D.M. Bhandari, J. - (1.) THESE two references have been made by the Income-tax Appellate Tribunal, Delhi Bench 'B', under Section 66(1) of the Indian Income-tax Act, 1922 (hereinafter called the Act). The assessee in these two references is Messrs. Bikaner Gypsum Ltd., Bikaner (hereinafter called the assessee-company). The facts of these cases as submitted by the Tribunal in their statement of the case are practically the same; therefore, we propose to decide these references by one single judgment.
(2.) THE facts giving rise to these references, briefly stated, are these: "THE assessee-company is a public limited company incorporated on 7th May, 1947, under the company law prevalent in the erstwhile State of Bikaner. It carries on business of extraction of Gypsum from Jamsar Mines in Bikaner District. THE company sold gypsum so extracted to various persons all over India. THE United State of Rajasthan was formed on 7th April, 1949, in which the State of Bikaner was merged. On January 26, 1950, when the Constitution of India came into force, the United State of Rajasthan became a Part B State under the Constitution. THE registered office of the assessee-company is situate at Bikaner. During the accounting year ending 31st March, 1949 (assessment year 1949-50), the assessee-company sold 24,291 tons of gypsum to various cement companies and local parties, the sale value of which was Rs. 3,01,479-12-0. In this year, the assessee-company started negotiations with the Government of India for persuading them to use Jamsar gypsum for the Fertilizer Project, Sindri. In this connection the assessee-company incurred expenses to the extent of Rs. 14,914-10-6. THEse expenses were not shown by the assessee-company in its profit and loss account for that year, but this amount was shown in the suspense account. In this very year, a sum of Rs. 7,000 was also spent for the survey of gypsum deposits. This expense was also not charged to the profit and loss account of that year and was kept in the suspense account. During the next accounting year ending 31st March, 1950 (assessment year 1950-51), the assessee-company secured contracts for the supply of gypsum for the said project. This contract was entered into with the Government of India on 11th February, 1950, for supply of 1,00,000 tons of gypsum. The supply was to commence in March, 1950, and was to be completed not later than 31st October, 1950. The Government of India also agreed to supply the assessee-company some mining and transport equipment on loan basis, the freight of which had to be borne by the company. During the said year, the assessee-company incurred the following further expenses on account of securing Sindri contract and in making supplies in pursuance of that contract: During the said year, the assessee-company also did extensive overburden removal work in expectation of the Sindri contract and incurred an expenditure of Rs. 47,386-15-0 out of which Rs. 7,696-15-9 was charged to the profit and loss account of that year and the balance of Rs. 39,690 being the value of unworked portion of the mines was carried forward to the coming years. During the said year the assessee-company sold 35,405 tons of gypsum the sale value of which was Rs. 2,89,664-6-6. This included 5,792 tons of the value of Rs. 31,133-1-0 supplied to the Fertilizer Project, Sindri, in the month of March, 1950. During the next account year ending on 31st March, 1951 (assessment year 1951-52), the assessee-company sold 1,39,995 tons of gypsum, the sale value of which was Rs. 9,11,599-3-9. Out of this 1,07,497 tons of gypsum of the value of Rs. 6,33,560-13-9 was supplied to the Fertilizer Project, Sindri. This year the assessee-company claimed a sum of Rs. 91,617 as expenses for procuring and execution of the Sindri Fertilizer Project contract. Out of this amount Rs. 82,504 were the expenses which had been incurred by it in the earlier two years and which, as already mentioned, was carried forward by it in the balance-sheet partly in "suspense account," on account of supply to the Sindri Fertilizer Project and partly as "overburden removal expenses". The assessee-company claimed the entire amount of Rs. 91,617 as deduction under Section 10(1) of the Act or under the general principles of determining the profit and loss of the assessee-company or under Section 10(2)(xv) of the Act. The Tribunal disallowed this sum as it had not been spent in the accounting year ending on 31st March, 1951 (assessment year 1951-52). These facts relate to question No. (1) in Civil Reference (Income-tax) No. 12/63 which is as follows: "(1) Whether, in the facts and circumstances, the sum of Rs. 82,504 spent by the assessee-company in the earlier years as expense for procuring and execution of Sindri Fertilizer Project first contract and carried forward by it in its balance-sheet partly as 'suspense (on account of supply to Sindri Fertilizer Project)' and partly as 'overburden removal' is allowable as a deduction under the Indian Income-tax Act under Section 10(1) or under the general principles of determining the profit or loss of theassessee or Section 