R.M. Sahai, J. - (1.) CLAIM of allowability of interest and commission in 1959-60 and 1960-61 (ITR No. 108 of 1982), expenditure on litigation and establishment in 1961-62 to 1965-66 (ITR No. 185 of 1973), and bad debt in 1966-67 (ITR No. 1231 of 1976) by the assessee shall principally depend on the construction of the agreement, dated October 26, 1954, entered into between the assessee, a firm registered and constituted with the object of carrying on business as sole distributors for sale of yarn and cloth manufactured by three textile mills, and B.R. and Sons, their sole selling agents, and the award given by the Tribunal of Arbitration, Federation of Indian Chambers of Commerce and Industry, on August 27, 1964, in a dispute between them.
(2.) ALTHOUGH these references arise out of different orders passed by the Tribunal, they stem out of the same transaction, and therefore, they are being disposed of by this common order. Under an agreement of 1954, the assessee was to invest Rs. 25 lakhs for distribution and sale of products, manufactured by textile mills which amount was always to remain invested. On delivery of goods to the assessee on consignment basis against advance payment, the assessee was entitled to 5% interest from the date of payment till the sale of goods. Assessee was also entitled to 66 2/3 of the expenditure incurred by it on establishment, etc. And on sale of goods it was to get commission of 1 1/2% of sales. The agreement appears to have remained in operation till November, 1958, when B.R. Sons wrote a letter to the assessee complaining that it was not fulfilling its obligation and responsibility under the agreement. Similar letters were repeated on 1st and 9th December, 1958. Ultimately, the dispute was referred to arbitration in 1959. Claims and counter-claims were made. In July, 1964, an award was given directing the assessee to pay Rs. 2,50,000 in full and final settlement. None of these letters are on record nor were they produced by the learned standing counsel despite a specific order of this court on the application of the assessee and grant of adjournments. But as the contents are mentioned in one or the other of the references, it is sufficient for disposal of these references. In assessment year 1959-60, the assessee had debited a sum of Rs. 1,75,509'87 by way of interest to the account of M/s. B.R. Sons and B.R. Kothi in its books of head office and branches and had taken these amounts to its profit and loss accounts. Certain other amounts by way of travelling expenses, insurance and bank commissions, etc., were also shown as recoverable from M/s. B.R. Sons. Consequently, they were debited in the books of the assessee in the account of M/s. B.R. Sons. In the books of B.R. Sons Ltd., a sum of Rs. 2,88,237.77 had been provided towards establishment, brokerage, distributor's commission, interest, etc. Of this, a sum of Rs. 2,88,237.77 was due to the assessee. These various amounts had been debited and charged to the profit and loss account of the company and liability thereof was shown as "Liability for expenses". In the balance-sheet, it was noted, the figure of Rs. 12,79,362-04, includes a provision of Rs. 2,85,266.01 by the company. "Disputed". Thus from the account books of B.R. Sons it is clear that the amount shown as debited in the name of the assessee was not admitted but disputed. When the assessee filed its return for 1959-60 for the period ending June 10, 1959, it showed an income of Rs. 3,07,431, but in January, 1964, the assessee filed a revised return showing loss of Rs. 5,63,087. Along with the revised return a covering letter of January 23, 1964, was also sent to the ITO, Central Area, Kanpur, stating that as a dispute had arisen between M/s. B.R. Sons and the assessee in respect of interest, as also expenses claimed, the assessee did not have any income in the assessment year in dispute but rather had suffered huge losses. The deduction of Rs. 5,90,711 was also claimed as B.R. Sons had claimed the same from the assessee in respect of loss on consignment of goods, interest, etc. The revised return appears to have been filed due to various claims raised by B.R. Sons in a dispute raised before arbitrator. Similarly, for assessment year 1960-61, the assessee had debited a sum of Rs. 13,06,824.60 by way of interest in the account of M/s. B.R. Sons Ltd. and a return showing an income of Rs. 77,634 was filed on December 23, 1960. But on March 4, 1964, a revised return showing a loss of Rs. 4,96,371 was filed again on the same basis, i.e., the dispute raised before the arbitrator. The ITO did not find any merit in the claim of the assessee as the dispute between the assessee and M/s. B. R. Sons had arisen after November, 1958, the previous year relevant to the assessment year 1959-60. Before the ITO numerous claims had been raised but when the matter came up before the AAC, the assessee modified its claim and sought deduction of Rs. 2,34,197 only. Out of this, Rs. 1,75,510 was in respect of interest debited to M/s B.R. Sons in books of account of the assessee. Rupees 17,224 was in respect of commission and Rs. 13,441 was for brokerage. The miscellaneous expenses claimed were Rs. 28,022. The claim of the assessee was that, in view of the award given by the arbitrators, the assessee was not entitled to get any amount from B.R. Sons. It was apparent, therefore, that the amount