S.C.R. SUPREME COURT REPORTS

MESSRS. CALCUTTA COMPANY LTD.

v.

THE COMMISSIONER OF INCOME-TAX,

WEST BENGAL

(S. R. DAs;C.J., N. H. BHAGWATI and

M. HID.A,YATULLAH, JJ.)

185

I nc01-ne-tax-Assessme11t of land-developing Company-Jf ercan­

tile method of accounting adopted by assessee and accepted by Income­

tax Officer-Accrued liability for fnture development expenses, if

an allowable ded·uction in the accomiting year-Indian Income-tax

Act

(XI of

r922), s. ro(r).

The appellant company ·carried on land-developing business

and sold land after development on a profit. The whole of the

'development was not carried out before the land was sold nor the

whole

of the sale price received in cash at the time of the sale.

·In the accounting year in question the appellant sold a number

of plots and received a portion of the sale price but as it maintain­

ed its accounts in the mercantile method it entered ·the whole

price receivable, viz., Rs.

43.692-n-9, in credit side though only

Rs.

29,392-n-9 was actually received and

·debited a sum of

Rs: 24,809, being the estimated expenditure for the develop­

ments it had, by t£rms incorporated in the deeds of sale, under­

taken to carry out within six months thereof, although no

part of it was actually spent during that year. The appellant

claimed a deduction of the said sum of Rs. 24,809 in computa­

tion of the profits and gains of its business during the assessment

year.

The Income-tax Officer, while accepting the method of

accounting adopted

by the appellant, disallowed the

Claim on

the ground that no expenses had actually been incurred and the

estimate was only a probable one. The Appellate Assistant

Commissioner a'-well as the Income-tax Appellate Tribunal

confirmed

the disallowance on appeals and the High

Court, on a

reference under s.

66(1) of the Income-tax Act held against the

appellant. The question was whether the deduction claimed was a legally allowable expense of the year in question.

Held, that the liability which was undertaken by the appel­

lant under the deeds of sale was an accrued liability and not a

contingent one. Although the time of six months was

not of

the essence

of the contract, the undertaking it had given was

unconditional and absolute in terms and

the liability must be

held to have accrued on

the execution of the deeds of sale though

it was to be discharged at a future date.

Keshav Mills Ltd. v. Commissioner of

Income-tax, Bombay,

[1953] S.C.R. 950, referred to.

Peter Merchant Ltd. v. Stedeford (Inspector of Taxes), (1948)

30 T.C. 496. distinguished.

24

I959

l'Jay I?.

186 SUPREME COURT REPORTS [1960(1)]

r959 The difficulty in estimating such a liability for purposes of

debit under the mercantile system of accounting could be no

Calcutta Cotnpany ground for treating an accrued liability as a conditional one,

Ltd. since it \Vas ahvays open to the Incornc-tax authorities to arrive

v. a proper estimate thereof having regard to all the circumstances

The Conunissioner of the case.

0

! Income-tax Gold Coast Sdection Trust Ltd. v. Humphrey (Inspector of

Taxes), [1948] A.C. 459, referred to.

Regard being had, therefore, to the accepted commerdal

practice and trading principles, the estimatcfl deduction, even if

it did not come under any of the specific provisions of s. 10(2)

of the Act, was certainly an allowable deduction under s. 10(1) of

the Act, there being no prohibition, either express or implied,

against it in the Act and, con"sequently, the question must be

answered in the affirmative.

Badridas Daga v. The Commissioner of Income-tax, (1958) 34

I.T.R. IO; Russel v. Town and County Bank Ltd., (1888) 13 App.

Cas. 418; Gresham Life Assurance Society \'. Styles, (1892) 3 T.C.

185; Pondicherry Railway Co., Ltd. v. Cormnissioner of Income-tax,

Madras,

(1913) L.R. 58 I.A. 239 and Income-tax

Commissioner v.

Chitnavis, (1932) L.R. 59 I.A. 290, referred·1o.

C1v1L APPELLATE JURISDICTION: Civil Appeal No.

213

of 1955.

