Rc/71/1993 Of Comnr.incometax Banglore v. K.c.p.ltd.vuyyur

IN THE HIGH COURT OF JUDICATURE AT HYDERABAD FOR THE STATE OF TELANGANA AND THE STATE OF ANDHRA PRADESH ***** REFERRED CASE NO.71 of 1993 Between: The Commissioner, Income-tax, Karnataka Central, Bangalore. …. Applicant and The KCP Limited. …. Respondent DATE OF JUDGMENT PRONOUNCED: 01.05.2018. SUBMITTED FOR APPROVAL: HON’BLE THE ACTING CHIEF JUSTICE RAMESH RANGANATHAN AND THE HON’BLE SRI JUSTICE GUDISEVA SHYAM PRASAD 1.Whether Reporters of Local newspapers may be allowed to see the Judgments? -- 2. Whether the copies of judgment may be marked to Law Reports/Journals Yes 3. Whether Their Ladyship/Lordship wish to see the fair copy of the Judgment? Yes RAMESH RANGANATHAN, ACJ * HON’BLE THE ACTING CHIEF JUSTICE RAMESH RANGANATHAN AND * THE HON’BLE SRI JUSTICE GUDISEVA SHYAM PRASAD + REFERRED CASE NO.71 of 1993 % Dated: 01.05.2018 Between: The Commissioner, Income-tax, Karnataka Central, Bangalore. …. Applicant and $ The KCP Limited. …. Respondent ! Counsel for Applicant: Sri J.V. Prasad, Learned Senior Standing Counsel for Income-tax ^ Counsel for respondent: Sri S. Ravi, Learned Senior Counsel for Sri Challa Gunarajnan, Challa Gunarajnan, < GIST: > HEAD NOTE: ? Citations: 1)(1975) 98 ITR 189 (SC) 2)(1998) 231 ITR 849 (Bom) 3)(1971) 82 ITR 835 (SC) 4)(2013) 358 ITR 295(SC) 5)(2008) 298 ITR 373 (AP) 6)(1958) 33 ITR 681 7)(2008) 220 CTR (Del.) 404 8)[1975] 98 ITR 167 (SC) 8)[1975] 98 ITR 167 (SC) 9)(2000) 245 ITR 428 (SC) 10)(2015)374 ITR 681 (T&AP) 11)(1971) 82 ITR 363 (SC) 12)(1964)53 ITR 134 (SC) 13)(1997) 4 SCC 530 14)1959 Supp (1) SCR 45 : AIR 1959 SC 82 : (1959) 35 ITR 298 15)(1986) 2 SCC 11 16)53 I.T.R. 122 17)(1936) 4 ITR 71 (Pat. HC) 18)(1945) 13 ITR 224( All. HC) 19)(1996) 11 SCC 530 20)(1964) 7 SCR 767 : AIR 1964 SC 1653 : (1964) 53 ITR 114 21)(1967) 3 SCR 482 : AIR 1968 SC 114 : (1967) 66 ITR 378 22)AIR 1927 Mad. 841 23)(1996) 2 SCC 277 24)(2015) 7 SCC 540 25)1991 Supp (2) SCC 618 26)[1954] 26 ITR 27 (SC) 27)(1963) 50 ITR. 495 (Mad) 28)AIR 1969 SC 501 29)1953 SCR 950 : AIR 1953 SC 187 : (1953) 23 ITR 230 30)(1954) SCR 258 31)1956 SCR 691 : AIR 1957 SC 49 : (1957) 31 ITR 28 32)(1905) 5 TC 159 33)(1965) 2 LLJ 175 34)(1963) 2 LLJ 403 35)(1964) 1 SCR 234 36)(1962) 1 LLJ 287 37)(1963) 1 LLJ 318 38)(1962) 2 LLJ 459 39)(1954) 1 LLJ 16 (Travancore – Cochin HC – DB) 40)(1979) ILLLJ 423 (Bom) = 1979 LAB.I.C.59 41)1997 (3) ALD 540 = 1997 (3) ALT 492 42)(Judgment in W.A.No.403 of 2004 dated 26.11.2004) 43)(2009) 312 ITR 254X (SC) 44)MANU/DE/3570/2017 45)(1997) 227 ITR 172 (SC) 46)(1970) 77 ITR 857 47)(1906) 2 Ch.654 (Ch D) 48)AIR 1974 SC 1596 49)AIR 1989 SC 1933 50)1993 (3) ALT 471 (F.B) = 1993 (6) SLR 1 (AP) 51)1989 (3) SLR 713 52)1993 (1) ALT 221 (DB) 53)AIR 1961 SC 398 54)[1943] 11 I.T.R. 328 55)(1978) 4 SCC 358 56)(1999) 8 SCC 338 57)(2012) 341 ITR 593 58)(2012) 208 Taxman 464 (Karn) 59)(1938) 6 ITR 36 = AIR 1938 PC 1 60)(2007) 13 SCC 673 61)(1921) 1 KB 64 62)1945(2) ALL ER 499 63)1948 (1) ALL ER 616 64)(Judgment in TRC No.153 of 2004 & Batch dated 05.10.2005) 64)(Judgment in TRC No.153 of 2004 & Batch dated 05.10.2005) 65)AIR 1970 SC 1173 = (1969) 2 SCR 481 66)(1936) A.C. 1 67)(1869) 4 H.L. 100 68)AIR 1976 SC 1503 = (1976) 3 SCC 800 69)AIR 1957 SC 657 = 1957 SCR 837 70)1901 AC 102 71)1990 (2) SCC 231 72)(1999) 4 SCC 197 73)(1984) 19 TTJ 572 (All.) 74)(2017) 395 ITR 515 75)(1997) 7 SCC 655 = (1997) 228 ITR 71 76)(1995) 212 ITR 177 (Cal) 77)(1985) 1 SCC 345 78)(2004) 6 SCC 186 79)1951 AC 737 80)(1970) 2 ALL.E.R 294 81)1971 (1) WLR 1062 82)1972 (2) WLR 537 83)AIR 1968 SC 647 84)1901 AC 495 57)(2012) 341 ITR 593 58)(2012) 208 Taxman 464 (Karn) 59)(1938) 6 ITR 36 = AIR 1938 PC 1 60)(2007) 13 SCC 673 61)(1921) 1 KB 64 62)1945(2) ALL ER 499 63)1948 (1) ALL ER 616 64)(Judgment in TRC No.153 of 2004 & Batch dated 05.10.2005) 64)(Judgment in TRC No.153 of 2004 & Batch dated 05.10.2005) 65)AIR 1970 SC 1173 = (1969) 2 SCR 481 66)(1936) A.C. 1 67)(1869) 4 H.L. 100 68)AIR 1976 SC 1503 = (1976) 3 SCC 800 69)AIR 1957 SC 657 = 1957 SCR 837 70)1901 AC 102 71)1990 (2) SCC 231 72)(1999) 4 SCC 197 73)(1984) 19 TTJ 572 (All.) 74)(2017) 395 ITR 515 75)(1997) 7 SCC 655 = (1997) 228 ITR 71 76)(1995) 212 ITR 177 (Cal) 77)(1985) 1 SCC 345 78)(2004) 6 SCC 186 79)1951 AC 737 80)(1970) 2 ALL.E.R 294 81)1971 (1) WLR 1062 82)1972 (2) WLR 537 83)AIR 1968 SC 647 84)1901 AC 495 85)(1997) 5 SCC 289 86)(2008) 5 SCC 680 87)(1970) 2 SCC 192 88)(1989) 1 SCC 345 THE HON’BLE THE ACTING CHIEF JUSTICE RAMESH RANGANATHAN AND THE HON’BLE SRI JUSTICE GUDISEVA SHYAM PRASAD REFERRED CASE NO.71 of 1993 JUDGMENT:{Per the Hon’ble the Acting Chief Justice Ramesh Ranganathan} The Income Tax Appellate Tribunal, Hyderabad bench, has referred the following questions for our opinion. 1.Whether, on the facts and in the circumstances of the case, the provision made for increase in wages on the basis of the Wage Board Award which became enforceable on the date of the publication of the award on 20.07.1983 could be accepted as a liability having accrued on 19.05.1983 within the previous year ended 30.06.1983, when the assessee agreed before the Arbitrators that the award shall come into operation from an earlier date? provision made for increase in wages on the basis of the Wage Board Award which became enforceable on the date of the publication of the award on 20.07.1983 could be accepted as a liability having accrued on 19.05.1983 within the previous year ended 30.06.1983, when the assessee agreed before the Arbitrators that the award shall come into operation from an earlier date? 2.Whether, on the facts and in the circumstances of the case, on a true construction of the agreements, the provision made for payment of commission by the assessee to the Sri Lankan agents was allowable as an accrued liability? a true construction of the agreements, the provision made for payment of commission by the assessee to the Sri Lankan agents was allowable as an accrued liability? 