ORDER
B.C. Mitra, Accountant Member
1. These four appeals of the assessee raising certain common grounds are disposed of by this consolidated order for the sake of convenience. The appeals relate to the assessment years 1976-77 to 1979-80.
2. The assessee is a non-resident banking company. The grounds raised for the four assessment years under appeal are discussed seriatim below.
Assessment year 1976-77 :
3. The assessee claimed deduction of Rs. 2,25,376 representing Income-tax paid by the assessee on behalf of 10 of its employees, who left India on the basis of guarantee bonds furnished by, the assessee-company with the object of facilitating the grant of exemption certificates by the ITO assessing the employees. The IAC disallowed the assessee’s claim and on appeal, the Commissioner (Appeals), in upholding the IAC’s order, held that the bank had guaranteed the payment of tax liability of the individual employees as an employer and it was not the bank’s business to guarantee tax payments of its employees. The Commissioner (Appeals) further observed that the assessee did not charge any guarantee commission and in issuing guarantee bonds to 10 of its employees, the bank did not obtain any security. The Commissioner (Appeals) also mentioned in his order that in respect of the assessment year 1974-75, the bank’s claim for deduction of Rs. 56,261 ‘representing payment of tax borne on behalf of some of its employees’ was disallowed and the bank accepted the disallowance of the ITO. In the first two grounds, the assessee has taken objection in regard to the aforesaid finding of the Commissioner (Appeals). It has been stated that the bank issued guarantee bonds for payment of taxes in respect of persons who were the constituents of the bank. The bank also issued such guarantee bonds to the assessee’s employees. It has been urged that the Commissioner (Appeals) erred in confirming the disallowance by ignoring the fact that the bank issued bank guarantees in course of its normal banking business and any liability arising out of such activity of the bank was a trading liability and, consequently, was to be allowed as a business expenditure. It has been pointed out that the Commissioner (Appeals) erred in stating that the guarantees were issued by the bank as an employer and that proper taxes were not deducted from the amount paid as salary to the employees. It has been argued that the Commissioner (Appeals)’s observation that bank guarantees were issued towards fulfilment of the bank’s obligation to deduct taxes was not based on proper appreciation of facts. It has been pointed out that the charging of commission at the time of issuing bank guarantees was not a legal requirement and in any case, such a concession allowed to a constituent did not change the character of the assessee’s liability arising from the granting of bank guarantees to the employees. Our attention was drawn to the statement furnished before the Commissioner (Appeals) showing particulars of the salary paid to 10 Japanese officers, who came on deputation in India during various periods falling between the assessment years 1963-64 to 1967-68, as also the particulars of income assessed and the additional tax raised on completion of assessments of these officers after adjusting tax deducted at source from salary payments made by the bank. The assessee’s learned counsel stated that the Japanese officers were the employees of Bank of Tokyo in Japan and they came to India for certain specified period. The Bank deducted tax on the salary and perquisites that were paid to them but in the assessments, the ITO included certain income by way of perquisites which, in the bank’s understanding, did not form part of salary. Reference was made to the Gujarat High Court decision in the case of CIT v. S.G. Pgnatale [1980] 124 ITR 391, wherein the High Court held that the living allowance paid to some foreign technicians was not a perquisite within the meaning of Section 17(2) of the Income-tax Act, 1961 (‘the Act’), as the allowance paid was in the nature of reimbursement and did not give rise to any personal advantage and, consequently, could not be included in the computation of salary income of the technicians. It has been argued that no foreigner would come to India if he was told that he could not leave the country unless his Income-tax assessments were completed and extra tax demanded was fully realised. There was a direct nexus, according to the assessee’s learned counsel, between the assessee’s furnishing of a bank guarantee and the work carried on by it as a bank, inasmuch as the services rendered by the Japanese officers working on deputation were essential for the smooth running of the assessee’s bank business. Reference in this connection was made to a Madhya Pradesh High Court decision in the case of CIT v. Shriram Prayagdas and Mahadeo Prasad [1983] 144 ITR 883, wherein the High Court in laying down the test for determining whether an expenditure falls under Section 37(1) of the Act, held that a payment voluntarily made, in order to facilitate the carrying on of the business of the assessee on the ground of commercial expediency, was an allowable business expenditure under Section 37(1). The learned counsel for the assessee further stated that the tax payable by the bank constituted ‘perquisite’ in the hands of the Japanese officials in terms of Section 17(2)(iv). The mere fact that in the hands of the employees, the tax borne by the bank was not treated as a perquisite, was of no consequence inasmuch as the amount paid to the employees was in the nature of remuneration and the same was deductible in computing the business income of the bank.
4. The departmental representative in reply refuted the arguments of the assessee’s learned counsel by stating that the guarantee furnished by the bank was in accordance with the provisions of Section 230 of the Act with a view to facilitate the ITO in assessing the employees to issue tax clearance certificates at the time of their departure from India. Such a guarantee issued under Section 230 could not be equated with the bank’s issuing of guarantee bonds to its constituents on payment of guarantee commission and furnishing of necessary security by it. It has been argued that the Income-tax payable by an assessee crystallises at the end of the accounting year and it was the duty of a bank as an employer to deduct tax properly. The extra tax liability of an employee cannot, under any circumstances, be regarded as a trading liability of the assessee. It has been pointed out that the assessee being a non-resident company, it was but natural that the employees stationed at the assessee’s headquarters in Tokyo or other places of Japan could work on deputation or on transfer to any other branch in India or elsewhere. It is not the assessee’s business to pay on behalf of its employees the extra tax liability, which aross as a consequence of the assessments made in the hands of the employees. Reference was made to a Supreme Court decision in the case of Indian Aluminium Co. Ltd. v. CIT [1971] 79 ITR 514, wherein it was held that the payment of tax made under a statutory obligation because the assessee was in default in not deducting the tax at source at the time of making payments to a non-resident, could not constitute expenditure laid out for the purpose of the assessee’s business within the meaning of Section 10(2)(xv) of the Indian Income-tax Act, 1922 (‘the 1922 Act’). In his counter reply, the assessee’s learned counsel stated that the Supreme Court’s decision in the case of Indian Aluminium Co. Ltd. {supra), relied on by the departmental representative, was distinguishable on facts inasmuch as in that case the question of allowability of the expenditure incurred by the assessee did not arise on the grounds of commercial expediency. In the assessee’s case, according to the learned counsel, the payment was directly linked with the assessee’s carrying on of its business as a banker and, consequently, the expenditure was rightly claimed as a business expenditure in terms of Section 37(1). It has been further stated that since the departmental representative did not dispute the fact that the tax payment constituted perquisite in the hands of the employees within the meaning of Section 17(2)(iv), the amount claimed was deductible in computing the business income of the assessee.
