JUDGMENT
K.N. Seth, J.
1. The, assessee carried on business of purchases and sales of both Indian and foreign books in wholesale as well as in retail. This business was carried on by Sri D.R. Chawla and Sri C.M. Chawla (father and son respectively) in partnership under the name and style of M/s. Universal -Bookstall, Kanpur (hereinafter called “the Kartpur firm”). In the year 1963, an office was opened at Delhi for wholesale business in books as also a publishing house. The Delhi business was started under the name and style of M/s. U.B.S. Publishers and Distributors (hereinafter called “the Delhi firm”) in partnership with two other persons (brother and mother of Sri C. M. Chawla). In the opinion of the Department, these two firms did not have separate identity and the Delhi firm was held to be a branch or an extension of the Kanpur firm. The Tribunal, however, did not accept the stand taken by the Department and treated them as distinct and different entities and that controversy is not before us. This reference arises out of the assessment of the Delhi firm.
2. It was stipulated between the Kanpur firm and the assessee-firm that all import licences held by the Kanpur firm shall be utilized by the asses-see-firm in consideration of the assessee-firm’s paying to the Kanpur firm a net commission at the rate of 1% on the value of imports under the licences in the name of the Kanpur firm. In the assessment proceedings for the assessment year 1967-68 (ending on May 31, 1966), the ITO noticed that the assessee-firm had debited its purchases by an amount of Rs. 6,39,124 on the basis of an advice note dated June 11, 1966, from the Delhi branch of the Kanpur firm. It was claimed that this sum represented the assessee’s additional liability to foreign suppliers in respect of books imported by it on credit up to the end of the previous year, i.e., up to 31st May, 1966, on account of devaluation of Indian currency by the Government of India on June 6, 1966. The assessee-firm also increased the value of its closing stock of the imported books by Rs. 2,06,806. Thus, the net loss claimed on account of devaluation amounted to Rs. 4,38,318.
3. The ITO disallowed the loss claimed principally oh the ground that the claim did not pertain to the previous year ending on 31st May, 1966,
since the devaluation took place only on June 6, 1966, and the claim was made on the basis of the debit note issued by the U.B.S. Delhi branch on June It, 1966, which was also after the close of the accounting period. For the assessment year 1968-69, the ITO took the view that effect could be given at the most to the extent of Rs. 2,06,805. The balance amount of Rs. 4,31,319 did not relate to any transaction of the trading account for the assessment year 1968-69, hence it could not be considered in the trading results for the assessment year 1968-69, and the amount of Rs. 4,31,319 could not be allowed as a deduction in the profit and loss account.
4. On appeal by the assessee, the AAC affirmed the order of the ITO relating to the assessment year 1967-68, on the reasoning that since the appellant was maintaining its account on mercantile system, the liability on account of devaluation of Indian rupee did not accrue during the accounting year relevant to the assessment year under appeal as the devaluation took place after the end of the accounting period. For the assessment year 1968-69, however, the AAC allowed the assessee’s claim partially.
5. The assessee preferred an appeal to the Tribunal. The Tribunal found that the assessee imported books from foreign countries through the Kanpur firm in respect of which it was, liable to pay the foreign suppliers the price of the book in terms of their currency. It was also found that the assessee’s liability to the foreign suppliers, as claimed at the end of the close of the year relevant for the assessment year 1967-68, was correct and that on account of devaluation of the Indian currency by the Govt. of India on June 6, 1966, that the liability increased by the amount claimed by the assessee. It was also found that the assessee’s liability to the foreign suppliers has always been in terms of foreign currency which the assessee had always been converting into Indian rupee at the end of each year on the basis of the then exchange rate and when before the accounts are finalised and the assessment is completed the actual conversion of the amount to be paid to the foreign suppliers is available. The Tribunal felt no difficulty in taking the correct amount into account as against the estimated or a hypothetical amount. In that view of the matter, the Tribunal upheld the stand taken by the assessee that though the devaluation of the Indian currency was announced by the Govt. of India six days after the end of the previous year, the assessee was justified in determining its liability on the basis of the actual figures available particularly when the accounts for that year had not been finalised.
6. At the instance of the Revenue, the Tribunal has referred the following question for the opinion of this court:
“Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 4,32,318 was allowable in the assessment year 1967-68 ?”
7. Income-tax is a levy on income. It is well settled that what is assessed to tax in a business are not profits considered from a theoretical, academic or legalistic sense, but commercial profits, i.e., profits which are made in a business by the carrying on of the business which a commercial man would accept as profits of that business (CIT v. Bai Shirinbai K. Kooka [1956] 30 ITR 753 (Bom)). This principle was approved by the Supreme Court in its decision in CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86. Again, in CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144, 148 (SC), Hidayatullah J. observed:
“Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a ‘hypothetical income’, which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.”
8. This view was cited with approval by Khanna J. in Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC). The concept of “real income” was also emphasised by the Supreme Court in CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266, where the principle expounded in the decision of the Bombay High Court in H.M. Kashiparekh & Co. Ltd. v. CIT [1960] 39 ITR 706 (Bom), the effect that in examining any transaction and situation of this nature the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it was approved.
