volume over the years alone would not be sufficient to justify the expenditure.

9.7 Further, if the commercial expediency is applicable to the assessee, it is far more applicable to all other parties involved. The assessee has not even got any additional incentives. The business models/structures prevalent in the modern world have undergone a tremendous change. More and more parties are involved in carrying out the business activities and in such complex structure if the expenses incurred by one party benefit to all the parties then such expenses are generally shared by and between the parties deriving such benefits. It is evidently clear from the material on record that the other parties deriving the benefits have not shared the expenses nor reimbursed the same to the assessee. The assessee has not been given any additional incentives even which is clearly an exception to the prevalent business practices and this leads to an apparent conclusion that by shifting their primary obligation of advertising for promoting their channels to assessee (resident assessee), both Principal and Star (non-resident assessees) have reduced the business profits of the assessee (resident assessee) to mitigate the tax liability of assessee and such practice clearly attracts the applicability of provisions of Section 92 of the Act which empowers the AO to determine the profits of resident assessee and the AO has, thus, rightly disallowed the expenditure by exercising his powers although the AO has not specifically mentioned the Section in the assessment order.

9.8 The assessee has vehemently contended that the expenditure cannot be disallowed merely because it has benefited the third party and has put strong reliance on the decisions of the Hon'ble Supreme Court in the case of Sassoon J. David and Co. (P) Ltd. v. CIT wherein the Hon'ble Court has held as under: The next contention urged on behalf of the Department was that since Davids and TATAs were indirectly benefited by the retrenchment of the services of the employees of the company and payment of compensation to them and since there was no necessity to retrench the services of all the employees, the expenditure in question could not be treated as an expenditure laid out wholly and exclusively for business purposes of the company. It has to be observed here that the expression 'wholly and exclusively' used in Section 10(2)(xv) of the Act does not mean 'necessarily'. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under Section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of Section 37 of the IT Act, 1961 which corresponds to Section 10(2)(xv) of the Act. An attempt was made in the Income-tax Bill of 1961 which laid down the 'necessity' of the expenditure as a condition for claiming deduction under Section 37. Section 37(1) in the bill read 'any expenditure laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed'. The introduction of the word 'necessarily' in the above Section resulted in public protest. Consequently, when Section 37 was finally enacted into law, the word 'necessarily' came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under Section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. This view is in accord with the following observations made by this Court in CIT v. Chandulal Keshavlal and Co. .

Another fact that emerges from these cases is that if the expenses is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment of expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party [Ushei's Wiltshire Brewary Ltd. v. Bruce (1914) 6 Tax Cases 399 (HL)]. Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that third party also benefits thereby [Eastern Investments Ltd. v. CIT ]. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee.

From the perusal of the above it is amply clear that Hon'ble apex Court has not given a blanket approval for the allowance of the expenditure and has only held that benefits to somebody other than the assessee cannot be criteria for disallowance if such expenditure satisfies otherwise the tests laid down by law. The Hon'ble Court has also laid down both negative and positive criteria to be satisfied by the assessee for claiming deduction.

9.9 The positive test as laid by the Hon'ble Court is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business and if that being so, then, it would be immaterial that any third party also benefits thereby. In every commercial transaction, there are two or more parties and every party thereto enters into only to derive some benefits and, therefore, according to my humble understanding what ratio has been laid down by the Hon'ble Supreme Court is first with regard to the assessee's legitimate needs of its business and if at this stage only, the allowability of expenditure is questionable, then, there is no need to look beyond that and the expenditure would be disallowed. But if this stage is cleared, then the expenditure incurred by the assessee cannot be disallowed merely for the reason that it also benefits the third party. On the basis of facts narrated hereinbefore, the obligation to incur advertisement expenses primarily rests on the legitimate commercial undertaking of the non-resident Principal, Channel Owner, and sponsors who should have incurred such expenditure and the assessee should have derived collateral benefits of the same as third party. At this point, it is relevant to mention that the word "exclusively" used under Section 37(1) of the Act refers to the exclusion of others, i.e., it should exclusively be incurred for the business of the assessee. In view of above, it is clear that the expenditure incurred by the assessee does not pass the primary criteria (positive test) even and, therefore, the contention of the assessee that the expenditure cannot be disallowed merely it benefited the third party is not valid.

The negative criteria as laid down by the Hon'ble apex Court broadly include the situations where expenses are incurred for fostering the business of another only or are made by way of distribution of profits or are wholly gratuitous or for some oblique/purpose outside the course of business. If the expenditure incurred comes within the ambit of any of above negative criteria then such expenditure would not be allowable. In the present case, admittedly the Principal of the assessee and Owner, the owner of the television channels are liable to pay tax at 10 per cent of the gross receipts in accordance with the CBDT Circular No. 742 which means that although such expenditure Is apparently their obligation, but no tax benefit would be derived by them if such expenditure is incurred by them and because of their close connection with the assessee, business affairs have been so arranged as to reduce the profits of the business of the assessee, being a resident, thereby resulting into less incidence of tax on the assessee.

Further as discussed in detail hereinbefore that the incurrence of advertisement expenditure is the primary and substantive obligation of parties other than the assessee and thus on this count also the expenditure amounts to have been incurred for fostering the business of another person only and thus it comes within the ambit of another negative test. In view of above discussion, it can be safely concluded that advertisement expenditure incurred by the assessee fails to satisfy both positive and negative criteria.

9.10 The view taken by me, that the advertisement expenditure incurred by the assessee, is not allowable under Section 37(1) as it does not satisfy the tests laid down by law which obviously includes Judge-made law is further supported by the decision of Hon'ble Gujarat High Court in the case of CIT v. Navsari Cotton and Silk Mills wherein the Hon'ble High Court has further elaborated positive/negative tests laid down by the Hon'ble Supreme Court in the case of E.D. Sasoon J. David and Co. (P) Ltd. cited supra and the relevant observations of the Hon'ble Court are reproduced below: In these facts and circumstances, the problem is posed whether the contribution made to the municipality for repairing the drainage pipeline is business expenditure under Section 37, inter alia, incurred on account of commercial expediency which can be allowed by way of a deduction. Of course, before it can be claimed under Section 37 or the Act, the following essential conditions will have to be satisfied, namely: 1. It must be expenditure in the nature of revenue expenditure and not in the nature of capital expenditure.

2. It must be laid out or expended wholly and exclusively for the purpose of the business or profession, 3. It must not be of the nature described in Sections 30 to 36 and Section 80VV (which is enforced w.e.f. 1st April, 1976).

Subject to these three basic conditions being satisfied some tests can be evolved on first principles. The tests can be divided into two categories, namely, (1) Positive tests, (2) Negative tests. One (at least one) of the positive tests must nod its head and none (not even one) must do in order to affirmatively hold that the expenditure is a business expenditure inter alia, incurred on account of commercial expediency.

Positive tests Negative tests If the expenditure is incurred : If it is incurred: 1. with a view to bring profits or 1. for a mere altruistic consideration, monetary advantage either today or tomorrow.

2. to render the assessee immune from 2. mainly in order to satisfy his impending or reasonably apprehended philanthropic urges.

litigation. Explanation--Factors (1) and (2) are laudable but the altruistic or philanthropic urges can be satisfied at one's own cost or sacrifice. Not at the cost of public exchequer or other taxpayers and those living below poverty line.

3. in order to save losses in 3. mainly in order to win applause or foreseeable future. earn garlands or public appreciation.

4. for effecting economy in working 4, for illegal, immoral or corrupt which may pay dividends today or purposes or by any such means or for tomorrow. any such reasons.

5. for increasing efficiency in working. 5. mainly in order to oblige a relative or an official.

6. for removing inefficiency in the 6. mainly in order to earn the goodwill working. of a political party or a politician.

7. where the expenditure incurred is 7. mainly in order to show off or such as a, (I) wise, (II) prudent, (iii) Impress others with his affluence or pragmatic, (iv) ethical, man of the for ostentatious purposes.

world of business would conscientiously incur with an eye on promoting his business prospects subject to the expenditure being genuine and within reasonable limits.

8. where it is incurred solely by way of 8. apparently for a factor listed as a civil duty owed by the assessee to positive factor in the left side column the society having regard to the but in reality for one of the obnoxious nature of his business which brings purposes listed hereinabove. him profits but results in some detriment to the public at large either by way of health hazard or ecological pollution or serious inconvenience to the citizens with a view to mitigate the aforesaid evil consequences and consequences of a like nature, subject to its being genuine and within reasonable limit.

