PETITIONER: SUPERINTENDENT AND REMEMBRANCER OF LEGAL AFFAIRS, WEST Vs. RESPONDENT: GIRISH KUMAR NAVALAKHA & ORS. DATE OF JUDGMENT03/03/1975 BENCH: MATHEW, KUTTYIL KURIEN BENCH: MATHEW, KUTTYIL KURIEN RAY, A.N. (CJ) KRISHNAIYER, V.R. GUPTA, A.C. CITATION: 1975 AIR 1030 1975 SCR (3) 802 1975 SCC (4) 754 ACT: Constitution of India, 1950, Art. 14-- Purpose of challenged classification in doubt--Concept of 'Purpose' and 'similar situations', when can be resorted to--Legislature if can be given benefit of doubt about its purpose. Constitution of India, 1950, Art. 14-- Under-inclusive classification meaning of--Under-inclusive classification, when permissible. Foreign Exchange Regulation Act , 1947, Section 23- -Two different procedures for dealing with persons contravening the Act--Benefit of inquiry by Director of Enforcement not available to persons dealt with under s. 23(IA) --Classification, if unreasonable. HEADNOTE: The respondents were tried for having committed offences under S. 4(3) , 20(3) and 22 of the Foreign Exchange Regulation Act, 1947 read with s. 120-B of the Indian Penal Code and s. 23 of' the Act. The Court discharged the respondents in view of the decision of <ORG> in M/s <ORG> and <ORG>. v. <ORG> and <ORG>. Civil Rules Nos. 2183 (W) of 1966 and cases Nos. 1998 and 1999 of 1963 decided on 16-9-1971, holding that s. 23(AI) was violative of Art. 14 of the Constitution. The appellant filed a revision petition against the order, before <ORG>. <ORG> concurred with the decision of <ORG> and dismissed the revision. This appeal, by special leave, is against that order dismissing the revision, It was contended for the respondents that s. 23 provides for two different procedures for dealing with contravention of the provisions of the Act. That is to say, persons who have contravened the provisions specified in s. 23(1)(a) and are found guilty by the Director of Enforcement need not face prosecution in a criminal court if the Director is of opinion that the penalty he is empowered to impose would be adequate punishment, whereas, the persons alleged to contravene the other provisions of the Act have necessarily to face prosecution in criminal court without being given the benefit of an inquiry by the Director of Enforcement and the opportunity to the delinquents to convince him that imposition of penalty by him would be adequate punishment even if they are found guilty. The classification made in s. 23(1) is under-inclusive and is, therefore, unreasonable. Allowing the appeal, HELD : (i) When the purpose of a challenged classification is in doubt, the courts attribute to the classification the purpose thought to be most probable. Instead of asking what purpose or purposes the statute and other materials reflect, the court may ask what constitutionally permissible objective this statute and other relevant materials could plausibly be construed to reflect. The latter approach is the proper one in economic regulation cases. The decisions dealing with economic regulation indicate that courts have used the concept of 'purpose' and 'similar situations' in a manner which give considerable leeway to the legislature. This approach of judicial restraint and presumption of constitutionality requires that the legislature is given the benefit of doubt about its purpose. [805H-806C] (ii) Often times the courts hold that tinder-inclusion does not deny the equal protection of laws under Article 14. In strict theory, this involves an 803 abandonment of the principle that classification must include all who are similarly situated with respect to the purpose. This under-inclusion is often explained by saying that the legislature, is free to remedy parts of a mischief or to recognize degrees of evil and strike at the harm where it thinks it most :acute. There are two main considerations to justify an under-inclusive classification. First, administrative necessity. Second, the legislature might not be fully convinced that the particular policy which it adopts will be fully successful or wise. Thus to demand application of the policy to all whom it might logically encompass would restrict the opportunity of a state to make experiment. These techniques would show that some sacrifice of absolute equality may be required in order that the legal system may preserve the flexibility to evolve new solutions to social and economic problems. [806E; H.807B] Missouri &. and T. Rly. v. <NAME>, (1903) 194 U.S. 267 at p. 269 and <CITATION> A.I.R. 1974 S.C. 1300 referred to. (iii) The experience of the Government was that persons contravening the provisions of the Act specified in s. 23(1)(a) invariably escaped without punishment.: firstly because, successful prosecution of these offences in many cases was not possible for want of legal evidence; secondly because, the criminal courts were not equipped with the training, expertize and experience necessary to deal with the intricate and ingenious methods adopted by the persons contravening them. The Government, therefore, thought that imposition of penalty by departmental adjudication would prove a more effective means of ,checking these types of foreign-exchange offences as against the previous system of' prosecution of all offences on the basis of the strict standard of proof required for criminal prosecution-which proof was, by and large, so much within the special knowledge of the offender and so much out of the reach .of the department. [808D-F] The basis of classification was that in cases where there was likelihood of getting sufficiently unimpeachable evidence as, for instance. in cases involving contravention of sections 14 , 13(2) , 15 , 18 etc., where <ORG> as a specialized agency comes into the picture and be in possession of relevant materials, those cases were left to be- dealt with under s. 23(IA) by criminal courts. The classification made in s. 23(IA) is, therefore, not dis- criminatory. [808H;-809E] JUDGMENT:

CRIMINAL APPELLATE JURISDICTION: Criminal Appeal No. 203 of 1973.