5. We have considered the submissions of both the parties and have carefully gone through the records of the case. A specimen copy of the guarantee issued by the bank has been placed at pages 37 to 39 of the paper book 1 filed at the time of hearing before us. The learned counsel for the assessee did not dispute that the bank guarantee is in the usual proforma that is generally submitted before the Income-tax authorities under Section 230. We fail to understand as to how such a guarantee furnished under Section 230 can be equated with the guarantee bonds issued by a bank in course of its ordinary banking business. To our mind, the reliance placed on the Madhya Pradesh High Court decision in the case of Shriram Prayagdas and Mahadeo Prasad (supra) is misplaced inasmuch as the facts in that case are clearly distinguishable from the facts of the instant case. In the case before the High Court, the assessee purchased the business of a running transport company, which was in arrears of tax. The buses in the possession of the assessee were attached for the tax dues of the transport company and the assessee paid a certain sum and got the buses released for carrying on the business and claimed the amount as business expenditure under Section 37(1). The Tribunal allowed the claim of the assessee. It was held that the buses were attached by the Income-tax Department for realising the tax dues of the transport company. The possession of the buses by the, assessee was absolutely necessary for carrying on its business. Deduction claimed by the assessee was held to be allowable on grounds of commercial expediency under Section 37(1). In the present case, the employees were liable to pay tax on salary earned from the bank. The bank also deducted tax at source on salary paid to the employees. The assessee admittedly did not enter into an agreement with the employees for payment of tax on completion of their Income-tax assessments. It is admittedly not the practice of the bank to pay on behalf of the employees the taxes levied on completion of their individual assessments. We are also not in agreement with the assessee’s learned counsel that the assessee’s payment of tax constituted income assessable in the hands of employees as perquisites within the meaning of Section 17(2)(iv). The statement furnished in respect of tax paid by the assessee on behalf of 10 of its employees revealed that the extra tax demanded was in respect of salary paid to the employees during the assessment years 1963-64 to 1967-68. It is relevant to point out that the Calcutta High Court in the case of N. Sciandra v. C1T [1979] 118 ITR 675 considered the question whether in absence of an agreement between a foreign technician and an Indian company, tax paid in respect of payment of tax-free salary could be treated as a perquisite in the hands of the foreign technician. The High Court answered the question in the negative as under :
In our view, if the tax paid by the employer is to be added to the salary of the employee as a perquisite under Section 17 of the Income-tax Act, 1961, then it must fulfil the characteristics of a perquisite as laid down in the section. It has been clearly laid down in the Section that such perquisite must be paid before it can be treated as a part of salary. In the instant case, the agreement only provides that the corporation would help the assessee to claim total exemption of all taxes and if such attempt fails then the tax payable would be on the account of the corporation. This liability of the corporation for the tax levied would normally arise at a future date and, therefore, any amount paid or to be paid in future on such account cannot be treated as a perquisite paid in the relevant assessment year.
The learned counsel’s reliance on the Gujarat High Court decision in the case of S.G. Pgnatale {supra), in our opinion, cannot help the assessee as it is not known what was the disputed income assessed in the hands of the non-resident employees, which resulted in the creation of an extra demand to the tune of Rs. 2,25,376. The assessment orders passed by the ITO in the case of 10 Japanese employees have not been made available before us. We, accordingly, are of the opinion that the Commissioner (Appeals) was justified in upholding the IAC’s addition in this regard. The addition is upheld.
6. In ground No. 3, the point raised is that the Commissioner (Appeals) has erred in upholding the ITO’s disallowance of Rs. 6,74,325, being the provision of loss on foreign exchange forward contracts.
7. The assessee in the profit and loss account disclosed net profit earned on foreign exchange transactions of Rs. 46,60,214.25 after making the following adjustments. The manner in which the profit has been arrived at, can be found from the details of commission on foreign exchange and brokerage as per page 24 of the paper book as under :
Rs.