Appeal from

the judgment

and· order dated

June 26, 1953 of the Calcutta High Court in I.T.R. No.

34of1952.

A. V. Viswanatha Sa.stri, N. C. TaZ.Ukdar and

Sukumar Ghose, for the appellant.

K. N Rajagopal Sastri and D. Gupta, for the

respondent.

1959. May 12. The

Judgment of the Court was

delivered

by

Bhagwati J.

BHAGWATf J.-This appeal with a certificate uhder

Art. 135 of the Constitution read with s. 66A(2) of the

Indian Income-tax Act raises the question as to whether

the appellant was entitled to a deduction of Rs. 24,809

in the computation of its profits and gains for the

assessment year 1948-49.

The appellant deals in land and property and carries

on

land developing business and in the course of the

said business, it buys land, develops it so as to make

it fit for building -purposes and sells it at a profit in

plots. The developments undertaken are in the main,

S.C.R. SUPREME COURT REPOR.TS 187

that roads are to be laid out, a drainage system to be I959

provided and street lights inst,111led and they are to be -_ ·

maintained till the same are taken over by the :Munici-Calcutta Company

pality. The whole of the development is not carried

1

~~·

out before the land is sold, nor the whole of the sale The Commissioner

price received in cash at the time of the sales. The oj Income-tax

procedure followed is that when a plot is sold, the

purchaser pays about 25% of the purchase price in cash llhag•.•'ati f.

and undertakes to pay the balance with interest at a.

certain rate in ten annual instalments which he secures

by creating a charge on the land purchased. The

appellant, in its turn, undertakes to carry out the

developments within six months from the date of the

sale, but this time is not of the essence of the contract

and what the appellant undertakes is to carry out the

developments within a reasonable time. The under-

taking is incorporated in the deed of sale itself, whereas

the security is given by the purchaser by means of a

separate document.

In the ac·counting year relating to the a8sessment

year 1948-49 the appellant sold a number of plots and

received a portion of the sale price from the purchasers

according

to the scheme mentioned above. The

appel­

lant maintains its accounts in the mercantile method

under which money not actually received but only

treated as received on the basis that it was due and

receivable is entered in the books of account on the

credit side. Even though the appellant did not receive

the whole of the price, viz., Rs. 43,692-11 9, it entered

in

the credit side of its books of account the whole of

that sum representing the full sale price of the lands

sold during

the

account.ing year though only a sum of

Rs. 29,392-11-9 was actually received in cas}l fron1 the

purchaser and the balance of Rs. 14,300 representer

the unpaid balance retained by the purchasers the pay­

ment of which was secured by creating charge on the

said lands as also the interest received or receivable in

the year of account under the deeds of charge. The

whole of this sum of Rs. 43,692-11-9 was, however,

credited

in the books of account by the appellant

according to the mercantile

system of accounting

adopted by it. '

188 SUPREME COURT REPORTS (1960(1)]

I959 In so far as under the terms of the deeds of sale the

- appellant had undertaken to carry out the develop-

Calcutt• Company men ts within six months from the date of sale it

L~d. estimated a sum of Rs. 24,809 as the expenditure for

The c0;.,;,;,,ioner the developments to be carried out in respect of the

of Income-tax plots which had been sold during the year and debited

t.he same

in its books of account on the ground that Bhagwali I· the liability for the said sum of Rs. 24,809 had actually

arisen, the appellant being bound to provide the facili­

ties it had undertaken to do, even though no part of

that amount represented any expenditure actually made

during that year.

In the course of its assessment to income-tax for the

year-1948-49, the appellant claimed a deduction of the

said sum of Rs. 24,809 in the computation of the profits

and gains of its business. The Income-tax Officer

disallowed

that claim on the ground that the expenses

had not been actually incurred in the year of account

and also on the ground that the estimate had not been

proved to be based on a consideration of the real

expenses which

the Company would have to incur for

the purpose. The Appellate Assistant Commissioner,

on appeal, confirmed

the disallowance by the

I.T.O.

on the ground that there was as yet no accrued liability

and on the further ground that as the development

would be carried

out in the future, the expenditure

estimated at current prices could not be allowed. On appeal taken by the appellant before the Income.

tax Appellate Tribunal, the Trilmnal, held that it was

by no means certain what the actual cost would be

when

the developments were carried out and that

although the appellant had undertaken to carry out

certain developments, it could bring expenses into

account only when the expenses were actually incurred.