Appeal by special leave from the Judgment and Order dated the 14th March, 1973 of <ORG> in Criminal Revision No. 613 of 1972.

<NAME>, Solicitor-General. <NAME> and <NAME> for the Appellant.

<NAME> Mrs. <NAME> and <NAME> for the Respondents.

The Judgment of the Court was delivered by <NAME>, J. The respondents were tried before the Presidency Magistrate, 11th Court for having committed offences under sections 4(3) , 20(3) and 22 of the Foreign Exchange Regulation Act, 1947 (hereinafter called 'the Act') read with S. 120-B of the Indian Penal Code and S. 23 of the Act. The Court discharged the respondents in view of the decision of <ORG>of Calcutta in M/s. <NAME> & Co- and Others v. <ORG>) holding that S. (1) Civil Rules Nos. 2183 (W), 2184 (W) of 1966 and cases Nos. 1998 and 1999 of 1963 decided on 16-9-1971.

23(IA) was violative of Article, 14 of the Constitution. The appellant filed a revision petition against the order, before <ORG>. The Court concurred with the decision of the trial Court and dismissed the revision. This appeal, by special leave, is against that order. The question for consideration is whether S. 23(1A) of the Act violates Article 14 of the Constitution. Section 23 (1) as it originally stood in the Act provided that whoever contravenes any of the provisions of the Act or of any rule, direction or order made thereunder shall be punishable with imprisonment for a term which may extend to two years or with fine, or with both, and any Court trying any such contravention may, if it thinks fit and in addition to any sentence which it may impose for such contravention, direct that any currency, security, gold or silver or goods or other property in respect of which the contravention has taken place shall be confiscated. Section 23 was amended in 1950 and 1952. We are not concerned with those amendments. In 1957, the section was further amended by the Foreign Exchange Regulation (Amendment) Act , 1957 (Act No. 39 of 1957). This amendment provided for departmental adjudication in respect of contravention of certain provisions of the Act. The section as amended read as under:

"23(1) If any person contravenes the provisions of s. 4 , s. 5 , s. 9 or sub-section (2) of s. 12 or of any rule, direction or order made thereunder, he shall-

(a) be liable to such penalty not exceeding three times the value of the foreign exchange in respect of which the contravention has taken place, or five thousand rupees, whichever is more, as may be adjudged by the Director of Enforcement in the manner hereinafter provided or,

(b) up on conviction by a Court, be punishable with imprisonment for a term which may extend to two years, or with fine or with both, (IA) Whoever contravenes-

(a) any of the provisions of this Act or of any rule, direction or order made thereunder, other than those referred to in sub-section (1) of this section and s. 19 shall, upon conviction by a court, be punishable with imprisonment for a term which may extend to two years, or with fine or with both.

(b) any direction or order made under s. 19 shall, upon conviction by a <ORG>, be punishable with fine which may extend to two thousand rupees."

By s. 23D it was provided that the Director of Enforcement shall for the purpose of adjudicating under clause (a) of sub-section (1) of s. 23  805 hold an inquiry after notice to the person proceeded against and impose a penalty, but if at any stage of the inquiry he is of opinion that having regard to the circumstances of the case, the penalty he is empowered to impose would not be adequate, he shall, instead of imposing a penalty, file a complaint in writing to the <ORG>.

The argument of the respondents was that s. 23 provides for two different procedures for dealing with contravention of the provisions of the Act; that while persons contravening the provisions of the Act specified in s. 23(1) (a) have to be dealt with by the Director of Enforcement in the first instance and need face trial in criminal court only if he is of opinion that having regard to circumstances of the case the penalty he is empowered to impose would not be adequate, the persons contravening the other provisions of the Act are liable to be prosecuted in the first instance in criminal court without an injury by the Director of Enforcement which would give them the possibility to escape prosecution in a criminal court. In other words the argument was that persons who have contravened the provisions specified in s. 23 (I) (a) anti are found guilty by the Director of Enforcement need not face prosecution in a criminal court if the Director is of opinion, that the penalty he is empowered to impose would be adequate punishment, whereas, the persons alleged to contravene the other provisions of the Act have necessarily to face prosecution in criminal court without being given the benefit of an inquiry by the Director of Enforcement and the opportunity to the delinquents to convince him that imposition of penalty by him would be adequate punishment even if they are found guilty. The question, therefore, is whether persons contravening the provisions specified in s. 23 (I) (a) are similarly situated with persons contravening the other provisions of the Act with respect to the purpose or object of the Act or whether by reason of the nature of the offences resulting from the contravention of the provisions specified in s. 2 3 (I) (a) the persons contravening them form a class by themselves distinct from the persons contravening the other provisions of the Act and therefore the legislative judgment to deal with them under a different procedure was justified with reference to the ultimate purpose of the Act. The preamble provides the key to the general purpose of the Act. that purpose is the regulation of certain payments, dealings in foreign exchange and securities and the import and export of currency and bullion in the economic and financial interest of India. The general purpose or object of the Act given in the preamble may not show the specific purpose of the classification made in s. 23(1) (a) and s. 23(1A) . <ORG> has therefore to ascribe a purpose to the statutory classification and coordinate the purpose with the more general purpose of the Act and with other relevant Acts and public policies. For achieving this the <ORG> may not only consider the language of s. 23 but also other public knowledge about the evil sought to be remedied, the prior law, the statement of the purpose of the change in the prior law and the internal legislative history. When the purpose of a challenged classification is in doubt, the courts attribute to the classification the purpose thought to be Most probable. Instead of asking what purpose or purposes the statute and other materials reflect, the court may ask what constitutionally permissible objective this statute and other relevant materials could plausibly be construed to reflect. The latter approach, is the proper one in economic regulation cases. The decisions dealing with economic regulation indicate that courts have used the concept of 'purpose' and 'similar situations' in a manner which give considerable leeway to the legislature. This approach of judicial restraint and presumption of constitutionality requires that the legislature is given the benefit of doubt about its purpose. How far a court will go in attributing a purpose which though perhaps not the most probable is at least conceivable and which would allow the classification to stand depends to a certain extent upon its imaginative power and its devotion to the theory of judicial restraint.