Profit on foreign exchange transaction
gross receipt 53,24,547.25
Add: Loss on forward exchange contract
provided in the previous year 31-3-1975 9,992.00
53,34,539.25
Less : Loss on forward exchange contract
provided during the year 31-3-1976 6,74,325.00
46,60,214.25
The amount provided to the extent of Rs. 6,74,325 has been shown in the credit side of the balance sheet under the head ‘Acceptances endorsement & other obligations’. The IAC added back in the assessment Rs. 6,74,325, by observing that ‘the provision made on the date of closing of the accounts for probable loss on the outstanding contracts is not admissible’. The Commissioner (Appeals) upheld the disallowance with the observation that ‘actual profit and loss will arise only at the day of the settlement when the contracts will be closed. The appellant is not carrying on business of earning incomes on foreign exchange by itself but only as a medium of banking transaction and, therefore, unless there is actually loss on transaction, mainly difference on accounts due to fall in the value of rupee cannot be allowed as a trading loss,
[Emphasis supplied]
8. It has been stated that the authorities below failed to appreciate the facts leading to the dispute. It has been pointed out that the foreign exchange dealings constituted the most important aspect of the assessee’s business. The bank is authorised to deal in foreign exchange by the Reserve Bank of India. Parties/constituents of the bank, having valid import licence, approached the bank for acceptance of the import documents and a contract was thereafter entered into for honouring the documents by payment in foreign exchange to the party abroad on a future date as mentioned in the documents. Loss/gain on the foreign exchange contracts is settled on the date when the actual payment is made. Now if a foreign exchange contract remains outstanding on the last date of the accounting year, the same is valued at the ruling market rate and necessary entries to that effect are recorded in the books of the bank. It has been the normal practice of the bank, according to the learned counsel, to value the outstanding foreign exchange contracts at the end of the year and such a practice has been followed consistently by the bank. It has been pointed out that the assessee takes into consideration the exchange loss/gain on outstanding forward contracts provided in the accounts of the earlier year and, thereafter, the actual loss or gain arising on valuation of the outstanding forward contracts at the prevailing market rate as at the end of the accounting year relevant for the assessment year is provided and taken to the balance sheet under the head ‘Acceptances endorsement & other obligations’. The foreign exchange contracts, according to the assessee’s learned counsel, are entered into in the normal course of the assessee’s business and the profit arising from such contracts constitutes the trading receipts of the bank. Accordingly, it has been pointed out that the outstanding foreign exchange contracts form part of the assessee’s closing stock, which the assessee has been consistently valuing for years together at the official foreign exchange rates of the currencies involved in the contracts. It has been stated that where an assessee regularly employs a particular method of accounting its income has to be computed in accordance with such regular method. Reference in this connection was made to a number of High Courts decisions, viz., Calcutta High Court decisions in the cases of Reform Flour Mills (P.) Ltd. v. CIT [1978] 114 ITR 227, Snow White Food Products Co. Ltd. v. CIT (No. 1) [1983] 141 ITR 847, Snow White Food Products Co. Ltd. v. CIT (No. 2) [1983] 141 ITR 861 and CIT v. National & Grindlays Bank Ltd. [1984] 145 ITR 457. It has been argued that while Section 145 of the Act enables the ITO not to accept the method of accounting of the assessee, if he were of the opinion that the method employed was such that the income cannot be properly deduced therefrom, there is no power vested with the assessing officer to impose his own method. Reliance, in this connection, was made on the Madras High Court decision in the case of CIT v. K. Sankarapandia Asari & Sons [1981] 130 ITR 541. It has been pointed out that the ITO did not disturb the system of accounting followed in regard to the valuation of outstanding foreign exchange contracts till the assessment year 1975-76. It is not the department’s case, according to the learned counsel for the assessee, that the system of accounting followed by the assessee is defective and that the method is such that correct profits cannot be deduced from the system of accounting followed by the assessee. The option lies with the assessee to follow a particular system of accounting which is best suited in the circumstances of the assessee’s case. Reference in this connection was made to the Andhra Pradesh High Court decision in the case of CIT v. Margadarsi Chit Funds (P.) Ltd. [1984] 19 Taxman 73.
9. The departmental representative stated that forward contracts could not be the stock-in-trade of the assessee. Loss/gain arising in a forward contract being notional cannot be taken into account in valuing the closing stocks of the assessee. It has been stated that entries made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may by making entries, which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive. Reference in this connection was made to a Supreme Court decision in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1. It has been argued that even though the assessee maintained its accounts on the mercantile system, the assessee was not bound to show all anticipated loss inasmuch as the loss could be claimed only where it was ascertained in the year when the foreign exchange contracts were to be settled. Reference in this connection was made to a Calcutta High Court decision in the case of CIT v. Shewbux Jahurilal [1962] 46 ITR 688. Reference was also made to the Supreme Court decision in the case of Karam Chand Thapar & Bros. (P.) Ltd. v. CIT [1969] 74 ITR 26. The departmental representative also referred to another Calcutta High Court decision in the case of CIT v. Soorajmull Nagarmull [1981] 129 ITR 169.
10. In his counter reply, the assessee’s learned counsel stated that the two Calcutta High Court decisions, relied on by the departmental representative, namely, in the case of Shewbux Jahurilal (supra) and Soorajmull Nagarmull (supra), were distinguishable since the facts of those cases were different to the facts of the present case. In the case of Shewbux Jahurilal (supra), the facts in brief were that the assessee entered into a contract in April 1946 for supply of jute to another company at specified rates on future dates. Under the contract, the buyer had the option, in the event of non-delivery of the goods on the due dates, to cancel the contract to recover the difference between the price fixed in the contract and the market price on the date of the cancellation. The assessee was not able to supply the goods on the due dates. The buyer cancelled the contract on 1-3-1947 and claimed a sum of Rs. 3,58,997 as the difference in price. The matter was referred to the Bengal Chamber of Commerce, which passed an award in 1948 and the award was filed in the High Court in 1949. A settlement was subsequently arrived at by which the sum payable was fixed at Rs. 1,35,000 and it was made payable in February 1950. The assessee paid this amount in February 1950 and claimed the amount as a loss in the year 1950-51. The Income-tax authorities contended that this was a loss pertaining to the year 1946 and that the assessee should have claimed the loss of Rs. 3,58,997 in the assessment year 1947-48 and should have applied for adjustment in the assessment year 1950-51, as he maintained his accounts in the mercantile system. The High Court held that even though the assessee maintained his accounts on the mercantile system, he was not bound to show all anticipated loss as and when the claims were made and pay tax on that basis and have the matter readjusted later when the anticipated loss was quantified. Accordingly, it was held that the assessee was entitled to the loss claimed in the assessment year 1950-51. It has been pointed out that in the assessee’s case, the point at issue was whether the system followed by the assessee in valuing its forward exchange contracts, which remained outstanding at the close of the year, was bone fide and if so, whether the adjustments made in the accounts were permissible in law. It has been stated that the assessee having followed a particular system of accounting, the revenue could not disturb the method so followed unless it was held that the accounting system followed by the assessee was defective and that correct profits from the foreign exchange transactions could not be deduced from the books of the assessee. It has been pointed out that the facts in the case of Soorajmull Nagarmull {supra) were different inasmuch as the point at issue in that case was whether loss arising due to difference in foreign exchange valuation of jute was to be allowed in the year when the contract was made or in the year when a settlement was reached between the parties in a subsequent year. It has been stated that in that case there was a dispute which was settled between the parties in a subsequent year. Accordingly, it has been urged that the ratio of the said decision cannot be applied in the assessee’s case. Similarly, it has been pointed out that the departmental representative’s reliance on the Supreme Court decision in the case of Karam Chand Thapar & Bros. (P.) Ltd. (supra) was wholly misplaced inasmuch as the point at issue in the said case was different. In that case, it has been pointed out that the assessee sold its dry ice factory at Lahore in September 1948 and the purchaser took over the factory on 1-10-1948, but the price was finally settled in December 1949. By the sale, the company suffered a loss of Rs. 34,891 which the ITO disallowed on the sole ground that the business of the dry ice factory was not carried on in the relevant year of account ended on 31-3-1950. It was held that the loss was suffered in the accounting period 1949-50 and was plainly allowable under Section 24(1) of the 1922 Act.