The Tribunal accordingly dismissed the appeal.

The appellant thereafter made an application

befor~

the Tribunal requiring it to refor to the High Court

under s. 66(1) of the Income-tax Act certain questions

of law arising out of its order. The Tribunal there­

upon stated a case and referred the following question

to the High Court for its decision :-

S.C.R. SUPREME COURT REPORTS 189

" Whether on the facts and circumstances stated I959

above, the sum of Rs. 24,809 can legally be allowed -

as an expense of the year under consideration." Calcutt~

1

~~

111

tany

The statement of ca.se drawn by the Tribunal was v.

severely criticized by the High Court as under: - Tlie Commissianer

"Unfortunately, the treatment of the question by of Income-tax

the authorities below has been of a somewhat sum-Bhagwati

1

.

ma.ry character, presumably becitnse it was raised and

argue~ before them in a superficial form. But even

if such was t.he case, there is hardly any justification

for

the Tribunal failing t.o realise

at least what facts

were required

to be found and stated. The statement

of case is sketchy and bare and like most of the

statements we have to deal with during this session,

has hardly any appearanee

·of a case seriously

stated."

In spite of the above observations the High Court

dealt with the question and after dealing exhaustively

with the arguments which were urged before it by the

learned Cod'nsel for the appellant answered t.he question

in the negative. On an application ma.de by the

appellant, however, the High Court granted the

requisite certificate under Art. 135 of the Constitution

to appeal to this Court and hence this appeal.

The quest.ion which really arises for our determina­

tion in this .appeal is whether having regard to the

fact that the appellant':-; method of accounting, viz.,

the Me1·cantile method was accepted Ly the Income

Tax Officer and the receipts appearing in the books of

account included the unpaid balance of the sale price

of the plots in question, the amount. of liability under­

taken by the appellant to earn those receipts was to be

deducted even

if there

had not been actual disburse­

ment made by it during the accounting year. Put in

other words, the question was whether in view of the

fact that the sum of Rs. 43,692-11-9 had been entered

on the credit side in the books of account even }hough

it was not money actually received but only money

treated as received on the basis that it was due and

receivable, th~ sum of Rs. 24,809 whirh had been

entered as debit, being the liability of the appellant

190 SUPREME COURT REPORTS [1960(1)]

r959 undertaken by it tg earn those receipts, should he

- deducted in determining

the taxable profits and gains Calrntt~,~~mpany of the appellant.

v. The mercantile system of accounting is well-known

The Commissioner and this method has been explained in a judgment of

of Income-tax this Court in Keshav .~fills Ltd. v. Commissioner of

Income-tax, Bombay(').

Bhagwati ].

" That system brings into credit what is due,

immediately

it becomes legally due and

before it is

actually received

and it brings into debit

expendi­

ture the amount for which a legal liability has been

incurred before

it is actually disbursed.

"

The main ground on which the claim of the appel­

lant for deducting this sum of Rs. 24,809 was

disallowed bv all the authorities below was that the

expenditure \vas not actually incurred in the year of

accm;mt, it was by no means certain what the actual

cost would be when the developments were carried out

and that there was as yet no accrued liability but only

a contingent liability undertaken by the appellant,

even though the undertaking was incorporated in the

deeds of sale themselves.

The following were the developments undertaken to

b<;i carried out by the appellant as appears from the

order of the Appellate Assistant Commissioner:-

" There was a condition in the ConYeyance Deeds

that the appellant does hereby covenant with the

purchaser that the appellant Hhi1!1 <"Omplete the

construction of roads, drains, provide suitable pucca

surface drains on both sides of the roads and shall

also

make arrangements for lighting up the

said

roads and shall maintain the said roads, drains,

lights till the same are taken over by the Mnnicipa­

lity."

