JUDGMENT
K.S. Paripoornan, J.
1. At the instance of the Revenue, the Kerala Agricultural Income-tax Appellate Tribunal, Additional Bench, Kozhikode, has, by an order dated January 13, 1987, referred the following three questions of law for the decision of this court :
” 1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the procedure of the assessee who maintains the accounts on the mercantile system of accounting and returning the differential value received in respect of coffee pooled during the previous year can be adopted for the purpose of assessment for the current year?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in directing deletion of the addition of Rs. 5,85,025.10 which was received in the accounting year 1977-78 towards the difference in value of 1976-77 season’s coffee? and
3. Is the decision of the Tribunal opposed to the principles laid down by the Hon’ble Supreme Court in 59 ITR 254 (State of Kerala v. Bhavani Tea Co. Ltd.) ? ”
2. The respondent is an assessee, assessed in the status of “tenants-in-common “, under the Kerala Agricultural Income-tax Act. We are concerned with the assessment year 1978-79 for which the accounting period was July 1, 1976 to June 30, 1977 (1976-77). Amongst others, the assessee returned income on coffee. The receipt during 1976-77 coffee season was accounted in the sum of Rs. 8,25,000. This represented value of 1,10,000 estimated points valued at Rs. 7.50 per point. The assessee was maintaining the accounts on “mercantile basis”. The assessing authority effected the assessment by order dated August 30, 1980. This was long after the accounting period. When the assessment came to be effected, it became known that the Coffee Board awarded value for 1976-77 season to the assessee at 1,16,531 points and at the rate of Rs. 12.10 per point. So, the assessing authority, as against the returned income of Rs. 8,25,000 on account of coffee, determined the value for 1,16,531 points, at Rs. 12.10 per point, in the sum of Rs. 14,10,025.10. In effect, the difference in the value of 1976-77 coffee season between the amount estimated by the assessee and the actual amount awarded by the Coffee Board in the season in the sum of Rs. 5,85,025.10 was added to the income returned. The order of assessment dated August 30, 1980, was affirmed by the Deputy Commissioner (Appeals), by his order dated August 25, 1983. The assessee carried the matter, by way of second appeal, before the Kerala Agricultural Income tax Appellate Tribunal, Additional Bench, Kozhikode. Against certain allowances upheld by the first appellate authority, the Revenue had also filed an appeal before the Appellate Tribunal. The appeal filed by the assessee (AITA. 368/83) and the appeal filed by the Revenue (AITA. 488/83) were heard together and a common order dated February 27, 1986, was rendered by the Appellate Tribunal. We are concerned in this case only regarding the valuation adopted for coffee for the season 1976-77–accounting period July 1, 1976 to June 30, 1977–relevant to the assessment year 1978-79. In the common order passed by the Appellate Tribunal dated February 27, 1986, it held that the income conceded by the assessee on the basis of the price announced by the Coffee Board at the commencement of the season at the rate of Rs. 7.50 per point for the estimated value of 1,10,000 points can be accepted as the gross income of the assessee for the year. The Tribunal took the view that the procedure followed by the assessee in accounting the value of the coffee can
be accepted. The excess income estimated on this score by the assessing authority in the sum of Rs. 5,85,025.10 was directed to be deleted. It is thereafter at the instance of the Revenue that the three questions of law formulated hereinabove have been referred for the decision of this court. The two references relate to only one year ( assessment year 1978-79 ). But the Tribunal disposed of the appeals filed both by the assessec and the Revenue by a consolidated order dated February 27, 1986. That is probably the reason why two references have been made, though they relate to only one year (assessment year 1978-79) for which the accounting period is July 1, 1976 to June 30, 1977 ( 1976-77).
