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Gupta Garments v. Assistant Commissioner Of Income Tax.

Madras High Court

Feb 20, 1995

Judgment

CaseIQ

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Factual and Procedural Background

This opinion concerns ITA No. 493/Mad/1992 — the assessee's appeal against the order dated 18 December 1991 of the Commissioner of Income Tax (Appeals)-VI, Madras, for the assessment year 1989‑90, together with Cross‑Objection No. 56/Mad/1991 (related to assessment year 1988‑89). The cross‑objection was heard together with ITA No. 493/Mad/1992 because its issues were common with the 1989‑90 appeal.

The assessee is a two‑partner firm engaged in exporting garments. Up to and including the assessment year 1986‑87 the assessee accounted for cash compensatory support and duty drawback on a receipt basis (accepted by the Department). For the assessment year 1987‑88 the assessee initially returned those incentives on receipt basis but later filed a revised return (relying on a Tribunal Special Bench decision) claiming the incentives were not exigible to tax. The CIT(A) held that retrospective amendments to section 28 of the Income‑tax Act made such incentives exigible and brought certain sums to tax on receipt basis for that year.

For assessment years 1988‑89 and 1989‑90 the Assessing Officer treated cash compensatory support and duty drawback as taxable on a "receivable" basis, adding amounts of Rs. 36,37,948 (1988‑89) and Rs. 30,95,213 (1989‑90). The Assessing Officer relied on the language of Ss. 28(iii)(b) and 28(iii)(c) (as amended by the Finance Act, 1990) referring to "received or receivable" cash assistance and "repayable" drawback, and also invoked S. 43B. The CIT(A) declined to interfere with these additions. The tribunal heard the appeal and cross‑objection together and reached the decision summarized below.

Legal Issues Presented

Whether cash compensatory support and duty drawback are taxable on a "receivable" (accrual) basis under Ss. 28(iii)(b) and 28(iii)(c) of the Income‑tax Act, or only on a "receipt" basis where the assessee's accounting method is to account on receipt.
Whether the assessee's claim for incentives (as shown in Form 3CD item 9(a)) can be equated with a legal right to receive those amounts (i.e., whether a mere claim equals an amount "receivable").
Whether the additions of Rs. 36,37,948 (1988‑89) and Rs. 30,95,213 (1989‑90) made on a receivable basis were legally sustainable.

Arguments of the Parties

Appellant's Arguments (Assessee)

The assessee had consistently accounted for cash compensatory support and duty drawback on a receipt basis; therefore the lower authorities were not justified in treating those incentives as taxable on a receivable basis.
Both assessment years in question saw incentives effectively brought to tax twice (as returned on receipt basis and as assessed on receivable basis), a result not contemplated by the scheme of the Act and unfair.
If the Tribunal upheld the lower authorities, then amounts actually received in 1989‑90 and attributable to the earlier receivable‑basis addition for 1988‑89 should be deleted; the primary contention remained that the incentives could be taxed only on receipt basis because that was the regular accounting method followed by the assessee.
The figures claimed by the assessee were inadvertently shown against item 9(a) of Form 3CD, and the authorities had not allowed the full claimed amounts (they imposed cuts), demonstrating that the claim did not equate to an admitted receivable.

Assessing Officer / CIT(A) Arguments

The Assessing Officer interpreted Ss. 28(iii)(b) and 28(iii)(c), as amended, to refer to "cash assistance received or receivable" and "duty repayable as drawback", and therefore considered the claimed sums as "receivable" and taxable in the relevant year on that basis.
The Assessing Officer stated that although the assessee followed cash accounting for these items earlier, a specific statutory provision overrides a general accountancy principle; he also invoked S. 43B as an example of statutory departure from general accounting practice.
The CIT(A) noted entries in Form 3CD and the assessee's statements, and, invoking S. 28(iii)(b), confirmed the assessment to the extent that cash incentives receivable are to be assessed, dismissing the assessee's ground challenging the addition (Ground No. 7 for 1988‑89).