"Besides provision for roads, drains, etc., the

Deed provides for filling up of low lands and there

is a clause in the Conveyance Deed which shows

that the appellant's shall at his own cost fill the low

lands

and tank with earth and

bring the same to

road level. "

(1) [1953] S.C.R. 950, 958.

S.C.R. ·SUPREME COURT REPORTS 191

This undertaking having been incorporated in the z959

deeds of sale themselves there was certainly a liability -

d k

· b tl ll t t t th Calculta Company

un erta en y ie appe an o carry ou ese Ltd

developments within six months from the dates of v. ·

those deeds. Time was of course not of the essence of The Commissioner

the contract and the appellant therefore was at liberty of Income-tax

to carry out that undertaking within a reasonable

time.

That, however, did not absolve it in any manner Bhagwati f.

whatever from carrying out the undertaking and the

purchasers were in a position to enforce the under-

taking by taking appropriate proceedings in that

behalf.

Reliance was placed on

behalf of the Revenue on

t.he case of Peter Merchant Ltd. v. Stedeford (Inspector

of Taxes)

(1) in which a distinction was drawn between

an actual i.e., legal liability, which is deductible, and

a liability which is future or contingent and for which

no deduction can be made.

The facts of that case

were

that the

Company, which carried on the business

of managing factory canteens, had contracted with a

factory owner to maintain the crockery, cutlery and

utensils used in the canteen otherwise known as the

light equipment in its original quantity and· quality.

The cost of replacement was admittedly a proper

deduction

in computing profits, as was also any sum

paid to a factory owner in settlement of the value of

shortages on termination of the contract.

Owing to

war and other circumstances it was impossible or

impracticable for

the

Company to obtain replacements

in some cases, and the obligations under the contracts

with the factorv owners in those cases still remained to

be performed. In the accounts for the year deductions

had been made both of the amounts actually expended

on replacements and the amounts which the company

was liable

to expend when the equipment became

available. The

Company claimed to be entitled to

deduct in computing its profits amounts representing

at current prices, the liability to effect replacements as

soon as the required equipment became obtainable.

The former amounts were allowed as deductions, and

the latter the Court of Appeal (reversing the decision

(1) (1948) 30 T.C. 496.

S.C.R. SUPREME COURT REPORTS 192

'959 of ~he Court below) held not to be deductible. The

- basis of the decision was that the real liability under

Calcutt~

1

~ompa"y the contract was contingent, not actual, since the

v. · obligations of the company were not such that it might

The Commissione. be sued for the cost of replacements at current

of Income-tax prices, but only for possible damages for breach of

contract in the event of tho factory owner preferring

Bhagwati f. a claim under the contract, and since no legal liability

could arise until such a claim was made, the liability

had to be regarded as contingent and not deductible.

It is clear from the above that on the facts and

circumstances of that case the Court held that it was

not an accrued liability but was merely a contingent

one and if that was the case only the sums actually

expended could be deducted and not those which the

company was liable to expe.nd in the future.

Simon in his " Income-tax ", Second Edition, Vol. II,

at p. 204 under the caption· " Accrued Liability "

observes as under, after citing the case mentioned

above:~ ·

"In cases, however, where an actual liability e:x;ists,

as is the case with accrued expenses, a deduction is

allowable; and this is not affected by the fact that

the amount of the liability and the deduction will

subsequently have to be varied. A liability, the

amount of which is deductible for income-tax

purposes, is one which is actually existing

at the

time of making the deduction, and is distinct from

the type of liability accruing in Peter Merchants

Ltd.

v. 8tedeford

(ln.speclor of Taxes) which although

allowable on accountancy principles, is not deducti­

ble for the purpose of income-tax. "

Approaching the question before us in the light of

the observations made above we have got to determine

what was the nature of the liability which was under­

taken by the appellant in regard to the development

of the lands in question, whether it was an accrued

liability

or was one which was contingent on the

happening of

a certain event in the future.

