Case: Keshav Mills Ltd Vs. Commissioner Of Income-Tax, Bombay

not when the entry is made. If the system is properly employed, the entry is made as soon as the right to receive the price arises and so for all practical purposes that is the date ordinarily referred to, but a man cannot manipulate the amount of his tax by choosing to enter or not to enter items which ought to be entered on a particular date, as and when he pleases.37. Now the Rs. 4 lakhs odd represents actual receipts but that is not what is taxable when the computation is based on the mercantile system. What should be taxed, or rather taken into account for the purposes of taxation, are the figures entered in the accounting year as the sale price of the various transactions which the Rs. 4 lakhs represent. The profits which arise out of these transactions do not, on my view, escape tax because the profits accrue or arise in the taxable territories. But the figure on which the tax is to be computed is not the 4 lakhs odd which represent the actual receipts but another figure which unfortunately we have not been given. I am of course assuming that the figures were duly entered in the books at the proper time in accordance with the mercantile system of accounting. If they were not, then the Income-tax authorities have bower to tax income which, for one reason or another, has escaped assessment.38. Turning to the Rs. 12 lakhs. We know that the figure entered in the books relating to these transactions was Rs.13,41,744. I am not clear whether that was entered in the accounting year with which we are concerned, though I gathered that that was the case. The actual receipts, which followed later, amounted to only Rs. 12,68,480. In my opinion if anything is computable for the purposes of tax, it is the former figure (assuming all the entries are in the accounting year) and not the latter. But in order to determine whether the profits on these transactions are taxable at all, we must examine the transactions.39. In these cases the sales were to merchants resident in Ahmedabad. But according to the assessees affidavit"in respect of buyers from Ahmedabad, the applicant Mills have no account of such buyers. The price is debited to the account of the mid Jagmohandas Ramanlal and Company and credited to the sales account in the books of the applicant,"And later, Jagmohandas"discharges its debts by making payments to the applicants from time to time towards the balance in their said account in the books of the applicant mills. The said amounts are paid by the said firm by paying the same to the credit of the applicant Mills with British Indian Banks or Shroffs."40. Now it is evident from this that Jagmohandas and Company do not merely guarantee payment by the Ahmedabad buyers but actually make the payments, or the equivalent of payments, to the assessee company. So little do the buyers matter that their transactions are not even reflected in the accounts. All we have is Jagmohandas. It does not, in my opinion, matter whether the actual buyers retrained primarily and legally responsible to the assessee or not. The fact remains that in practice Jagmohandas and Company actually met the obligations of the buyers and discharged their liabilities to the assessee. It is equally clear that Jagmohandas and Company must have recouped themselves in some way from the buyers. The question is how. If the whole of the transactions recurred outside British India and the buyers or their agents went to Petlad and received the goods there and paid Jagmohandas and Company outside British India, then I am clear that the profits and gains did not accrue or arise in British India, simply because the goods were ultimately brought there. But if Jagmohandas and Company or their agents were paid in British India, the profits and gains, in my opinion, arose there in the same way as in the 4 lakhs case. If Jagmohandas and Company were the actual agents of the assessee as were the Banks in the other case, and the payments were made in the taxable territories, then the accrual and arising was direct. If, however, they were not the agents in the strict sense of the term, then I am of opinion that S. 42 would be attracted because at the very least there would be a "business connection", provided of course the payments were made in the taxable territories.41. Now, here again, I am looking to what was actually done in order to determine what the rights were, for it is evident that what was done in pursuance of some agreement, express or implied, between the parties which agreement regulated their rights, and those rights in turn determine the place where the profits accrued or arose, or must, because of S. 42, be deemed to have accrued or arisen.42. In my view, the question referred by the Income-tax Appellate Tribunal in its statement of the case does not reflect the true position because it concentrates on the actual receipts. If the cash basis system of accounting was germane here, then I would agree that the Rs. 4,40,878 was part of the assessees income in British India, and so also in the other case, provided the payments were made in British India. But it is misleading to enquire what would have happened in circumstances which are not material in this case because of the mercantile system of accounting which was employed.43. As regards the High Court. The learned judges reframed the question and answered it without sending the case back to the Income-tax Appellate Tribunal for a further statement of the case. That was not strictly proper. But, in my opinion, the reframed questions suffer from the same defect.44. In my opinion, the case should be sent back to the Income-tax Appellate Tribunal for a reframing of the questions along the lines I have indicated and for a further statement of the case.45.