COMMISSIONER OF INCOME-TAX VS SUPER SCIENTIFIC CLOCK CO.
2001 P T D 273
[238 I T R 731]
[Gujarat High Court (India)]
Before R. Balia and A. R. Dave, JJ
COMMISSIONER OF INCOME‑TAX
versus
SUPER SCIENTIFIC CLOCK CO.
Income‑tax Reference No. 124 of 1984, decided on 22/12/1998.
(a) Income‑tax‑‑‑
‑‑‑‑Business expenditure‑‑‑Payment to foreign collaborator‑‑‑Mercantile system of accounting‑‑‑Liability accrues arid is deductible in year in which slim payable‑‑‑Not year in which assessee actually pays‑‑‑Procedure for obtaining permission of Reserve Bank to make payment‑‑‑Will not postpone accrual of liability or make it contingent‑‑‑Indian Income Tax Act, 1961, S.37.
Admittedly, the liability of the assessee to pay the amount to its non‑resident technical collaborator under the contract became due‑in the previous year relevant to the assessment year 1975‑76 and not in the previous year relevant to the assessment year in question. The assessee was not entitled to urge that it maintained its accounts on the cash system only for the transaction in question for the year in question. The parties had entered into agreement on transfer of technical know‑how with the permission of the Government of India. Under it the liability of the assessee to pay the fee for technical know‑how accrued. The fact that actual payment could be made only with the permission of the Reserve Bank of India, only put the assessee under obligation to apply to the Reserve Bank of India for grant of necessary permission for releasing payment of the‑amount to the non‑resident: But its enforceability was not a contingent one. The Tribunal was wrong in allowing the sum in question as deduction for the assessment year in question by holding that the liability in the preceding year was contingent and became due and payable in the year in question only.
Chandnee Widya Vati Madden (Mrs.) v. Dr. C.L. Katial AIR 1964 SC 978 ref.
(b) Income‑tax‑
‑‑‑‑Method of accounting‑‑‑Cash or mercantile ‑‑‑Assessee following mercantile system‑‑Cash system adopted for one transaction in one year‑‑ Not permissible‑‑Indian Income Tax Act. 1961; S.145.
Under section 145 of the Income Tax Act. 1961, income under the head "Profits and gains" of business or profession, where the assessee maintains books of account, has to be in accordance with the method of accounting regularly, employed by the assessee. which could be either cash, mercantile or hybrid system. The assessee for .any particular source of income could adopt a different system of accounting but in no case, can he employ for part of, the, transactions or events relating to one source of income, a different system of accounting. There cannot be piecemeal method of accounting in respect of the same business or the same source of income or expenditure. It cannot be said that for a source of income one system is follow but for some of expenses required to be incurred for earning income from that source a different method of accounting can be employed.
The liability of an assessee to pay "know‑how fee" to the foreign technical collaborator arises under the collaboration agreements. The consideration for which such agreement was entered into is not governed by the Foreign Exchange Regulation Act. 1973. The liability to pay, and the right of the recipient of consideration to receive the same, and on failure to pay, the right to enforce, does not depend on the permission or grant of exemption of the Reserve Batik of India under the Foreign Exchange Regulation Act, The tact that before actual payment, is made permission of the Reserve Bank is to be obtained, does not make the account' and enforceability of liability subject to it. On the contrary it prima facie supports that there exists a valid liability to pay.
Manish R. Bhatt for the Commissioner.
Nemo for the Assessee.
JUDGMENT
The following question has been referred at the instance of the Revenue and statement of case has been submitted by the Tribunal to this Court on an application trade under section 256(1) of the Income Tax Act, 1961, by the Commissioner of Income‑tax in respect of the assessment for the assessment year 1977‑78 in the case of the respondent assessee.
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the sum of Rs.89,722 paid as know‑how fees to the foreign collaborator by the assessee was an allowable expenditure for the assessment year in question ?
The facts and circumstances in which the aforesaid question has been referred to this Court are that a sum of Rs.89,722 paid by the assessee to its foreign collaborator as technical know‑how fees during the previous year relevant to the assessment year 1976‑‑77 was not allowed as deduction by the Assessing Officer on the ground that, the liability to pay had arisen during the previous year relevant to the assessment year 1975‑76 and the assessee is not entitled to claim the same on the payment basis for the assessment year 1976‑77 as he is maintaining his accounts on mercantile bas The assessee's plea that in respect of this payment, he has followed the cash system of accounting though otherwise he has followed the mercantile system of account has not been accepted by the Assessing Officer. The plea did not find favour with the Commissioner of Income‑tax (Appeals) either, and he observed that as the assessee has not provided for tax liability in the year in which it has accrued and claimed deduction thereon, it cannot claim deduction for the subsequent year of actual payment. The Tribunal on further appeal held that the liability did not accrue because of the provisions of section 9 of the Foreign Exchange Regulation Act, 1973, that no payment could be made to any person outside India except with and in accordance with the exemption from the provisions of the Act being granted by the Reserve Bank of India until such permission was granted by the Reserve Bank of India. Until then the liability .was not enforceable and a therefore, contingent. The Tribunal also observed that the Commissioner of Income‑tax (Appeals) in, para. 7 of his order has held that payment was due in the assessment year 1976‑77 and as the appellant though following, the cash system of accounting did not make any provision, the appellant is not entitled to any deduction in respect of the amount of Rs.89,722.