Departmental Representative

The Departmental Representative strongly supported the impugned orders of the lower authorities and drew attention to the terms of item 9(a) of Form 3CD, which speaks of particulars of duty drawback "admitted as due by the concerned authorities, but not credited to P&L account", arguing the statutory language supports treating admitted amounts as receivable.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Gedore Tools (India) (P) Ltd. vs. IAC (1988) 31 TTJ (Del) 260 (SB) : (1988) 25 ITD 193 (Del) (SB)	Relied upon by the assessee to file a revised return and to contend that certain incentives were not exigible to tax (basis for revised return in assessment year 1987‑88).	The opinion records that the assessee relied on this Special Bench decision to file a revised return; however, the CIT(A) treated retrospective amendments to S. 28 by the Finance Act, 1990 as making the incentives exigible and brought specified sums to charge. The Tribunal noted the reliance but decided the matter on statutory interpretation and accrual principles rather than adopting the Gedore Tools outcome as dispositive in favour of the assessee.

Court's Reasoning and Analysis

The tribunal's analysis proceeded through the following steps, closely following the text of the opinion:

The Bench examined the meaning of "receivable" in Ss. 28(iii)(b) and 28(iii)(c) and recalled the general legal principle that an amount is "receivable" only when a legal right to receive the sum has accrued to the person — not merely when the person makes a claim for a sum.
The Bench illustrated the distinction with a factual hypothetical (and applied it to the assessee): if a claim of Rs. 5,00,000 is made but the authority after verification sanctions only Rs. 3,75,000 and communicates that decision on a later date, the right accrues when the sanction/communication is given (i.e., Rs. 3,75,000 accrues then), and not when the claim was made (nor for the full claimed sum).
The Bench considered the wording of item 9(a) of Form 3CD, which speaks of amounts "admitted as due by the concerned authorities, but not credited to P&L account" and observed that the statutory phrases "cash assistance receivable" and "duty repayable as drawback" naturally refer to amounts admitted as due by the concerned authorities (i.e., where a legal right has been established by admission).
The tribunal found that in the assessee's case the amounts shown in item 9(a) of Form 3CD were in fact the assessee's claims (the same figures as claimed) and that the actual receipts were less than the claims; the authorities had imposed cuts to the claimed amounts. Thus the amounts claimed had been incorrectly equated by the lower authorities with amounts the assessee had a legal right to receive.
Given that the legislature, through Ss. 28(iii)(b) and 28(iii)(c), did not intend to depart from settled accrual principles (i.e., that a right accrues only on admission by the appropriate authority), the lower authorities were legally mistaken to treat mere claims (or the figures exhibited in item 9(a)) as "receivable" sums for taxation purposes.
The tribunal also observed that the lower authorities ignored the assessee's consistently followed method of accounting (receipt basis), and that the Assessing Officer's reliance on the statutory language did not justify equating claims with accrued rights where verification and admission by the competent authority were necessary.
On these legal and factual bases the tribunal concluded that the additions made on a receivable basis were not sustainable: the additions had been made by misdirecting themselves to equate claims with rights and by disregarding the assessee's mode of accounting where the statutory language did not mandate departure from accrual principles.

The tribunal therefore deleted the additions and directed that the incentives be assessed only on receipt basis. For other related grounds (grounds Nos. 1–10 of the cross‑objection (1988‑89) and grounds Nos. 8–11 of the appeal (1989‑90)), the tribunal declined to interfere and dismissed those grounds.

Holding and Implications

Holding: The tribunal partly allowed both the assessee's appeal and cross‑objection: it deleted the additions made on a "receivable" basis and directed that the cash compensatory support and duty drawback be taxed only on a receipt basis.

Immediate consequences for the parties (as stated in the opinion):

The additions of Rs. 36,37,948 (made on receivable basis in the assessment for assessment year 1988‑89) and Rs. 30,95,213 (made on receivable basis in the assessment for assessment year 1989‑90) were deleted.
The Assessing Officer was directed to bring the relevant incentives to charge only on a receipt basis (i.e., when the assessee actually receives the admitted amounts).
Other related grounds before the tribunal were not interfered with and were dismissed; in result both the cross‑objection and the appeal were partly allowed.

Broader implications: The opinion reasons that the statutory language in Ss. 28(iii)(b) and 28(iii)(c) should be read in conformity with settled accrual principles — an amount is "receivable" only once a legal right to receive the amount has arisen (for example, by admission or sanction by the competent authority). The opinion does not state that it is establishing any wider binding precedent beyond the application of these principles to the facts before it; the immediate legal effect is limited to the deletions and the direction to assess on receipt basis as specified above.

Show all summary ...

