Civil Appeal No 213 of 1955
Appeal from the judgment and order dated June 26 1953 of the Calcutta High Court in ITR No 34 of 1952
AV Viswanatha Sastri Y C Talukdar and Sukumar Ghose for the appellant
KN Rajagopal Sastri and
D Gupta for the respondent
May 12
The Judgment of the Court was delivered by BHAGWATI J
This appeal with a certificate under article 135 of the Constitution read with section 66A2 of the Indian Income tax Act raises the question as to whether the appellant as entitled to a deduction of Rs 24809 in the computation of its profits and gains for the assessment year 1948 49
The appellant deals in land and property and carries on land developing business and in the course of the said business it buys land develops it so as to make it fit for building purposes and sells it at a profit in plots
The developments undertaken are in the main 187 that roads are to be laid out a drainage system to be provided and street lights installed and they are to be maintained till the sample are taken over by the Muncipality
The whole of the development is not carried out before the land is sold nor the whole of the sale price received in cash at the time of the sales
The procedure followed is that when a plot is sold the purchaser pays about 25  of the purchase price in cash and undertakes to pay the balance with interest at a certain rate in ten annual installments which he secures by creating a charge on the land purchased
The appellant in its turn undertakes to carry out the developments within six months from the date of the sale but this time is not of the essence of the contract and what the appellant undertakes is to carry out the developments within a reasonable time
The tinderbox is incorporated in the deed of sale itself whereas the security is given by the purchaser by means of a separate document
In the accounting year relating to the assessment year 1948 49 the appellant sold a number of plots and received a portion of the sale price from the purchasers according to the scheme mentioned above
The appellant maintains its accounts in the mercantile method under which money not actually received but only treated as received on the basis that it was due and receivable is entered in the books of account on the credit side
Even though the appellant did not receive the whole of the price viz Rs 43692 11 9 it entered in the credit side of its books of account the whole of that sum representing the full sale price of the lands sold during the accounting year though only a sum of Rs 29392 11 9 was actually received in cash from the purchaser and the balance of Its
14300 represented the unpaid balance retained by the purchasers the payment of which was secured by creating charge on the said lands as also the interest received or receivable in the year of account tinder the deeds of charge
The whole of this sum of Rs 43692 11 9 was however credited in the books of account by the appellant according to the mercantile system of accounting adopted by it
188 In so far as under the terms of the deeds of sale the appellant had undertaken to carry out the developments within six months from the date of sale it estimated a sum of Rs 24809 as the expenditure for the developments to be carried out in respect of the plots which had been sold during the year and debited the same in its books of account on the ground that the liability for the said sum of Rs 24809 had actually arisen the appellant being bound to provide the facilities it had undertaken to do even though no part of that amount represented any expenditure actually made during that year
In the course of its assessment to income tax for the year 1948 49 the appellant claimed a deduction of the said sum of Rs 24809 in the computation of the profits and gains of its business
The Income tax Officer disallowed that claim on the ground that the expenses had not been actually incurred in the year of account and also on the ground that the estimate had not been proved to be based on a consideration of the real expenses which the Company would have to incur for the purpose
The Appellate Assistant Commissioner on appeal confirmed the disallowance by the ITO on the ground that there was as yet no accrued liability and on the further ground that as the development would be carried out in the future the expenditure estimated at current prices could not be allowed
On appeal taken by the appellant before the Income
tax Appellate Tribunal the Tribunal held that it was by no means certain what the actual cost would be when the developments were carried out and that although the appellant had undertaken to carry out certain developments it could bring expenses into account only when the expenses were actually incurred
The Tribunal accordingly dismissed the appeal
The appellant thereafter made an application before the Tribunal requiring it to refer to the High Court under section 661 of the Income tax Act certain questions of law arising out of its order
The Tribunal thereupon stated a case and referred the following question to the High Court for its decision 189 Whether on the facts and circumstances stated above the sum of Rs 24809 can legally be allowed as an expense of the year under consideration
 The statement of case drawn by the Tribunal was severely criticized by the High Court as under  Unfortunately the treatment of the question by the authorities below has been of a somewhat summary character presumably because it was raised and argued before them in a superficial form
But even if such was the case there is hardly any justification for the Tribunal failing to realise it least what facts were required to be found and stated
The statement of case is sketchy and bare and like most of the statements we have to deal with during this session has hardly any appearance of a case seriously stated
 In spite of the above observations the High Court dealt with the question and after dealing exhaustively with the arguments which were urged be fore it by the learned Counsel for the appellant answered the question in the negative