3. We heard counsel for the Revenue, Senior Government Pleader, Mr. V.C. James, as also counsel for the respondent/assessee, Mr. P. Bala-chandran. It is common ground that the assessee maintains its accounts on the ” mercantile basis “. It is also common ground that the sale of coffee is regulated by the Coffee Act, 1942. Analysing the provisions of the Coffee Act, 1942, in the light of the Madras Plantations Agricultural Income-tax Act, 1955, the Supreme Court of India in State of Kerala v. Bhavani Tea Produce Co. Ltd. [1966] 59 ITR 254 at page 260, stated thus ;
” The appellant-company maintains its accounts on the mercantile system. When it handed over coffee to the Coffee Board it entered the price of the coffee according to the valuation of the Coffee Board in its books of account although it did not receive payment immediately because as has been shown above, the payment is delayed unless immediate settlement is made … In these circumstances, it is plain that the handing over of coffee by the planter amounts to a sale to the Coffee Board and the payment of the price is from the sale of all the coffee in the surplus pool unless the planter settles for immediate payment. The system of accounting must make a difference. If it were a cash system, income would be taxable when actually received but in the mercantile system it would be taxable in the year in which the relevant entry is made about the sale of coffee to the Coffee Board.”
4. In the light of the above observations, the learned Government Pleader contended that, in so far as the coffee was delivered to the Coffee Board during the relevant accounting period (July 1, 1976 to June 30, 1977), the income accrued to the assessee on the sale so effected and such income accruing during the relevant accounting period is taxable in the hands of the assessee. In other words, it was submitted that the estimated value and the points made by the assessee cannot be accepted. By delivering the coffee during the relevant accounting period (July 1, 1976
to June 30, 1977), the assessee became entitled to the amount awarded by the Coffee Board. Handing over of coffee to the Board has resulted in accrual of income and the relevant entry made in the account books about the sale of coffee to the Coffee Board is sufficient to rope in the liability to agricultural income-tax for the assessment year 1978-79 (accounting period July 1, 1976, to June 30, 1977), although the payment was not received immediately or was otherwise delayed. On the other hand, counsel for the respondent/assessee contended that the exact points and the valuation per point became known to the assessee only after the expiry of the accounting period and the receipt of the excess sum was in the later year and so it is taxable in the year of receipt and cannot be related back to an earlier year. Reliance was placed on the decision of the Supreme Court in CIT v. A. Gajapathy Naidu [1964] 53 ITR 114.
5. On hearing the rival pleas put forward before us, we are of the view that the Revenue is entitled to succeed in both the references. It is common ground that the assessee maintains its accounts on the ” mercantile ” basis and that for the coffee delivered during the accounting period July 1, 1976, to June 30, 1977, the assessee had made the relevant entry in its account books about the sale of coffee to the Coffee Board. Since, by the close of the accounting year, the total points and the valuation per point were not exactly known, the assessee had estimated the points at 1,10,000 and valued the coffee per point at Rs. 7.50. The assessee had estimated the value of the coffee only on the basis of the price announced by the Coffee Board at the commencement of the season. The assessee has a further plea that the actual amount received by it in the later year for this accounting period is taxable in the later year consistent with the procedure followed by the assessee in accounting for the value of coffee. The plea of the assessee was that the estimate made by it in its accounts regarding the valuation of coffee should have been accepted. The fact that the coffee was sold at a higher rate or for larger points and such facts came to the notice of the assessing authority before the assessment was made cannot enable the assessing authority to look back and adopt the figure actually awarded which became known only long after the expiry of the accounting period. We are of the view that this submission by the assessee is unsustainable. In the mercantile system of accounting, the assessee is taxable on the income earned or accrued due though the receipt or payment may not be immediate and may be delayed. Since, in this case, the assessee was maintaining the accounts on mercantile basis and the agricultural income was derived by the assessee for the year in which the relevant entry was made in its accounts about the sale of coffee to