S. KANNAN, A. M. :

ITA No. 493/Mad/1992 is the assessees appeal against the order dt. 18th Dec., 1991 of the CIT(A)-VI, Madras, relating to the asst. yr. 1989-90. Cross-objection No. 56/Mad/1991 filed by the assessee is related to the Departmental appeal bearing ITA No. 1655/Mad/1991 (asst. yr. 1988-89). The cross-objection in question, however, raises no issue which is common to the issue raised in the said Departmental appeal. On the contrary, the issues raised in the said cross-objection are common with the issues raised in the assessees appeal relating to the asst. yr. 1989-90.

In the circumstances, therefore, the Departmental appeal bearing ITA No. 1655/Mad/1991 (asst. yr. 1988-89) was delinked for being heard separately together with the Departmental appeal relating to the asst. yr. 1987-88. Cross-objection No. 56/Mad/1991 was, however, heard along with the assessees appeal bearing ITA No. 493/Mad/1992 (asst. yr. 1989-90).

2. The facts of the case are that the assessee, a firm of two partners, is engaged the business of exporting garments. The issues arising for consideration in the case before us is better understood against the backdrop of a brief history of the assessees assessment to income-tax and particularly in relation to (a) cash compensatory support, and (b) duty drawback received by the assessee. It is not disputed that upto and including the assessment for the asst. yr. 1986-87, the assessee was accounting for cash compensatory support and duty drawback on receipt basis. This was accepted by the Department.

For the asst. yr. 1987-88 the assessee initially filed a return of income in which cash compensatory support and duty drawback received by the assessee were disclosed on receipt basis. Subsequently, however, relying on the Tribunal, Delhi Bench A (Special Bench) order dt. 25th March, 1988 in the case of Gedore Tools (India) (P) Ltd. vs. IAC (1988) 31 TTJ (Del) 260 (SB) : (1988) 25 ITD 193 (Del) (SB), the assessee filed a revised return claiming that tax was not exigible in the said two items of receipts. When the matter reached the CIT(A), he held that by virtue of the retrospective amendments made to S. 28 of the IT Act, 1961, by the Finance Act, 1990, tax was exigible on the said two items of receipt. With the result, an aggregate of Rs. 13,63,895 received by the assessee as and by way of cash compensatory support and duty drawback (which, as pointed out earlier, had been accounted for by the assessee in its books of account on receipt basis) was brought to charge on receipt basis as before.

3. For the purposes of the assessment for the asst. yr. 1988-89, the assessee had, as before, accounted for cash compensatory support and duty drawback on receipt basis. The Assessing Officer found that in the statutory audit report (Form No. 3CD) sums of Rs. 20,84,969 and Rs. 15,52,979 had been shown as the amounts receivable respectively on account of cash compensatory support and duty drawback. According to him, the said sums should be brought to tax on "receivable basis". In this regard he was impelled by the consideration that Ss. 28(iii)(b) and 28(iii)(c) interested by the Finance Act, 1990 with retrospective effect talked respectively of "cash assistance (by whatever name called) received or receivable" and "any duties of customs or excise repaid or repayable drawback".

As for the assessees submission that it had all along been accounting for cash compensatory support and duty drawback on receipt basis, the Assessing Officer observed :

"The submission that the assessee is following cash basis as regards these two items since beginning may be correct and also an accepted principle of accountancy. But this principle which can generally be followed is subject to the condition that if any specific condition or enactment is there, the general rule will have no effect."

And according to him Ss. 28(iii)(b) and 28(iii)(c) laid down such a specific condition. He also drew support in this regard from the provisions of S. 43B of the Act, which contains provisions different from the general principles of accountancy. According to the Assessing Officer, therefore,

"if the enactment specifies a particular thing, the question of following another method does not arise."

4. One of the contentions that was raised before the Assessing Officer was that the words "receivable" and "repayable" can also be interpreted to mean and include the benefits accruing to the exporter in relation to the goods belonging to third parties which had been exported by exporter. This argument too was rejected by the Assessing Officer.

5. It was also the assessees case that if both the incentives received and the incentives receivable are brought to tax together, the scheme of the Act would be vitiated. This argument was also rejected by the Assessing Officer because, according to him, the problem would not have arisen had the assessee been accounting for the incentives in question on receivable basis right from the beginning. In other words, according to the Assessing Officer, if the assessee had followed the correct method of accounting, this situation would not have arisen. And by the same token "double taxation is not existing".

