Soumitra Pal, J. -The appeal was admitted on the following substantial questions of law:—
"1. Whether the Tribunal was justified in deleting the addition of Rs.63,37,320/- on the plea of deferred receipt instead of treating the same as accrued receipt when admittedly the assessee is following Mercantile system of accounting and the receipt should have been on accrual basis ?
2. Whether the Tribunal erred in deleting the said amount by misinterpreting two agreements and the condition contained therein although the agreement in question is an arranged mutual agreement dated 05.09.1988 which cannot take away the nature of accrued receipt of fees in the hands of the assessee and therefore the decision of the Tribunal is perverse ?
3. Whether the order of the Tribunal is at all sustainable in view of the subsequent events or activities of the assessee inasmuch as the assessee stopped filing of return from the assessment year 1992-93 as per the records of the Assessing Officer which proved the assessee is not inclined to pay due taxes on the accrued receipts rather to evade ?"
2. Considering the gravity and importance of the present appeal, we requested Mr. J.P. Khaitan, learned Senior Advocate to act as amicus curiae to assist the Court, which he did willingly and admirably.
3. This income tax appeal relates to the income tax assessments of the assessee for the assessment years 1989-90, 1990-91 and 1991-92. The assessee, a company, follows the mercantile system of accounting. Since trade mark and marketing assistance fee of Rs.63,37,320 ('fee' for short) payable by M/s Telelink Nicco Ltd (for short 'Telelink Nicco') to the assessee accrued in the financial year 1990-91, the assessment year 1991-92 is relevant. The Assessing Officer found that the assessee did not credit the fee. Explanation was as the original agreement between the assessee and Nicco Telelink for payment of fee payable by Telelink Nicco got modified by an agreement, the income did not accrue during the financial year 1990-91, that is in the assessment year 1991-92. However as fee was receivable from Telelink Nicco, the Assessment Officer treated the income as accrued and added it to the income of the assessee. Aggrieved, appeal was preferred before the CIT(A). The assessee succeeded. The revenue, being aggrieved, preferred appeal before the Income Tax Appellate Tribunal. The Tribunal found that the assessee, a co-promoter of Telelink Nicco and M/s.Nicco Orissa Ltd., had guaranteed loan from financial institutions apart from investing money by way of share capital and loan. In view of financial difficulties of the two companies, the payment of loan and interest payable to the financial institutions were delayed. On being approached for reschedulement of loan and interest, necessary conditions were imposed by the financial institutions for deferment of fee payable to the assessee. The Tribunal found that as the assessee had agreed to deferment of fee, the original agreement got modified which were ratified by a resolution of the Board. Since modification of the agreement rendered the amount as not due and as the genuineness of the modifications were not in doubt and was not an afterthought, the Tribunal held that for the assessment year 1991-92 nothing had accrued to the assessee for the purpose of taxation.
4. Mr. S. N. Dutta, learned advocate for the appellant submits that there is no dispute that the fees were receivable from Telelink Nicco a sister concern of the assessee. The said company was promoted by the assessee. Since the income had accrued, deferment cannot take it out of the ambit of the definition of 'income'. As the assessee did not give up the income, the Tribunal erred in holding that the income did not accrue.
5. Mr.J.P. Khaitan, learned amicus curiae has pointed out that the real dispute hinged around the issue whether the income had really accrued or not. The facts surrounding the deferment of income has to be examined. If deferment means postponing the income itself, as deferment was made prior to the close of the assessment year 1991-92 and parties agreed not to pay, therefore, it does not come within the ambit of the term 'income'. In support of his submission he has relied on the following judgements:- CIT v. Birla Gwalior (P) Ltd [1973] 89 ITR 266 (SC), CIT v. Excel Industries Ltd. [2013] 358 ITR 295/38 taxmann.com 100/219 Taxman 379 (SC), CIT v. Simplex Concrete Piles India (P.)Ltd. [1989] 179 ITR 8/45 Taxman 370 (Cal.) and CIT v. Shree Export House Ltd. [1992] 194 ITR 695/61 Taxman 152 (Cal).
6. It appears from the order of the Tribunal, that the assessee in view of the modification of the argeement and in view of the letters as mentioned in the order under challenge, had agreed to defer the receipt of payment of fees of Rs.63,37,320/- from Nicco Telelink. The veracity of the agreement and letters are not in doubt.
