1990-VIL-92-ITAT-DEL

Equivalent Citation: TTJ 038, 551,

Income Tax Appellate Tribunal DELHI

Date: 29.01.1990

INCOME TAX OFFICER.

Vs

INFRATEX ENGG. CO.

BENCH

Member(s)  : S. K. CHANDER., M. A. BAKSHI.

JUDGMENT

This is an appeal by the Revenue directed against the order of the CIT(A)-I,New Delhion the following ground:

"On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs. 3 lakhs made on account of service charges paid to M/s Rashmi Trading Co.,Bombay".

2. The assessee is a private limited company and the accounting year for the asst. yr. 1983-84 ended on30th Sept., 1982. A sum of Rs. 3 lakhs was claimed as deduction on account of service charges payable to M/s Rashmi Trading Co., 1/11, Ramkrishna Co-operative Society, JVPD Scheme,Bombay. The amount was shown as payable for the services rendered as under:

(1) From21st Oct., 1980to30th Sept., 1981Rs. 1,20,000

(2) From1st Oct., 1981to30th Sept., 1982Rs. 1,80,000

The Assessing Officer disallowed the claim of Rs. 1,80,000 as he was not satisfied that M/s Rashmi Trading Co. had rendered any services which would entitle them to the payment of Rs. 1,80,000. The claim of Rs. 1,20,000 was disallowed as it pertained to the preceding year. The Assessing Officer was also guided in disallowing the claim by the fact that no payment had been made to Rashmi Trading Co. till the end of the accounting period. The CIT(A) on consideration of evidence was satisfied that services were rendered by M/s Rashmi Trading Co. and that the payments had been made subsequently to the said concern for the services rendered. He accordingly allowed deduction of Rs. 1,80,000 as pertaining to the year under appeal. Deduction on account of Rs. 1,20,000 was also allowed considering the fact that formal agreement for payment of services charges was executed during the year under appeal in consequence of which the assessee had incurred a liability to pay. The CIT(A) was also guided by the fact that in the preceding year there was only a moral binding of making a payment to M/s Rashmi Trading Co. and accordingly, the liability could not be said to have accrued to the assessee in that year.

3. The Revenue being aggrieved, is in appeal before us. The learned Departmental Representative, Shri Subhas Kumar contended that in respect of payment of Rs. 1,20,000 no deduction could be allowed as the expenditure admittedly related to the preceding year. Since the assessee was maintaining books of account on mercantile basis, it was accordingly argued that the claim could not be allowed in the subsequent year, i.e., the year under consideration.

4. On the other hand, the learned counsel for the assessee, Shri K. Sampat, C.A., drew our attention to the correspondence between Mr. G.D. Hirennandani of Rashmi Trading Co. and Shri T.K. Chakraborty of the assessee company. It was brought to our notice that there was an understanding between Shri G.D. Hirennandani and Mr. T.K. Chakraborty for rendering of services by M/s. Rashmi Trading Co. to the assessee company which had not been incorporated till21st Oct., 1980. The learned counsel contended that there was no office of the assessee company atBombayand it was also not financially viable for the company to open an office atBombay. The services of M/s Rashmi Trading Co. were accordingly utilised till the end of September, 1986, when the company was in a position to station one Director and two engineers atBombayand when the agreement with M/s Rashmi Trading Co. was terminated. The learned counsel accordingly urged that there should be no dispute with regard to allowance of a deduction in respect of Rs. 1,80,000 which relates to the year under appeal as the liability has accrued during the year in any case. With respect to deduction of Rs. 1,20,000 relating to the preceding year, the learned counsel contended that there was no definite liability for payment of services charges to M/s Rashmi Trading Co. prior to execution of formal agreement on 27th of Aug., 1982. Before the incorporation of the company Shri T.K. Chakraborty was in correspondence with M/s G.D. Hirennandani of M/s Rashmi Trading Co. and though the payment of service charges was negotiated between the parties, there was no formal agreement in consequence of which the liability could be said to have accrued during the preceding year. In this connection the learned counsel has relied upon a decision of the Hon'ble Supreme Court in the case of CIT vs. A. Gajapati Naidu (1964) 53 ITR 114 (SC). In the said case the Hon'ble Supreme Court has held as under :

"When an ITO 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 mercantile system subject to the deeming provisions, when has the right to receive accrued? If he comes to this conclusion that such a right accrued or arose to the assessee in a particular accounting year, he should include the said income in the assessment of the succeeding assessment year. No power is conferred on the ITO under the Act to relate back an income that accrued or arose in a subsequent year to another earlier year on the ground that income arose out of an earlier transaction".