At this stage, it is necessary to sharpen the focus to understand the real grievance of the respondents. As already indicated, their submission is that since they are similarly situated with persons contravening the provisions of the Act specified in s. 23 (1) (a), they should have been included in that class and dealt with by <ORG> in the first instance so that they might also have the benefit of inquiry by him with the possible advantage of escaping with penalty even if they are found guilty of the offences. Their grievance therefore is that the classification made in s. 23 (1) is under-inclusive and is, therefore, unreasonable.

Often times the courts hold that under-inclusion does not deny the equal protection of laws under Article 14. In strict theory, this involves an abandonment of the principle that classification must include all who are similarly situated with respect to the purpose. This under inclusion is often explained by saying that the legislature is free to remedy parts of a mischief or to recognize degrees of evil and strike at the harm where it thinks it most acute. The <ORG> have recognised the very real difficulties under which legislatures operate-difficulties arising out of both the nature of the legislative process and of the society which legislation attempts perennially to reshape- and they have refused to strike down indiscriminately all legislation embodying classificatory inequality here under consideration. Mr. Justice <NAME>, in urging tolerance of under-inclusive classifications, stated that such legislation should not be disturbed by the <ORG> unless it can clearly see that there is no fair reason for the law which would not require with equal force its extension to those whom it leaves untouched. See Missouri K. and T. Rly. v. May(I). What, then, are the fair reasons for non-exten- sion ? What should a court do when it is faced with a law making an under-inclusive classification in areas relating to economic and tax matters'?

There are two main considerations to justify an Linder- inclusive classification. First, administrative necessity. Second, the legislature might not be fully convinced that the particular policy which it adopts (1) (1903) 193 U. S. 1967 at p. 269.

<NAME>

will be fully successful or wise. Thus to demand application of the policy to, all whom it might logically encompass would restrict the opportunity of a state to make experiment. These techniques would show that some sacrifice of absolute equality may be required in order that the legal system may preserve the flexibility to evolve new solutions to social and economic problems. The gradual and piece-meal change is often regarded as desirable and legitimate though in principle it is achieved at the cost of some equality. It would seem that in fiscal and regulatory matters the court not only entertains a greater presumption of constitutionality but also, places the burden on the party challenging its validity to show that it has no reasonable basis for making the classification. This was the approach of this <ORG> in <CITATION> (1). The <ORG> said :

"The piecemeal approach to a general problem permitted by under-inclusive classifications, appears justified when it is considered that legislative dealing with such problems is usually an experimental matter. It is impossible to tell how successful a particular approach may be, what dislocations might occur, what evasions might develop, what new evils might be generated in the attempt. Administrative expedients must be forged and tested. Legislators, recognizing these factors, may wish to proceed cautiously, and courts. must allow them to do so (37 California Rev. 341)."

The background of the amendment of s. 23 of the Act will be relevant for appreciating the reason for making the distinction between the two classes of contraventions. From April, 1949 to December, 1952, <ORG> was handling all cases including those relating to unauthorized import, export of gold and silver. The <ORG> had an enforcement section. In 1952, <ORG> authorised the <ORG> and <ORG> officers to investigate and prosecute cases if import or export of gold and silver in contravention of the provisions relating to them. In May, 1956, <ORG> took over the work relating to enforcement, i.e., the residuary work done by <ORG> other than those entrusted to Custom.% Department.<ORG> was set up in May, 1956 with the idea that there should be a specialized agency to deal with specified categories of offences. Between April, 1949 and April 1956, when the duty of enforcement was with <ORG>, the <ORG> had completed investigation in about 200 cases but prosecutions could be launched in respect of 66 cases only and out of these 60 cases ended in convictions. No prosecution could be launched in respect of other cases in view of the fact that evidence legally neces- sary to secure conviction in a court was not forthcoming. When the work was transferred to <ORG> of <ORG>, its experience was also similar. From May, 1956 till about 1957, the <ORG> had handled 832 cases. But prosecutions could be launched only in respect of 32 cases. This Was due to the fact that legal evidence necessary for establishing the cases beyond (1) A.I.R. 1974 S.C. 1300.