6. In view of the foregoing, therefore, the Assessing Officer added an aggregate sum of Rs. 36,37,948 (Rs. 20,84,969 + Rs. 15,52,979).

7. Predictably, the said addition was one of the subject-matters of the appeal by the assessee before the CIT(A) who declined to interfere in the following words :

"In the report under S. 44AB, it was stated that the appellant followed, Generally mercantile method of accounting, excepting accounting of bonus, sales, commission, cash incentive, etc., on cash basis as followed hitherto. In column 9(a) of form 3CD and the appellants letter dt. 12th Nov., 1990, duty drawback and cash incentive receivable were specified at Rs. 36,37,948. The appellant claimed as expenditure exempt in its statement accompanying its return, cash incentive of Rs. 17,70,338, which was credited to its P&L account the year ending on 31st March, 1988. But, in its statement filed with its letter dt. 19th Dec., 1990, it offered it for assessment.

Though the appellant objects to this addition, its representative did not furnish any argument regarding what, according to the appellant, was the actual amount of cash compensatory support, which was assessable in 1988-89 assessment year. Further, as per S. 28(iii)(b), cash incentives receivable is to be assessed. Therefore, I confirm its assessment and I dismiss Ground No. 7."

8. In the cross-objection No. 56/Mad/91 filed by the assessee the said issue is one of the subject-matters for consideration.

9. In the assessment for the asst. yr. 1989-90 also the Assessing Officer took an identical line and brought to charge, on receivable basis, an aggregate sum of Rs. 30,95,213 comprising cash compensatory support of Rs. 21,62,949 and duty drawback of Rs. 9,32,264. The CIT(A) declined to interfere in the matter.

10. It is in these circumstances that the assessee is now before us with the appeal No. 493/Mad/1992 (asst. yr. 1989-90).

11. Both the cross-objection and the appeal were heard together.

12. Shri Philip George, the learned counsel for the assessee, took us through the facts and circumstances of the case and contended that if regard be had to the significant fact that the assessee had all along been accounting for cash compensatory support or duty drawback on receipt basis, it will be readily seen that the lower authorities were not justified in bringing into charge the incentives in question on "receivable basis". There is also the further significant consideration that in both the assessment years in question the incentives have been brought to charge both on receipt basis (as returned by the assessee) and on receivable basis (as has been held by the lower authorities). The scheme of the Act does not envisage such an unfair result.

13. Shri Philip George finally contended that if the Tribunal were to uphold the decision of the lower authorities on this issue, then in the assessment for the asst. yr. 1989-90 the incentives actually received during the relevant previous year and attributable to the aggregate addition of Rs. 36,37,948 made on receivable basis in the assessment for the asst. yr. 1988-89 must be deleted. He, however, made it clear that his main contention was that the sums in question could have been brought to tax only on receipt basis, because that was the method of accounting regularly followed by the assessee.

14. The learned Departmental Representative on his part strongly supported the impugned orders of the lower authorities on this common issue.

15. In the course of the hearing, certain queries from the Bench elicited the following data :

(a) The amounts claimed by the assessee in relation to cash compensatory support and duty drawback were treated by the Assessing Officer as amounts "receivable" by the assessee;

(b) The amounts claimed by the assessee were exhibited against item No. 9(a) of the Statement of particulars in the case of a person carrying on business in Form 3CD filed along with the assessees return.

16. In the course of the hearing the Bench wondered aloud whether the true legislative intent behind the relevant provisions of S. 28 was to equate the claim made by the assessee with "cash assistance receivable" or as the case may "duty repayable as drawback" within the meaning of Ss. 28(iii)(b) and 28(iii)(c) of the Act. The Bench pointed out that in law, an amount could be said to be "receivable" by a person only when a legal right to receive the sum had accrued to him; and not at any earlier point of time. Particularly, in cases in which the assessees claim for certain incentives in certain sums are naturally subjected to verification by the authorities concerned, can it be said that a legal right to receive a particular sum has accrued to the assessee for the only reason that he had made a claim for a certain amount ? In such cases, clearly, it is only when the authority concerned, on a verification of the claim made by the assessee, decides that the assessee is entitled to receive a particular sum as and by way of incentive and communicates the said decision to the assessee that a legal right to receive the amount decided by the authority could be said to have accrued to the assessee. In such cases it does not matter that the assessee actually receives the amount approved by the authority at a later point of time. To illustrate, let us take the assessees own case. Here the financial year is the accounting year. Suppose the assessee had made a claim for, say, duty drawback of Rs. 5,00,000 in June, 1988 and on 15th March, 1989 had received a communication from the authorities concerned to the effect that the assessee had been sanctioned duty drawback of Rs. 3,75,000, the assessee can be regarded as having acquired a right to receive a sum of Rs. 3,75,000 on 15th March, 1989 and not before; and certainly not the sum of Rs. 5,00,000 claimed by it. Even here, the sum of Rs. 3,75,000 could be brought to tax on accrual basis only if the assessee was following the mercantile system of accounting, particularly as respects the incentives of the type under consideration. Such being the position in law, how could one possibly say that the assessee acquired a right to receive the sum the moment it made a claim ?