3.Whether, on the facts and in the circumstances of the case, the expenditure incurred under the agreements with the Sri Lankan agents will amount to an expenditure incurred for maintaining an agency abroad within the meaning of Section 35B(1)(b)(iv) of the Income Tax Act? expenditure incurred under the agreements with the Sri Lankan agents will amount to an expenditure incurred for maintaining an agency abroad within the meaning of Section 35B(1)(b)(iv) of the Income Tax Act? 4.Whether, on the facts and in the circumstances of the case, the liability to pay the premium for insurance policy could be allowed as accrued liability within the previous year ended 30.06.1983 even though the indemnity depended on payment of the premium which was made only subsequent to the end of the previous year? liability to pay the premium for insurance policy could be allowed as accrued liability within the previous year ended 30.06.1983 even though the indemnity depended on payment of the premium which was made only subsequent to the end of the previous year? 5.Whether, on the facts and in the circumstances of the case, the liability to pay commission under the agreement dated 18.08.1981 with M/s. Annapurna Agencies accrued on the procurement of the purchase orders within the previous year ended 30.06.1983? liability to pay commission under the agreement dated 18.08.1981 with M/s. Annapurna Agencies accrued on the procurement of the purchase orders within the previous year ended 30.06.1983? 5.Whether, on the facts and in the circumstances of the case, the liability to pay commission under the agreement dated 18.08.1981 with M/s. Annapurna Agencies accrued on the procurement of the purchase orders within the previous year ended 30.06.1983? liability to pay commission under the agreement dated 18.08.1981 with M/s. Annapurna Agencies accrued on the procurement of the purchase orders within the previous year ended 30.06.1983? 6.Whether, on the facts and in the circumstances of the case, the liability to pay the liquidated damages under the terms of the agreement accrued when the delivery was made within the previous year ended 30.06.1983? liability to pay the liquidated damages under the terms of the agreement accrued when the delivery was made within the previous year ended 30.06.1983? QUESTION No.6: In so far as question No.6 is concerned, the Tribunal, in its order in ITA No.834/Hyd/1989 dated 26.03.1991, followed its decision for the earlier assessment year 1982-1983 in the assessee’s own case, in I.T.A. No.1785 of 1986, and held that the right to receive the extra price arose when the delivery was made, and the assessee had actually accounted for the extra price when the goods were actually delivered. On finding that its order for the earlier year had led to a reference, which was pending in the High Court, Question No.6, as extracted hereinabove, was also referred to this Court. This question, in so far as the assessee’s own case for the earlier assessment year 1982-83 is concerned, was considered in R.C.No.342 of 1991 and a Division bench of this Court, by its order dated 08.08.2013, answered the question in the affirmative, against the revenue and in favour of the assessee. Following the order of the Division bench, in R.C. No.342 of 1991 dated 08.08.2013, we answer question No.6 in the affirmative, against the revenue and in favour of the assessee. QUESTION No.1: For the assessment year 1984-85, the assessee filed its return on 30.06.1984 declaring a total income of Rs.1,47,92,909/-. A revised return was filed on 06.01.1987 declaring an income of Rs.1,71,92,147/-. The Income Tax Officer passed an assessment order on 05.01.1988 determining the total income of the assessee as Rs.11,95,39,861/-. Among the deductions claimed by the assessee, in its profit and loss account, was a provision for payment of increase in wages. A joint reference was made to the arbitrators, in an industrial dispute between the cement manufacturers association and their workmen, on 04.12.1981. The parties filed a memo before the arbitrators on 19.05.1983 agreeing that the award of the arbitrators would come into effect from 01.01.1982, and continue to remain in force till 30.06.1986. Thereafter the Award was made on 11.07.1983 which was received by the Central Government on 14.07.1983, and was published in the Gazette of India dated 20.07.1983. In its accounts, for the accounting year 01.07.1982 to 30.06.1983, the assessee made a provision for expenses relating to increase in wages from 01.01.1982 to 30.06.1982 for Rs.7,75,902/-, and for expenses relating to increase in wages from 01.07.1982 to 30.06.1983 for Rs.23,27,706/-, i.e for a total sum of Rs.31,03,608/-. The assessee’s claim, that these amounts should be deducted in computing their income, was rejected by the Income Tax Officer who opined that, since the Award itself was made after the end of the previous year, the assessee could not have worked out the provision for increase in wages; the Award became final only on its publication; and, since publication of the Award was beyond