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]In regard to the item of Rs. 4,40,878 even though the amounts of the sales bills were debited in the first instance by the company to the accounts of the respective merchants in the books of account at Petlad the relative railway receipts were sent by the company to banks or Shroffs in British India together with drafts or hundies in connection with the same with instructions that delivery of the railway receipts should be given to the respective merchants against payment and the amounts of the sales bills were thus paid by the respective merchants to the banks or Shroffs in British India and were transmitted under the instructions of the company by the banks and Shroffs in British India to the company at Petlad. Prima facie, therefore, the amounts of the sales bills in both the cases whether they were paid to Messrs. Jagmohandas Ramanlal and Co. or to the banks or shroffs through whom the railway receipts were negotiated were paid by the merchants in British India and were received by Messrs. Jagmohandas Ramanlal and Co. and the banks or Shroffs on behalf of the company in British India. The receipt of these amounts thus fell within S. 4(1) (a) of the Act and the profits or gains of this business thus were received in British India by or on behalf of the company.The mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of book keeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. 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 profits or gains of the business which are thus credited are not realised but having been earned are treated as received though in fact there is nothing more than an accrual or arising of the profits at that stage. They are book profits. Receipt being not the sole test of chargeability and profits and gains that have accrued or arisen or are deemed to have accrued or arisen being also liable to be charged for income-tax the assessability of these profits which are thus credited in the books of account arises not because they are received but because they have accrued or arisen.It is clear that under these circumstances there is no receipt of the moneys at all, either actual or constructive, in cash or in kind, by actual payment or by adjustment or settlement of accounts. There is also no scope for the argument that even though these sums may not be said to be either actually or constructively received they should be "deemed to be received." The expression "deemed to be received " only means deemed by the provisions of the Act to be received. The phrase statutory receipt might be conveniently employed to cover income which is "deemed to be received," and instances of such statutory receipts are to be found in the provisions of theis true that the words used in S. 4 (1) (a) relate to the first receipt after the accrual of the income. Once it is received by the party entitled to it, in respect of any subsequent dealing with the said amount it cannot be said to be "received" as income on that occasion.Mr. Kolah pressed into service the argument based on S. 13 of the Act that the mercantile system of accounting regularly adopted by the assessee was obligatory on the income-tax authorities for computation of his income. While agreeing generally with that submission in case of residents, we doubt whether that position would be available to a non-resident, who maintains his books of account outside British India according to the mercantile system. The Section would only be relevant where the total profits of the assessee have to be computed, in which event he would be entitled to claim that they should be computed according to the system of accounts maintained by him. But the Section would hardly be relevant where stray items of income are caught in taxable territories as received in taxable territories by a non-resident. The entries in the present case were not in merely to prove that the sale proceeds were received outside British India where the entries were made. That contention, however could not be sustained, as S. 4 (1) (a) is concerned with cases of actual receipt and not with cases of paper receipts.20. Having regard to the observations made above, we have come to the conclusion that the High Court was right in holding that the two sums of Rs. 12,68,480 and Rs. 4,40,878 were the sale proceeds of the goods sold and delivered by the appellant to merchants in British India, that they were received by Messrs. Jagmohandas Ramanlal and Co. and by the banks and Shroffs through whom the railway receipts were negotiated, on behalf of the appellant in British India, that they were liable to tax under S. 4 (1)(a) of the Act as having been received in British India on its behalf, that there is nothing either in the facts and circumstances of the case or in law why they should be exempted from such liability, that the answers given to the questions which were ultimately considered by the High Court were correct, and the appellant was rightly held liable for the tax on these two amounts subject to all just deductions and allowances. The appeal, therefore, fails and must stand dismissed with costs.Now in the present case, the method of accounting was the mercantile system. The essential difference between this and the cash basis system is that in the latter actual receipts and disbursements are taken into account. In the former, sums which are due to the business are entered on the credit side immediately they are legally due and before they are actually received end expenditures are entered the moment a legal liability to pay arises and before the actual disbursements. The Profit or loss at the end of the accounting year is therefore based, not