9. on a nebulous plea or pretext by way of an alibi in the name of winning profits in remote future or promoting business prospects but really for one or the other of the abovementioned purposes.

12. it must not be an expenditure merely with a view to avoid tax liability without any genuine purpose or reason in good faith.

13. the advantage to be secured by incurring the expenditure must not be of the nature of a remote possible advantage depending on "its" and 'buts' and if at all to be secured at an uncertain future date which may be considered too remote.

It is apparently clear that the expenditure incurred by the assessee falls into more than one of negative tests, i.e., cls. 1,8, 11, 12, and 13 of aforesaid negative list and, therefore, the same is not allowable under Section 37(1) of the Act.

10. In view of above discussion, I am of the considered opinion that the learned CIT(A) was not justified in restricting the disallowance made by AO to 80 per cent merely on the ground that some benefits were derived by the assessee, therefore, I set aside the order of learned CIT(A) and restore the order of AO in this regard for all the years under consideration.

Reference under Section 255(4) OF THE IT ACT, 1961 19th De Since there is a difference of opinion between the Members constituting the Bench on certain points, we request the Hon'ble President, Tribunal to kindly refer the following questions for the opinion of the Third Member.

1. Whether, on the facts and in the circumstances of the case and in law, the commission income under the agreement dt. 31st May, 1994 accrued to the assessee when it was received by it from its clients as held by the JM or accrued at the time of acceptances of the solicited advertisement by the Principal though could be assessed in the year in which such advertisement was telecast as held by the AM 2. Whether, on the facts and in the circumstances of the case and in law, the assessee is entitled to deduction of advertisement expenses amounting to Rs. 9,03,02,000 for asst. yr. 1998-99 and Rs. 9,38,05,000 for asst. yr. 1999-2000 under Section 37 of the IT Act, 1961? 1. On account of the difference between the learned Members of Tribunal 'D' Bench Mumbai, the following questions have been referred to me under Section 255(4) of the IT Act, 1961 (the Act for short): 1. Whether, on the facts and in the circumstances of the case and in law, the commission income under the agreement dt. 31st May, 1994 accrued to the assessee when it was received by it from its clients as held by the JM or accrued at the time of acceptances of the solicited advertisement by the Principal though could be assessed in the year in which such advertisement was telecast as held by the AM 2. Whether, on the facts and in the circumstances of the case and in law, the assessee is entitled to deduction of advertisement expenses amounting to Rs. 9,03,02,000 for asst. yr. 1998-99 and Rs. 9,38,05,000 for asst. yr. 1999-2000 under Section 37 of the IT Act, 1961 The case was fixed for hearing at Mumbai and Shri Porus F. Kaka, learned counsel, appeared for the assessee and Shri Indra Kumar, learned Departmental Representative, appeared for the Department.

2. The facts of the case are given in detail in the proposed orders of my learned brothers and this order is to be read conjunctively with those orders and, therefore, I deem it unnecessary to give detailed facts here again. All the same, it is necessary to give few facts to bring home the controversy between the learned Members.

3. The assessee is a non-resident (resident) company engaged in the business of (i) procuring and collecting advertisement revenue on behalf of Satellite Television Asian Region Advertising Sales ("STAR"), BV ("SAS BV"); (ii) producing/procuring and supplying programmes to Satellite Television Asian Region Advertising Sales ("STAR"), Hong Kong; and (iii) acting as a licensee in India in respect of Star Movies pay channel.

4. The assessee entered into an agreement on 31st May, 1994 with a nonresident with the name Star Advertising Sales BV of Netherlands, which had exclusive rights in India from Satellite Television Asian Region Ltd. of Hong Kong for television advertising on various television channels. The assessee was appointed as one of the agents in India to market television advertising for the channels. This arrangement had the approval of the Reserve Bank of India (RBI) as per their approval letter dt. 22nd July, 1994.

The company hereby appoints the agent as its non-exclusive independent agent in India to market television advertising for the said channels, and the agent unequivocally accepts such appointment.

The agent shall solicit the advertisements in India for the said channels at such rates as the company may fix from time-to-time.

After having solicited the advertisements as above, the agent shall forward, by facsimile or telex, each client's requisition for telecast of its advertisement(s) to the company and the company reserves the right to accept or reject the aforesaid requisition at its sole discretion.

The company shall send the invoice for the advertisements telecast, to the clients and a copy to the agent, within thirty (30) days from the date on which the advertisement is so telecast, with instructions to the clients to make the payment thereof to the agent.

The agent shall, without any charge to the company, collect all sums due from the clients and hold the same in trust for the company pending remittance as hereinafter provided.

The agent shall be entitled to retain fifteen per cent (15 per cent) of the net invoiced amount paid by the clients as commission.

The agent shall not make any profit under this Agreement other than by means of the commission from soliciting advertisements under this Agreement.

The agent shall promptly arrange to have the amount paid by the clients, against each invoice net of its commission retained as above and any other sums payable by the agent to the company under the terms of this Agreement, remitted without demand or any unauthorized deduction or set off, to the bank account designated by the company.

The receipt of money by the company shall not prevent it from questioning the correctness of any statement referred to in Article 13(a) herein in respect of the remittance so made by the agent.

(a) This Agreement shall be subject to the agent obtaining the necessary RBI approval to act as an agent for the company under the terms and conditions mentioned herein.

(b) The agent shall arrange to obtain the necessary RBI approvals and/or such other approvals as may be necessary to remit the invoiced amount to the company's bank account in Netherlands.

6. The assessee in the years under consideration as also in the earlier years followed mercantile system of accounting. In the past, assessee took accrual of commission income on the dates when the advertisements were telecast by the Principal and accordingly commission income was offered for taxation. The assessee subsequently realized that income did not accrue to it on the date of telecast of advertisements booked, but accrued when payment was received from clients. Accordingly, in the years under consideration, the assessee claimed that income accrued from commission from its Principal on the date when the money was realized by it from the clients. After giving appropriate notes, the assessee returned income on above basis, i.e., taking accrual of income when realized from the clients and to that extent method of computation of income was changed. In the notes given along with the return submitted, assessee relied upon the decision of the Supreme Court in the case of Keshav Mills Ltd. v. CIT to justify the change and also pointed out that on account of change in accounting policy, commission income for the year ended 31st March, 1997 would be lesser by Rs. 8,10,11,000. The assessee disclosed loss instead of net profit of Rs. 52,32,000 if the system earlier adopted was followed in the year under consideration. The relevant notes are reproduced in detail at pp. 4 and 5 of the proposed order of the JM.7. When called upon to justify above change in policy, the assessee explained that under Clause 8 of agreement with its Principal, commission @ 15 per cent of net invoice amount accrued to the assessee when amount was paid by clients. Unless the amount was paid there was no accrual of income.

8. The AO did not accept above contention of the assessee for the reason that under the system of accounting regularly followed by. the assessee income accrued or arose when a legal right in respect of it came into existence. The AO interpreted the word "paid" in Clause 8 of the agreement in the light of the decision of various High Courts, viz., Bombay High Court decision in Aziende Colon Nazionali Affini v.CIT ; Kerala High Court decisions in Janatha Contract Co. v. CIT and Neroth Oil Mills Co. Ltd. v. CIT . He was of the view that when question of accrual was to be determined on the basis of agreement, the whole agreement was to be considered to ascertain the true intention and not a particular clause. The AO also relied upon the fact that in the past assessee has been taking accrual of income as soon as advertisements were telecast.

Since there was no change in the original agreement, the new interpretation of Clause 8 could not be accepted. The AO on consideration of various clauses of agreement and above circumstances held that income accrued to the assessee on the dates when advertisements booked were telecast. This resulted in addition of Rs. 8,10,11,000, Rs. 8,30,00,449 and Rs. 35,48,804 for asst. yrs. 1997-98, 1998-99 and 1999-2000, respectively.