11. We have considered the submissions of the parties concerned. The detailed working of the loss on forward exchange contracts totalling Rs. 6,27,325 has been furnished at page 42 of the paper book 1, which is reproduced below :
Loss on forward exchange contracts outstanding as on 31-3-1976 provided in the accounts.
Calcutta Office
Rs. Rs.
Selling contracts
Inter bank £ 40,000 7,21,574.27
at the rate of £ 5.7705--Rs. 100 6,93,180.83 + 28,393.44
Buying contract
Customers, $. 62,165 5,42,925.75
at the rate of $. 11.20--Rs. 100 5,55,044.64 + 12,118.89
Selling contracts
Customers $. 4,38,582.76 33,74,474.36
at the rate of $. 11.08--Rs. 100 39,58,328,16 -- 5,83,903,80
Selling contracts
Inter Bank $. 1,20,000 10,76,882.12
at the rate of $. 11.08--Rs. 100 10,83,032.49 -- 6,150.37
Net loss 5,49,541.84
New Delhi Office
Selling contracts
Inter bank $. 9,05,000 80,97,557.32
at the rate of Rs. 908.25--Rs. 100 82,19,662.50 -- 1,22,105.18
Selling contracts
Interbank DM. 15,000 52,631.58
at the rate of DM. 27.12--Rs. 100 53,309.73 -- 2,678.15
Net loss 1,24,783.33
Grand total loss 6,74,325.17
In the first two transactions shown under the Calcutta office account, the valuation made on the last date of the accounting year in respect of the assessee's outstanding foreign exchange contract, liabilities resulted in a profit, while the other transactions, as shown in the working sheet, resulted in a loss. It is the assessee's case that the business of the assessee being a banking business and it was dealing in forward exchange contracts, the outstanding liabilities at the end of the year were to be valued at the cost of market price whichever was lower. It is the assessee's case that the outstanding liabilities in respect of its forward exchange contracts constituted stock-in-trade along with the negotiable instruments held by the bank. It is not in dispute that the bank's major earnings are from foreign exchange dealings. In fact, the profit shown on foreign exchange transactions for the year ending 31-3-1976, as per details furnished on page 24 of the paper book 1, amounts to Rs. 53.24 lakhs. The assessee in disclosing a net profit from foreign exchange transactions at Rs. 46.60 lakhs made adjustments in respect of the provision made in the assessment year 1975-76 and the provision made in respect of the outstanding liabilities for the year ending 31-3-1976. Such adjustments have been made in the earlier years as also in the subsequent years as per the details furnished at pages 13 and 50 in paper book 1, pertaining to the assessment years 1975-76 and 1977-78, respectively, and on page 18 of the paper book 2 for the assessment year 1978-79. It is also not in dispute that the department accepted till the assessment year 1975-76 the method of accounting consistently followed in this regard by the assessee-bank. The Madras High Court in the case of CJT v. E.A.E.T. Sundararaj [1975] 99 ITR 227 held that an assessee may employ one method of accounting for one part of his business or one class of customers and a different method for another part of his business or another class of customers. He may also keep accounts in respect of different parts of the same business on different basis. If such different methods are employed regularly and consistently the profits have to be computed in accordance with the respective methods, provided it results in a proper determination of the true profits. The said decision of the Madras High Court has been relied upon by the Calcutta High Court in the two decisions relating to the case of Reform Flour Mills (P.) Ltd. (supra), and Reform Flour Mills (P.) Ltd. v. CIT [1981] 132 ITR 184. In the two decisions relating to the cases of Snow White Food Products Co. Ltd. (supra), it has been observed that if the method of accounting followed by the assessee does not reflect the correct income, the ITO can always compute the income on a different basis under Section 144 of the Act. In respect of the first decision in Snow White Food Products Co. Ltd. (No. 1)'s case (supra), the High Court upheld the revenue's stand that the assessee-company was not entitled to change its method of accounting from the mercantile to the cash system in respect of its interest income as the Tribunal found that for the assessment year 1968-69 no evidence could be produced by the assessee that a change effected in the method of accounting was only for the year and there was nothing on record to indicate that a change was intended to be followed regularly in future by the assessee. In the decision of the same assessee, viz., Snow White Food Products Co. Ltd. (No. 2)'s case (supra) their Lordships observed that :
Only in the year where a change in the method of accounting is introduced for the first time, it is to be examined by the revenue authorities whether the change introduced is meant to be regularly followed or not. Where it is found that an assessee has changed his regular method of accounting by another recognised method and has followed the latter method regularly, it is not open to the revenue authorities to go into the question of bona fides of the introduction and continuance of the change.