7. Now the issue is as the assessee was following mercantile system of accounting, whether the Tribunal was justified in holding that the receipt of the fee stood deferred and was not due. In Birla Gwalior (P.) Ltd. (supra) the facts were the assessee was the managing agent of the National Bearing Co.Ltd. and Gwalior Rayon & Silk Manufacturing Company. As managing agent of the former company it was entitled to receive a commission of 12½ per cent on the net profits of the managed company together with a sum of Rs.18,000 as office allowance. In the case of Gwalior Rayon & Silk Manufacturing Co. the assessee was entitled to get an office allowance of Rs.30,000 per year in addition to the agreed managing agency commission. In the relevant accounting years the assessee gave up the managing agency commission due from both the managed companies. It also gave up the office allowance due from Gwalior Rayon & Silk Manufacturing Company. The accounting years of both the assessee-company as well as the managed companies were the financial years. In the agreement entered into between the assessee-company and the managed companies no date for payment of the managing agency commission was stipulated. The commission was given up by the assessee-company after the end of the financial year but before the accounts of the managed companies were made up. The accounts of the managed companies were made up somewhere during the end of September of the year following the respective accounting years. But, in the case of office allowance, the same was given up even before the end of the financial years. On the basis of these facts the Income-tax Officer as well as the Appellate Assistant Commissioner came to the conclusion that the deductions claimed were not allowable. The Income Tax Appellate Tribunal differed from the view taken by the Income Tax Officer and the Appellate Assistant Commissioner. The High Court agreed with the order passed by the Tribunal. Aggrieved, the Revenue preferred appeal and the Supreme Court held as under :
"Now turning to the question regarding giving up of the commission, as mentioned earlier, the assessee was maintaining its accounts on the basis of the mercantile system. Its accounting year was the financial year. It gave up the commission after the end of the financial year. On the basis of these facts it was contended on behalf of the revenue that the commission had accrued before it was given up. Hence, it cannot be said that the assessee had not earned the commission in question. Therefore, the assessee's case cannot be considered under section 10(1). We are unable to accept this contention as correct. As mentioned earlier, no due date was fixed for the payment of the commission under the managing agency agreements. The commission receivable could have been ascertained only after the managed company made up its accounts. The assessee had given up the commission even before the managed company made up its accounts. Hence, the mere fact that the assessee-company was maintaining its accounts on the basis of the mercantile system cannot lead to the conclusion that the commission had accrued to it by the end of the relevant accounting year." (page 270)
8. The question as to when an income becomes due came up for consideration in CIT v. Excel Industries Ltd. (supra) wherein it was held as under :
"It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee." (paragraph 20)
9. In Simplex Concrete Piles (India) (P.)Ltd. (supra), as the assessee followed the mercantile system of accounting, question arose whether the Tribunal was right in holding that the retention money in respect of the jobs completed by the assessee during the relevant previous year should not be taken into account in computing the profits and gains of the assessee's business. Having regard to the facts of the case and taking note of the terms and conditions of the contract, which were examined by the Tribunal, the High Court held that since the retention money was legally due to the assessee on completion of work and on the fulfillment of obligations under the contract and as the dates of submission of the bills were immaterial and as the assessee had no right to claim any part of the retention money till verification of satisfactory execution of the contract, the amount in question did not accrue.
10. In Shree Export House Ltd. (supra), where the assessee was following the mercantile system of accounting, a similar question arose. The Income Tax Officer held that interest on loan had accrued and assessed accordingly. In appeal the CIT deleted the addition which was affirmed by the Tribunal. On a reference under section 256(1) of the Income Tax Act, 1961, it was held as under:-
'"In the instant case, the assessee is in a strong position. Not only the root or the germ to stop accrual of interest was planted in the relevant year of account, but the root or germ also fructified in the relevant year of account. A request came for giving up of the interest by a letter from the debtor-company within the year of account and the assessee also, in its return, within the year of account and before its accrual, gave up the claim of interest." (page 699) The Court went on to hold that "There is no finding in the instant case that interest was given up as an afterthought. In fact, the interest was given up in the course of the relevant accounting year itself".' (page 700)
11. Therefore, the principle of law which emerges is if it is found that the assessee had given up the amount even before the accounts were made up, the mere fact that the accounts of the assessee are maintained on mercantile basis cannot lead to a conclusion that the amount had accrued in the relevant assessment year. Hence, the actual or real accrual of income is the point in issue.
12. In the case in hand, it appears from records that in its best interest the assessee had agreed for deferment of fees. Accordingly the original agreement was modified which was supported by a resolution of the Board. The genuineness of such modification is not in question as the financial institution was a party to such modification. Therefore, as the accrual of income was deferred prior to the closing of the accounting year, which as evident from facts was for business expediency, and as the right to receive the fee was suspended, the Tribunal was justified in deleting the addition of Rs.63,37,320.
13. Therefore, the question no.1 is answered in the affirmative, against the revenue and in favour of the assessee.
14. Accordingly, the question no.2 is answered in the negative, against the revenue and in favour of the assessee.
15. So far as the question no.3 is concerned we are of the view that if the assessee has stopped filing returns from the assessment year 1992-93, the revenue authorities are at liberty to proceed for non-filing of returns as per provisions of the Income Tax Act, 1961.
16. Thus, the appeal is dismissed.
17. It is necessary again put on record our appreciation for the assistance rendered by Mr. J.P. Khaitan, learned Senior Advocate, as amicus curiae, ably assisted by Mr. S.K. Bhowmik and Mr. S. Kejriwal learned advocates.