There is no doubt that the undertaking to carry out

the developments within six months from the dates of

S.C.R. SUPREME COURT REPORTS 193

the deeds of sale was incorporated therein and that z959

undertaking was unconditional, the appellant binding c

1

-c

· b 1 1 h I a culta ompany

itself a so ute y to carry out t e same. t was not Ltd.

dependent on any condition being fulfilled or the v.

happening of any event, the only condition being that The Commissioner

it was to be carried out within six months which in of Income-tax

view of the fact that the time was not of the essence

of the contract meant a reasonable time. Whatever Bhagwati f.

may be considered a reasonable time under the circum-

stances

of the case, the setting up of that time limit

did

not prescribe any condition for the carrying out of

that undertaking and the undertaking was absolute in

terms. If that undertaking imported any liability

on

the appellant the liability had already accrued on

the dates of the deeds of sale, though that liability was

to be discharged at a future date. It was thus an

accrued liability and the estimated expenditure which

would be incurred

in discharging the same could very

well be deducted from

the profitR and gains of the

business.

Inasmuch as the liability which had thus accrued

during

the accounting year was to be discharged at a

future

date the amount to be expended in the discharge

of that liability would have to be estimated in order

that under the mercantile system of accounting the

amount could be debited before it was actually

disbursed.

The difficulty in the estimation thereof again would

not convert an accrued liability into

a conditional one,

because

it is always open to the Income-tax

authori­

ties concerned to arrive at a proper estimate thereof

having regard to all the circumstances of the case.

That it can be so done is illustrated by Gold Coast

Selection Trust Ltd. v Humphrey (Inspector of Taxes) (

1

)

where a particular asset which could not be

immedi­

ately realised in a commercial sense was valued in

money for income-tax purposes in the year of its receipt

and it was observed by Viscount Simon:-

" It seems to me that it is not correct to say that

an asset, such as this block of shares, cannot be

valued

in money for income-tax purposes in the

(r) [1948] A.C. 459,

469.

2~

I959

Calcutta Company

Ltd.

v.

The Com1nissioner

of I ncome.-ta~

Bhagwati ].

194 SUPREME COURT REPORTS [1960(1)]

yiiar of its receipt because it cannot, in a commercial

sense, be immediately realized.

That is no reason

for

saying that it is incapable of being valued,

though, if its realization cannot take place promptly,

that may be a reason why the money figure set

.

against it at the earlier date should be reduced in

order to allow for an appropriate interval. Supposing,

for example,

the contract conferring the asset on

the taxpayer included a stipulation

that the asset

should

not be realized by the transferee for five

years,

and that if an attempt was made to realise

it before that time, the property in it should revert

to the transferor. This might seriously reduce the

value of the asset when received, but it is no reason

for saying that when received it must be regarded

as having no value at all. The Commissioners,

as

its seems to me, in fixing what money equivalent

should be taken as representing the asset, must fix

an appropriate money value as at the end of the

period to which the appellant's accounts are made

up by taking all the circumstances in to consideration."

As in the case of assets received during the account-

ing year which could not be immediately realized in

a commercial sense, so in the case ofliabilities which

have already accrued during the accounting year,

though they may not have to be discharged till a

later date. It will be always open to the Income-tax

authorities to fix an appropriate money value of that

liability as at the (lnd of the accounting period by

taking all the circumstances into consideration and the

estimate of expenses given by the assessee would be

liable to scrutiny at their hands having regard to all

the facts and circumstances of the case.

The High Court was, therefore, clearly in error

when it stated :-

" In view of all the circumstances of the case it

must in my opinion, be held that the amounts of

sale-price, not received in cash, were also received

and for the purpose of earning the receipts the

assessee spent, besides giving the lands, nothing

more than a promise. Since the whole amount was

actually received in the year of account before and

s.c.R. SUPREME COURT REPORTS 195

without making the promised expenditure, no ques-x959

tion of allowing a deduction of any expenditure c

1

-c

. f h . ,, a cutta ompany

from such receipts o t e year arises. Ltd.