In the assessee’s case, the only point to be considered, in our opinion, is whether the method of accounting systematically followed by the assessee is such that the true profits of the assessee-bank cannot properly be deduced so as to entitle the IAC to make an addition in computing the assessee’s income from its banking business. The IAC disallowed the assessee’s claim for deduction of the loss of Rs. 6,74,325, on the ground that the same represented provision made for probable loss on the outstanding contracts. The Commissioner (Appeals), in upholding the IAC’s order, was of the opinion that the loss provided in the accounts was a notional loss as the actual profit or loss arising in the forward exchange contracts would arise only on the date of the settlement. The authorities below did not consider the method of accounting followed by the assessee as also the submissions made by the bank that the outstanding foreign exchange contracts were to be valued at the ruling market rate as they formed part of the bank’s closing stocks. Since it is not in dispute that the assessee in the course of its foreign exchange dealings entertained forward contracts from its constituents, the outstanding contracts as at the end of the year had to be valued in accordance with the practice followed consistently in this regard by the bank. It is not the department’s case that the method of accounting followed in this regard was not bona fide. We, accordingly, hold that the Commissioner (Appeals) was not justified in upholding the IAC’s disallowance of Rs. 6,74,325. The addition is deleted.
12. In ground No. 4, the point raised is that the Commissioner (Appeals) erred in confirming the IAC’s disallowance of Rs. 4,37,605 representing the deferred amount of guarantee fees relating to future periods.
13. The assessee’s explanation before the authorities below was that the assessee issued bank guarantees to different clients for varying periods. It has been the practice of the assessee to take into account the proportionate commission relatable for the year for which the accounts are drawn up and commission for the unexpired period mentioned in the bank guarantees is carried forward in the balance sheet and is accounted for in the year to which the commission income pertains. The IAC brought to tax the entire deferred commission of Rs. 4,37,605 with the observation that the fees and commission accrued to the assessee at the time of issue of guarantee letters and since the assessee followed the mercantile system of accounting, the assessee could not defer a portion of its income, which had accrued already during the accounting period relevant for the assessment year 1976-77. The Commissioner (Appeals) upheld the disallowance by observing as follows :
The commission is fixed once for all when the bank undertakes to pay the amount and guarantees such payment. The commission is receivable in its entirety even if the debtor pays off the liability well within the period of guarantee, say within two years, the appellant was under no obligation to return or refund commission for three years in such case.
According to the Commissioner (Appeals), the income accrued at the time when the bank guarantees were issued irrespective of the length of the period for which the bank guarantees remained in force.
14. The assessee’s learned counsel referred to the rules regarding issue of bank guarantees as framed by the Foreign Exchange Dealers’ Association of India. (Copy of rules furnished at pages 1 to 5 of the paper book 1.) Rule 16 is the relevant rule in terms of which guarantees are issued by the bank. The charges for bank guarantee in terms of the said rule are ‘one-twelfth of 1 per cent per month with a minimum of one-fourth per cent for the validity period of the guarantee (including extensions) plus an additional three months’. Our attention was drawn to the following stipulations made in Rule 16 :
(a) If the guarantee be redeemed (i.e., returned duly cancelled) before the expiry of the extra six months, the proportionate overcharge may be refunded.
(b) The commission for the full specified period of liability shall be collected at the time of signing a guarantee, except in respect of guarantees covered by Rule 15 III(E), and Rule 16 II(6).
Our attention was also drawn to the specimen copies of some of the contracts entered into by the assessee for providing bank guarantees for varying periods–vide pages 6 to 11 of the paper book 1. It has been stated that the bank guarantees are generally issued for periods exceeding 12 months and according to the accounting practice systematically followed by the bank, the commission relatable to each year is accounted for in the books or in other words, the commission relatable to the unexpired period of guarantee is deferred and shown separately in the balance sheet under the head ‘Acceptances endorsements & other obligations’. It has been pointed out that the Commissioner (Appeals)’s finding that, the assessee is under no obligation to refund or return commission, once a bank guarantee is issued is contrary to the facts. According to the learned counsel for the assessee, if the obligations under the guarantee are met before the completion of the guarantee period, the guarantee contract necessarily has to be revoked. In this connection, reference was made to the particulars furnished on page 3 of the paper book 2, giving particulars of the bank guarantee commission refunded in the case of two parties as under :
Sl. Name of Date of Guarantee Total amount Amount
No. the party issue and bond reference received and refunded
amount and period date of refund Rs.
1. Usha Martin 14-7-1975 613-2074 3,958.33
Black Ltd. 1,90,000 28 months 30-4-1976 2,375.00
2. Usha Martin 7-8-1975 613-2077 8,750.00
Black Ltd. 4,20,000 25 months 30-4-1976 5,600.00
3. Usha Martin 7-8-1975 613-2078 9,687.50 6,200.00
Black Ltd. 4,65,000 25 montns 30-4-1976
4. Usha Martin 7-8-1975 613-2079 7,70833 4,933.33
Black Ltd. 3,70,000 25 months 30-4-1976
5. Universal 1-3-1978 613-2321 30,000.00 8,333.33
Electrics Ltd. 2,00,000 18 months 12-4-1979
It is pointed out that the assessee did not depart from the accounting practice followed in the past and since it was not the IAC’s case that the method of accounting followed by the assessee was defective or that correct income from guarantee commission could not be deduced, the Commissioner (Appeals) was wrong in upholding the IAC’s addition. The arguments advanced in this connection were more or less the same as have been made by the learned counsel in connection with ground No. 3.
15. The departmental representative stated that in the instant case, the income was deferred after it had accrued. It has been argued that the entire guarantee contract was irrevocable as would be evident from the specimen copies submitted at pages 6 to 11 of the paper book 1. Our attention was drawn to page 11 of the paper book containing a copy of the guarantee contract entered into by the bank with the Andhra Pradesh State Electricity Board, wherein it was clearly mentioned that ‘the Bank of Tokyo Ltd., lastly undertakes not to revoke this guarantee during its currency except with the previous consent of the Board in writing’. According to the departmental representative, there was no provision for refunding any amount to the client in the contract form. It has been pointed out that the Tribunal in the case of State Bank of India [IT Appeal No. 745 (Cal.) of 1983] on this very issue, decided the matter in favour of the department mentioning, inter alia, vide para 12.3 of their order ‘(i) that the guarantee agreement is an indivisible one lasting over the entire period of repayment; (ii) that it is irrevocable and unconditional; and (iii) that the right to receive guarantee, commission accrues and arises as soon as the agreement is entered into and this right does not get deferred merely because the bank has option to realise the commission in instalments’. It has been stated that since all the banks in the country are under the direct control of the RBI, it would be wrong to say that the system of accounting followed by the assessee bank is different than that of the State Bank of India. The departmental representative relied on various decisions of the Supreme Court and High Courts on the point that income, which accrued during a particular accounting year could not be deferred to a different year. Particular reference was made to the two Supreme Court decisions in the cases of E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 and CIT v. A. Gajapathy Naidu [1964] 53 ITR 114. Reference was also made to another Supreme Court decision in the case of Laxmipat Singhania v. CIT [1969] 72 ITR 291, wherein it has been observed that :
… It is a fundamental rule of the law of taxation that, unless otherwise expressly provided, income cannot be taxed twice. Again, it is not open to the Income-tax Officer, if income has accrued to the assessee, and is liable to be included in the total income of a particular year, to ignore the accrual and thereafter to tax it as income of another year on the basis of receipt.