<NAME>

doubt in a court of law was not forthcoming partly because it was difficult to secure cooperation of the foreign collaborators in getting the incriminating documents against the suspects and partly because the banks in foreign countries were under no obligation to furnish statements of accounts maintained by the suspects in them. Faced with this difficulty, the Government had to consider other ways of enforcing the provisions of the Act more effectively. The Government, after considering the pros and cons decided to provide for departmental enquiry and adjudication of contravention of certain provisions of the Act by an authority specially constituted for that purpose. In the statement of Objects and Reasons to the Foreign Exchange Regulation Bill, 1957, it was stated ;

". . . The most important of these amendments is the one providing for departmental inquiry an adjudication of foreign exchange offences by an authority constituted by Government on the Sea Customs Act."

In short, the reason for the amendments made in 1957 was the experience gained in the working of the Act till then. That experience was that persons contravening the provision of the Act specified in s. 23 (1) (a) invariably escaped without punishment : firstly because, successful prosecution of these offences in many cases was not possible for want of legal, evidence; secondly because, the criminal courts were not equipped with the training, expertize and experience necessary to deal with the intricate and ingenious methods adopted by the persons contravening them.

The Government therefore thought that imposition of penalty by departmental adjudication would prove a more effective means if checking these types of foreign-exchange offences as against the previous system of prosecution of all offences on the basis of the strict standard of proof required for criminal prosecution which proof was by and large, so much within the special knowledge of the offender and so much out of the reach of the department. It may be noted that after the amendment in 1957, further amendments of s. 23 were made in 1964 whereby sections 10 , 17 , 18(A) and 18(B) were also brought within the purview of s. 23(1)(a) . The introduction of these sections within s. 23(1)(a) was the result of further experience gained during the succeeding years. It was only on the basis of the experience gained by the working of the Act that a decision could be taken about the classification of offences in respect of which a trial by a court would be expedient and those in respect of which summary procedure visualized by s. 23(1) (a) might be necessary.

Generally speaking, therefore, the basis of the classification was that in cases where there was likelihood of getting sufficiently unimpeachable evidence as, for instance, in cases involving contravention ,of sections 14 , 13(2) , 15 , 18 , etc., where <ORG> as a specialized agency comes into the picture and be in possession ,of relevant materials, those cases were left to be dealt with under s.23(1A) by criminal courts.

In paragraph 17 of the affidavit of <NAME>, Under Secretary, <ORG>, <ORG>, filed with the permission of this <ORG>, the reasons why the legislature selected the contravention of certain provisions of the Act for being dealt with by the criminal courts in the first instance have been fully stated. According to that affidavit, broadly speaking, the classes of offenceswhich have been brought under sections 23(1) and 23A are what maybe termed as 'primary' offences and those brought under s.23(1A)may be termed as 'secondary' offences. Primary offences are those which need detection and action at executive or field level by the concerned specialized agency. There is greater need fur taking deterrent measures in respect of these offences. It is not a question of the seriousness or gravity of the offences. Both primary and secondary offences may be grave or serious and involve large amounts. But the difference is that primary offences are distinguished by the volume and areas of incidence and may need greater deterrence which sometimes may lie in large pecuniary penalty and sometimes in criminal punishment by way of imprisonment. A delinquent who has become an insolvent may not feet any deterrent effect however large the pecuniary penalty may be and such a case may call for a sentence of imprisonment. In respect of secondary offences there are heady built-in institutional checks laid down by <ORG> or other Government agencies. As indicated above, where contraventions do take place in regard to, other sections, there would normally be adequate or reasonable documentary evidence, etc., and these will facilitate prosecution in courts of law. We do. not think that there is any merit in the contention that the classification made in s.23(lA) is discriminatory. Even according to the respondents, it is the classification made in s.23(1)(a) which is under inclusive and is, therefore, unreasonable. If this <ORG> were_ to declare that the classification made in s. 23 (1) (a) is under inclusive and therefore unreasonable, the result would be that contraventions of the provisions specified in s. 23(1)(a) would also fall within s. 23 (1 A) and would have to be dealt with by the Criminal <ORG>--a consummation which the respondents devotedly want to avoid.

We do not think that <ORG> was right in holding that s. 23(1A) was bad. We set aside the order of <ORG> and allow the appeal.

<NAME>

Appeal allowed.


JUDGMENT <NAME>, J.

By this reference application, the <ORG> has referred the following two questions for our opinion :-

Whether, having regard to the fact that the assessee had income from the shares of a company in which the donor of the said shares had substantial interest within the meaning of section 13(2)(h) read with 13(1)(c) of the Income Tax Act , 1961 ('the Act'), the <ORG> was correct in law in holding the provisions of section 13(2) of 1 he said Act were riot attracted ?