9. The assessee impugned additions in appeal, but remained unsuccessful. The learned CIT(A) held that commission income accrued to the assessee on the dates advertisement were booked for telecast. This, according to the learned CIT(A), followed from Clause 7 of the agreement between the parties. He also held that the word "paid" does not contemplate actual receipt of amount. The detailed reasoning of the learned CIT(A) are noted in para 7 of the proposed order of the learned JM.10. assessee being aggrieved carried the matter in appeal before the Tribunal. In the course of hearing of appeals before the Tribunal, learned Counsel for the assessee did not dispute that assessee had all along been following mercantile method of accounting and same method was followed in the three years under appeal. He argued that as per agreement, commission to the assessee did not accrue when the advertisements solicited by the assessee were telecast by its Principal. It was accordingly submitted that the assessee in the years under appeal had shown income correctly on the ground that income accrued to the assessee only when the amount was realized. In this connection, reliance was placed on Clause 8 of agreement under which assessee as an agent was entitled to retain 15 per cent of the net invoice amount paid by clients as commission. The aforesaid Clause 8 of the agreement when read with conditions on which permission to the assessee was granted by RBI leaves no amount of doubt that commission accrued to the assessee only when it got the right to retain the commission, which situation did not arise unless the amount was paid by the clients. He submitted that no enforceable debt in favour of assessee accrued till the amount was realized from the clients. Receipt of amount was condition for accrual of income. The learned Counsel also argued that Circular of CBDT No. 742 supported assessee's contention.

As per above Circular, no income accrued even to the foreign Principal unless the amount was remitted. Thus, the learned Counsel for the assessee contended, income to the assessee cannot be said to have accrued unless amount payable to its foreign Principal is received by the assessee from Indian clients. So, the aspect of payment of money was most crucial for determining the time of accrual. It was submitted that right to receive commission remained inchoate till the assessee received money from its clients, since neither the assessee could retain its commission nor it could remit the same to its Principal.

11. In support of the above claim, learned Counsel for the assessee relied upon the decisions in the case of Pfizer Corporation v. CIT and in the case of Seth Pushlal Mansinghka (P) Ltd. v. CIT (1967) 63 ITR 109 (Raj). The latter decision was approved by apex Court and is reported at Seth Pushalal Mansinghka (P) Ltd. v. CIT (1967) 66 ITR 159 (SC).

The learned Counsel for the assessee also submitted that income did not accrue to the assessee as theory of real income was applicable in this case. The learned Counsel pointed out that on account of various disputes large number of amount due to the assessee on account of telecast were not recovered. Therefore, the amounts about which there is no hope of recovery, cannot be added in one year as income and then treated as bad debts in the next year on the basis of theory of real income. Reliance in this connection was placed on the decisions of Hon'ble Supreme Court in the case of Godhm Electricity Co. Ltd. and in the case of CIT v. Bokaro Steels Ltd. 12. The learned Departmental Representative submitted that assessee could not be permitted to change method of accounting from mercantile to cash system unless there were good and bona fide reasons to do so.

There were neither any change in the terms and conditions of agreement between the assessee and its Principal nor any plausible reason has been given by the assessee to change its method of accounting. The assessee intended to adopt hybrid system of accounting, which was not permissible under the amended Section 145 of the Act. The learned Departmental Representative further submitted that income had accrued to the assessee as per reasons given in detail by the AO on the telecast of advertisements. As soon as advertisements were telecast, right to receive commission accrued to the assessee. The learned Departmental Representative further submitted that once income has accrued its taxability cannot be postponement merely because it is not quantified or not realized subsequently. The agreement between the parties is to be read as a whole and when so done, it is clear that primary job of the assessee was to market and elicit advertising for telecast for its Principal. Therefore, when advertisements were telecast on Star TV, the job of the assessee can be said to be fully executed. So right to receive commission would accrue as soon as services in the shape of telecast of advertisements is carried. Clauses 7 and 8 of agreement only provided for modalities for remitting the amounts to the Principal. Likewise, approval of RBI and conditions imposed by them had nothing to do with the accrual of income.

Alternatively, commission could be said to have accrued when invoice was raised by the Principal. The decisions cited by the learned Counsel for the assessee in the case of Pfizer Corporation (supra), as per the learned Departmental Representative was distinguishable as it related to a non-resident and pertained to accrual or deemed accrual of dividend income.

13. On consideration of rival contentions of parties and other materials referred to above, the learned JM at the outset recorded that there was no change in the mercantile system of accounting followed by the assessee throughout and in the years under consideration. The dispute was relating to the dates when commission income had accrued to the assessee. The aforesaid question was required to be determined in accordance with the terms of agreement between the parties and the case laws. If by mistake income was shown on some erroneous basis, the assessee could always show correct time of accrual of income in the subsequent year. The learned JM in his proposed order further observed that as per settled legal position income accrues when an enforceable debt is created in favour of the assessee; in other words, when a right to receive income is acquired. For the aforesaid proposition, reliance was placed on the decision of the Hon'ble Supreme Court in the case of E.D. Sassoon and Co. Ltd. and Ors. (supra). However, where right to receive is inchoate, it would accrue on the date when such right becomes absolute. In other words, if accrual of income depends on happening of any event or fulfilment of a condition, then income will accrue on happening of that event or fulfilment of the condition. The learned JM, in this connection, relied upon the decision of the Hon'ble Supreme Court in the case of CIT v. Shri Goverdhan Ltd. .

14. The learned JM thereafter observed in his proposed order that accrual of income would depend upon the agreement between the parties.

He thereafter considered and discussed the decisions of Supreme Court in the cases of E.D. Sassoon and Co. (supra), CIT v. Ashokbhai Chimanhhai and J.P. Shrivastava and Sons (Bhopal) (P) Ltd. v. CIT and drew the following conclusion in para 24 of his order: In view of the above judgments of the apex Court, it is clear beyond doubt that normally the commission income would accrue to the assessee when the services are rendered or completed. However, the parties, with mutual consent, may provide that commission would accrue on happening of future contingency. Therefore, in such cases, commission would not accrue until the happening of the contingency and AO would not be justified in assessing the same merely on the basis of completion of services by the assessee. Such contingency may, in certain case, also coincide with date of payment as in the case of Seth Pushalal Mansinghka (P) Ltd. v. CIT (1967) 66 ITR 159 (SC), where transfer of property in goods, which was the basis of accrual of income, coincided with the date of payment. So, the contention of Revenue that date of payment can never be the date of accrual, cannot be accepted. So accrual of income would depend on the terms of agreement in each case.

15. Thereafter, the learned JM referred to the agreement between the parties as according to him the agreement as a whole was required to be considered. He found that Clause 8 of the agreement was the only Clause, which speaks of commission to be paid to the assessee and provided as under: The agency shall be entitled to retain 15 per cent (fifteen per cent) of net invoice value paid by the clients as commission Above clause, according to the learned JM, clearly provided a contingency in the agreement, i.e., payment of net invoice amount to the assessee by its clients. According to the learned JM, the assessee had no right to receive commission till the happening of such contingency as right to retain commission is dependant upon payment of invoice amount to the assessee.

Once invoice amount was received by the assessee, the right to retain commission would accrue immediately irrespective of the remittance to the non-resident. Thus, payment by the clients was a condition precedent for accrual of income, which has been provided in the agreement to ensure the recovery of the amount. The learned JM also observed that effect of Clause 8 of the agreement was that assessee would never get any commission where invoice amount is not paid by the clients. The date of remittance to the Principal would be irrelevant and the claim of the assessee could not be rejected because date of accrual coincided with the date of payment. The learned JM accordingly held that orders of lower authorities were not sustainable.

16. Before parting, the learned JM observed that decision of Supreme Court in the case of Seth Pushalal Mansingkha (P) Ltd. v. CIT (supra) does not help the assessee. The learned JM has reproduced the relevant observations of the apex Court at pp. 22 and 23 of his proposed order.

The learned JM also rejected the contentions of the assessee that income cannot accrue to it unless income has accrued to the Principal.

The learned JM also did not agree with the assessee that approval granted by the RBI to the assessee to remit amounts to its Principal had nothing to do with accrual of income. Reasons for aforesaid findings are given by the learned JM in paras 24 and 25 of his proposed order. It has been held by learned JM that decision of Supreme Court in the case of Morvi Industries Ltd. v. CIT relied upon by learned Departmental Representative was in no way in conflict with the view, which was being taken in this case.

30. In view of the above discussions, we hold that in the present case, the income of commission accrued to the assessee when it received the amounts from its clients. Where the payments are directly made to the Principal, then in such cases, the date of accrual of income would be the date when such amount is paid by the clients to its Principal. The orders of the learned CIT(A) are, therefore, set aside on this issue and consequently, the AO is directed to recompute the income for all the years under consideration in accordance with our order.

18. The ground relating to disallowance of Rs. 9,03,02,000 and Rs. 9,38,05,000 on account of advertisement expenses for asst. yrs. 1998-99 and 1999-2000, respectively is discussed by learned JM in para 35 of his proposed order. The learned JM has noted explanation of the assessee to justify the expenditure in question as under: As submitted earlier, NTVI incurs expenditure for advertisements, which are undertaken to promote channel recall in viewers minds.