It has been argued that the manner in which the entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned profit or suffered any loss. The assessee may by making entries, which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. In support, the departmental representative referred to the Supreme Court decision in the case of Sutlej Cotton Mills Ltd. (supra).
It has been stated that Section 145 merely prescribes that the computation of taxable profits shall be made in accordance with the method of accounting regularly employed, where in the opinion of the ITO the income cannot properly be deduced from the method of accounting, it is open to the ITO to compute the income upon such basis and in such a manner as he may determine. The said Section does not compel an ITO, to accept a balance sheet and a profit and loss account showing adjustments made on wrong basis. Reliance in this connection was made to the Supreme Court decision in the case of CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122. In regard to the point that under the mercantile system of accounting, the assessee was liable to be taxed on the entire guarantee commission on accrual basis, reliance was placed on the Calcutta High Court decision in the case of James Finlay & Co. v. CIT [1982] 137 ITR 698.
16. In his counter reply, the assessee’s learned counsel stated that the Tribunal’s decision in the case of State Bank of India (supra), on which reliance was placed by the departmental representative, did not apply to the facts of the assessee’s case. In this connection, our attention was drawn to para 12.4 of the Tribunal’s order, where it has been held “that the statutory auditors had advised the assessee-bank to spread over the commission of guarantee over the years for which the guarantee lasted will not alter the legal accrual of the commission. Its accrual depends on the agreements referred to above and not on the advice of the statutory auditors”. It has been pointed out that in the case of State Bank of India (supra), no evidence was led to show that it was the normal practice of the bank to account for the commission relatable to the year to which it related and to carry forward the commission that did not relate to the year of account as was the practice followed regularly by the assessee-bank. It has been stated that the bank issues an irrevocable guarantee bond for a particular period, which can only be revoked with the consent of the third party to whom the guarantee is given. The learned counsel for the assessee, with reference to the copy of the agreement entered into by the bank with Andhra Pradesh State Electricity Board (pages 10 and 11 of the paper book 1), stated that the agreement which was executed on 14-2-1984 was effective till 31-3-1986 and the commission pertaining to the entire period amounted to Rs. 777. In terms of the agreement, the bank undertook not to revoke the guarantee during the currency of the guarantee, period, i.e., till 31-3-1986. It has been stipulated in the agreement that the bank guaranteed in lieu of cash deposit, which the Andhra Pradesh State Electricity Board required from Universal Co. Ltd., post office Joka, District 24 pgs. It has been stated that in case, Universal Co. Ltd., a constituent of the bank, made the cash deposit, as required by the Andhra Pradesh State Electricity Board, the agreement could be revoked with the consent of the Andhra Pradesh State Electricity Board. In fact, according to the learned counsel bank has refunded (sic) commission for the unexpired period on revocation of the guarantee agreements to certain other parties, as per particulars submitted at page 3 of the paper book 2. It has been argued that receipt of money as per contract does not necessarily mean accrual of the entire income as it has to be examined whether the receipt was for a particular period/periods and whether such period/periods fell within the accounting year for which the accounts had been maintained on mercantile basis. It has been stated that payment of refund for the unexpired portion as and when a particular guarantee agreement is revoked with the consent of the party to whom the guarantee is given by the bank, does not violate Rule 16 laying down the procedure for issuing guarantees by the banks, who are members of the Foreign Exchange Dealers’ Association of India. It is a normal commercial practice of the assessee-bank to account for only the income arising from guarantee commission relatable to the year of account.
According to the assessee’s learned counsel, the provisions of Section 145 being mandatory, it imposes a statutory duty on the ITO to examine whether the accounts submitted by the assessee are correct and complete and the assessee followed a system of regular method of accounting from which income could be deduced properly. Reference in this connection was made to the Bombay High Court decision in the case of In re. B.M. Kamdar [1946] 14 ITR 10 and the observations of the Supreme Court in the case of A. Krishnaswami Mudaliar (supra). Reliance was placed on the following observations of their Lordships of the Madras High Court in the case of E.A.E.T. Sundararaj (supra) :
…An assessee may employ one method of accounting for one part of his business or one class of customers, and a different method for another part of his business or another class of customers. He may also keep accounts in respect of different parts of the same business on different basis. If such different methods are employed regularly and consistently the profits have to be computed in accordance with the respective methods, provided it results in a proper determination of the true profits ….