Question raised in R.A. No. 22 (Cal.) of 1988:

Whether, on the facts and in the circumstances of the case and on a proper interpretation of section 2(15) of the Income Tax Act, 1961, the <ORG> is correct in law in holding that depreciation claimed in the accounts by the assessee was an outgoing for the purpose of determination of income in terms of section 11 (1) of the Income Tax Act , 1961 and in that view deleted the addition so made in this regard ?"

2. The assessee is a trust. The trust received donation to the extent of Rs. 18,11,134 during the accounting year ending 30-6-1982. Such donation includes shares of the face value of Rs. 14 lakhs of <ORG> (1,40,000 equity shares of Rs. 10 each), received from <NAME> and <NAME> on 28-8-1981. The Income Tax Officer found that the donor had substantial interest in<ORG> within the meaning of section 13(2)(h) of the Income Tax Act, 1961 ('the Act). Therefore, the Income Tax Officer invoked the provisions of section 13(4) and brought to tax the dividend income derived by the trust of Rs. 1,68,000.

3. In appeal, the Commissioner (Appeals) found that the donation of shares does not amount to investment by the assessee for acquisition of shares. Therefore, the provisions of section 13(2) (h) are not attracted.

4. In appeal before the <ORG>, the <ORG> has confirmed the view taken by the Commissioner (Appeals) that the provisions of section 13(1)(c) , read with section 13(2) (h) are not attracted in the case of this assessee. However, the <ORG> remitted the matter back to the Income Tax Officer to examine whether the provisions of section 13(1)(a) can be attracted or not.

5. Mr. <NAME>, the learned counsel for the revenue, placed reliance on the order of the assessing officer and submits that the matter has right] ' y been remitted back to the assessing officer since the assessing officer has not examined the applicability of section 13 (])(a). He further submits that when the donation is with a condition that it will form part of the corpus, it amounts to investment by the assessee.

6. Mr. <NAME>, the learned counsel for the assessee, submits that the assessee is a charitable trust. When there was a donation of shares of the assessee, the assessee had not incurred any expense. There is no investment by the assessee in acquiring the shares in question. When there is no investment by the assessee, the provisions of section 13(1)(c) are not attracted. For section 13 (])(c), he submits that in view of the <ORG>'s Circular, the provisions of section 13(1)(d) are applicable with effect will the assessment year 1984-85 and not from the assessment Year 1983-84. Therefore, when the provisions of section 13(1)(d) are not applicable in (lie year 1983-84, no purpose will be served in case the matter is remitted back to the A.0. For depreciation, he submits that in case of charitable trust, income will be taken on commercial basis as shown by the assessee in t lie books of account and it should not be computed as per the provisions of the Act. He drew our attention to the definition of 'total income' in section 2(45) of the Act. He further submits that even the provision of section 14 which provides heads of income is also not applicable. He placed reliance on the decision in <CITATION> v. Trust (1988) 170 ITR 150/34 Taxman 504 (Cal.) and CWT v. <NAME> (1993) 199 ITR 420 (Cal). For the application of the provisions of section 13(1)(a) , he placed reliance on the decisions in CITv. Deoria Public Charitable Trust (1992) 196 1TR 110 and CITv. Savan Public Charitable Trust (1993) 201 ITR 877 (Cal). For depreciation, he placed reliance on the decisions <CITATION> (1984) 146 ITR 28/16 Taxman 400, CITv. Raiput Palloiline Sociey (1989) 180 ITR 579/50 Taxman 233 and <CITATION> - van Trust (1992) 198 ITR 598 (Gui). He further submits that this Court held that depreciation is expenditure in the case of <CITATION> (1982) 134 ITR 68 (Cal.). in the case of Deoria Public Charitable Trust (supra), this Court has considered whether the provisions of section 13(1)(l) are applicable in [lie assessment year 1983-84. At page 115, this Court has quoted the <ORG>'s Circular. The relevant portion of the Circular reads as under:

"The issue has been considered in the <ORG> and it is decided that the provisions of section 13(1)(d) would be applicable from the assessment year 1984-85 and not from the assessment year 1983-84. It is also decided that appellate decisions on this issue, hitherto in favour of the assessee, may not be further contested, and pending appeals/ references may be withdrawn by the Chief Commissioners of Income-tax in exercise of the powers delegated to them."

When the <ORG> itself has clarified the position as to from which assessment year the provisions of section 13(1) (c~ will be applicable, it was decided that the provisions of section 13(1)(a) will be applicable from the assessment year 1984-85. In this case, the year under consideration is 1983-84. In view of the <ORG>'s Circular dated 15-3-1991 and the decision of this <ORG> in the case of <ORG> (supra), in our view, no purpose will be served in case the matter is remitted back to the assessing officer to examine the applicability of the provisions of section 13(1) (d,.

7. The next issue relevant to question no. 1 is whether the provisions of section 13(1)(c) , read with section 13(2)(h) are attracted to tax the dividend income in this case. There is no dispute that the shares from which the dividend income is derived are donated by <NAME> and <NAME>. This Court has considered a similar issue whether it can be taken that there was an investment by the assessee when he received shares free of charge.