shown in the accounts of the assessee as income was incorrect. According to the assessee, these entries were made on the assumption that the assessee was entitled to receive the same from M/s B.R. Sons under different heads but once the claim was negatived by the arbitrator, it shall be deemed to reflect back in the assessment years in dispute and as nothing was found due against M/s B.R. Sons, the assessee could not be deemed to have any income from this business. According to the assessee, what could be brought to tax was real income and not income which was only notional. The AAC accepted the claim. On further appeal to the Tribunal by the Department, the appellate order was set aside and it was held that the award given by the arbitrator did not abrogate or abridge the rights of the assessee to interest or commission to which it was entitled in the agreement, dated October 26, 1954. The award was given in the context of the large claims made by M/s B.R. Sons and the counter-claims made by the assessee of Rs. 60 lakhs odd. In other words, the Tribunal was of the opinion that the award had nothing to do with interest and commission claimed by the assessee. It was also found that the dispute before the arbitrator was confined to claims and counter-claims in respect of the volume of business carried on by the assessee. It did not touch the controversy in respect of interest, brokerage and commission. Against this order, the assessee filed an application under Section 256(1) which was rejected by the Tribunal, but it was allowed by this court and the Tribunal on direction of this court referred the following questions of law : Assessment year 1959-60 : "Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,75,510 being interest merged in the profit and loss account but not actually realised could be assessed as income on accrual basis ?" Assessment year 1960-61 : "Whether, on the facts and in the circumstances of the case, the amount of Rs. 2,42,118 being interest and commission merged in the profit and loss account, but not actually realised could be assessed as income on accrual basis ?"
(3.) IN assessment years 1961-62, 1962-63, 1964-65 and 1965-66, the dispute was slightly different. Agreement of 1954 had come to an end. Assessee returned losses while in the year 1963-64, it declared a small profit. IN all these years principal source of income was money lying with the erstwhile principals on which interest was earned. Major portion of the expenses claimed every year was on litigation. Other expenses were on establishment, rent, travelling, telephone, stationery, etc. The ITO held that since the assessee did not carry on any business during these years it was not entitled to claim these expenses as business expenditure. But as the assessee had income from other sources, an estimated sum was allowed. IN the same years, fees paid for income-tax representations was also allowed. Order was affirmed on appeal. On further appeal, the Tribunal held that the business of the assessee was sale and distribution and not financing, and, therefore, it was not entitled to claim expenditure incurred on recovery of advance payments made to principal for lifting of goods nor could it claim expenditure incurred on establishment, for this purpose, as there was complete closure of business. INference was drawn against the assessee, as, after 1958, goods were lifted not on consignment basis but against cash payment. Litigation expenses were disallowed as it was not necessary for earning income from interest. Nor was it satisfied that the assessee was required to incur any expenditure for earning interest on money lying with the principal. On the application of the assessee under Section 256(1), the Tribunal referred the following questions of law : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that interest income assessed for the years 1961-62 to 1965-66 was income from 'other sources' assessable under Section 36 of the INcome-tax Act, 1961 ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in limiting the allowable expenditure to the amount of Rs. 1,000 in the assessment years 1961-62 and 1963-64 and to Rs. 1,300 in assessment years 1962-63, 1964-65 and 1965-66 and disallowing the rest of the expenses including litigation expenses incurred by the assessee in conducting the arbitration proceedings before the Federation of INdian Chambers of Commerce and INdustry, New Delhi ?" In 1966-67, the dispute related to the claim made by the assessee that payment made by it in pursuance of award, dated August 27, 1964, was revenue loss allowable as deduction. It was repelled by the Tribunal as business had ceased in 1958. Further, the Tribunal held that claim of interest and commission in 1959-60 and 1960-61 having been repelled, it shall be deemed that the assessee received that amount and payment in pursuance of award having been made for outstandings of B. R. Sons, the assessee could not claim it as revenue loss. For this year, the Tribunal referred the following question of law ; "Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the two sums of Rs. 1,75,510 and Rs. 2,52,118 claimed as bad debts or business loss and the sums of Rs. 2,50,000 and Rs. 17,812 representing payment and interest on the same as per terms of the award were not allowable items of expenditure or business loss ?" ITR No. 108 of 1982 (1959-60 and 1960-61) : ;