On an application made by the appellant however the High Court granted the requisite certificate under article 135 of the Constitution to appeal to this Court and lience this appeal
The question which really arises for our determination in this appeal is whether having regard to the fact that the appellant s method of accounting viz the Mercantile method was accepted by the Income Tax Officer and the receipts appearing in the books of account included the unpaid balance of the sale price of the plots in question the amount of liability undertaken by the appellant to earn those receipts was to be deducted even if there had not been actual disbursement made by it during the accounting year
Put in other words the question was whether in view of the fact that the sum of Rs 43692 11 9 had been entered on the credit side in the books of account even though it was not money actually received but only money treated as received on the basis that it
was due and receivable the sum of Rs 24809 which had been entered as debit being the liability of the appellant 190 undertaken by it to earn those receipts should be deducted in determining the taxable profits and gains of the appellant
The mercantile system of accounting is well known and this method has been explained in a judgment of this Court in Keshav Mills Ltd vs Commissioner of Income tax Bombay 1
 That system brings into credit what is due immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed
 The main ground on which the claim of the appellant for deducting this sum of Rs 24809 as disallowed by all the authorities below was that the expenditure was not actually incurred in the year of account it was by no means certain what the actual cost would be when the developments  are carried out and that there was as yet no accrued liability but only a contingent liability undertaken by the appellant even though the undertaking was incorporated in the deeds of sale themselves
The following were the developments undertaken to be carried out by the appellant as appears from the order of the Appellate Assistant Commissioner  There was a condition in the Conveyance deeds that the appellant does hereby covenant with the purchaser that the appellant shall complete the construction of roads drains provide suitable pucca surface drains on both sides of the roads and shall also make arrangements for lighting up the said roads and shall maintain the said roads drains lights till the same are taken over by the Municipal Besides provision for roads drains etc
 the Deed provides for filling up of low lands and there is a clause in the Conveyance Deed which shows that the appellant s shall at his own cost fi11 the low lands and tank with earth and bring the same to road level  1 II9531 SCR 95o 958 191 This undertaking having been incorporated in the deeds of sale themselves there was certainly a liability undertaken by the appellant to carry out these developments within six months from the dates of those deeds
Time was of course not of the essence of the contract and the appellant therefore was at liberty to carry out that undertaking within a reasonable time
That however did not absolve it in any manner whatever from carrying out the undertaking and the purchasers were in a position to enforce the undertaking by taking appropriate proceedings in that behalf
Reliance was placed on behalf of the Revenue on the case of Peter Merchant Ltd vs Stedeford Inspector of Taxes 1 in which a distinction was drawn between an actual ie legal liability which is deductible and a liability which is future or contingent and for which no deduction can be made
The facts of that case were that the Company which carried on the business of managing factory canteens had contracted with a factory owner to maintain the crockery cutlery and utensils used in the canteen otherwise known as the light equipment in its original quantity and quality
The cost of replacement was admittedly a proper deduction in computing profits as was also any sum paid to a factory owner in settlement of the value of shortages on termination of the contract
Owing to war and
other circumstances it was impossible or impracticable for the Company to obtain replacements in some cases and the obligations under the contracts with the factory owners in those cases still remained to be performed
in the accounts for the year deductions had been made both of the amounts actually expended on replacements and the amounts which the company was liable to expend when the equipment became available
The Company claimed to be entitled to deduct in computing its profits amounts representing at current prices the liability to effect replacements as soon as the required equipment became obtainable
The former amounts were allowed as deductions and the latter the Court of Appeal reversing the decision 1 192 of the Court below held not to be deductible
The basis of the decision was that the real liability under the contract was contingent not actual since the obligations of the company were not such that it might be sued for the cost of replacements at current prices but only for possible damages for breach of contract in the event of the factory owner preferring a claim under the contract and since no legal liability could arise until such a claim was made the liability had to be regarded as contingent and not deductible
It is clear from the above that on the facts and circumstances of that case the Court held that it was not an accrued liability but was merely a contingent one and if that was the case only the sums actually expended could be deducted and not those which the company was liable to expend in the future
Simon in his  Income tax  Second Edition Vol
II at p 204 under the caption  Accrued Liability  observes as under after citing the case mentioned above 