8. In the case of <ORG> (supra), this Court held that the assessee received the shares (if company by way of donation. The assessee did riot deal with or commit or lay out any part of its existing assets to acquire the said shares. In such case, there was no investment of the fund of the assessee within the meaning of section 13(2)(b) .

9. This Court again has considered similar issue in the case of <ORG> (supra). This Court has considered section 21A of the Wealth Tax Act, 1957 corresponding to section 3(1)(a) of the Income Tax Act and the issue before the Court was when the assessee received the shares by way of donation, would it amount to investment of the assessee ? This Court held that when there was no investment of the fund of the assessee within the meaning of section 13(2)(h) and when there was no investment of the assessee in acquiring the shares, the charitable trust had not well within the provisions of the Wealth Tax Act .

10. When the shares are received but there is no investment on the part of the assessee, the <ORG> is justified in holding that the assessee's income from shares is not hit by the provisions of section 13(2)(h) , read with section 13(1)(c) .

11. Question referred is regarding depreciation and the issue is whether the <ORG> is justified in holding that the depreciation claimed in the accounts by the assessee was an outgoing for the purpose of determination of income in terms of section 11(1) of the Income Tax Act, 196 1. During Z course of assessment, the assessee claimed depreciation worth up to Rs. 21,779 which has been disallowed by the assessing officer. In appeal before the Commissioner (Appeals), it did not allow the claim on the ground that when there is no business of the assessee, he is not entitled for deduction on account of depreciation. The <ORG> has allowed the claim following the view taken by <ORG> in Society of Sisters SI. Anne case (supra).

12. The learned counsel for the assessee submits that there are decisions of various <ORG> including this <ORG> where a view has been taken that in case of charitable trust the income should be computed on commercial basis as shown in the books of the account of the assessee and not strictly as per the provisions of the Act. He placed reliance on the decision ill <ORG> case (supra), <ORG> case (supra) and <ORG> case (supra). In <ORG> case (Supra), the Karnataka High court has considered how the income of the charitable trust should be computed and whether the amount of depreciation debited to the accounts of the charitable institution is to be deducted to arrive at the income available for application to charitable purposes. At page 33 the <ORG> has quoted part of Circular No. 5-P(LXX) of 1968/19-7-1968. The <ORG> has clarified that "income" referred under section 11 (1) should be understood in its commercial sense, ie., book income after adding back any appropriation or application thereof towards the purpose of the trust or otherwise and also after adding back an * v debits made in capital expenditure in regard thereto f or the purpose of' tile trust or otherwise. It should be noted in this connection that the amounts so added back will become chargeable to tax under section 11 (3) to the extent that they represent outgoings for purposes other than those of the trust.

13. Though there is a Board Circular and there are some decisions of the various <ORG> and even this High court in <CITATION> (1986) 159 1TR 280 (Cal.) has followed the decision of <ORG> in <CITATION> (1982) 135 ITR 485 (Mad.) and held that while computing the income of charitable trust, income has to be arrived at in commercial manner.

14. It is true that a view has been taken by the various <ORG> including this Court in the cases referred to above, that in case of charitable trust income should be computed and arrived at in commercial manner but nowhere in the Act it prohibits to calculate or compute the income as per the provisions of the Act. Section 11 (1) refers to income and not total income defined in section 2(45) of the Act but income itself has been defined in section 2(24) . The question as arises to why the meaning of income given in section 2(24) should not be taken for income referred in section 11 (1) Act. Therefore, decision referred also requires reconsideration.

15. But in the case at hand the assessment year involved is 1983-84; even if we differ from the view taken by this <ORG>, it will take another five years to conclude. The tax effect is only Rs. 7,000. Therefore, no purpose will be served to differ on this issue with the view taken by this <ORG> in <ORG> case (supra) and we leave the issue open to consider this issue in an appropriate case in future.

16. In the result, in view of these facts, we answer both the questions in the affirmative,i.e., in favour of the assessee and against the revenue.

<NAME>, J. - I agree.


PETITIONER: <ORG> Vs. RESPONDENT: THE COMMISSIONER OF INCOME-TAX,WEST BENGAL DATE OF JUDGMENT: 12/05/1959 BENCH: <NAME>, NATWARLAL H. BENCH: <NAME>, NATWARLAL H. DAS, <NAME> <NAME>, M. CITATION: 1959 AIR 1165 1960 SCR (1) 185 ACT: Income-tax-Assessment of land-developing Company-Mercantile method of accounting adopted by assessee and accepted by Incometax Officer-Accrued liability for future development expenses, if an allowable deduction in the accounting year- lndian Income-tax Act (XI Of 1922), S. 1O(1) . HEADNOTE: 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 maintained its accounts in the mercantile method it entered the whole price receivable, viz., Rs. 43,692-11-9, in credit side though only Rs. 29,392-11-9 was actually received and debited a sum of Rs. 24,809, being the estimated expenditure for the developments it had, by terms 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 computation 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 as well as <ORG> confirmed the disallowance on appeals and <ORG>, 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. <CITATION> ,  S-C.R. 950, referred to. <NAME> v. <NAME> (Inspector of Taxes), (1948) 30 T.C. 496. distinguished. 24 186 The difficulty in estimating such a liability for purposes of debit under the mercantile system of accounting could be no ground for treating an accrued liability as a conditional one, since it was always open to the Income-tax authorities to arrive a proper estimate thereof having regard to all the circumstances of the case. <ORG> v. <NAME> (Inspector Taxes), [19481 A.C. 459, referred to. Regard being had, therefore, to the accepted commercial practice and trading principles, the estimated 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, consequently, the question must be answered in the affirmative. <CITATION> , (1958) 34 I.T.R. 10 ; Russel v. <ORG>, (1888) 13 App. Cas. 418 ; <ORG>, v. <NAME>, (1892) 3 T.C. 185; <ORG> <CITATION> , (1913) L.R. 58 .A. 239 and <CITATION> , (1932) L.R. 59 I.A. 290, referred to. JUDGMENT:

Civil, APPELLATE JURISDICTION: Civil Appeal No. 213 of 1955. Appeal from the judgment and order dated June 26, 1953 of <ORG> in I.T.R. No. 34 of 1952. <NAME>, <NAME> and <NAME>, for the appellant.

<NAME> and<NAME>, for the respondent. 1959. May 12. The Judgment of the Court was delivered by BHAGWATI J.-This appeal with a certificate under Art. 135 of the Constitution read with s. 66A(2) of the Indian Income- tax Act raises the question as to whether the appellant ",as 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, that roads are to be laid out, a drainage system to be provided and street lights installed and they are to be maintained till the sample are taken over by the <ORG>. The whole of the development is not carried out before the land is sold, nor the whole of the sale price received in cash at the time of the sales. The procedure followed is that when a plot is sold, the purchaser pays about 25 % of the purchase price in cash and undertakes to pay the balance with interest at a certain rate in ten annual installments 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 tinderbox is incorporated in the deed of sale itself, whereas the security is given by the purchaser by means of a separate document.

In the accounting year relating to the assessment 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 appellant 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 accounting year though only a sum of Rs. 29,392-11-9 was actually received in cash from the purchaser and the balance of Its. 14,300 represented the unpaid balance retained by the purchasers the payment of which was secured by creating charge on the said lands as also the interest received or receivable in the year of account tinder 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.

In so far as under the terms of the deeds of sale the appellant had undertaken to carry out the developments within six months from the date of sale it estimated a sum of Rs. 24,809 as the expenditure for the developments to be carried out in respect of the plots which had been sold during the year and debited the same in its books of account on the ground that the liability for the said sum of Rs. 24,809 had actually arisen, the appellant being bound to provide the facilities 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 <ORG>, the <ORG>, 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 <ORG> accordingly dismissed the appeal.

The appellant thereafter made an application before the <ORG> requiring it to refer to <ORG> under s. 66(1) of the Income-tax Act certain questions of law arising out of its order. The <ORG> thereupon stated a case and referred the following question to <ORG> for its decision:-

Whether on the facts and circumstances stated above, the sum of Rs. 24,809 can legally be allowed as an expense of the year under consideration."

The statement of case drawn by the <ORG> was severely criticized by <ORG> as under: -

" Unfortunately, the treatment of the question by the authorities below has been of a somewhat summary character, presumably because it was raised and argued before them in a superficial form. But even if such was the case, there is hardly any justification for the <ORG> failing to realise it 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 appearance of a case seriously stated." In spite of the above observations <ORG> dealt with the question and after dealing exhaustively with the arguments which were urged be-fore it by the learned Counsel for the appellant answered the question in the negative. On an application made by the appellant, however, <ORG> granted the requisite certificate under Art. 135 of the Constitution to appeal to this <ORG> and lience, this appeal.

The question which really arises for our determination in this appeal is whether having regard to the fact that the appellant's method of accounting, viz., the Mercantile method was accepted by 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 undertaken by the appellant to earn those receipts was to be deducted even if there had not been actual disbursement 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 though it was not money actually received but only money treated as received on the basis that it. was due and receivable, the sum of Rs. 24,809 which had been entered as debit, being the liability of the appellant undertaken by it to earn those receipts, should be deducted in determining the taxable profits and gains of the appellant.

The mercantile system of accounting is well-known and this method has been explained in a judgment of this Court in <CITATION> (1). " That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. "

The main ground on which the claim of the appellant for deducting this sum of Rs. 24,809 ",as disallowed by all the authorities below was that the expenditure was not actually incurred in the year of account, it was by no means certain what the actual cost would be when the developments "-are 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 be carried out by the appellant as appears from the order of the Appellate Assistant Commissioner:-

" There was a condition in the Conveyance deeds that the appellant does hereby covenant with the purchaser that the appellant shall complete 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 Municipal Besides provision for roads, drains, etc., t~he ~Deed provides for filling u~p of low lands and there is a clause in the Conveyance Deed which shows that the ~appellant's shall at his own cost ~fi.11 the low lands and tank with earth and bring the same to road level. "

(~1) II9531 ~S.C.R. ~95o, 958~-

This undertaking having been incorporated in the deeds of sale themselves there was certainly a liability undertaken by the appellant to carry out these developments within six months from the dates of those deeds. Time was of course not of the essence of the contract and the appellant therefore was at liberty to carry out that undertaking within a reasonable time. That, however, did not absolve it in any manner whatever from carrying out the undertaking and the purchasers were in a position to enforce the undertaking by taking appropriate proceedings in that behalf. Reliance was placed on behalf of the <ORG> on the case of <ORG> v. <NAME> (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 factory 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 <ORG> (reversing the decision (1) (1948) 30 T.C. 496.

of the <ORG> below) held not to be deductible. The basis of the decision was that the real liability under the contract was contingent, not actual, since the obligations of the company were not such that it might be sued for the cost of 'replacements at current prices, but only for possible damages for breach of contract in the event of the factory owner preferring 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 <ORG> 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 expend in the future.