17. In response, Shri M. Narayanan, the learned Departmental Representative, fairly drew our attention to the fact that item 9(a) of Form 3CD in items talks of particulars, inter alia, of duty draw back where such drawbacks "are admitted as due by the concerned authorities, but are not credited to P&L account". As we see it, the underlined portion brings into bold relief to the fact that when Ss. 28(iii)(b) and 28(iii)(c) talk respectively of cash assistance receivable and any duty repayable as drawback, they obviously refer to cases where the person concerned had acquired a legal right to receive the cash assistance or, as the case may be, duty drawback on account of the admission by the concerned authorities that the person was entitled to cash assistance or duty drawback in sums determined by the concerned authorities. Thus, as we see it, the true legislative intent behind the said sections conforms to the well settled principles of law relating to accrual of rights, and does not seek to make any departure therefrom.

18. At this stage, we may mention that the learned counsel for the assessee stated that the amount actually claimed by the assessee inadvertently came to be exhibited against item 9(a) of Form 3CD. According to him, this will be clear from the fact that the assessee did not receive the full amount claimed and that the authorities concerned had disallowed the assessees claim to some extent.

19. We abstract below the details of the claim made by the assessee, the figures incorporated against item 9(a) of Form 3CD, and the amounts received by the assessee :

Items Items Assessees claim Assessees claim Figures shown in item 9(a) of Form 3CD Figures shown in item 9(a) of Form 3CD Actual receipt Actual receipt Rs.

Rs.

Asst. yr. 1988-89 :

(a) Cash compen-satory support 20,84,969 20,84,969 20,44,385

(b) Duty draw back 15,52,979 15,52,979 15,44,524 Asst. yr. 1989-90 :

(a) Cash compen-satory support 21,62,949 21,62,949 21,37,298

(b) Duty draw back 9,32,264 9,32,264 9,23,932 The said figures lead to two important conclusions, namely :

(a) The amounts claimed by the assessee have been exhibited against item 9(a) of the report, which is clearly wrong;

(b) The authorities concerned have not allowed the assessees claims in full but have imposed some cuts.

It should, therefore, follow that it would be bad in law to equate the claim made by the assessee with the assessees right to receive certain amounts as a result of the orders passed by the concerned authorities.

20. In view of the foregoing, therefore, the lower authorities misdirected themselves in law when they equated the claim made by the assessee with the assessees right to receive incentives under the schemes concerned.

21. There is also the further consideration that they completely ignored the method of accounting regularly followed by the assessee, obviously going on the wrong basis that Ss. 28(iii)(b) and 28(iii)(c) made a departure from the general legal principles governing the actual of the right to receive a particular sum. As demonstrated earlier, the legislature has not intended any such departure.

22. In view of the foregoing, therefore, we delete the additions for Rs. 36,37,948 and Rs. 30,95,213 made on receivable basis respectively in the assessments for the asst. yrs. 1988-89 and 1989-90. We also direct the Assessing Officer to bring to charge the incentives in question only on receipt basis.

23. In the result, the related grounds are allowed.

24. That leaves for consideration the issues covered by grounds Nos. 1 to 10 of the cross-objection relating to the asst. yr. 1988-89 and ground Nos. 8 to 11 of the grounds of appeal relating to the asst. yr. 1989-90.

25. On hearing both the sides, we decline to interfere in the matter and dismiss the related grounds.

26. In the result, both the cross-objection and the appeal filed by the assessee are partly allowed.