9. The Tribunal has found that the assessee’s liability to the foreign suppliers has always been in terms of foreign currency. At the time of closing, the accounts, its value could at the best be estimated and for that purpose there appears to be nothing wrong in taking into account the devaluation of the Indian currency announced by the Govt. of India six days after the end of the previous year. That a subsequent event can be taken into account finds support from the decision of the Supreme Court in CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144. In that case, the
assessee-firm was the managing agent of two shipping companies and tinder the managing agency agreement it was entitled to receive as commission 10 per cent. of the freight charged. In the books of account of the asses-see, these amounts were credited to itself and debited to the managed companies. Subsequently, the assessee desired to have the managing agency transferred to two private companies and in this connection agreed to accept 2 1/2 per cent. as commission and gave up 75 percent, of its earnings. The Department sought to assess this 75 per cent. on the ground that the commission at 10 per cent. had already accrued to the assessee in the year of account and the amount given up after the close of the previous year could not save that portion from liability to income-tax. It was held that the subsequent agreement had altered the rate of commission in such a way as to make the income which really accrued to the assessee different from what had been entered in the books of account. This was not a case of a gift by the assessee to the managed companies of a portion of income which had already accrued, but an agreement to receive a lesser remuneration than what had been agreed upon. The assessee had in fact received only the lesser amount in spite of the entries in the account books, and this lesser amount alone was taxable, on the principle that if income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a “hypothetical income”, which does not materialise.
10. A similar question came up for consideration before the Supreme Court in CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266, where the commission given up after the close of the accounting year was not taken into consideration in determining the real taxable income of the assessee.
11. The stand taken up by the assessee finds ample support from the decision of this court in Motilal Padampat Sugar Mills v. CIT [1977] 106 ITR 988. In that case, the assessee-company carried on the business of manufacture and sale of sugar. For the assessment years 1960-61 and 1961-62, the assessee claimed a deduction of Rs. 1 lakh in each year as deferred cane price under the price-linking formula envisaged by 3A of the Sugarcane Control Order, 1955. This claim was rejected by the ITO on the grounds that the liability had not accrued and the assessee, though maintaining accounts on the mercantile system, had not made entries in the profit and loss account showing the liability. During the pendency of the appeal before the AAC, orders had been passed by the proper authority quantifying the liability of the assessee to pay the additional price at Rs. 6,07,280 for the assessment year 1960-61 and Rs. 9,95,285 for the assessment year 1961-62. The AAC permitted the assessee to amend his claim to include the additional sums of Rs. 5,07,280 and Rs. 8,95,285, but he dismissed the appeal. The Appellate Tribunal also dismissed the appeal to it. This
court held that under the Sugarcane Control Order, the liability in respect of the additional cane price accrued as soon as the sugarcane was purchased and the minimum price therefor was fixed. The assessee was entitled to claim deduction of a reasonable estimated amount, or, in the alternative, if during the course of the assessment proceedings the actual amount is quantified, the quantified amount. It was further held that since the amount in respect of this liability had been quantified at the appellate stage, the assessee was entitled to the deduction of the entire amounts. In coming to its decision the Bench relied on an earlier decision of this court in CIT v. Poonam Chand Trilok Chand [1976] 105 ITR 618 (All), which, in its turn, had placed reliance on the decision of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363.
12. A similar question came up for consideration before the Punjab and Haryana High Court in Addl. CIT v. Jai Bajranj Nail Industries [1974] 95 ITR 415, In the original return for the assessment year 1965-66, for which the previous year was 1964-65, the claim for payment of bonus to employees was limited by the assessee to Rs. 2,000. The provisions regarding payment of bonus under the Payment of Bonus Act, 1965, were made applicable in respect of every “accounting year” commencing on any day in the year 1964. In view of this, the assessee filed a revised return on March 28, 1966, and claimed additional bonus of Rs. 6,200. The ITO rejected this claim but it was allowed on second appeal by the Appellate Tribunal. On a reference before the High Court, it was contended for the Revenue that the liability though it accrued for the year ending March 31, 1965, the same not having been reflected in the account books nor any provision having been made for the same, could not be accounted for in that year. It was held that the assessee was entitled to make adjustment in his accounts, which would relate back to the last date of the accounting period on the reasoning that the effect of the enforcement of the Bonus Act would be that the amount of bonus sought to be accounted for subsequently would be deemed to have been included for all intents and purposes in the accounting year for which it is required to be paid by the statute, and it would be deemed to be part of the expenditure for that accounting year. In this case, the liability of the assessee arose on account of statutory provisions but the same principle would apply to the case of a contractual liability as in the case before us.
13. Before the Gujarat High Court in CWT v. Kantilal Manilal [1973] 88 ITR 125, which related to wealth-tax proceedings, a question arose whether the actual liability, which was admittedly determined after the valuation date, could be taken into account for the purposes of computing the assessee’s total wealth as on a particular date. Income-tax liability was claimed as debt owed by the assessee on the relevant valuation dates as
per the assessee’s own working. When the assessments under the I.T. Act were finalised, the liability came to be much more than what was estimated by the assessee in the wealth-tax returns. The decision was rendered in favour of the assessee.