the previous year, the liability did not arise during the previous year. Accordingly, he disallowed the claim. In appeal, the CIT (Appeals) agreed with the Income Tax Officer that the liability accrued only after the close of the relevant accounting period, and could not therefore be allowed as a deduction in the said year. In further appeal, the Tribunal held that, while the Award was no doubt made on 11.07.1983 after the end of the previous year on 30.06.1983, it was made before the accounts were closed on 29.09.1983; while an Award, under Section 17 of the Industrial Disputes Act, became enforceable on the date of its publication in the gazette, it came into operation, under Section 17(4) of the Industrial Disputes Act, with effect from the dates specified therein or on the date when the Award became enforceable; since the assessee had agreed, before the arbitrators on 19.05.1983, that the Award should come into operation from 01.01.1982, their liability to pay the increased wages accrued on 19.05.1983; and, as the liability was accepted, it could be taken into account in computing the income of the previous year which ended on 30.06.1983. As the question, which arose on these facts, was whether the liability had accrued on a date prior to the date when the award itself became enforceable, and since there was no decision on the retrospective effect of an award with reference to the creation of a liability, the Tribunal has referred this question for our opinion. Sri J.V. Prasad, Learned Senior Standing Counsel for Income-tax, would submit that, in the case of an assessee following the mercantile system of accounting, the liability would arise or accrue only when the assessee becomes legally liable in respect of the same; till such time as the assessee is legally due, in respect of a liability, it cannot be said that the liability has accrued or has arisen to the assesee; in a situation where the liability may be contemplated, or the liability is uncertain on account of litigation or otherwise, such a liability can only be termed as a contingent liability, and not an accrued liability; it is only when a legally enforceable debt becomes due, can it be said that the liability has arisen, even if the amounts are actually paid at a later point of time; similarly, in the case of receipts, it is only when the assessee has acquired a legal right to receive the amounts, can receipt be said to have arisen to the assessee, even if they are not actually received; with respect to wages, liable to be paid on account of the Wage Board Award, the award was made only on 11.07.1983, it was received by the Central Government on 14.07.1983, and was published in the Gazette on 20.07.1983, i.e., all the three dates fall beyond the relevant previous year; the claim of the assessee, based on the Memo dated 19.05.1983, or on the retrospective date specified in the Gazettee, did not create any liability legally due by the assessee during the previous year relevant to the subject assessment year; the agreement between the parties was subject to an award being passed by the Wage Board; the submission of the learned Senior Counsel, appearing on behalf of the assessee, that, as the assessee was following the mercantile system of accounting, they were obligated to adhere to Accounting Standard 4, as per Section 145(2) of the Act and, on following the same, the amount is deductible, is not tenable; Section 145(2), as it now stands, was inserted for the first time w.e.f. 01.04.1997; the said provision was not in existence in so far as the relevant previous year is concerned; and, even otherwise, A.S. 4 does not aid the assessee in respect of the claim made under this head. Learned Senior Standing Counsel for Income-tax would rely on (1) Nonsuch Tea Estates Ltd. v. CIT, Madras[1]; (2) CIT v. Kirloskar Tractors Ltd.[2]; (3) Morvi Industries Ltd v. CIT (Cal)[3]; and (4) CIT v. Excel Industries Ltd.[4]. On the other hand Sri S. Ravi, Learned Senior Counsel appearing on behalf of the respondent-assessee, would submit that the increase in wages was agreed to, in principle, by both the Cement Manufacturers Association and the Workmen on 19.05.1983 by filing a Joint Memo before the Arbitrator; it is on the basis of the said memo that an award was passed on 11.07.1983, and the same was published in the Gazette dated 20.07.1983; therefore the liability, to pay the increased wages with effect from 1 (1975) 98 ITR 189 (SC) 2 (1998) 231 ITR 849 (Bom) 3 (1971) 82 ITR 835 (SC) 4 (2013) 358 ITR 295(SC) 01.01.1982, arose before the end of the previous year i.e., 30.06.1983, though the same was quantified, on the Award being passed, on 11.07.1983; the assessee, therefore, claimed Rs.31,03,608/- as deduction, as the said amount has been admitted as liability and became enforceable following the mercantile system of accounting; though this liability was quantified by the award dated 11.07.1983, as the accounts were finalized after the Award was published in the Gazette dated 20.07.1983, the assessee is entitled to claim deduction in terms of Accounting Standard (AS) 4, i.e Contingencies and Events Occurring After the Balance Sheet Date, issued by the Institute of Chartered Accountants of India (ICAI); the Accounting Standards (AS4 is relevant to the present case) issued by ICAI is a policy statement based on a number of Accounting Principles; if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date; the Accounting Standards were made mandatory only after the amendment to Sec.145 of