It has been stated that in terms of Section 145, the assessee can exercise his option to follow whatever method of accounting it likes in respect of incomes assessable under Sections 28 and 56 of the Act. Reliance in this connection was made on the Allahabad High Court decision in the case of J.K. Bankers v. CIT [1974] 94 ITR 107. The other case laws relied upon were K. Sankarapandia Asari & Sons’ case (supra) and Margadarsi Chit Funds (P.) Ltd.’s case (supra). It has been argued that the Supreme Court decision in the case of Sutlej Cotton Mills Ltd. (supra), relied upon by the departmental representative, was not applicable in the present case inasmuch as the interpretation of Section 145 was not before the Supreme Court in that case. It has been stated that both the decisions of the Supreme Court in A. Gajapathy Naidu’s case (supra) and A. Krishnaswami Mudaliar’s case (supra) supported the assessee’s case as the income which accrued in a particular year of account could not be related back to another year on the basis of the method of accounting followed regularly by an assessee. Similarly, it has been pointed out that the Supreme Court’s decision in the case of Laxmipat Singhania (supra) did not help the department as it is the assessee’s case that the income which accrued during a particular year was liable to be included in the total income of that year. It has been pointed out that the assessee has been systematically disclosing that part of the guarantee commission which related to a particular year irrespective of the fact that the receipt at the time of executing the guarantee agreement covered the entire period for which the guarantee remained in force. It has been pointed out that the Calcutta High Court decision in the case of James Finlay & Co. (supra) also did not apply to the facts of the assessee’s case inasmuch as there was no departure from the method of accounting followed by the bank in the past years. It has been stated that the department accepted the method of accounting followed in regard to the treatment made of the guarantee commission in the books of the assessee till the assessment year 1975-76 and the IAC, having failed to point out any defect in the system of accounting followed earlier, could not make an addition by rejecting the accounts by bringing into aid the provisions of Section 145(1).
17. We have considered the submissions of both the representatives of the assessee and the department. We have also gone through the two paper books submitted by the assessee’s learned counsel containing pages 1 to 39 and pages 1 to 30, respectively, as also the paper book submitted by the departmental representative (pages 1 to 32) at the time of hearing before us. We have also gone through the Tribunal’s order in the case of State Bank of India (supra), a copy of which has been placed at page 6 of the paper book submitted by the departmental representative. A perusal of the Tribunal’s order reveals that on the advice of the statutory auditors, the State Bank of India spread over the commission of guarantee over the years for which the guarantee lasted. It has not been discussed in State Bank of India’s case (supra), whether the bank in accordance with the normal practice followed by it accounted for the guarantee commission relatable to the year for which the accounts of a particular period pertained. It is also not known when the auditors advised for spreading over the commission over the years for which the guarantee remained in force. Accordingly, there is force in the learned counsel’s submission that the Tribunal’s decision in the case of State Bank of India (supra) was distinguishable no facts from the assessee’s case before us. The departmental representative did not dispute the fact that up to the assessment year 1975-76, the method of accounting followed by the bank in regard to the issue of bank guarantee commission has not been disturbed in framing the assessments of the bank. In view of what we have stated in deciding the point raised in ground No. 3, we are of the opinion that the system of accounting followed by the bank being bonafide and as no evidence has been led before us that the accounting procedure followed was defective so as to render it impossible to deduce the profits of the bank correctly, the authorities below were not justified in adding back the guarantee commission which did not relate to the accounting year relevant for the assessment year 1976-77. We would, accordingly, set aside the Commissioner (Appeals)’s order in this regard and delete the IAC’s disallowance of Rs. 4,37,605.
18. Ground No. 5 mentioning that the Commissioner (Appeals) has erred in confirming disallowance of rebate under Section 80M of the Act on dividend income of Rs. 64,756 was not pressed by the assessee’s learned counsel at the time of hearing before us. We, accordingly, uphold the Commissioner (Appeals)’s order in this regard.
Assessment year 1977-78 :
19. In the first ground, the point raised is that the Commissioner (Appeals) erred in confirming the IAC’s disallowance of Rs. 1,54,963 being the deferred amount of guarantee fees relating to the future periods without directing the IAC to allow credit of the amount disallowed in the assessment year 1976-77 to the extent of Rs. 4,37,605. Since the point in dispute is common to ground No. 4 pertaining to the assessment year 1976-77, following our order for that year, we hold that the authorities below were not justified in making an addition out of bank guarantee commission by invoking the provisions of Section 145(1). The addition of Rs. 1,54,963 is deleted. In regard to the submission that the Commissioner (Appeals) ought to have considered that in the earlier year the ITO disallowed Rs. 4,37,605, we find that in adding back Rs. 1,54,963, the IAC deducted from the current year’s provision of Rs. 5,92,569 last year’s provision of Rs. 4,37,605, which was disallowed by the IAC in the assessment year 1976-77. The assessee cannot have any grievance as the addition made of Rs. 1,54,963 has now been deleted by us.
20. Ground No. 2, pertaining to the disallowance of entertainment expenditure of Rs. 20,831 since sustained by the Commissioner (Appeals) has not been pressed by the assessee’s learned counsel at the time of hearing before us. The addition is upheld.
21. In ground No. 3, the point raised is that the Commissioner (Appeals) erred in disallowing Rs. 1,18,561 being provision of loss on foreign exchange forward contracts. This point being similar to the one raised in ground No. 3 for the assessment year 1976-77, we hold by following our order for that year that the Commissioner (Appeals) was not justified in upholding the IAC’s disallowance of Rs. 1,18,561. The addition sustained by the Commissioner (Appeals) is accordingly, deleted.
22. The alternative submission made by the learned counsel for the assessee that the IAC having disallowed in the assessment year 1976-77 of Rs. 6,74,325, the assessee was entitled to the set off of a loss amounting to Rs. 5,55,764 being the difference between the last year’s provision disallowed to the tune of Rs. 6,74,325 and the current year’s provision made of Rs. 1,18,561 cannot be accepted as we have deleted the addition of Rs. 6,74,325 in the assessment year 1976-77.