Customers see that advertisement for the channels, thus a demand is generated with the cable operator, who in turn approach NTVI for enabling channel viewing.

The learned JM noted the objections of the AO to the claim made by the assessee as under: (i) manufacturing programme for Star TV, (ii) activity of assessee as commission agent for collecting advertisements, revenue for Star TV and (iii) activity of cable subscription for Star TV, The AO was of the view that such expenditure was not incurred wholly and exclusively for the purpose of business of assessee and, therefore, could not be allowed as deduction under Section 37. Regarding the manufacturing activity, it was observed by him that assessee was charging 5 per cent additional sum over and above cost of manufacturing TV serials for Star TV and, therefore, there was no reason for assessee to incur any expenditure as advertisement. In respect of commission activity, it was observed by him that there was no necessity to incur any expenditure for such activity. Sample of advertisements showed that the advertisements were in the name of Star TV and not the assessee's own name. Hence, there was no link between the expenditure and assessee's business. According to him, such advertisements and publicity increases the viewership of Star TV and, therefore, is not related to assessee's business. Similar observations were made with reference to cable subscription activity.

The AO had accordingly disallowed the claim for both the assessment years and the assessee carried the matter in appeal before the CIT(A).

It was submitted before the CIT(A) that the expenses were incurred to promote the programmes on channels which resulted in great demand for the programmes aired by the Principal. Thus, publicity carried through advertisements resulted soliciting and marketing of advertising easier and beneficial. It was argued that commercial expediency was required to be Judged from the point of view of the businessman and not of taxing Department. The learned CIT(A) held that assessee collected subscription not for itself but for Star India (P) Ltd. Advertisements carried by assessee only benefited Star TV. Only a small benefit was received by the assessee. The CIT(A) accordingly allowed 20 per cent of the expenses as deduction.

19. The assessee impugned the above disallowance in appeal before the Tribunal. After hearing both the parties and on the facts and circumstances of the case, the learned JM did not find any force in the objections raised on behalf of the Revenue and held that assessee was entitled to relief for advertisement carried by it. The learned JM in his proposed order held as under: 40. After considering the rival submissions, we are of the view that no disallowance of expenditure on advertisement was warranted in law. There is no dispute that expenditure was incurred on advertisement. The disallowance was made by AO on the ground (i) that advertisements by assessee only increased the viewership of Star TV and, therefore, it was neither obligatory nor necessary for the assessee to incur such expenditure, (ii) that advertisement had no nexus with assessee activity since advertisements were in the name of Star TV. In view of these grounds, the AO held that expenditure was not incurred wholly and exclusively for the purpose of business. Such grounds taken by AO are in conflict with the settled legal position as explained by the apex Court in the case of Sassoon J. David and Co. (P) Ltd. v. CIT . In that case, it was held that no disallowance could be made on the ground that it was not necessary for the assessee to incur such expenditure or it benefited the third party. Accordingly, the AO was not justified in considering these factors for the purpose of disallowance. The only relevant factor is whether incurring of expenditure was for the purpose of assessee's business. The assessee was carrying on its business activity exclusively for Star TV and, therefore, survival of its business depends on the success of programmes transmitted by Star TV. assessee was required to solicit the advertisements for Star TV channel. No person would give advertisement unless he is sure of large viewership of programmes on Star TV. Therefore, if assessee incurs expenditure on advertisement with a view to increase the viewership of Star TV, in our opinion, such expenditure would be in the interest of assessee's business though it may also benefit its Principal. Accordingly, no disallowance was warranted in law. The order of the learned CIT(A) is, therefore, modified and disallowance sustained by him is hereby deleted.

20. The learned AM did not agree with the view taken by the learned JM.He first referred to the grounds of appeal raised by the assessee. He observed that assessee was obliged under law to follow mercantile system of accounting. The learned AM in his proposed order further noted that under the agreement dt. 31st May, 1994, the assessee had treated advertising commission as accrued at the time when time spots were aired and, therefore, change in system was sought to be made under the same agreement by giving new interpretation to Clause 8 of the agreement. According to the learned AM, change in accounting policy was aimed to reduce tax liability for the assessment years under consideration. The learned AM also observed that assessment in this case was to be made on the income as earned against traditional concept of actual receipt from right to receive.

21. The learned AM then referred to agreement between the parties and reproduced clauses of agreement like "Preamble", "Rate" and "Client requisition". On reading of above relevant clauses, the learned AM concluded that the assessee is required only to solicit advertisements in India for channel in accordance with procedure, terms and conditions and instructions issued by Principal and at such rate as fixed by the Principal. In the view of the learned AM, "contractual obligations of the assessee comes to an end and once the client's requisition forwarded by the assessee is accepted by Principal, at this very point, assessee becomes eligible for its commission, i.e., a legally enforceable debt has been created in favour of assessee because the sale of time spots is completed, and the commission receivable by the assessee is also ascertainable on the basis of number of time spots sold at the rate accepted by the Principal and the client." Ascertainment or quantification of a debt will not affect accrual of income. For the aforesaid conclusion, the learned AM relied upon the decision of the Supreme Court in the case of CIT v. Shri Govardhan Ltd. (supra).

The learned AM further observed that once a debt is created, the uncertainties attached thereto regarding quantification or realization would not alter its character, though the amount of profit may change depending upon the realization; that it also emerges from the perusal of the above decision that the future uncertainties, difficulties and delays, etc., which may arise in a particular case would not affect the right to receive the income and that, therefore, even if one assumes a situation that the telecast of solicited advertisements does not take place for any reason whatsoever, the assessee would remain entitled to receive the commission from Principal in respect of such cases also on the basis of requisition accepted by Principal.

The aforesaid observation seems to be inspired from the decision of Kings Bench in the case of IRC v. Gardener Mountain and D'Ambrumenil Ltd. (1947) 29 Tax Cases 69 (HL).

The learned AM also referred to Accounting Standard and provisions notified by the Central Government under Section 145(2) of the Act and the conduct of the assessee in the past accepting of commission on sale of time spots. Accordingly, the learned AM observed that he would prefer not to disturb the accounting policy in which the commission income was recognized by the assessee in the past particularly when agreement remained unaltered. The learned AM thereafter referred to Clause 7 of the agreement relating to "invoicing and collection" and Clause 9 relating to "net profit of agent". With reference to aforesaid clauses, the learned AM observed that the assessee had no contractual obligation to make efforts to realize amounts from clients as it would have caused implications and the assessee is not getting any money from Principal on this score. Thus, role of assessee under the agreement is "limited to receive the amount paid by the clients. In nutshell, the assessee is under no obligation to realize the amount from the clients". After referring to certain other clauses, the learned AM refers to the more important Clause 8 providing for retention of commission by the assessee. In respect of above clauses, the learned AM has observed "Thus Clause 8 does not, in any way, dilute the right of the assessee to receive the commission which has already accrued to the assessee upon its having solicited the advertisements for the Principal.

The learned AM thereafter referred to the new agreement entered into between the assessee and its Principal w.e.f. 1st April, 1999 and the relevant clauses of the agreement have been reproduced. After perusal of different clauses, the learned AM observed that the above agreement materially altered and widened in the Representation Agreement than the agreement existing at the material time. The responsibility of collecting of advertisement revenue from clients has been specifically included in the scope of work and other duties in this regard like maintenance of records regarding amount due from clients, periodical reporting of the same to owner have also been included in the new agreement. No such responsibilities are listed in the agreement dt.

31st May, 1994. So it can be safely stated that the assessee was not liable for realization of amounts from clients and in substance the only role assigned to the assessee was to receive money from clients as per the instructions of the Principal. The learned AM in para 5.9 of his proposed order discussed in detail and was of the view that change made by the assessee in accounting policy relating to accrual of commission income was not justified and liable to be rejected. In subsequent para the learned AM discussed in detail how assessee was not justified in changing accounting policy relating to accrual of commission.

22. The learned AM thereafter discussed the proposition and distinction between "accrual of income" and "earning of income". He also referred to AS 1 and provisions of Sections 4, 5 and 145 of the Act. There is reference to the dictionary meaning of the word "earned" and "accrual".

In ultimate analysis, the learned AM held as under: 7.3. Admittedly, it is not the case of the assessee that the concept of matching of cost with the revenue is not applicable to its case.