14. We may in this connection also refer to the decision of the Gujarat High Court in Arvind Mills Ltd. v. CIT [1978] 112 ITR 64. The assessee-textile mill, a public limited company, entered into an agreement with ICICI on June 25, 1965, whereunder, the latter agreed to lend moneys to the assessee in foreign currencies to pay the price of the imported machinery and the assessee agreed to pay back the moneys in the same currencies in which they were borrowed. In the calendar years 1965 and 1966, the assessee had borrowed moneys in foreign currencies from its loan account with ICICI and it had purchased and installed some machinery with the aid of such funds. In the midst of the relevant previous year 1966, for which the assessment year was 1967-68, devaluation of the Indian rupee took place and, as a result thereof, the liability of the assessee in respect of the repayment of the loan, relatable to the machinery acquired and installed in the previous year, increased. The assessee maintained its accounts, according to the mercantile system, and it made an entry in its books of account in respect of such additional liability, although the first instalment of repayment of the loan was to commence from June 1, 1967. The assessee claimed that for the purpose of allowing development rebate, the additional liability, which was relatable to the cost of the machinery acquired in the calendar year 1966 (previous year) was required to be taken into account. This claim was disallowed right up to the Tribunal on the grounds: (i) the machineries were acquired before devaluation and additional liability subsequently arising on account of devaluation could not add to the original cost of acquisition ; (ii) no instalment of loan was repayable in the year of account and the question of recomputation of the cost of the machinery in view of the additional liability did not arise ; and (iii) the additional liability could not be taken into account as it was not relatable to the cost of the acquisition of machineries but to repayment of loan taken from the ICICI. It was held that the increased liability, which arose on account of devaluation, was an integral part of the original arrangement between the parties. The assessee, who maintained its accounts, according to the mercantile system, can be said to have incurred such liability, when it started drawing upon the loan account to make the purchase of machinery irrespective of such liability being quantified and disbursed later. The increased liability on account of devaluation was within the contemplation of the parties as an integral part of the original transaction, and it can legitimately be taken into account as enhancing the cost of the machinery purchased and it should, therefore, be taken into
consideration in determining the actual cost of such machinery to the assessee for the purpose of allowing development rebate under Section 33. The principles enunciated in this case fully apply to the case in hand where also the liability to pay in foreign currency for the books imported was an integral part of the original transaction. The liability was for the purchase price of the books imported and not on account of devaluation. The contractual liability was inherent in the purchase itself.
15. The learned counsel for the Revenue placed reliance on the decision of the Supreme Court in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC). In that case, the Supreme Court held (p. 13):
“……where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature.”
16. Since the Supreme Court felt that no finding appeared to have been given by the Tribunal as to whether the amounts in question were held by the assessee in West Pakistan on capital account or revenue account and whether they were part of fixed capital or of circulating capital embarked and adventured in the business in West Pakistan, the case was remanded to the Tribunal. In our opinion, this decision is of no assistance in determining the question referred to us.
17. The decisions in CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC) and CIT v. Swadeshi Cotton and Flour Mills P. Ltd. [1964] 53 ITR 134 (SC), relied on by the Revenue are clearly distinguishable. In the former case, the assessee supplied bread to a Government hospital under a contract during the period April 1, 1948, to March 31, 1949. He made representations to the Government after the close of the year that he had incurred loss. The Government directed the payment of a certain sum to the assessee by way of compensation for the loss sustained in respect of the supply of bread. That amount was received by the assessee in the accounting year 1950-51. It was held that since the amount received was not on the basis of a right accrued in an earlier year it could be taken into account only in the year in which it was received by the assessee, i.e., in the accounting year 1950-51, and it could not be related back to the earlier year during which the assessee actually supplied bread to the hospital. In Swadeshi Cotton and Flour Mill’s case [1964] 53 ITR 134 (SC), the assessee paid a certain sum by way of profit bonus to its employees for the calendar year 1947 in
terms of an award made on January 13, 1949, under the Industrial Disputes Act. It debited the amount in its profit and loss account for the year 1948 but in fact paid it to the employees in the calendar year 1949. It was held that it was only in 1949 that the claim to profit bonus was settled by an award of the Industrial Tribunal and me only year to which the liability under the award could be properly attributed was 1949. It was observed that an employer, who follows the mercantile system of accounting, incurs a liability towards profit bonus only when the claim, if made, is settled amicably or by industrial adjudication.
18. In our case, as noted earlier, it has been found that the liability to pay in foreign currency had accrued when the books were imported. It did not come about as a result of devaluation. The stand taken up by the assessee that though the devaluation of Indian currency was announced six days after the end of the previous year, the assessee was justified in determining its liability on the basis of actual figures available particularly when the accounts for that year had not been finalised. Our answer to the question referred is in the affirmative, in favour of the assessee and against the Department. The assessee is entitled to costs which is assessed at Rs. 250.