23. One additional ground raised is that the Commissioner (Appeals) erred in sustaining an addition of Rs. 31,000 out of total addition of Rs. 38,465 made by the IAC in the assessment as disallowable perquisites under Section 40A(5) of the Act. It has been pointed out that the IAC, in para 9 of his order, disallowed Rs. 6,000 by estimating the perquisite value of a car provided to each of the three general managers of the assessee-bank posted at Calcutta, Bombay and New Delhi. It has been stated that the IAC, vide para 12 of his order, made further disallowance of Rs. 6,000 on account of use of car by the three general managers of the assessee. Accordingly, it has been pointed out that there has been a double addition in respect of a sum of Rs. 6,000 and this point escaped the notice of the Commissioner (Appeals), even though a specific ground was raised in this regard before the Commissioner (Appeals). After hearing the departmental representative, we find that the learned counsel’s contention in this regard is correct. We accordingly, admitting the additional ground, direct the Commissioner (Appeals) to pass a fresh order in this regard after allowing necessary opportunity to the assessee of being heard. Assessment year 1978-79 :
24. The first ground relates to the disallowance of Rs. 8,64,204 confirmed by the Commissioner (Appeals) being the deferred amount of guarantee fees relating to future periods. In view of our order, for the assessment year 1976-77, we hold that the Commissioner (Appeals) was not justified in confirming the IAC's disallowance of Rs. 3,64,204. The addition is deleted. 25. An alternative submission made by the learned counsel for the assessee is that the IAC was wrong in adding back Rs. 8,64,204 inasmuch as after setting off the last year's provision of Rs. 5,92,659 from the current year's provision of Rs. 10,19,167, the net provision which could be disallowed by the IAC worked out to Rs. 4,26,599. Since we have deleted the entire addition of Rs. 8,64,204, the learned counsel's alternative submission becomes academic in nature. The alternative submission made by the learned counsel for the assessee is, accordingly, rejected.
26. In the next two grounds, the points raised are that the Commissioner (Appeals) erred in confirming the IAC’s disallowance of Rs. 25,000 under Section 40A(5) on account of estimated depreciation of furniture and fixtures provided to the Japanese officers at their residences and that the Commissioner (Appeals) erred in confirming the disallowance of Rs. 6,000 being the perquisite value of the cars used by the general managers of the bank. The IAC, in para 8 of his order, determined on estimated basis Rs. 35,000 on account of depreciation on furnitures and fixtures used in the assessee’s guest house. Before the Commissioner (Appeals), the assessee stated that one-third of the guest house was used as residence by the officers of the bank and two-third portion of the building was used as a guest house. The Commissioner (Appeals) upheld the IAC’s estimate of Rs. 25,000 being the depreciation of the furnitures used in the residential portion of the building occupied by the officers. It has been pointed out that the IAC having determined the depreciation on furnitures for the entire building at Rs. 35,000, the IAC’s estimate of depreciation on furnitures used in the residential premises of the officers at Rs. 25,000 was incorrect and out of proportion.
27. In regard to the disallowance of Rs. 6,000 being the perquisite value of the cars used by three Japanese general managers, the point at issue is the same as raised in the additional ground for the assessment year 1977-78. We have held for the assessment year 1977-78 that the Commissioner (Appeals) did not consider the assessee’s objection in regard to the double addition of a sum of Rs. 6,000 on account of the perquisite value of the cars provided by the bank to three general managers posted at Calcutta, Bombay and New Delhi. Since we have restored the matter on the IAC’s file, the point raised for the assessment year 1978-79 is also restored on the Commissioner (Appeals)’s file for fresh disposal. As regards the dispute relating to the depreciation on furnitures pertaining to the residential portion of the building used by the officers of the bank, we would, by restoring the matter on the Commissioner (Appeals)’s fiie, direct that the matter be adjudicated once again after hearing the assessee on the point whether Rs. 25,000 considered as depreciation on furnitures used in one-third portion of the building is correct or not.
28. No other ground has been pressed for the assessment year 1978-79. Assessment year 1979-80 :
29. In the first two grounds, the points raised are that the Commissioner (Appeals) erred in sustaining disallowance of Rs. 25,000 being estimated depreciation on the furnitures and fittings supplied to the Japanese officers and that the Commissioner (Appeals) was wrong in sustaining the disallowance of Rs. 6,000 on estimate for personal use of the car by the Japanese officers. In the assessment year 1978-79, on identical grounds raised, we have restored both the points on the Commissioner (Appeals)’s file for fresh disposal after allowing necessary opportunity of being heard to the assessee. The points raised being similar for this year, we also restore the same for fresh disposal by the Commissioner (Appeals). We direct, accordingly.
30. In the next ground, the point raised that the Commissioner (Appeals) erred in sustaining disallowance of Rs. 35,000 on estimate being the depreciation on furnitures and fittings in the guest house of the bank has not been pressed by the assessee’s learned counsel. The Commissioner (Appeals) order in this regard is upheld.
31. Ground No. 4 pertaining to the Commissioner (Appeals)’s disallowance of Rs. 2,240 out of dues and membership fees has not been pressed. The Commissioner (Appeals)’s order in this regard is, accordingly, upheld.
32. Ground No. 5 relates to the disallowance of Rs. 7,64,798 being the bank guarantee for deferred periods upheld by the Commissioner (Appeals). In view of our order for the assessment year 1976-77, we hold that the Commissioner (Appeals) was not justified in upholding the addition of Rs. 7,64,798. The addition is deleted.
33. The alternative submission made by the learned counsel for the assessee is that the IAC was wrong in making the disallowance of Rs. 7,64,798 inasmuch as the net disallowance after adjusting the last year’s provision of Rs. 10,19,167 from the current year’s provision of Rs. 16,29,002 becomes academic in nature since the entire addition made of Rs. 7,64,798 has been deleted by us.
34. Ground No. 6 raised by the assessee reads as follows :
For that the learned Commissioner (Appeals) has erred in adjudicating the ground of allowing deduction of Rs. 2,56,972 in respect of disallowance of loss on forward contract of foreign exchange taken before him at the time of hearing.
It has been stated that the IAC ought to have allowed deduction of Rs. 2,75,532 being the difference arising between the last year’s provision of Rs. 4,49,060 and the current year’s provision made in the accounts to the extent of Rs. 1,73,528. Since we have deleted the additions made in this regard for the assessment years 1976-77 to 1978-79, the question of allowing deduction of the net loss shown of Rs. 2,75,532 after adjusting provisions made for the assessment years 1978-79 and 1979-80 cannot arise. We, accordingly, reject ground No. 6 raised for the assessment year 1979-80.
35. In the result, the appeals for the assessment years 1976-77 to 1979-80 are allowed in part.