the Income Tax Act, and Section 211 of Companies Act, 1956; though the Accounting Standards were not mandatory prior to the said amendments, the same was recognized to be a guiding principle to be adopted in Accounting Practice; judicial notice has been taken by this Court, in M.S. Raju v. Deputy Commissioner of Income Tax[5], regarding maintenance of accounts following AS-4; the reason for amendment of Section 145, as explained by Circular No.717 dated 14.08.1995, was to standardize the Accounting system either on cash or mercantile system of accounting, but not mixed or Hybrid methods; and the said circular in (215 ITR (stat.) 70 @ pg. 103-104) reads thus:- “Methods of accounting and accounting standards for computing income: accounting, but not mixed or Hybrid methods; and the said circular in (215 ITR (stat.) 70 @ pg. 103-104) reads thus:- “Methods of accounting and accounting standards for computing income: 44.1. Section 145(1) of the Income Tax Act prior to its amendment by the Finance Act, 1995, provided for computation of income from business or profession or income from other sources in accordance with the method of accounting regularly employed by the assessee. Income is generally computed by following one of the three methods of accounting, namely, (i) cash or receipts basis, (ii) accrual or mercantile basis, and (iii) mixed or hybrid method which has elements of both the aforesaid methods. It was noticed that many assesses are following the hybrid method in a manner that does not reflect the correct income. The Finance Act, 1995, has amended Section 145 of the Income-tax Act to provide that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall be computed only in accordance with either the cash or the mercantile system of accounting, regularly employed by an assessee. The first proviso to sub-section (1) of Section 145 has been deleted. 44.2. The Finance Act, 1995, has also empowered the Central Government to prescribe by notification in the Official Gazette, the accounting standards which an assessee will have to follow in computing his income under the head “Profits and gains of business or profession” or “Income from other sources”. These accounting standards wil be laid down in consultation with expert bodies like the Institute of Chartered Accountants. 44.3. The amendment will take effect from 1[st] April, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years”. Sri S. Ravi, Learned Senior Counsel, would submit that the issue relates to whether allowability of increase in wages should be made in the Financial Year A.Y. 1984-85 or 1985-86, and there is no dispute on the allowability of the amount; in CIT v. Nagri Mills Co. Ltd[6] the Bombay High Court, while dealing with a reference as to whether the Assessee was entitled for deduction towards bonus during the year 1952 or 1953, held that, by allowing such a deduction, there would be no consequence either in A.Y. 1952-53 or 1953-54; this view was followed by the Delhi High Court in CIT v. Shri Ram Pistons and Rings Ltd[7]; the Tribunal has rightly allowed the claim holding that Accounting Standard-4 permitted events, occurring after the Balance Sheet date and before finalization of Accounts, to be taken into account as the liability 6 (1958) 33 ITR 681 7 (2008) 220 CTR (Del.) 404 because of increase in wages accrued by virtue of the award dated 11.07.1983; and, once an amount is legally liable to be paid and enforceable though the same has not been actually incurred, such amount becomes expenditure and is allowable. Learned Senior Counsel would rely on Challapalli Sugars Ltd. v. CIT [8]; Bharat Earth Movers v. CIT[9]; CIT v. Pact Securities and Financial Services Ltd.[10]; M.S. Raju[5]; Nagri Mills Co. Ltd[6]; Shriram Pistons and Rings Ltd[7]; Kedarnath Jute Manufacturing Co. v. CIT[11]; Morvi Industries[3] and CIT v. Swadeshi Cotton and Flour Mills[12]). 6 (1958) 33 ITR 681 7 (2008) 220 CTR (Del.) 404 because of increase in wages accrued by virtue of the award dated 11.07.1983; and, once an amount is legally liable to be paid and enforceable though the same has not been actually incurred, such amount becomes expenditure and is allowable. Learned Senior Counsel would rely on Challapalli Sugars Ltd. v. CIT [8]; Bharat Earth Movers v. CIT[9]; CIT v. Pact Securities and Financial Services Ltd.[10]; M.S. Raju[5]; Nagri Mills Co. Ltd[6]; Shriram Pistons and Rings Ltd[7]; Kedarnath Jute Manufacturing Co. v. CIT[11]; Morvi Industries[3] and CIT v. Swadeshi Cotton and Flour Mills[12]). In the present case, the assessment year is 1984-85, and the previous year relevant thereto is from 01.07.1982 to 30.06.1983. The assessee maintains its accounts on the mercantile system of accounting. The computation of income is to be made in accordance with the method of accounting regularly employed by the assessee. It may either be the cash system or it may be the mercantile system where entries are made on accrual basis, i.e., accrual of the right to receive payment and the accrual of the liability to disburse or pay. (Godhra Electricity Co. Ltd. v. CIT[13]). Once the assessee has adopted the mercantile basis of accountancy, it is upon that basis, and that basis alone, that he has to be assessed. (Smt. Indermani Jatia v. CIT[14]).There are two principal systems of book-keeping, firstly, the cash system in which a record is maintained of actual receipt and actual disbursements, entries being posted when money or money's worth 8 [1975] 98 ITR 167 (SC) 9 (2000) 245 ITR 428 (SC) 10 (2015)374 