In cases however where an actual liability exists as is the case with accrued expenses a deduction is allowable and this is not affected by the fact that the amount of the liability and the deduction will subsequently have to be varied
A liability the amount of which is deductible for income tax purposes is one which is actually existing at the time of making the deduction and is distinct from the type of liability accruing in Peter Merchant8 Ltd vs Stedeford lnspector of Taxes which although allowable on accountancy principles is not deductible for the purpose of income tax
 Approaching the question before us in the light of the observations made above we have got to determine what was the nature of the liability which was undertaken by the appellant in regard to the development of the lands in question whether it was an accrued liability or was one which was contingent on the happening of a certain event in the future
There is no doubt that the undertaking to carry out the developments within six months from the dates of 193 the deeds of sale was incorporated therein and that undertaking was unconditional the appellant binding itself absolutely to carry out the same
It was not dependent on any condition being fulfilled or the happening of any event the only condition being that it was to be carried out within six months which in view of the fact that the time was not of the essence of the contract meant a reasonable time
Whatever may be considered a reasonable time under the circumstances of the case the setting up of that time limit did not prescribe any condition for the carrying out of that undertaking and the undertaking was absolute interms
If that undertaking imported any liability on the appellant the liability had already accrued on the dates of the deeds of sale though that liability was to be discharged at a future date
It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could very well be deducted from the profits and gains of the business
Inasmuch as the liability which had thug accrued during the accounting year was to be discharged at a future date the amount to be expended in the discharge of that liability would have to be estimated in order that under the mercantile system of accounting the amount could be debited before it was actually disbursed
The difficulty in the estimation thereof again would not convert an accrued liability into a conditional one because it is always open to the Income tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case
That it can be so done is illustrated by Gold Coast Selection Trust Ltd v Humphrey Inspector of Taxes 1 where a particular asset which could not be immediately realised in a commercial sense was valued in money for income tax Purposes in the year of its receipt and it was observed by Viscount Simon  It seems to me that it is not correct to say that an asset such as this block of shares cannot be valued in money for income tax purposes in the 1  469
25 194 year of its receipt because it cannot in a commercial sense be immediately realized
That is no reason for saying that it is incapable of being valued though if its realization cannot take place promptly that may be a reason why the money figure set against it at the earlier date should be reduced in order to allow for an appropriate interval
Supposing for example the contract conferring the asset on the taxpayer included a stipulation that the asset should not be realized by the transferee for five years and that if an attempt was made to realise it before that time the property in it should revert to the transferor
This might seriously reduce the value of the asset when received but it is no reason for saving that when received it must be regarded as having no value at all
The Commissioners as its seems to me in fixing what money equivalent should be taken as representing the asset must fix an appropriate money value as at the end of the period to which the appellant s accounts are made up by taking all the circumstances into consideration
 As in the case of assets received during the accounting year which could not be immediately realized in a commercial sense so in the case of liabilities which have already accrued during the accounting year though they may not have to be discharged till a later date
It will be always open to the Income tax authorities to fix an appropriate money value of that liability as at the end of the accounting period by taking all the circumstances into consideration and the estimate of expenses given by the assessee would be liable to scrutiny at their hands having regard to all the facts and circumstances of the case
The High Court was therefore clearly in error when it stated  In view of all the circumstances of the case it must in my opinion be held that the amounts of sale price not received in cash were also received and for the purpose of earning the receipts the assessee spent besides giving the lands nothing more than a promise
Since the whole amount was actually received in the year of account before and 195 without making the promised expenditure no question of allowing a deduction of any expenditure from such receipts of the year arises
 If then the estimated expenses which would have to be incurred in duly discharging that liability which was undertaken by the appellant and was incorporated in the deeds of sale could be deducted in accordance with the mercantile system of accounting adopted by the appellant and accepted by the ITO is there anything in the Income tax Act which would prevent this debit being allowed as a deduction in the computation of the profits and gains of the appellant s business The appellant had it appears claimed this deduction as and by way of expenditure wholly laid out for the purposes of its business under section 102xv of the Income tax Act