The matching concept is not a one-way process in a sense that only the cost should be matched to the revenue but it also applies otherwise, i.e., if the cost are being charged to the P&L a/c of a particular period correspondingly the Revenue related to such cost should also be credited in the P&L a/c of the period. In this view of the matter, the assessee's conduct of claiming the cost related to such commission in the period under consideration also obliges the assessee to account for the revenue in relation to such cost in the same period. The assessee has not done so, resulting into distortion of results by way of understatement of profits which fact has also been pointed out by the statutory auditors. All these factors lead to the irresistible conclusion that such change is not guided by bona fide considerations. The bona fides of the change could have been established if the assessee would have simultaneously deferred the expenditure incurred in relation to income from commission not recognised as revenue to the period when such commission was recognized as revenue. It is also a settled judicial principle that the assessee, has, of course to satisfy the IT authorities, i.e., he is doing so in good faith and Revenue is not likely to be defrauded. The AO has given a categorical finding that the sole objective behind change in accounting policy is to reduce the tax liability of the assessee for years under consideration, which in the light of above discussion, deserves to be upheld. However, in case it is felt that commission income should be recognized in some other year, then, the expenses pertaining to earning of such commission should also be considered for allowance in the same year.

8. Thus, in view of discussion in foregoing paragraphs, I hold that the commission accrued to the assessee at the time of acceptance of the solicited advertisement by Principal but for the reasons mentioned in para 5.2, at pp. 50 and 51 of this order, the same would be recognized as revenue of the period in which telecast takes place. Accordingly, I uphold the decision of the Revenue authorities in this regard and this ground of the assessee is rejected for all the years under consideration.

23. As regards the second issue, the learned AM noted the activities of the assessee. He held that advertisement expenses incurred by the assessee were not incurred wholly and exclusively for the purpose of business. It was also not correct on the part of the assessee to claim that reasonableness of expenses could not be examined by the Revenue authorities. assessee was also not justified in claiming that increase in business resulted on account of advertisements carried on by the assessee. There could be several factors like quality and contents of programmes and not advertisements, which are responsible for increase in business. The assessee was further not able to show that advertisement expenditure was incurred on account of any commercial expediency. On the basis of the decision of the Hon'ble Supreme Court in E.D. Sassoon J. David and Co. (P) Ltd. (supra) the learned AM evolved the positive and negative steps to be applied to determine whether expenditure was incurred for the purpose of business and was admissible in law. On application of above tests, the learned AM held that expenditure incurred by the assessee was not deductible. The learned AM relied upon the following observations of the Supreme Court in the case of CIT v. Chandulal Keshavlal and Co. (supra): Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business, then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment of expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party [Usher's Wiltshire Brewary Ltd. v. Bruce (1914) 6 Tax Cases 399 (HL)]. Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that third party also benefits thereby [Eastern Investments Ltd. v. CIT ]. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee.

Accordingly, the learned AM set aside the order of the CIT(A) and restored that of the AO disallowing advertisement expenses.

24. The case was fixed for hearing at Mumbai and I have heard Shri Porus Kaka, the learned Counsel for the assessee and Shri Indra Kumar, the learned Departmental Representative for the Revenue. Shri Kaka pointed out that the assessee was a marketing and collecting agent for Star TV. There is no dispute on facts between the two Members. As is evident from p. 2, para 2 of proposed order of the learned JM, the assessee is carrying on the activities, viz., (i) procuring and collecting advertisement revenue on behalf of Star (ii) producing/procuring and supplying programmes (iii) acting as a licensee in India in respect of Star Movies pay channel. Therefore, he emphasized that apart from commission as agent of Star, the assessee had two other sources of income. The assessee was maintaining consolidated account for all the three sources as far as expenses claimed were concerned. He also drew my attention to p. 126 onward of the paper book to show how advertisement of Star Plus are carried in various States to promote Star TV (cutting of certain newspapers, where such advertisements were carried, are included in the paper book).

25. In respect of the first question, Shri Kaka argued that Clause 8 of agreement was more than clear that assessee was to retain 15 per cent of net invoice amount paid by clients. Shri Kaka also explained as to why net invoice amount was written in the agreement. He submitted that 15 per cent of the amount payable to assessee's Principal was deducted by agents outside India and thus, commission of the assessee was worked out only on the balance amount. Shri Kaka argued that the learned AM had misread the agreement between the assessee and its Principal to conclude that commission would accrue as soon as agreements were approved as far as terms and conditions on which advertisements were procured by the assessee was approved by its Principal and invoice was raised. The learned AM was also not right in holding that it was not the responsibility of the assessee to make collection of the amount due to its Principal. Shri Kaka argued that the learned AM misread the agreement relating to responsibility of the assessee to collect fees due to its Principal. He also submitted that Principal of the assessee was a non-resident and was interested in amounts remitted to it. It was not interested in merely booking advertisements on Star TV. Having above in mind, it had provided in the agreement that commission would be due to the assessee only when amount due to the Principal is collected by the assessee.

26. Shri Kaka vehemently contended that the learned AM was wrong in concluding that commission due to the assessee would accrue as soon as services are rendered by the assessee. The learned AM was also not correct in holding that the services rendered by the assessee would be taken as complete when advertisements solicited are approved by the Principal and are aired. Income (here commission) would accrue only under the terms and conditions of the agreement and not when services are completed by the agent. In this connection, he drew my attention to large number of decisions discussed hereinafter: (i) Shri Ambika Mills Ltd. v. CIT [sic-CIT v. Harivallabhadas Kalidas and Co.] : In this case, the assessee, a managing agent, was entitled to commission at 5 per cent on sale proceeds of yam, three pies per pound on sale of cloth by the company, 10 per cent on sale proceeds of all other materials and 10 per cent on the bills of any ginning and pressing factories. The commission was payable after 31st December or such other date as the directors might have fixed.

The board of directors through a resolution reduced rate of commission payable to the assessee, which was agreed to by the managing agent. The Revenue was of the view that the amount reduced had accrued to the assessee as soon as sales were effected by the company. Their Lordships of the Supreme Court did not agree with the above contention and held that commission did not accrue to the assessee as per terms of the agreement. Their Lordships held as under: (a) As was observed by Lord Wright in IRC v. Gardner, Mountain and D'Ambrumenil Ltd. 'It is on the provisions of the contract that it must be decided, as a question of construction and therefore of law when the commission was earned'. The contract in the present case in para 2 shows that (1) the company was to pay each year; (2) that the managing agents were to be paid 5 per cent commission on the proceeds of the total sales of yarn and of all cloth sold by the company or three pies per pound avoirdupois on the sale, whichever the managing agents chose : thus there was an option to be exercised at the end of the year; (3) they were also to be paid at 10 per cent. On the proceeds of sales of all other materials; and (4) the mills were to pay to the managing agents each year after 31st December, or such other date which the directors of the company may choose for the closing of the accounts. There was a further clause that if the net profits of the managed company, that is, the mills were not sufficient to enable the directors to recommend a dividend of 8 per cent per annum on the paid-up capital, then the managing agents were bound to forgo a portion of their commission upto one third. All these provisions as to payment have to be read together as an indivisible and an integral whole. On a proper construction of this contract, therefore, it is obvious that the managing agents were to be paid at the end of the year. They had the option of receiving a percentage on total sales or three pies per pound and this was exercisable at the end of the year. There was also a liability to pay back a portion of the commission in certain contingencies, which also could be determined only when the accounts were made up for the year. It is thus clear that there was no accrual of any commission till the end of the year. On this construction of the contract it cannot be held that the commission had accrued as and when the sales took place and that as a result of their agreeing to the modification of the agreement the managing agents were entitled to receive commission only at the end of the year and before then the agreement was varied modifying its terms as from the beginning of the accounting year.

We are of the opinion, therefore, that the High Court correctly found against the appellant and we, therefore, dismiss C.A. No. 145 of 1958 with costs. In view of this Mr. Palkhivala for the managed company did not press C.A. No. 323 of 1957, which is, therefore, dismissed but the parties will bear their own costs in that case because the result of that appeal is really dependent upon the result in C.A. No. 145 of 1958.

(ii) In the case of CIT v. Chamanlal Mangaldas and Co.

the assessee, a commission agent, was entitled to commission of 3.5 per cent on sale price of all cotton yarn and further commission of 10 per cent on the profit made by the company from its ginning or pressing operation. The company through a resolution decided that commission to managing agent be paid at Rs. 1,05,575 instead of Rs. 2,05,775 payable at the rate provided in the agreement. Their Lordships have noted the stand of the Revenue as under: The income-tax authorities held that the entire sum of Rs. 2,05,575, having accrued as commission during the previous year was taxable income, and that Rs. 1,00,000 was a mere voluntary surrender which could not affect the taxability of the whole amount of commission.