ITR 681 (T&AP) 11 (1971) 82 ITR 363 (SC) 12 (1964)53 ITR 134 (SC) 13 (1997) 4 SCC 530 14 1959 Supp (1) SCR 45 : AIR 1959 SC 82 : (1959) 35 ITR 298 is actually received, collected or disbursed. There is, secondly, the mercantile system, in which entries are posted in the books of accounts on the date of the transaction, i.e., on the date on which rights accrue or liabilities are incurred, irrespective of the date of receipt or payment. For example, when goods are sold on credit, a receipt entry is posted as on the date of sale, although no cash is received immediately in payment of such goods; and a debit entry is similarly posted when a liability is incurred although payment on account of such liability is not made at the time. (State Bank of Travancore v. CIT[15]; Commissioner of Income-Tax, Madras v. A. Krishnaswami Mudaliar[16]). According to the cash system, a record is kept of actual receipts and actual payments, entries being made only when money is actually collected or disbursed and, if the profits of the business are accounted for in this way, the tax is payable on the difference between the receipts and the disbursements for the period in question. In the mercantile system, under which a profit and loss account is maintained, the assets and liabilities are valued and entered in the accounts at the end of the financial year, and the difference between the two is the profit upon which the tax is paid. (Dhakeshwar Prasad Narain Singh v. Commissioner of Income Tax, Bihar & Orissa[17]; State Bank of Travancore[15]). The mercantile system of accounting differs substantially from the cash system of book keeping. Under the cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits; whereas under the mercantile 15 (1986) 2 SCC 11 16 53 I.T.R. 122 17 (1936) 4 ITR 71 (Pat. HC) Income Tax, Bihar & Orissa[17]; State Bank of Travancore[15]). The mercantile system of accounting differs substantially from the cash system of book keeping. Under the cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits; whereas under the mercantile 15 (1986) 2 SCC 11 16 53 I.T.R. 122 17 (1936) 4 ITR 71 (Pat. HC) system credit entries are made in respect of amounts due, immediately they become legally due and before they are actually received; similarly, the expenditure items for which legal liability has been incurred are immediately debited even before the amounts in question are actually disbursed. (Smt.Indermani Jatia[14]; Morvi Industries Ltd.[3]).The distinguishing feature of the mercantile system of accountancy is that it 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. (Commissioner of Income Tax v. Singari Bai[18]; State Bank of Travancore[15]).Where accounts are kept on mercantile basis, the profits or gains are credited though they are not actually realised and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. The same is the position with regard to debits made. (Smt. Indermani Jatia[14]; C.I.T v. Shiv Prakash Janak Raj & Co. Pvt Ltd.[19]). In the mercantile system of accountancy, the book profits are taken for the purpose of assessment of tax, though the credit amount is not realized or the debit amount is not actually disbursed. (CIT v. A. Gajapathy Naidu[20]). Whenever the right to receive money, in the course of a trading transaction accrues or arises, even though income is not realised, income embedded in the receipt is deemed to arise or accrue. (Raja Mohan Raja Bahadur v. CIT[21]). Where the assessee keeps the accounts according to the mercantile method of book-keeping, the effect of 18 (1945) 13 ITR 224( All. HC) 19 (1996) 11 SCC 530 20 (1964) 7 SCR 767 : AIR 1964 SC 1653 : (1964) 53 ITR 114 21 (1967) 3 SCR 482 : AIR 1968 SC 114 : (1967) 66 ITR 378 making a credit entry in the interest account would be to treat that amount as income or profits received by the assesses or treated by him as received for the purpose of tax. (CIT, Madras v. A.T.K.P.L.S.P., Subramaniam Chettiyar[22]; Smt.Indermani Jatia[14]). An assessee, who follows the mercantile system of accounting, is entitled to deduct, from the profits and gains of the business, such liability which had accrued during the period for which the profits and gains were being computed, even though it is required to be discharged at a future date. (C.I.T v. Kalinga Tubes Ltd.[23]; Kedarnath Jute Manufacturing Co. Ltd.[11]).If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged later. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty, though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent liability. It is a liability in praesenti, though it will be discharged at a future date. It does not make any difference if the future date, on which the liability has to be discharged, is not certain. (Taparia Tools Ltd. v. CIT[24]; Bharat Earth Movers[9]). Where accounts are kept on accrual basis, profits or gains are credited though they are not actually realised. (Babulal Narottamdas v. CIT[25]).Income can be held to accrue when the assessee acquires a right to receive that income. Income must be 22 AIR 1927 Mad. 841 23 (1996) 2 SCC 277 24 (2015) 7 SCC 540 25 1991 Supp (2) SCC 618 held to accrue on the date when a debt becomes due. (Babulal Narottamdas[25]; E.D. Sassoon & Co. Ltd. v. C.I.T.[26]). Where accounts are kept on accrual basis, profits or gains are credited though they are not actually realised. (Babulal Narottamdas v. CIT[25]).Income can be held to accrue when the assessee acquires a right to receive that income. Income must be 22 AIR 1927 Mad. 841 23 (1996) 2 SCC 277 24 (2015) 7 SCC 540 25 1991 Supp (2) SCC 618 held to accrue on the date when a debt becomes due. (Babulal Narottamdas[25]; E.D. Sassoon & Co. Ltd. v. C.I.T.