At the outset we may, say there is no foundation for noticing about the Commissioner of Income‑tax (Appeals) finding "though following cash system of accounting". On the close reading of the order of the Commissioner of Income‑tax (Appeals) we do not find any such finding reached by the Commissioner of Income‑tax (Appeals). We find from the order that the assessee has raised this contention that the appellant was maintaining the accounts on cash system basis which was contested by the Income‑tax Officer and the finding was that "it could not be said that the, appellant maintained the accounts on cash system basis so far as this year". It was the‑case of the assessee that only for the purpose of the entry in question and for the year in question, he has followed the cash accounting system, otherwise he is following the mercantile system. This plea did not find favour with the Assessing Officer nor with the Commissioner of Income‑tax (Appeals). Therefore, the Tribunal, in our opinion, has erroneously assumed that the Commissioner of Income‑tax (Appeals) has found that the appellant though following the cash system of account, the deduction was not allowed because he did not make any provision.
Under section 145 of the Income‑tax Act, as it was in force during the relevant period, income under the head "Profits and gains" of business or profession, where the assessee maintains books of account, has to be in accordance with the method of accounts regularly employed by the assessee, which could be either cash, mercantile or hybrid system. The assessee for any particular source of income could adopt different system of accounting but in no case, he could employ for part of the transactions or events relating to one source of income employed different system of accounting. The very foundation of the assessee's plea is against this basic principle.
In concluding that because of the provision of section 9 of the Foreign Exchange Regulation Act, the liability to pay did not become due and enforceable, in our opinion, the Tribunal has failed to perceive the distinction between accrual of liability to pay on the one hand and the procedure required for making such payment which has become due on accrual of such liability on the other hand. The provisions of the FERA has nothing to do with the accrual of liability which arises under the terms of the contract independent of the provisions of the FERA. The liability of the assessee to pay "know‑how fee" to the technical collaborator arises under the collaboration agreements. The consideration for which such agreement was entered into is not governed by the FERA. The liability to pay, and the right of the recipient of consideration to receive the same, and on. failure of promisor to pay the right to enforce, does not depend on‑ the permission or grant of exemption of the Reserve Bank of India under the Foreign Exchange Regulation Act. The fact that before actual payment is made permission of the. Reserve Bank of India is to be obtained, does not make the account and enforceability of liability subject to it. On the contrary it prima facie supports that there exists a valid liability to pay to grant such permission. The object of the FERA Act is not to control or regulate the obligation to pay any sum due to a non‑resident arising under a valid contract, but is to keep a check on unauthorised payment to and from non‑residents and regulate payments in foreign exchange. If payment under any provision of law is to be made only by way of a demand draft, it cannot be said that the liability to pay accrued only when money is paid into the bank and demand draft is delivered by the bank. The liability to pay accrues independent of the required procedure for payment, if any, prescribed under law is put in action. There is no doubt in the present case, nor any finding to the contrary, that so far as, the liability of the assessee to pay the amount to its non‑resident technical collaborator under the contract became due in the previous year relevant to the assessment year 1975‑76 and not in the previous year relevant to the assessment year in question. The only question that could have been germane for the purpose of computing profits and gains under the head "Business and profession" of the year would be the method of accounting followed by the assessee regularly in respect of his business for which the technical know‑how was obtained. There cannot be a piecemeal method of accounting in respect of the same business or the same source of income or expenditure. It cannot be said that for a source of income one system is followed, but for some of expenses required to be incurred for earning income from that source, a different method of accounting can be employed. Agreement to acquire technical know‑how for its business is not by itself a source of income for which different system of accounting could be maintained. It was very curious that the assessee had urged maintenance of cash system of accounting only for the transaction in question for the year in question and that too by pleading difficulty in making payment in the earlier year. The difficulty or time taken in following the procedure prescribed for making actual payment is hardly relevant for the purpose of maintenance of account on mercantile system. It often happens that there is a gap between accrual of liability and its payment. The liability does not cease to be enforceable because some procedure is required to be fulfilled on the part of the promisor under the agreement, for making such payment under any law. The fact that permission of the Reserve Bank of India is required to be obtained is there in all cases where payment is to be made or received from non‑residents. It is for the person liable to remit or receive payment to apply for the same. The fact that a person may apply for such permission in advance or one awaits until after it becomes due and payable, does not stop accrual of liability or make it contingent on happening of any event. Else the result will be that notwithstanding that the liability to pay has arisen under the terms of agreement, the party under obligation to make payment, can postpone its accrual or enforceability at his free‑will, by choosing his own time to move the appropriate authority for such permission.
We may usefully refer to the ratio in the case of Mrs. Chandnee Widya Vati Modden v. Dr. C.L. Katial, AIR 1964 SC 978, which draws distinction between a contingent contract and a completed contract in order to appreciate the distinction between a contingent liability and the liability which is crystallised. It was a case in which parties have entered into agreement to sell certain property. The law required the vendor to seek necessary permission to such transfer. The suit for specific‑ performance of such agreement was sought to be defended on the ground that the contract was contingent as its performance was dependant on permission to be granted by the Collector. As to the obligation of the parties to the contract, the Court said (headnote):
"That the contract was not a contingent contract and that the parties had agreed to bind themselves by the terms of the document executed between them. The Court had got to enforce the terms of the contract and to enjoin upon the vendor to make the necessary application for permission."
In our opinion, the principle fully applies. The parties have entered into agreement on transfer of technical know‑how with the permission of the Government of India. Under it the liability of the assessee to pay the fee for technical know‑how accrued. The fact that actual payment could be made only with the permission of the Reserve Bank of India, only put him under obligation to apply to the Reserve Bank of India for grant of necessary permission for releasing payment of the amount to a non‑resident, but its enforceability is not a contingent one.
In view of the aforesaid discussion, we are of the opinion that the Tribunal has erred in allowing the sum in question as deduction for the assessment year in question by holding that liability in the preceding year was contingent and became due and payable in the year in question only.
Accordingly, we answer the question referred to us in the negative, that is to say, in favour of the Revenue and against the assessee.
The assessee has not appeared in spite of service,
No, order as to costs.
M.B.A./147/FC
Reference answered.