The claim of the Revenue was rejected with the following observation: The question whether the sum of Rs. 1,00,000 was income in the hands of the managing agents was one of construction of the terms of the contract. The clause in regard to commission had to be read as one integrated whole and so read it meant that the right of the managing agents to receive the commission or its accrual was at the end of the accounting year when all the sales were and could be added up and the accounts were made up. The amount which alone accrued or which they were entitled to receive was the latter sum of Rs. 1,05,575 and not what would have been payable had there been no modification of the agreement. The amount of Rs. 1,00,000 was not, therefore, taxable.

In C.A. No. 210 of the 1958, by Clause (3) of the managing agency agreement the managing agent of a company was to be paid for services as secretaries and treasurers and agents a commission of 3 per cent on the gross sale proceeds of all yarn and cloth manufactured in the company's mills provided that if there was not sufficient profit in any financial year to enable a distribution of a dividend of Rs. 1,20,000 on the total paid-up capital the managing agent was to give up out of the commission an amount upto 1/3 of the commission to enable the distribution of that amount of dividend to the shareholders. On 28th Dec, 1950 and 1951 that if the directors having regard to the results of the working of the managed company were of the opinion that a lesser remuneration should be paid to the managing agent for any of the two years the directors shall have the right to fix such lesser remuneration either by way of a lump sum or at a reduced percentage rate and the managing agent shall be bound to accept the same. On 17th March, 1951, there was a supplemental agreement embodying the terms of this resolution and on a supplemental agreement embodying the terms of this resolution and on 8th April, 1651. the directors by a resolution fixed the remuneration at Rs. 4,11,875 instead of the commission calculated at the old rates which worked out at Rs. 5,11,875. In this case also the question was whether the sum of Rs. 1,00,000 was subject to income-tax: Held (i) that the agreement was one integrated and indivisible whole and that the managing agent's commission was only determinable and accrued when the year was over; (ii) that the fact that the amounts of commission were credited in the books of the managed company every six months only meant that as an interim arrangement the accounts of all sales were made up at the end of six months also. But this did not affect the construction of the clause containing the terms for payment of commission nor the reduction made therein as a result of the modified arrangement. The amount which arose or accrued and which the managing agent had the right to receive was not affected by the manner in which the entry was made.

(iii) That the managing agent was entitled to receive as commission only sum of Rs. 4,11,875 and that amount alone accrued to the managing agent; the amount of Rs. 1,00,000 was not taxable.

the assessee, commission agent, was entitled to commission at 3.5 per cent on gross proceeds of sales. Clause 3 of the agreement provided as under: The commission shall become due to the managing agents at the end of each financial year or other period for which the accounts of the company are to be made before the general meeting and shall be payable and paid immediately after such accounts have been passed by the general meeting.

Subsequently, the commission was reduced and only a sum of Rs. 67,957 was agreed to be payable to the assessee. Their Lordships of the Supreme Court held that only the sum settled by the assessee, i.e., commission agent had accrued to it by stating as follows: (i) That under the managing agency agreement no commission accrued or arose on the sale proceeds at the time, of each transaction of sale. There was neither any debt created or any right to receive payment when each transaction of sale took place. The commission of the managing agents became due at the end of the financial year and that was when it accrued. As the remuneration for the entire financial year 1944-45 accrued in the hands of the assessee.

(ii) That the fact that the original managing agents were also assessed to tax in respect of the commission for the period 1st April to 31st Dec, 1944, had no relevancy.

there were no date fixed in the agreement for payment of managing agency commission. The assessee had foregone commission upto the end of the previous year before the accounts of the managing company was made up. The Revenue contended that commission had accrued to the assessee as income and, therefore, could not be given up after the end of the financial year. This contention was repelled by Their Lordships with the following observations: (i) That the office allowance forgone by the respondent was allowable as revenue expenditure under Section 10(2)(xv) of the IT Act, 1922.--CIT v. Chandulal Keshavlal and Co. (1960) 261 SCR 38 (SC) followed.

(ii) That, as the managing agency commission receivable could have been ascertained only after the managed company had made up its accounts and the respondent had given up the commission even before the managed company made up its accounts, and no date had been fixed in the agreement for payment of the commission, the mere fact that the respondent was maintaining its accounts on the mercantile system did not lead to the conclusion that the commission had accrued to it by the end of the relevant accounting year. The commission given up by the respondent could not be considered to be its real income. The High Court was, therefore, justified in refusing to answer the question relating to the allowability as revenue expenditure of the commission forgone.

On the basis of the above arguments Shri Kaka argued that it is demonstratively established on the basis of the above pronouncements of the Supreme Court that income (out of Commission) does not accrue as soon as services are performed. It would accrue as provided in the agreement. In the present case, Clause 8 of the agreement clearly provided that agent was to realize amount due to the Principal and thereafter retain 15 per cent of the remittances.

Therefore, unless condition relating to realization of amount is satisfied income will not accrue. To say that income will accrue at any stage earlier than realization of amount would be ignoring the terms of the agreement, which was not permissible in law.

27. Shri Kaka also argued that there is lot of difference between method of accounting, relevant for purpose of Section 145 of the Act, and accrual of income. Income will accrue to an assessee as provided in Sections 4 and 5 of the Act. Provision of Section 145 of the Act has nothing to do with accrual of income. It only provides for computation of income as per method of accounting regularly followed by the assessee. In the present case, there was no dispute that the assessee in earlier years and in the three years under consideration, followed mercantile system of accounting. The question and issue involved here was whether income had accrued to the assessee. He submitted that the learned AM confused the two issues and, therefore, made observations relating to method of accounting, which are not relevant as there was no dispute on this count. In this connection, Shri Kaka drew my attention to decision of Hon'ble Madras High Court in the case of CIT v. Devi Films (P) Ltd. (1982) 31 CTR (Mad) 341 : (1983) 143 ITR 386 (Mad) wherein their Lordships have observed as under: Regular mode of accounting only determines the mode of computing taxable income and the point of time at which the tax liability is attracted, it cannot determine or affect the range of taxable income or the ambit of taxation. Where no income has resulted, it cannot be said that income has accrued merely on the ground that the assessee has been following the mercantile system of accounting. Even if the assessee makes a debit entry to that effect, still no income can be said to have accrued to the assessee. If no income has materialized, there can be no liability to tax on a hypothetical income. It is not the hypothetical accrual of income based on the mercantile system of accounting followed by the assessee that has to be taken into account, but what should be considered is, whether the income has really materialized or resulted to the assessee. The question whether real income has materialized to the assessee has to be considered with reference to commercial and business realities of the situation in which the assessee has been placed, and not with reference to his system of accounting.

Similar is the view taken by the Tribunal, Special Bench at Hyderabad in the case of Dy. CIT v. Nagarjuna Investment Trust Ltd. (1998) 62 TTJ (Hyd)(SB) 33 : (1998) 65 ITD 17 (Hyd)(SB). Relevant observations are reproduced below: (iii) From a reading of the provisions of Section 145 in conjunction with the charging provisions contained in Section 4. the scope of the total income defined in Section 5 and other relevant provisions in the light of principles of law laid down in various judgments the following well settled principles of law clearly emerges.

(i) That the provision of Section 145 cannot override Section 5. If an income has neither accrued nor received within the meaning of Section 5. whatever Section 145 may say, such income cannot be charged to tax even though a book keeping entry has been made recognizing such hypothetical income, which in law and on fact did not really accrue or arise or received in previous year. Section 145 determines the mode of computing the taxable income. It does not affect the range of taxable income or the ambit of taxation. The computation provisions cannot enlarge or restrict the content of taxable income. The range of taxable income or ambit of taxation is to be determined in accordance with the charging provisions.

(ii) The proviso to Section 145(1) does not merely confer a discretionary power upon the AO but also imposes a statutory duty on him to examine in every case whether income, profits and gains chargeable to tax in the relevant year, could properly be deduced from the method of accounting followed by the assessee.

(iii) The term "accrual" of income used in the Companies Act, as explained in the various Accounting Standards and as understood for the purposes of taxation laws in certain circumstances may have different meanings depending on the purpose of legislations, the context in which such expressions has been used and on the interpretation of the terms of relevant contracts.

