COMMISSIONER OF INCOME-TAX VS BENGAL WATERPROOF LTD.
2001 P T D 628
[239 I T R 265]
[Calcutta High Court (India)]
Before Shyamal Kumar Sen and B.M. Mitra, JJ
COMMISSIONER OF INCOME‑TAX
versus
BENGAL WATERPROOF LTD.
I. P. No. 144 of 1996, decided on 22/12/1997.
Income‑tax‑‑
‑‑‑‑Income‑‑‑Accounting‑‑‑Accrual of income‑‑‑Time of accrual‑‑ Collaboration agreement with non‑resident company‑‑‑Amount received by assessee‑company under agreement‑‑‑Resolution of Board of Directors before entering into agreement that receipts would be treated on a cash basis‑‑ Amounts not received in year‑‑‑Not assessable‑‑‑Indian Income Tax Act, 1961.
The assessee entered into an agreement with a company in Sri Lanka. Under the agreement, the assessee was to receive Sri Lankan Rs.10 lakhs as technical fees, royalty and export commission within 240 days of the signing of the agreement, which came into effect from September 23, 1982. However, before the period of 240 days was over, the Indian Bank which financed the entire project of the new company by letter, dated December 7, 1982, put a restriction to the effect that no such payment would be allowed to be made to the assessee so long as any loan to the bank was in arrears. The Assessing Officer assessed the amount on the ground that it had accrued. The assessee submitted before the Commissioner of Income‑tax (Appeals) that in respect of the income from this portion of the foreign venture, the board had resolved by its resolution, dated .May 20, 1982, that the new source of income of the company from technical fees, royalty and export commission receivable under the agreement with the Sri Lankan company be treated on cash basis. The Commissioner of Income‑tax (Appeals), however, sustained the addition of Rs.5 lakhs. The Tribunal found that the assessee had passed a resolution on May 20, 1982, to treat the income receivable from Sri Lanka on cash basis. The resolution indicated clearly that the Board of Directors long before the foreign company carry into existence resolved to account for the income of the company from the agreement on cash basis. The Tribunal also found that the bona fides of the assessee in passing this resolution had not been challenged by the Department. The Tribunal deleted the addition. On a reference:
Held, that the resolution passed on May 20, 1982, indicated that the Board of Directors, long before the foreign company came into existence, resolved to account for the income of the company from the agreement on cash basis. The bona fides of the assessee in passing this resolution which had not been challenged by the Department had also been noted by the Tribunal. The method of accounting so far as the assessee was concerned in respect of this transaction not being disputed; the amount would not be taxable since the same had in fact not been realised in that particular year.
Bimal Chatterjee and P. Bhowmick for Petitioner
Debi Pal and Monisha Seal for Respondent.
JUDGMENT
SHYAMAL KUMAR SEN, J.‑‑‑Rule was issued on the following question:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the technical know‑how fees of Rs.5 lakhs (equivalent of Sri Lankan Rs.10 lakhs) receivable by the assessee as per the agreement between the assessee and Bansri Rubber Products (Pvt.) Ltd. is not taxable in the assessment year under consideration?"
It is not in dispute that in terms of the agreement between the assessee and the Sri Lankan Company Rs.5 lakhs was to be paid by the Sri Lankan Company to the assessee‑company. The claim of the ‑assessee that due to stipulation by Indian Bank as a term of the loan and deferred payment Government facility extended by them laying down a covenant, the royalty and consultancy fees due to the assessee‑company stood modified to the extent was not accepted by the Assessing Officer and the Assessing Officer held that at best such remittance may be held back but would nevertheless remain income accrued in the hands of the assessee‑company as the accounts are maintained on the mercantile basis.
Before the Commissioner of Income‑tax (Appeals) it was submitted that as per the agreement between the assessee and Bansri Rubber Products (P.) Ltd. of Sri Lanka, the assessee was to receive Sri Lankan Rs.10 lakhs as technical fees, royalty and export commission within 240 days of the signing of the agreement, which came into effect from September 23, 1982. However, before period of 240 days was over, the Indian Bank who financed the entire project of the new‑ company vide their letter, dated December 7, 1982, put a restriction to the effect that no such payment will be allowed to be paid to Bengal Water Proof Ltd., so long as any loan to the bank is in arrears. As a result, the agreement stood amended to this extent and no payments were received. It was further submitted that in respect of the Income from this portion of foreign venture, the Board had resolved vide its resolution, dated May 20, 1982, that the new source of income of the company from technical fees, royalty and export commission receivable under the agreement with Bansri Rubber Products (P.) Ltd. be treated on cash basis. In view of these arguments, the assessee submitted that the addition made by the Assessing Officer was unjustified.