5. On the basis of the authority quoted above, the learned counsel has contended that when an income is to be assessed only when the right accrues, on the same analogy, the liability is to be allowed in the year in which the payee acquired the right to receive the amount. The learned counsel has further relied on Nonsuch Tea Estate Ltd. vs. CIT 1975 CTR (SC) : (1975) 98 ITR 189 (SC) in support of his contention.

6. We have given our careful consideration to the rival contentions and have perused the records. The CIT(A) on consideration of relevant evidence has been satisfied that services were rendered by M/s Rashmi Trading Co. to the appellant company and that the payments have been made by the assessee company as under:

7. Since this is a finding of fact recorded by the CIT(A) and the Departmental Representative not having established that the finding reached by the learned CIT(A) is incorrect, we confirm the same. The deduction of Rs. 1,80,000 relating to the year in appeal for which the liability to pay has also accrued during the year in appeal is allowable as a deduction.

8. For a sum of Rs. 1,20,000 pertaining to the period of 21st Oct., 1980 to 30th Sept., 1981 it is observed from the correspondence that M/s Rashmi Trading Co. had claimed a sum of Rs. 15,000 p.m. for rendering services to the assessee company at Bombay. The assessee had accepted the terms subject to deduction by a sum of Rs. 5,000 p.m. The letter datedAugust 9, 1980being relevant written by Shri T.K. Chakraborty to Shri G.D. Hirennandani is reproduced hereunder:

"Thank you for your letter dated31st July, 1980. I am happy to note that you can effectively liaison inBombayfor my company and render the best services. That you have fully understood of the requirement to enable my company to start its operations inBombayis a very good sign. I think we can cooperate on mutually agreeable terms. I have one observation to make on your terms. For a new company, which is unable to participate financially or to take heavy liabilities, I find your service charges on the higher side. You will appreciate that although I will not be in a position to remunerate you right from start, I do wish to compensate you as soon as possible. On that account, I will be morally obligated to you and shall consider it a personal liability which should be cleared as early as I am able to. Therefore, I propose that you reduce your charges by Rs. 5,000 per month only. Should you agree to this, I would reckon that our business relationship will start from1st Oct., 1980. Based on this understanding and after our company will have made enough progress, we propose to enter into a formal agreement. I should like to inform you that I have started processing my application for registration of my company with the Registrar of Companies and expect the registration to take place by October, 1980. I now await your reply".

9. It is evident from the contents of the letter quoted above that there was an understanding between the two persons for rendering of services and payment of service charges before the incorporation of the company. Though M/s Rashmi Trading Co. offered the services to the assessee, there was no agreement and for that matter even written understanding between the company and M/s Rashmi Trading Co. till the execution of an agreement on27th Aug., 1982. So, it is clear that M/s Rashmi Trading Co. had not acquired any enforceable right against the company for payment of service charges till a formal agreement was executed. Even though the assessee has maintained books of account on mercantile basis, the assessee could not claim liability in the earlier year when the same had not accrued. It is now well settled that even under mercantile system of accounting the liability is allowable in the year of accrual even if it relates to an earlier year. Since we are of the view on consideration of the relevant evidence that the liability for payment of service charges accrued during the year under appeal by virtue of an agreement executed by the company with M/s Rashmi Trading Co., the assessee is entitled to a deduction for a sum of Rs. 1,20,000 in the year under appeal even if the expenditure relates to the preceding year. The CIT(A) having allowed deduction of Rs. 3 lakhs towards the liability on account of service charges paid to M/s Rashmi Trading Co., we see no reason to interfere.

10. In the result, the appeal of the Revenue is dismissed.

 

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