For tax purposes, the accrual or receipt of income in the relevant previous year, in the instant case, will have to be determined in consonance with the ambit of taxable income as per Section 5 on the basis of a careful scrutiny of the terms of contract for hire-purchase and lease agreements regardless of the method of accounting followed by the assessee for recognition of such income in its books of account.

28. Shri Kaka further submitted that even if it is accepted that commission accrued to the assessee on completion of services required to be rendered by assessee as an agent, then collection of amount due to the Principal was part of the obligation to be performed by the assessee. In this connection, he drew my attention to Clause 7(b) of the agreement, which casts a duty on the agent to collect all sums due from clients and hold the same in trust for the company pending remittance as provided in the agreement. The collections are to be made without any charge to the company.

29. In the light of above clause it is difficult to hold that assessee does not have obligation to collect sums due to its Principal as the assessee was required to make collection on behalf of its Principal and the service of the assessee would be treated as complete only when sums due to the Principal are collected by the assessee. Therefore, even on principle accepted by the learned AM, commission could not accrue unless collection was made by the assessee. This position is made more explicit as per clause 8 of the agreement referred to above.

30. The learned Departmental Representative supported the proposed order of learned AM. He submitted that the learned Member had taken into account concept of accrual of income and concept of real income.

He has noted that under mercantile system of accounting, point of accrual of income is when assessee acquires a right to receive income.

Right to receive in the present case accrued to assessee as soon as job was performed under the contract. As soon as job was completed, right to receive commission arose to the assessee. To argue that right to receive will accrue only when amount is realized from customers for remittance to the Principal would tantamount to holding that assessee was following cash system of accounting. Admittedly, the assessee followed mercantile system of accounting and not cash and, therefore, right to receive income accrued to the assessee as soon as assessee performed his part of contract, i.e., when advertisement procured by the assessee was approved by the Principal.

31. The learned Departmental Representative further argued that learned AM, in the proposed order had taken into account application of Sections 4 and 5 of the IT Act, relevant Accounting Standards and dictionary meaning of accrual and other relevant words involved. By giving proper meaning to the word, the learned AM has rightly concluded that right to receive commission had accrued to the assessee. Actual receipt of commission was not relevant. The learned AM had also taken into account as to what is the true meaning of word "earned". The learned Departmental Representative read out paras 6.8 and 6.9 of proposed order of learned AM. He relied upon various findings recorded by the learned AM in the proposed order.

32. On question of deductibility of expenditure mentioned in question No. 2 referred to the Third Member, learned Departmental Representative pointed out that onus was on the assessee to establish that expenses were incurred wholly and exclusively for purposes of business. Thus test to be applied while considering claim of expenditure was to see the purpose of expenditure and whether it was laid out wholly and exclusively for purposes of business. The learned AM as per elaborate order, pointed out that neither the expenditure was necessary for purposes of assessee's business nor the same was laid wholly and exclusively for purposes of business. It was the expenditure which the Principal should have incurred for promoting his business. The learned Departmental Representative further argued that learned AM did not as such invoke provisions of Section 92 of the IT Act. Only the spirit of the Section has been invoked to show that benefit of expenditure was derived by the Principal and not by the assessee. It was, therefore, a case of diversion of income. Learned Departmental Representative accordingly supported impugned order of learned AM.33. I have given careful thought to the rival submissions of the parties and examined orders of my learned Brothers in the light of above submissions. I have also carefully examined agreement between the parties which has been reproduced in the earlier part of this order.

There is no controversy that assessee's income is to be computed on the basis of mercantile system of accounting. It is nobody's case that assessee is following cash system of accounting. There is further no dispute that under the above system, income is liable to be taxed as soon as assessee has right to receive the income. Likewise expenditure under the system is to be allowed on the basis of liability to pay.

Actual payment is not relevant. There is further agreement that aforesaid question has to be determined with reference to provisions of Sections 4 and 5 of the IT Act. The main controversy involved here is at what point of time, income accrued to the assessee. According to the assessee, commission income under the agreement could accrue to the assessee as per Clause 8 of the agreement which provided that the agent (assessee) shall be entitled to retain 15 per cent of net invoice amount paid by clients as commission. So the case of the assessee as accepted by the learned JM in the proposed order is that income cannot accrue under the agreement unless assessee is in a position to exercise his right to retain 15 per cent of net invoice amount paid by assessee's Principal clients. The stand of the Revenue, as supported by proposed order of learned AM is that income would accrue to the assessee as soon as advertisements are solicited by the assessee for Principal. Both the parties agree that agreement between the assessee and its Principal is to be read as a whole to determine its legal implication.

34. Having regard to the case law cited on behalf of the assessee and noted earlier, I am inclined to agree with the submissions advanced on behalf of the assessee. In all the aforesaid decisions, the dispute between the assessee and the Revenue was that according to the Revenue income accrued as soon as sales were effected. The payable commission was to be worked out on the basis of sale. The assessee on the other hand had contended that under the agreement income could not accrue unless books of account were made up and amount was determinable as per terms and conditions of the agreement. It is agreed and even Supreme Court has emphasized that income would accrue as per terms and conditions of the agreement. Reference be made to the decision of Supreme Court in the case of CIT v. Harivallabhdas and Kalidas and Co.

(supra) wherein it has been emphasized by their Lordship of Supreme Court that income will not accrue as soon as services are performed.

Their Lordships have held "the managing agent's commission did not accrue as and when the sale took place." In the case of CIT v.Chamanlal Mangaldas and Co. (supra), their Lordship reiterated on "construction of the clause containing the terms for payment of commission." Thus for determining accrual of income, the agreement and in particular, "clauses containing terms of payment are required to be construed". Applying above principle here in the present case, it is seen as per Clause 8, the assessee is entitled to, i.e., he gets a right to retain "15 per cent of net invoice amount paid by the clients as commission". Thus commission is required to be worked and right of assessee to receive commission is dependent on payment of charges by clients of assessee's Principal. So it is clearly provided that right to receive/retain income would accrue after the amount is paid by assessee's client. It cannot accrue prior to or before payment is made by the assessee's client. The payment or realization of amount from client for the advertisement aired in TV channel is a condition precedent for accrual of income in this case. Though Clause 8 of the agreement is in clear terms and is sufficient to indicate as to when income would accrue to the assessee, other terms of the agreement also support the same inference: The learned AM, in the proposed order, on the basis of Clause 7 of agreement, has observed, "it is relevant to mention that no contractual obligation has been cast upon the assessee to make efforts to realize the amount from clients as it would have cast implications and the assessee is not getting any money from Principal on this score, therefore, it leads to an obvious conclusion that role of the assessee is limited to receive the amount paid by clients. In nutshell the assessee is under no obligation to realize the amount from clients." The aforesaid inference drawn by the learned AM is legally and factually incorrect. Sub Clause (b) of Clause 7, of the agreement provides as under: (b) The agent shall, without any charge to the company, collect all sums due from the clients and hold the same in trust for the company pending remittance as hereinafter provided.

The aforesaid sub clause clearly cast duty on the assessee to collect sums due from the clients without any charge to the company (Principal). The amount is to be held in trust for the company pending remittance. In the light of above clause, it is difficult to hold that assessee has no obligation to realize amounts from clients and that role of the assessee is over as soon as assessee solicits TV advertisements from the customers for telecast in Star TV channel.

Again with reference to cls. 9, 13, 14, etc., the learned AM in the proposed order has observed the cumulative effect of "provisions of agreement is that contractual obligation of the assessee comes to an end and once client's requisition forwarded by the assessee is accepted by Principal, at this very point the assessee becomes eligible for its commission, i.e., legally enforceable debt has been created in favour of the assessee because the sale of time spots is completed and commission receivable by the assessee is also ascertainable on the basis of number of time spots sold at the rate accepted by the Principal and the client.

35. In my humble opinion, aforesaid observations are contrary to other clauses of the agreement casting duty on the assessee to realize amount due to its Principal and remit the same to its foreign Principal after retaining 15 per cent towards its commission. So realization of amount and remittance is very much part of the job required to be performed by the assessee and having regard to the wording of the agreement assessee becomes entitled or acquires right to retain 15 per cent of amount realized on account of Principal. No right can be said to have accrued to the assessee before the amount is actually realized and assessee is in a position to remit the same to its foreign Principal.

36. The learned AM in support of his view has placed strong reliance on the decision of Supreme, Court- in the case of CIT v. Shri Goverdhan Ltd. (supra) and on decision of House of Lords in the case of IRC v.Gardner Mountain and D'Ambrumenil Ltd. (supra).