If then the estimated expenses which would have to v.

be incurred in duly discharging that liability which was The Commissioner

undertaken by the appellant and was incorporated in of Income-tax

the deeds of sale could be deducted in accordance with Bhagwati

1

.

the mercantile system of accounting adopted by the

appellant and accepted by the I.T.0., is there anything

in the Income-tax Act which would prevent this debit

being allowed

as a deduction in the computation of

the profits and gains of the appellant's business? The

appellant, had,

it appears, claimed this deduction as

and by way of expenditure wholly laid out for the

- purposes of its business under s. 10(2)(xv) of the

Income-tax Act. On an interpretation of that provision,

the High Court was inclined to hold, though it did not

decide the question, that to the extent that a definite

liability

had accrued about which all preliminary

proceedings causing

the accrual of the liability in a

concluded form had already been gone t.hrough

although

the actual disbursement had not yet taken

place,

s.

10{2)(xv) would cover accrued liabilities

though the

amount may not actually have been

ex­

pended on the footing that the liability being certain,

the amount was as good as spent and on that basis

there would be room in the clause for debits which

are

proper debits under the mercantile system of

account­

ing. It, however, distinguished the present case on

the ground that the liability here was a floating liability,

the measure of which depended upon the will of the

appellant and the discharge of which rested only in a

promise

and that the expenses were entirely at large

and the development work itself merely so.

Apart, however, from the question whether s.

10(2)

(xv) of the Income-tax Act would apply to the facts

of the present case, the case is, in our opinion, well

within

the purview of s.

10(1) of the Income-tax Act.

The appellant here is being assessed in respect of the

profits

and gains of its business and the profits and gains

of the business cannot be determined unless and until

he expenses

or the obligations which have been

196 SUPREME COURT l'tEPORTS [1960(1)]

'959 incurred are set off against the receipts. The expression

Cal<utta Company " profits .and gains " has to be understood in its

Ltd. commercial sense and there can be no computation of

v. such profits and gains until the expenditure which is

The Commissioner necessary for the purpose of earning the receipts is

0! Income-tax deducted therefrom-whether the expenditure is

Bhagwati

1

.

actually incurred or the liability in respect thereof has

accrued even though it may have to be discharged at

some future date. As was observed by Lord Herschell

in

Russel v. Town and County Bank, Ltd.('):

"The duty is to be charged upon ' a sum not less

than the full amount of the balance of the profits or

gains of the trade, manufacture, adventure, or

concern'; and it appears to me that that language

implies

that for the purpose of arriving at the

balance of profits all

~hat expenditure which is

necessary for

the purposes of earning the receipts

must be dedljcted, otherwise yon

<;lo not arrive at

the balance of profits, indeed, otherwise you do not

ascertain, and cannot ascertain, whether there is

such a thing as profit or not. The profit of a trade

or business is the surplus by which the receipts from

the trade or business exceed the expenditure neces­

sary for the purpose of earning those receipts. That

seems to me to be the meaning of the word " profits "

iu relation to any trade or business. Unless and

until you have ascertained that there is such a

balance, nothing exists

to which the name

" profits"

can properly be applied."

A similar opinion was expressed in the Gresham Life

Assurance Society v. Sty/,es (•) :-

" When we speak of the profits or gains of a trader

we meari that which he had made by his trading.

Whether there be such a thing as profit or gain can

only be ascertained by setting against the receipts

the expenditure

or obligations to which they have

given

rise."

These are no doubt observations from the English

cases dealing

with English statutes of Income-tax, but tht' general principles which can he deduced therefrom

(1) (1888) 13 App. Cas. 418, 424 (2) (1892) 3 T. C. 185

S.C.R. SUPREME COURT REPORTS 197

are, nevertheless, applicable here and it was stated by r959

Lord Macmillan in Pondicherry Railway Go., Ltd. v. Calcutta Company

Commissioner of Income-tax, Madras (1) Ltd.