On an interpretation of that provision the High Court was inclined to hold though it did not decide the question that to the extent that a definite liability had accrued about which all preliminary proceedings causing the accrual of the liability in a concluded form had already been gone through although the actual disbursement had not yet taken place section 102xv would cover accrued liabilities though the amount may not actually have been expended on the footing that the liability being certain the amount was as good as spent and on that basis there would be room in the clause for debits which are proper debits under the mercantile system of accounting
It however distinguished the present case on the ground that the liability here was a floating liability the measure of which depended upon the will of the appellant and the discharge of which rested only in a promise and that the expenses were entirely at large and the development work itself merely so
Apart however from the question whether section 102 xv of the Income tax Act would apply to the facts of the present case the case is in our opinion well within the purview of section 10 1 of the Income tax Act
The appellant here is being
assessed in respect of the profits and gains of its business and the profits and gains of the business cannot be determined unless and until he expenses or the obligations which have been incurred are set off against the receipt s The expression profits and gains has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom whether the expenditure is actually incurred or the liability in respect thereof has accrued even though it may have to be discharged at some future date
As was observed by Lord Herschell in Bussel vs Town and County Bank Ltd   The duty is to be charged upon I a sum not less than the full amount of the balance of the profits or gains of the trade manufacture adventure or concern  and it appears to me that that language implies that for the purpose of arriving at the balance of profits all that expenditure which is necessary for the purposes of earning the receipts must be deducted otherwise you do not arrive at the balance of profits indeed otherwise you do not ascertain and  cannot ascertain whether there is such a thing as profit or not
The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts
That seems to me to be the meaning of the word  profits  in relation to any trade or business
Unless and until you have ascertained that there is such a balance nothing exists to which the name  profits can properly be applied
 A similar opinion was expressed in the Gresham Life Assurance Society V Styles 2   When we speak of the profits or gains of a trader we mean that which he had made by his trading
Whether there be such a thing as profit or gain can only be ascertained by setting against the receipts the expenditure or obligations to which they have given rise
 These are no doubt observations from the English cases dealing with English statutes of Income tax but the general principles which can he deduced therefrom 1  424 2 197 are nevertheless applicable here and it was stated by Lord Macmillan in Pondicherry Railway Co Ltd vs Commissioner of Income tax Madras 1  English authorities can only be utilised with caution in the consideration of Indian Income tax cases owing to the difference in the relevant legislation but the principle laid down by Lord Chancellor Halsbury in Gresham Life Assurance Society vs Styles supra is of general application unaffected by the specialities of the English Tax system
 The thing to be taxed said his Lordship is the amount of profits or gains 
The word  profits  I think is to be understood in its natural and proper sense in a sense which no commercial man would misunderstand
  It may be useful to observe at this stage that prior to the amendment of the Indian Income tax Act in 1939 bad and doubtful debts were not treated as deductible allowance for the purpose of computation of profits or gains of a business The Privy Council in the Income tax Commissioner vs Chitnavis observed  Although the Act nowhere in terms authorises the deduction of bad debts of a business such a deduction is necessarily allowable
What are chargeable to income tax in respect of a business are the profits and gains of a year and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred otherwise you would not arrive at the true profits and gains
 The High Court in disallowing the claim of the appellant in the present case only considered the provisions of section 10 2xv of the Act and came to the conclusion that on a strict interpretation of those provisions the sum of Rs 24809 was not an allowable deduction
Its attention was drawn by the learned Counsel for the appellant to the provisions of section 101 of the Act also but it negatived this argument observing that under the Indian Act the profits must be 1 193i L R 58 1
A 239 252
2 1932 L R 59 I A 290 296
198 determined by the method of making the statutory deductions from the receipts and any deduction from the business receipts if it was to be allowed must be brought under one or the other of the deductions mentioned in section 102 and that there was no scope for any preliminary deduction under general principles
It was however held by this Court in Badridas Daga vs The Commissioner of Income tax1  It is to be noted that while section 101 imposes a charge on the profits or gains of a trade it does not provide how those profits are to be computed
Section 102 enumerates various items which are admissible as deductions but it is well settled that they are not exhaustive of all allowances which could be made in ascertaining profits taxable under section 101
 Venkatarama Aiyar J who delivered the Judgment of this Court then proceeded to discuss the cases of Commissioner of Income tax vs Chitnavis2 Gresham Life Assurance Society vs Styles 3 and Pondicherry Railway Co vs Income tax Commissioner4 and observed The result is that when a claim is made for a deduction for which there is no specific provision in section 102 whether it is admissible or not will depend on whether having regard to accepted commercial practice and trading principles it can be said to arise out of the carrying on of the business and to be incidental to it