[26]). When the assesses is following the mercantile system of accounting, the liability to pay sales tax would accrue the moment the dealer made sales, which are subject to sales tax. At that stage the obligation to pay the tax arises. If the liability to pay the central sales tax arose or accrued, during the previous year relevant to the assessment year 1962-63, the liability to pay the quantified sales tax dues can be said to have accrued to the assessee for the relevant assessment year 1962-63, even though assessment, for that year, was completed by the Sales Tax Officer on 31.3.1966. If the tax liability is reduced in appeal/revision and if, in retrospect, it was found that, during the relevant assessment year, the assessee had claimed a large amount of deduction by way of business expenditure, the difference of the amount wrongly claimed and allowed in the earlier relevant assessment year can always be added back in the assessment of the relevant subsequent assessment year. (Kalinga Tubes Ltd.[23]; Kedarnath Jute Manufacturing Co. Ltd.[11]; Pope The King Match Factory v. Commissioner of Income-tax[27]). In Pope The King Match Factory[27] a demand for excise duty was served-on the assessee who debited that amount in his accounts. on the last day of his accounting year and claimed the amount as a deductible allowance on the ground that he was keeping his accounts on the mercantile basis. The Madras High Court held that the assessee had incurred an enforceable legal 26 [1954] 26 ITR 27 (SC) 27 (1963) 50 ITR. 495 (Mad) liability on and from the date on which he received the Collector's demand for payment, and his endeavor to get out of that liability by preferring appeals did not detract from or retard the efficacy of the liability which had been imposed upon him by the competent excise authority. The law declared by the Madras High Court was approved by the Supreme Court in The Kedarnath Jute Mfg. Co. Ltd.[11]. If a business liability has arisen in the accounting year, the deduction should be allowed even if such a liability may have to be quantified and discharged at a future date. (Bharat Earth Movers[9]; Taparia Tools Ltd.[24]). It is not open to the Income-tax Officer, if income has accrued to the assessee and is liable to be included in the total income of a particular year, to ignore the accrual, and thereafter tax it as income of another year on the basis of receipt. (Laxmipat Singhania v. C.I.T[28]).If an assessee regularly adopts the mercantile system of accounting he would be liable to tax on the profits thus credited by him in his books of accounts subject to all permissible deductions.(Keshav Mills Ltd. v. CIT[29]). When an Income Tax Officer proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions, namely, (i) what is the system of accountancy adopted by the assessee? and (ii) if it is the mercantile system of accountancy, subject to the deemed provisions, when has the right to receive that amount accrued? If he comes to the conclusion that such a right accrued or arose to the assessee in a particular 28 AIR 1969 SC 501 29 1953 SCR 950 : AIR 1953 SC 187 : (1953) 23 ITR 230 accounting year, he should include the said income in the assessment of the succeeding assessment year. No power is conferred on the Income Tax Officer under the Income-tax Act, to relate back an income, that accrued or arose in a subsequent year, to another earlier year on the ground that the said income arose out of an earlier transaction. (A. Gajapathy Naidu[20]). 28 AIR 1969 SC 501 29 1953 SCR 950 : AIR 1953 SC 187 : (1953) 23 ITR 230 accounting year, he should include the said income in the assessment of the succeeding assessment year. No power is conferred on the Income Tax Officer under the Income-tax Act, to relate back an income, that accrued or arose in a subsequent year, to another earlier year on the ground that the said income arose out of an earlier transaction. (A. Gajapathy Naidu[20]). As the assessee, in the present case, is maintaining its books of accounts on the mercantile system of accounting, the question which necessitates examination is when its liability, to pay increased wages to its workmen, arose. In order to answer this question, it is necessary to take note of the relevant statutory provisions. In an industrial dispute between the Cement Manufacturers Association and their Workmen, a joint reference was made for arbitration under Section 10-A of the Industrial Disputes Act on 04.12.1981. Section 2(b) of the Industrial Disputes Act, 1947 defines an award to mean an interim or a final determination of any industrial dispute, or of any question relating thereto, by any Labour Court, Tribunal or National Industrial Tribunal and includes an arbitration award made under Section 10-A. Section 10-A relates to voluntary reference of disputes to arbitration and, under sub-section (1) thereof, where any industrial dispute exists or is apprehended, and the employer and the workmen agree to refer the dispute to arbitration, they may, at any time before the dispute has been referred under Section 10 to a Labour Court or Tribunal or National Tribunal, by a written agreement, refer the dispute to arbitration and the reference shall be to such person or persons (including the presiding officer of a Labour Court or Tribunal or National Tribunal) as an arbitrator or arbitrators