" English authorities can only be utilised with v. . .

caution in the consideration of Indian Income.tax The Commissioner

. t h d'&C . tl 1 1 . 1 of Income-tax

cases owmg o t e 1uerence m ie re evant eg1s a-

tion,

but the principle laid down by Lord Chancellor Hhagwati

1

.

Halsbury in Gresham Life Assurance Society v.

Styles (supra), is

of general application unaffected

by the specialities of the English Tax system.

" The

thing to be taxed ", said his Lordship, " is the

amount of profits or gains ". The word " profits ",

I think, is to be understood in its natural and proper

sense-in a sense which no commercial man would

misunderstand."

It may be useful to observe at this stage that prior

to the amendment of the Indian Income.tax Act

in 1939,

bad and doubtful debts were not treated as

deductible allowance for the purpose of computation

of profits or gains of a business, The

Privy Council

in the Income-tax Commissioner v. Chitnavis (~)

observed:-

" Although the Act nowhere in terms authorises

the deduction of bad debts of a business, such a

deduction is necessarily allowable.

What are ch~rgeable to income-tax in respect of a business

are the profits and gains of a year; and in assessing

the amount of the profits and gains of a year

account must necessarily be taken of all losses

incurred, otherwise you would

not arrive at the true

profits and

gains."

The High Court in disallowing the daim of the

appellant in the present case only considered the pro­

visions of s. 10 (2)(xv) of the Act. and came to the

conclusion that on a strict interpretation of those

provisions

the sum of Rs.

24,809 was not an allowable

deduction.

Its attention was drawn by the learned Counsel for the appellant to the provisions of s. 10(1)

of the Act also but it negatived this argument observ­

ing that under the Indian Act, the profit.a must he

( 1) (1931) L. R. 58 I. A. 239, 252. (2) (1932) L. R. 59 I. A. 290, 296.

198 SUPREME COURT REPORTS [1960(1)]

z959 determined by the method of making the statutory

- deductions from the receipts and any deduction from

ca1,uita Company h b . . t "f "t t b 11 d t b

Ltd t e usmess rece1p s, I I was o e a owe , mus e

v. · brought under one or the other of the deductions

The commissioner mentioned in s. 10(2) and that there was no scope for

of In,ome-tax any preliminary deduction under general principles. It

was, however, held by this Court in Badrirlas Daga v.

Bhagwati J.

The Gammissioner of Income-tax(')

"It is to' be noted that while s. 10(1) imposes a

charge

on the profits or gains of a trade, it does not

provide how those profits are to be computed.

Sec­

tion 10(2) enumerates various items which are

admissible as deductions, but it is well settled that

they are not exhaustive of all allowances which

could be made in ascertaining profits taxable under

s. 10(1)."

Venkatarama Aiyar, J., who delivered the Judgment

of this Court then proceeded to discuss the cases of

Gammissioner of Income-tax v. Ghitnavis('), Gresham

Life Assurance Society v. Styles(') and Pondicherry Rail­

way Go. v. I ncmne-tax Gammissioner('), and observed:-

" The result is that when a claim is made for a

deduction for which there is no specific provision in

s. 10(2), whether it is admissible or not will depend

oh whether, having regard to accepted commercial

practice and trading principles, it can be said to

arise out of the carrying on of the business and to

be incidental to it. If that is established, then the

deduction must be allowed, provided of course there

is no prohibition against it, express or implied, in

the Act.

Turning now to' the facts of the present case, we

find

that the sum of Rs. 24,809 represented the estim­

ated expenditure which had to be incurred by the

appellant in discharging a liability which it had already

undertaken under the terms of the deeds of sale of the

lands in question and was an accrued liability which

according

to the mercantile system of accounting the

appellant was entitled to debit in its books of account

(1) (1958) 34 l.T.R.

IO, 14.

(i} (1932) L.R. 59 I.A. 290, 296.

(3) (i892) 3 T.C. i85.

(4) (i931) L.R. 581.A. 239, 252.

S.C.R. SUPREME COURT REPORTS 199

for

the

· accounting year as against the receipts of z

959

Rs. 43,692-11-9 which represented the sale proceeds of Calcutta Company

the said lands. Even under s. 10(2) of the Income-tax Ltd.