the Coffee Board, we are of the view that the assessing authority was justified in reckoning 1,16,531 points and also declaration of valuation at the rate of Rs. 12.10 per point for 1976-77 season coffee. It is true that the total points and the valuation at Rs. 12.10 per point were not known to the assessee or the assessing authority till after the accounting period was over. But, after the actual details came to the notice of the assessing authority, before the assessment was made or effected, the assessing authority will be well within its right to adopt the quantum of coffee and the income thereon as awarded by the Coffee Board for the relevant year–July 1, 1976, to June 30, 1977. The peculiar circumstance that the assessment was made for the accounting period July 1, 1976, to June 30, 1977 (assessment year 1978-79), long after the expiry of the accounting period, on August 30, 1980, before which time the assessing authority came to know about the award made by the Coffee Board is sufficient to enable the assessing authority to substitute the income declared by the Coffee Board as the income of the year in substitution of the income returned by the assessee on an estimate basis. Since the handing over of coffee by the planter amounts to a sale to the Coffee Board and the mercantile system of accounting adopted by the assessee renders the income as one accrued in the year in which the relevant entry is made about the sale of coffee to the Coffee Board, we are of the view that the Appellate Tribunal was in error in deleting the sum of Rs. 5,85,025.10 which was the difference as per the award made by the Coffee Board for the coffee delivered during the season July 1, 1976, to June 30, 1977. The fact that the award made by the Coffee Board was not known by the close of the accounting period and became known only at a later point of time has no consequence since, before the assessment was completed, the award made by the Coffee Board was known and the quantum and the valuation declared by the Coffee Board were substituted for the estimate of income made by the assessee. The view of the Appellate Tribunal to the contrary and directing deletion of the addition of Rs. 5,85,025.10 received by the assessee for the accounting period 1976-77 (assessment year 1978-79), though definitely known later is a clear error of law. The view of the Appellate Tribunal militates against the decision of the Supreme Court in Bhavani Tea Produce Co.’s case [1966] 59 ITR 254.
6. We are of the view that the decision of the Supreme Court in Gajapathy Naidu’s case [1964] 53 ITR 114, cited by counsel for the assessee will not, in any way, advance the plea that the income did not accrue or arise during the relevant accounting period. In the said case, the assessee had no legal right for the payment of the sum in issue therein
(compensation) during the accounting year 194849 (assessment year 1949-50). He, however, made representations to the Government, after the close of the year, stating that he had incurred loss. The Government directed the payment of Rs. 12,447 to the assessee by way of compensation for the loss which was received by the assessee in the accounting year 1950-51 relevant to the assessment year 1951-52. A question arose as to whether the amount so received could be related back to the earlier assessment year (1949-50), during which year the assessee actually supplied the goods to the Government. Noticing that there was no legal right to the present sum (compensation) during the accounting period
(1948-49) and that no such income accrued to the assessee during the said accounting period, the court held that the amount received during the accounting year 1950-51 could be brought to tax only during the assessment year 1951-52. It was so held on the basis that no income accrued or arose in the earlier year (1948-49). The right to the amount arose in a later year and cannot be related to an earlier year when no right to receive the amount existed or accrued to the assessee. The said decision of the Supreme Court (53 ITR 114) is clearly distinguishable and has no application herein. In this case, the handing over of the coffee by the planter was admittedly during the accounting period July 1, 1976, to June 30, 1977, and as held by the Supreme Court in Bhavani Tea Produce Co.’s case [1966] 59 ITR 254, when the assessee handed over the coffee to the Coffee Board and entered the price of the coffee according to the valuation of the Coffee Board, it amounted to a sale and since the accounts are kept on the mercantile basis, the income accrued due in that year. We repel the plea to the contrary put forward by the respondent/assessee on the basis of the decision of the Supreme Court in Gajapathy Naidu’s case [1964] 53 ITR 114.
7. We answer the questions referred to us in the above perspective and hold that the Appellate Tribunal was in error in deleting the addition of Rs. 5,85,025.10 from the income of the assessee for the accounting period July 1, 1976, to June 30, 1977, relevant to the assessment year 1978-79. The decision of the Appellate Tribunal to the contrary is against the decision of the Supreme Court in Bhavani Tea Produce Co.’s case [1966] 59 ITR 254. We answer question No. 2 in the negative–against the assessee and in favour of the Revenue. We answer question No. 3 in the affirmative, in favour of the Revenue and against the assessee. Question No. 1 is not properly worded and proceeds on a hypothetical basis. We decline to answer question No. 1, all the more so, since our answers to questions Nos. 2 and 3 completely adjudicate the issue raised before us in these cases.
8. The references are answered as above.
9. A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Agricultural Income-tax Appellate Tribunal, Additional Bench, Kozhikode.