37. On the facts of the case and by applying ratio of aforesaid decision, the learned Member has concluded as under: Once a debt is created the uncertainties attached thereto regarding quantification or realization would not alter its character though the amount of profit may change depending upon the realization, the delays and difficulties which may arise in particular case. In the present case, a debt in favour of assessee was created as soon as the assessee performed its part of contractual obligations and the quantification of commission based upon the contract with the clients, at the stage of acceptance of soliciting advertisements by Principal could be done. Therefore, there is no limitation as such to account for the income from commission at this very point. It also emerges from the perusal of the above decision that the future uncertainties, difficulties and delays etc would not effect the right to receive the income, therefore, even if one assumes a situation that the telecast of solicited advertisements does not take place for any reason whatsoever, the assessee would remain entitled to receive the commission from Principal in respect of such cases also on the basis of requisition accepted by Principal. If the assessee does not claim commission in such cases, it would amount to relinquishment of income after its accrual.

38. Having regard to terms and conditions of the agreement between the assessee and its Principal, it is difficult to agree with the observations quoted above. It is nowhere provided that assessee would be entitled to receive its commission even if advertisements solicited by the assessee are not telecast or amount is not realized by the assessee's Principal. There is no clause in the agreement which would indicate that commission would accrue to the assessee as soon as advertisements are solicited by the assessee. The learned AM or learned Departmental Representative during the course of hearing could not show me any provision or case law under which right to receive commission could be said to have accrued in favour of assessee as soon as advertisements are solicited/booked by the assessee. In the agreement there are further steps to be taken and advertisements solicited are required to be sent for approval by the Principal. The Principal under the agreement is not only to approve the advertisement solicited by the assessee but also to raise invoices within 30 days from the date on which advertisement is so telecast. The Principal has also to issue instructions to the client to make payment thereof to its agent (assessee), The assessee is further obliged to collect all the sums due to its Principal. It is not possible to ignore all the abovementioned clauses of the agreement and hold that assessee acquires right to receive income as soon as advertisements are solicited by the assessee and that other situations provided in the agreement relate only to "future uncertainties, difficulties and delays" and these would have no effect on the accrual of income. Other clauses cannot be understood to be relating to relinquishment of income after its accrual.

39. In my opinion, the learned AM has not properly appreciated the ratio of decision of Supreme Court in the case of Shri Goverdhan Ltd. (supra). In the said case, the assessee-company, apart from having its own business was also a partner in a firm Indian Steel Syndicate. The firm in which the assessee was a partner, closed its accounts on 30th Nov., 1951. For the asst. yr. 1951-52, the assessee did not declare any dividend and dispute arose whether share of income of assessee in firm amounting to Rs. 70,895 was liable to be taken into account for purposes of Section 23A which authorized the AO to impose levy under Section 23A of the IT Act. Undisputedly Section 23A was attracted if aforesaid sum of Rs. 70,895, i.e., the share income of assessee-company from partnership was taken into account. The contention of the assessee was that meeting of board of directors to declare dividend was held on 17th May, 1951 and by that time books of account of the firm were not made up nor share of profit was known. Therefore, income of Rs. 70,895 had not accrued to the assessee. Their Lordship of Supreme Court rejected above contention by observing as under: It is conceded in this case that the annual general meeting of the assessee was held on 17th May, 1951, after the close of the accounting year of the Indian Steel Syndicate, It is true that the actual profits of the assessee from its partnership business were ascertained after the close of the accounting period, i.e., 31st March, 1951. It is, however, well established that the income may accrue to an assessee without actual receipt of the same and if the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on, on its being ascertained. The legal position is that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happens. But if it is a debt the fact that the amount has to be ascertained does not make it any the less a debt if the liability is certain and what remains is only a quantification of the amount : debitum in praesenti, solvendum in futuro....

It is admitted in the present case that the Indian Steel Syndicate closed the accounts of the partnership for the first time for the first set of partners on 30th Nov., 1950, and for the other set of partners on 31st March, 1951, and the assessee as a partner was, therefore, entitled to the share of the profits as on the last day of the accounting period of the partnership, i.e., 31st March, 1951.

40. The proposition laid down in the aforesaid decision that share income accrues to the partner as soon as the previous year of the firm comes to a close, It is immaterial that exact amount of profit is not known on the close of the year (31st March in the cited case). Whenever the profit is worked out, it would be the profit as on 31st March and liable to be taken in assessment year immediately following the previous year. Therefore, having regard to the facts involved in Goverdhan Ltd. (supra), no support can be derived by the Revenue from the decision.

41. The Revenue and learned AM has also referred to decision of House of Lords in IRC v. Gardner, Mountain and D'Ambrumenil Ltd. (supra). In the said case on construction of relevant material, House of Lords held that right to receive commission accrued to the assessee when the risk was underwritten. It was earned at that stage though profit resulting from insurance could not be ascertained at that time, the right of the assessee was a vested right. The conclusion has been arrived at after considering terms and conditions of the agreement between the parties, particularly terms relating to payment of commission or right to receive commission. The agreement provided that right to receive commission or payment would accrue to the assessee as soon as risk was underwritten. If the right to receive commission had accrued, then it was immaterial that there was difficulty in quantification of profit or realization of amount of commission. Whether income accrued or not in case of a contract would depend on the terms and conditions of the contract. The decision of House of Lords is based on peculiar terms of that contract. No material is brought on record to show that contract involved in the case before House of Lord and one in the case before us were identical or so similar that from the terms of the contract, it can be held that right to receive compensation accrued to the assessee, much earlier than amount on which commission was to be worked out was actually realized. Aforesaid cases are distinguishable on facts and not applicable to the present case.

42. The decisions cited by the learned Counsel for the assessee are fully applicable and, therefore, on that basis and in the light of Clause 8 of agreement, it has rightly been held by the learned JM that income accrued to the assessee when payment due to its Principal was realized by the assessee and he was in a position to retain his commission.

43. As far as second question relating to disallowance of expenses is claimed, I find that there is no dispute about the genuineness of the expenditure incurred by the assessee. There can further be no dispute that expenditure incurred by the assessee on advertisement made had direct nexus with earning of income by the assessee. It is possible that expenditure on advertisement might have also benefited the Principal of the assessee but on above ground, the expenditure incurred by the assessee could not be disallowed. The assessee clearly incurred expenses wholly and exclusively for purposes of its business and, therefore, was entitled to deduction of expenditure claimed in computing its income. The learned JM has given sound reasons for allowing expenditure in question. On facts of case, it is not possible for me to agree with learned AM on any of the reasons given by him to disallow the expenditure in question.

44. In the light of above discussion of both the points/issues raised before me, I agree with the order proposed by the learned JM. The addition made for alleged accrual of income and disallowance of expenditure claimed on advertisement, in my opinion, is not justified.

45. The appeal should now go before the regular Bench for disposal in accordance with law.

1. These appeals were originally heard by the Division Bench, Since there was difference of opinion between the Members, the following points of difference were referred under Section 255 of the IT Act, 1961 for the opinion of Third Member: 1. Whether, on the facts and in the circumstances of the case and in law, the commission income under the agreement dt. 31st May, 1994 accrued to the assessee when it was recovered by it from its clients as held by the JM or accrued at the time of acceptances of the solicited advertisement by the Principal though could be assessed in the year in which such advertisement was telecast as held by the AM 2. Whether, on the facts and in the circumstances of the case and in law, the assessee is entitled to deduction of advertisement expenses amounting to Rs. 9,03,02,000 for asst. yr. 1998-99 and 9,38,05,000 for asst. yr. 1999-2000 under Section 37 of the IT Act, 1961 2. The Hon'ble President, Tribunal, as Third Member, vide order dt.

13th July, 2006, has agreed with the view of the JM on both the points.

Therefore, in accordance with the majority opinion, the issues arising out of the above points are decided in favour of the assessee by 'holding that--(i) commission would accrue to the assessee either on the date of receipt of commission, i.e., when the commission is collected by the assessee or on the date of payment by the clients directly to the Principal as the case may be; and (ii) assessee would be entitled to deduction in respect of advertisement expenses.

3. In the result, the appeal of the assessee for asst. yr. 1997-98 is allowed while the appeals of the assessee for the asst. yrs. 1998-99 and 1999-2000 are partly allowed. On the other hand, the appeal of the Revenue for the asst. yr. 1999-2000 is dismissed and appeal for asst.

yr. 1998-99 is partly allowed.