as may be specified in the arbitration agreement. Section 10-A(3) requires a copy of the arbitration agreement to be forwarded to the appropriate Government and the Conciliation Officer, and the appropriate Government shall, within one month from the date of receipt of such a copy, publish the same in the official gazette. Under Section 10-A(3A) where an industrial dispute has been referred to arbitration and the appropriate Government is satisfied that the persons making the reference represent the majority of each party, the appropriate Government may, within the time referred to in sub-section (3), issue a notification in such manner as may be prescribed; and when any such notification is issued, the employers and workmen who are not parties to the arbitration agreement but are concerned in the dispute, shall be given an opportunity of presenting their case before the arbitrator or arbitrators. Section 10-A(5) stipulates that nothing in the Arbitration Act, 1940 shall apply to arbitration under Section 10-A. The parties to the industrial dispute i.e. the Cement Manufacturers Association and their Workmen filed a memo before the arbitrators on 19.05.1983 agreeing that the arbitrators award may be given effect to from 01.01.1982, and to continue to remain in force till 30.06.1986. The award was passed by the arbitrators only 11.07.1983 which is beyond the previous year 01.07.1982 to 30.06.1983. This award dated 11.07.1983 is said to have been received by the Government of India on 14.07.1983 and was, admittedly, published in the Gazette of India on 20.07.1983. The question which necessitates examination is when the liability to make payment, in terms of the arbitration award dated The parties to the industrial dispute i.e. the Cement Manufacturers Association and their Workmen filed a memo before the arbitrators on 19.05.1983 agreeing that the arbitrators award may be given effect to from 01.01.1982, and to continue to remain in force till 30.06.1986. The award was passed by the arbitrators only 11.07.1983 which is beyond the previous year 01.07.1982 to 30.06.1983. This award dated 11.07.1983 is said to have been received by the Government of India on 14.07.1983 and was, admittedly, published in the Gazette of India on 20.07.1983. The question which necessitates examination is when the liability to make payment, in terms of the arbitration award dated 11.07.1983, accrued. The assessee made a provision for expenses relating to increase in wages from 01.01.1982 to 30.06.1982 for Rs.7,75,902/-, and for expenses relating to increase in wages from 01.07.1982 to 30.06.1983 for Rs.23,27,706/- i.e for a total sum of Rs.31,03,608/- in its books of accounts for the previous year 01.07.1982 to 30.06.1983. The manner in which the assessee recorded its liability in its books of accounts is not conclusive, for the test to be applied, in cases where an assessee is regularly maintaining its books of accounts on the mercantile system of accounting, is when the liability accrued, and it is only on the date of accrual of such expenditure can the assessee claim its deduction from their income during the relevant previous years. The liability to pay tax on the income arises when it has arisen or accrued, and how the assessee deals with it subsequently does not affect that liability. (CIT v. K.R.M.T.T. Thyagaraja Chetty[30]; Sree Meenakshi Mills Ltd. v. CIT[31]). Whether income tax is due or not cannot be determined according to the manner in which the person, making the profit, pleases to deal with it. (Californian Copper Syndicate (Limited and Reduced) v. Harris (Surveyor of Taxes[32]; Raja Mohan Raja Bahadur[21]).A party cannot avoid tax by adopting the simple expedient of not disclosing its receipt in his books. That will be a case of income accrued or arisen but concealed and not of income not accrued or arisen. (Sree Meenakshi Mills Ltd.[31]). The liability, regarding increase in wages, arose only in terms of the arbitration award made under Section 10-A of the Industrial 30 (1954) SCR 258 31 1956 SCR 691 : AIR 1957 SC 49 : (1957) 31 ITR 28 32 (1905) 5 TC 159 Disputes Act. Section 17 of the Industrial Disputes Act, as it then stood, relates to publication of reports and awards and, under sub-section (1) thereof, every arbitration award shall, within a period of thirty days from the date of its receipt by the appropriate Government, be published in such manner as the appropriate Government thinks fit. Section 17(2) stipulated that, subject to the provisions of Section 17-A, the award, published under sub-section (1), shall be final and shall not be called in question by any Court in any manner whatsoever. Section 17-A related to commencement of the award and, under sub-section (1) thereof, an award (including an arbitration award) shall become enforceable on the expiry of thirty days from the date of its publication under Section 17. 