<NAME> 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 exists, 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 <ORG> v. <NAME> (lnspector of Taxes) which although allowable on accountancy principles, is not deductible 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 undertaken 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 the deeds of sale was incorporated therein and that undertaking was unconditional, the appellant binding itself absolutely to carry out the same. It was not dependent on any condition being fulfilled or the happening of any event, the only condition being that it was to be carried out within six months which in view of the fact that the time was not of the essence of the contract meant a reasonable time. Whatever may be considered a reasonable time under the circumstances 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 interms. 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 profits and gains of the business. Inasmuch as the liability which had thug 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 authorities 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 <ORG> v <NAME> (Inspector of Taxes) (1) where a particular asset which could not be immediately 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 (1) [1948] A.C. 459, 469.

year 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 saving 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 into consideration."

As in the case of assets received during the accounting year which could not be immediately realized in a commercial sense, so in the case of liabilities 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 end 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.

<ORG> 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 without making the promised expenditure, no question of allowing a deduction of any expenditure from such receipts of the year arises."

If then the estimated expenses which would have to be incurred in duly discharging that liability which was undertaken by the appellant and was incorporated in the deeds of sale could be deducted in accordance with the mercantile system of accounting adopted by the appellant and accepted by the I.T.O., 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, <ORG> 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 through 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 expended 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 accounting. 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 incurred are set off against the receipt's The expression profits and gains has to be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure which is necessary for the purpose of earning the receipts is deducted therefrom- whether the expenditure is 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 <NAME> in <NAME> v. <ORG>('):

" The duty is to be charged upon I 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 that expenditure which is necessary for the purposes of earning the receipts must be deducted, otherwise you do 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 necessary for the purpose of earning those receipts. That seems to me to be the meaning of the word " profits " in 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 <ORG> V. Styles (2) :-

" When we speak of the profits or gains of a trader we mean 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 the general principles which can he deduced therefrom (1) (1888) 13 App. Cas. 418, 424 (2) (1892) 3 T. C. 185 are, nevertheless, applicable here and it was stated by Lord <NAME> in <CITATION> (1) " English authorities can only be utilised with caution in the consideration of Indian Income-tax cases owing to the difference in the relevant legislation, but the principle laid down by Lord Chancellor <NAME> in <ORG> v. <NAME> (supra), is of general application unaffected by the specialities of the <ORG> 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, <ORG> in the <CITATION> observed:-

" Although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable 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."

<ORG> in disallowing the claim of the appellant in the present case only considered the provisions 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 observing that under the Indian Act , the profits must be (1) (193i) L. R. 58 1. A. 239, 252.

(2) (1932) L. R. 59 I. A. 290, 296.

determined by the method of making the statutory deductions from the receipts and any deduction from the business receipts, if it was to be allowed, must be brought under one or the other of the deductions mentioned in s. 10(2) and that there was no scope for any preliminary deduction under general principles. It was, however, held by this Court in <CITATION> (1) " 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. Section 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) ."

<NAME>, J., who delivered the Judgment of this Court then proceeded to discuss the cases of <CITATION> (2), <ORG> v. <NAME> (3) and <CITATION> (4), 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 on 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 estimated 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 I.T.R. 10, 14.

(2) (1932) L.R. 59 I.A. 290, 296.

(3) (1892) 3 T.C. 185.

(4) (1931) L.R. 58 I.A. 239, 252.

for the accounting year as against the receipts of Rs. 43,692-11-9 which represented the sale proceeds of the said lands. Even under s. 10(2) of the Income-tax Act, it might. possibly be urged that the word " expended was capable of being interpreted as " expendable "or to be expended " at least in a case where a liability to incur the said expenses had been actually incurred by the assessee who adopted the mercantile system of accounting and the debit of Rs. 24,809 was thus a proper 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 appellant 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 <ORG> 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 <ORG> to urge that the sum of Rs. 24,809 should not have been allowed as a permissible deduction before arriving at the profits or gains-of the appellant which were liable to tax. Consistently enough with this attitude, the <ORG> ought to have expressed its willingness to treat only a sum of Rs. 29,392-11-9 as the actual receipt of the appellant during the accounting year and made up the computation of the profits and gains of the appellant's business on that basis. The <ORG>, however, did nothing of the sort and insisted 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 judgment of <ORG> and answer the referred question in the affirmative. The respondent will of course pay the appellant's costs throughout.

Appeal allowed.