If that is established then the deduction must be allowed provided of course there is no prohibition against it express or implied in the Act
Turning now to the facts of the present case we find that the sum of Rs 24809 represented the estimated expenditure which had to be incurred by the appellant in discharging a liability which it had already undertaken under the terms of the deeds of sale of the lands in question and was an accrued liability which according to the mercantile system of accounting the appellant was entitled to debit in its books of account 1  14
2 1932 LR 59 IA 290 296
3 4 1931 LR 58 IA 239 252
199 for the accounting year as against the receipts of Rs 43692 11 9 which represented the sale proceeds of the said lands
Even under section 102 of the Income tax Act it might
possibly be urged that the word  expended was capable of being interpreted as  expendable or to be expended  at least in a case where a liability to incur the said expenses had been actually incurred by the assessee who adopted the mercantile system of accounting and the debit of Rs 24809 was thus a proper debit in the present case
We need not however base our decision on any such consideration
We are definitely of opinion that the sum of Rs 24809 represented the estimated amount which would have to be expended by the appellant in the course of carrying on its business and was incidental to the same and having regard to the accepted commercial practice and trading principles was a deduction which if there was no specific provision for it under section 102 of the Act was certainly allowable deduction in arriving at the profits and gains of the business of the appellant under section 101 of the Act there being no prohibition against it express or implied in the Act
It is to be noted that the appellant had led evidence before the Income tax authorities in regard to this estimated expenditure of Rs 24809 and no exception was taken to the same in regard to the quantum though the permissibility of such a deduction was questioned by them relying upon the provisions of s102 of the Act
It therefore follows that the conclusion reached by the High Court in regard to the disallowance of Rs 24809 was wrong and it should have answered the referred question in the affirmative
Before we conclude we are bound to observe that having accepted the receipts of Rs 43692 11 9 in their totality even though a sum of Rs 29392 11 9 only was actually received by the appellant in cash thus making the  appellant liable for income tax on a sum of Rs 14300 which had not been received by it during the accounting year it was hardly open to the Revenue to urge that the sum of Rs 24809 should not have been allowed as a permissible deduction before 200 arriving at the profits or gains of the appellant which were liable to tax
Consistently enough with this attitude the Revenue ought to have expressed its willingness to treat only a sum of Rs 29392 11 9 as the actual receipt of the appellant during the accounting year and made up the computation of the profits and gains of the appellant s business on that basis
The Revenue however did nothing of the sort and insisted upon having its pound of flesh asking us to delete the whole of the item of Rs 24809 from the debit side of the account which it was certainly not entitled to do
We accordingly allow the appeal set aside the judgment of the High Court and answer the referred question in the affirmative
The respondent will of course pay the appellant s costs throughout
Appeal allowed


Summary:
Section 101b11 of the Banking Companies Act 1949 provided No banking company shall employ any person whose remuneration or part of whose remuneration takes the form  of a share in the profits of the company
 The dispute between the appellant Banks and their employees related inter alia to the question whether the provisions of the Banking Companies Act 1949 prohibit the grant Of bonus to bank employees
The Labour Appellate Tribunal took the view that section 10 of the Act did not stand in the way of granting bonus to bank employees because bonus according to it was not a share in the profits of the company
On appeal it was contended for the appellant Banks that bonus as awarded by the Industrial Courts is remuneration within the meaning of section 10 201 read with section 2 of the Banking Companies Act 1949 and that it was also a share in profits and therefore the express provisions of section 10 read with section 2 override the provisions of the  so far as banking companies are concerned and prohibit the award of bonus to employees of Banks
Held  1 that the expression  shall employ any person in section 10 of the Banking Companies Act 1949 means and includes  shall have in employment any person  and that in this respect the amendment of 1956 merely makes clear what was already meant by the section  2 that the word  remuneration  in section 10 of the Act has been used in the widest sense and includes bonus  3 that bonus in the industrial sense comes out of the available surplus of profits and when paid it fills the gap wholly or in part between the living wage and the actual wage
It is labour s share in the profits and as it is a remuneration which takes the form of a share in profits it comes within the mischief of section 10 of the Act 4 The  is not a declaratory Act and except in the small matter of the expression  shall continue to employ  in sub section
1 it does not purport to explain any former law or declare what the law has always been
Consequently though section 10 as amended by the Act Of I956 does not stand in the way of the grant of industrial bonus for the period relating to the present appeals the amended section had no retrospective effect
Accordingly section 10 of the Banking Act prior to the amend ment of 1956 prohibited the grant of industrial bonus to bank employees inasmuch as such bonus is remuneration which takes the form of a share in the profits of the banking company