The Commissioner of Income‑tax (Appeals) considered the submission of the assessee and found that there is no dispute regarding the source of income, the quantum of the amount that is receivable by the company and that the only point of dispute is that this amount of Rs.10 lakhs in Sri Lankan money although receivable as per the terms of the agreement was not actually received due to the stipulation of its restriction laid down by the Indian Bank vide their letter, dated December 7, 1982. According to the Commissioner of Income‑tax (Appeals) as the assessee had passed resolution vide Board's Resolution, dated May 20, 1982, to treat the income receivable from Sri Lanka on cash basis, such amounts could not be included in the income as no amount has been received by the assessee. He also observed that it is not the assessee's ground that the amount in question is not receivable or could not be included even if the mercantile system of accounting was followed. According to the Commissioner of Income‑tax (Appeals) till December 7, 1982, the assessee did not have any reasons to believe that the amount, would not be remitted to India within the time stipulated. He further observed that in spite of that the Board has passed a resolution on May 26, 1982, resolving to maintain cash system in respect of the income from this agreement. The Commissioner of Income‑tax (Appeals) further observed that it is also surprising that this vital fact was never raised before the Assessing Officer nor was made the ground of claiming non, taxability of the amount in a specific manner based on the Board's Resolution, but was only mentioned in a general way. As the assessee had claimed that the amount should be taxed on actual receipt basis, the Commissioner of Income‑tax (Appeals) held that the Assessing Officer has correctly included the amount of Rs.5 lakhs. Being aggrieved by the order of the Commissioner of Income‑tax (Appeals), the assessee has preferred this appeal to the Tribunal.
The Tribunal, however, found that there was no dispute regarding the source of income, quantum of income or the amount that was receivable by the assessee. The only point of dispute was that this amount of Rs.10 lakhs in Sri Lankan money although receivable as per the terms of the agreement which came into effect from September 23, 1982, was not actually received due to stipulation/restriction laid down by the Indian Bank vide their letter, dated December 7, 1982. The Tribunal found that the assessee had passed a resolution on May 20, 1982, to treat the income receivable from Sri Lanka on cash basis on May 20, 1982. The resolution indicates clearly that the Board of Directors long before the foreign company came into existence resolved to account for the income of the company from the agreement on cash basis. It is also observed that no income had accrued even on the date of resolution. The assessee has furnished a copy of the resolution passed by the Board as well as a copy of the Indian Bank's sanctioned letter of December 7, 1982, placed at page 12 of the paper book No.2, in order to prove its contention. On a perusal of these facts, the Tribunal found that the observation of the Commissioner of Income‑tax (Appeals) in his order quoted as under is not correct:
"It is also surprising that this fact which is so vital to this issue, was never raised before the Inspecting Assistant Commissioner, nor made the ground for claiming non‑taxability of the amount, and in fact never found a place in the assessment order, in a specific manner based on the Board's Resolution, but was only mentioned in .a general way."
The Tribunal held, even if it was indicated in a general way by the assessee before the Assessing Officer, it was the duty of the Assessing Officer to look into the books of account and minutes of the directors' meeting through which the above resolution was passed. The Tribunal also found that the bona fides of the assessee in passing this resolution has not been challenged by the Department.
The Tribunal considered several decisions and held that the orders of the Assessing Officer or the Commissioner of Income‑tax are not in accordance with the provisions of law and Rs.5 lakhs cannot be included in the income of the assessee for the assessment year in consideration.
We have considered the submissions made by the learned Advocates for the parties.
It appears that the assessee passed a Resolution on May 20, 1982, to treat the income receivable from Sri Lanka on cash basis. We are also of the view that the said resolution passed on May 20, 1982, indicates that the Board of Directors long before the foreign company came into existence resolved to account for the income of the company from the agreement on cash basis. The bona fides of the assessee in passing this resolution which has not been challenged by the Department has also been noted by the Tribunal in view of the fact that the assessee was maintaining the income relating to this transaction on cash basis. The amount since not realised in the particular assessment year has not been shown in the account for the said year and the amount in fact be taxable in that particular year, the said amount will form part of the income as and when the same is received and will be taxed in that particular assessment year.
The method of accounting so far as the assessee is concerned in respect of this transaction since not being disputed the same cannot be taxable since the same has in fact not been realised in that particular year.
In that view of the matter, we do not find any merit in the contention of the learned Advocate for the applicant and there is no ground in our view to make the rule absolute.
Accordingly, the rule issued stands discharged.
There will be no order as to costs.
BIJITENDRA MOHAN MITRA, J.‑‑‑I agree.
M.B.A./217/FCOrder accordingly.