32 (1905) 5 TC 159 Disputes Act. Section 17 of the Industrial Disputes Act, as it then stood, relates to publication of reports and awards and, under sub-section (1) thereof, every arbitration award shall, within a period of thirty days from the date of its receipt by the appropriate Government, be published in such manner as the appropriate Government thinks fit. Section 17(2) stipulated that, subject to the provisions of Section 17-A, the award, published under sub-section (1), shall be final and shall not be called in question by any Court in any manner whatsoever. Section 17-A related to commencement of the award and, under sub-section (1) thereof, an award (including an arbitration award) shall become enforceable on the expiry of thirty days from the date of its publication under Section 17. Though the proviso to Section 17-A(1) does not appear to have any application to arbitration awards, it is nonetheless necessary to note its contents as reliance is placed, on behalf of the assessee, on a judgment of this Court whereby the proviso was declared ultravires the constitutional scheme. Under proviso (a) to Section 17-A(1), if the appropriate Government is of opinion, in any case where the award has been given by a Labour Court or Tribunal in relation to an industrial dispute to which it is a party, that it will be inexpedient on public grounds affecting national economy or social justice to give effect to the whole or any part of the award, the appropriate Government, or as the case may be, the Central Government may, by notification, in the official gazette, declare that the award shall not become enforceable on the expiry of the said period of thirty days. While Section 17(1) required an arbitration award to be published, and on its publication to attain finality under Section 17(2), Section 10-A(3) requires the appropriate Government, within one month from the date of receipt of a copy of the award, to publish the same in the official gazette. Section 17-A(1), as it then stood, stipulated that, after expiry of the 30 days period from the date of its publication under Section 17, the award shall become enforceable. Ordinarily, an award comes into operation from the time stated in Section 17(1) or Section 10-A(3) of the I.D. Act i.e., on its publication in the Gazette. The Tribunal, however, is given the power to order that its award shall be applicable from another date (All India Reserve Bank Employees’ Association v. Reserve Bank of India[33]), even from a date prior thereto.Retrospective operation implies the operation of the award from a date prior to the reference, and the word 'retrospective' cannot apply to the period between the date of the reference and the award. (Wenger & Co. v. Their Workmen[34]; All India Reserve Bank Employees’ Association[33]). Section 17(4) gives a discretion to the Tribunal, and no general principle is either possible or desirable to be stated in relation to the fixation of the date from which the award should operate. (All India Reserve Bank Employees’ Association; The Hindustan Times Ltd. v. Their Workmen[35]).A discretion "exercised on judicial principles by the Tribunal, about the commencement of the award, should, ordinarily, not be interfered 33 (1965) 2 LLJ 175 34 (1963) 2 LLJ 403 35 (1964) 1 SCR 234 with. (All India Reserve Bank Employees’ Association v. Reserve Bank of India[33]; Remington Rand of India v. Workmen[36]; Rajkamal Kalamandir (P) v. Indian Motion Picture Employees’ Union[37]; and Western India Match Company Ltd. v. Their Workmen[38]). Section 17(4) gives a discretion to the Tribunal, and no general principle is either possible or desirable to be stated in relation to the fixation of the date from which the award should operate. (All India Reserve Bank Employees’ Association; The Hindustan Times Ltd. v. Their Workmen[35]).A discretion "exercised on judicial principles by the Tribunal, about the commencement of the award, should, ordinarily, not be interfered 33 (1965) 2 LLJ 175 34 (1963) 2 LLJ 403 35 (1964) 1 SCR 234 with. (All India Reserve Bank Employees’ Association v. Reserve Bank of India[33]; Remington Rand of India v. Workmen[36]; Rajkamal Kalamandir (P) v. Indian Motion Picture Employees’ Union[37]; and Western India Match Company Ltd. v. Their Workmen[38]). As the award itself was made only on 11.07.1983, after the end of the previous year 01.07.1982 to 30.06.1983 for the relevant assessment year 1984-85, the liability to pay increased wages, in terms of the arbitration award dated 11.07.1983, can be said to have accrued only thereafter, and not prior thereto in the previous year 01.07.1982 to 30.06.1983. The mere fact that a joint memo was filed by the Cement Manufacturers Association and its members before the arbitrator on 19.05.1983 agreeing that the award be made applicable from 01.01.1982 is of no consequence, as it is only on an award being passed, could the joint memo be given effect to. Consequently, the assessee was not entitled to claim deduction of these amounts in the previous year relevant to the Assessment year 1984-85, merely because a joint memo was filed before the arbitrator on 19.05.1983, as their liability, to make payment of the increased wages, accrued only in terms of the arbitration award made on 11.07.1983, after the end of the previous year 01.07.1982 to 30.06.1983. As noted hereinabove, the arbitrators award was published in the Gazette of India, as required under Section 10-A(3) of the Industrial Disputes Act, on 20.07.1983. That the parties to the Award, i.e., the Cement Manufacturers Association and their 36 (1962) 1 LLJ 287 37 (1963) 1 LLJ 318 38 (1962) 2 LLJ 459 Workmen, had agreed before the arbitrators on 19.05.1983, only means that, in terms of the said joint memo, the award would apply from an anterior date i.e., from 01.01.1982. The distinction, between the date from which the award is enforceable and the date from which it comes into operation, must be borne in mind. Although, normally, the date of enforceability and the date of operation may be identical, yet there may be cases where these two dates may be different. The date from when the