on a difference between what was actually received and what was actually paid out, but on the difference between the right to receive and the liability to pay. I find it impossible in such a case to say that the taxation is on income, or profits and gains which were "received." It can only be on profits which "accrued" or "arose" to the assessee in the accountingwere the goods in the present caseif there are no books, the profits on such a transaction would accrue in the place where the money is to be paid and the good are to be handed over. I cannot see how that can alter by reason of the method of accounting employed. Accordingly, I agree that the method of accounting adopted by the assessee cannot affect the substance of the transactions between the parties or affect their nature. The rights and liabilities of the parties inter se cannot be made to depend on the way in which one of them chooses to keep its books. But that is not the case when we come to the question of taxation for income-tax purposes. There the method of accounting is vital. But even there the substance of the transaction must be viewed, for the substance cannot alter by a mere method of accounting. It is evident that if the assessee had been resident in British India and these transactions had been omitted from the books, the sums which ought to have been entered would be taxable as items which had escaped assessment even if there had been no actual receipts in that or in any following year. Therefore, it is not the entry in the books which attracts the taxation but the profits on the transaction itself, and which the mercantile system is used the profits arise when the right to receive them accrues and not when the entry is made. If the system is properly employed, the entry is made as soon as the right to receive the price arises and so for all practical purposes that is the date ordinarily referred to, but a man cannot manipulate the amount of his tax by choosing to enter or not to enter items which ought to be entered on a particular date, as and when he pleases.Now the Rs. 4 lakhs odd represents actual receipts but that is not what is taxable when the computation is based on the mercantile system. What should be taxed, or rather taken into account for the purposes of taxation, are the figures entered in the accounting year as the sale price of the various transactions which the Rs. 4 lakhs represent. The profits which arise out of these transactions do not, on my view, escape tax because the profits accrue or arise in the taxable territories. But the figure on which the tax is to be computed is not the 4 lakhs odd which represent the actual receipts but another figure which unfortunately we have not been given. I am of course assuming that the figures were duly entered in the books at the proper time in accordance with the mercantile system of accounting. If they were not, then the Income-tax authorities have bower to tax income which, for one reason or another, has escaped assessment.Now it is evident from this that Jagmohandas and Company do not merely guarantee payment by the Ahmedabad buyers but actually make the payments, or the equivalent of payments, to the assessee company. So little do the buyers matter that their transactions are not even reflected in the accounts. All we have is Jagmohandas. It does not, in my opinion, matter whether the actual buyers retrained primarily and legally responsible to the assessee or not. The fact remains that in practice Jagmohandas and Company actually met the obligations of the buyers and discharged their liabilities to the assessee. It is equally clear that Jagmohandas and Company must have recouped themselves in some way from the buyers. The question is how. If the whole of the transactions recurred outside British India and the buyers or their agents went to Petlad and received the goods there and paid Jagmohandas and Company outside British India, then I am clear that the profits and gains did not accrue or arise in British India, simply because the goods were ultimately brought there. But if Jagmohandas and Company or their agents were paid in British India, the profits and gains, in my opinion, arose there in the same way as in the 4 lakhs case. If Jagmohandas and Company were the actual agents of the assessee as were the Banks in the other case, and the payments were made in the taxable territories, then the accrual and arising was direct. If, however, they were not the agents in the strict sense of the term, then I am of opinion that S. 42 would be attracted because at the very least there would be a "business connection", provided of course the payments were made in the taxable territories.In my view, the question referred by the Income-tax Appellate Tribunal in its statement of the case does not reflect the true position because it concentrates on the actual receipts. If the cash basis system of accounting was germane here, then I would agree that the Rs. 4,40,878 was part of the assessees income in British India, and so also in the other case, provided the payments were made in British India. But it is misleading to enquire what would have happened in circumstances which are not material in this case because of the mercantile system of accounting which was employed.43. As regards the High Court. The learned judges reframed the question and answered it without sending the case back to the Income-tax Appellate Tribunal for a further statement of the case. That was not strictly proper. But, in my opinion, the reframed questions suffer from the same defect.In my opinion, the case should be sent back to the Income-tax Appellate Tribunal for a reframing of the questions along the lines I have indicated and for a further statement of the case.