Act, it might possibly be urged that the word " expend- v.

ed" was capable of being interpreted as "expendable" The Commissioner

or " to be expended" at least in a case where a of Income-tax

liability to incur the said expenses had been actually Bhagwati J.

incurred by the assessee who adopted the mercantile

system

of accounting and the debit of Rs.

24,809 was

thus a p_roper debit in the present case. We need not

however base our decision on any such consideration.

We

are definitely of opinion that the sum of Rs.

24,809

represented the estimated amount which would have

to be expended by the appellant in the course of

carrying on its business and was incidental to the same

and having regard to the accepted commercial practice

and trading principles was a deduction which, if there

was no specific provision for it under section 10(2) of

the Act was certainly allowable deduction, in arriving

at the profits and gains of the business of the appel-

lant under section 10(1) of the Act, there being no

prohibition against it, express

or implied in the Act.

It is to be noted that the appellant had led evidence

before

the Income-tax authorities in regard to this

estimated expenditure

of Rs.

24,809 and no exception

was

taken to the same in regard to the quantum,

though the permissibility of such a deduction was

questioned

by them relying upon the provisions of

s.

10(2) of the Act.

It therefore follows that the conclusion reached by

the High Court in regard to the disallowance of

Rs. 24,809 was wrong and it should have answered the

referred question in the affirmative.

Before we conclude,'we are bound to observe

that

having accepted the receipts of Rs. 43,692-11-9 in their

totality even though a sum of Rs. 29,392-11-9 only was

actually received

by the appellant in cash, thus making

the appellant liable for income-tax on a sum of

Rs.

14,300 which had not been received by it during

the accounting year, it was hardly open to the

Revenue to urge that the sum of Rs. 24,809 should not

have been allowed as a permissible deduction before

200 SUPREME COURT REPORTS [1960(1)]

'959 arriv,ing at the profits or ,gains of the appellant which

Calcutta Company were liable to tax. Consistently enough with this

Ltd. attitm;le, the Revenue ought to have expressed its

v. willingness to treat only a sum of Rs. 29,392·11-9 as

The Commissio"'' the actual receipt of the appellant during the account!

of Income-ta.• ing year and made up the computation of the profits

Bhagwati J. and gains of the appellant's business on that basis. The

Revenue, however, did nothing of the sort and insisted

1959

May IZ.

upon having its pound of flesh, asking us to delete the

whole of the item of Rs. 24,809 from the debit side of

the account which it was certainly not entitled to do.

We accordingly allow

the appeal, set aside the judg­

ment

of the High

Court and answer the referred ques­

tion

in the affirmative. The respondent will of course

pay the appellant's costs

~hroughout.

Appeal allowed.

THE CENTRAL BANK OF INDIA

v.

THEIR WORKMEN

(and connected appeals)

(S. R.

DAS, c. J., JAFER IMAM, s. K. DAS,

K. N. WANCHOO and M. HrnAYATULLAH, JJ.)

Industrial Dispute-Bonus-Banking Companies-Bank Em­

ployees-Whether disentitled to bonus-" Remuneration•• meaning of

-Banking Companies (Amendment) Act, I956 (95 of r956), amended

s. IO, whether retrospective-Banking Companies Act, I949' (IO

of r949), s. IO.

Section 10(r)(b)(ii) of the Banking Companies Act, 1949·

provided: "No banking company shall employ any person

whose remuneration or part of who~e remuneration takes the

form ... of a share in the profits of the company."

The dispute between the appellant Banks and their

employees related, inter alia, to the qnestion whether, the pro­

visions of

the Banking

Companies Act. 1949, prohibit the grant

of bonus to bank employees. The Labour Appellate Tribunal

took

the

view that s. IO of the Act did not stand in the way of

granting bonus to bank employees, because bonus according to

it

was not a share in the profits of the company.

On appeal, it was

contended for

the appellant Banks that bonus as awarded by the

Indnstrial

Courts is remuneration within the meaning of s. IO