10(2)(xv) of the Indian Income-tax Act ? " The further facts are that the assessee-company sold gypsum to certain parties in Part A and Part B States during the accounting year ending on 31st March, 1951 (assessment year 1951-52). In paragraph 7 of the statement of the case in Reference No. 12/63, which states the relevant facts regarding these sales, it is stated that gypsum was sold f. o. r. Jamsar, Bikaner. Contracts for the supply of gypsum to the various parties were contracts for supply of unascertained goods. Gypsum extracted by the assessee-company was appropriated towards various contracts by the mines manager at Jamsar. The railway receipts were drawn in the names of the buyers and the goods moved at the buyer's risk. The railway receipts, without any lien of the sellers on them, were then sent in the usual course of business to the buyers through post, but in the case of supply to the Sindri Fertilizer Project, the railway receipts were handed over to their representative posted at Jamsar. The total sales of the year amounted to Rs. 9,1-1,599 of which sale to parties residing in Part A States was of Rs. 8.73,568 and to parties residing in Part B States was of Rs. 38,031. Out of this amount, the sum of Rs, 99,272-12-0 was not actually received by the company but was shown as book debts in the books of the company. For purposes of tax concession under Sub-clause (in) of Clause (1) of paragraph 4 of the Part B States (Taxation Concessions) Order, 1950, hereinafter called the Tax Concessions Order, the Income-tax Officer allocated the profits of the assessee-company between Part A and Part B States in the proportion of bills drawn on parties of Part A and Part B States. The Income-tax Officer held that the assessee-company's sales to the extent of Rs. 8,73,568 were effected to parties in Part A States and accordingly taxed the proportionate profits at the full rate of tax without giving any concession under the Tax Concessions Order. The assessee preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner rejected the appeal. The assessee-company then preferred an appeal to the Tribunal. The Tribunal upheld the decision of the Appellate Assistant Commissioner on the ground that profits on the sales of Rs. 8,73,568 had accrued to the assessee-company in Part A State and as such the assessee-company was not entitled to any concession on these profits under the Tax Concessions Order. The following questions Nos. 2 and 3 have been referred by the Tribunal on these facts : "(1) Whether, in the circumstances of the case, there was any material before the Tribunal on which it could assume and hold that the profit on sales of Rs. 8,73,568 accrued in Part A State ? (2) Whether on a correct interpretation of Sub-clause (iii) of Clause (1) of para. 4 of the Part B States (Taxation Concessions) Order, 1950, the Tribunal was right in holding that the assessee-company was not entitled to concessions on profits of goods sold, the sale price of which was not received within the relevant previous year and stood as book debt, at Rs. 99,272'75 in the books of the assessee-company ?" Reference No. 13/63 relates to the year ending 31st March, 1952 (assessment year 1952-53). During this year, the total sales of the assessee-company amounted to Rs. 6,75,376, of which the sales to parties in Part A States was of Rs. 6,34,888 and to the residents of Part B States was of Rs. 40,488. There appears to be some mistake in the figures, but this is not material for the purposes of answering question No. 1 of this reference which runs as follows : "(1) Whether, in the circumstances of the case, there was any material before the Tribunal on which it could assume and hold that the profit on sales of Rs. 6,34,888 accrued in Part A State ?" The assessee-company had claimed that out of the aforesaid total sale of Rs. 6,75,376 a sum of Rs. 81,686.02 was not received or deemed to have been received in the taxable territories other than Part B States as the amount stood as book debts in the books of the company. This claim was rejected by the Tribunal. These facts have given rise to question No. 2 which runs as follows: "(2) Whether on a correct interpretation of Sub-clause (iii) of Clause (1) of Section 4 of the Part B States (Taxation Concessions) Order, 1950, the Tribunal was right in holding that the assessee-company was not entitled to concessions on the profits of goods sold, the sale price of which was not received within the relevant previous year and stood as book debt at Rs. 81,686.02 in the books of the assessee-company ?" The third question that has been referred by the Tribunal in this reference runs as follows : "(3) Whether, in the facts and circumstances of the case, the Tribunal was right in holding that legal expenses amounting to Rs. 7,453 incurred in defending the monopoly right enjoyed by the assessee-company under an instrument of assignment of lease was an inadmissible expense under Section 10(2)(xv) of the Indian Income-tax Act ? " The facts stated in the statement of the case with regard to this question are as follows : In the terms of the indenture of assignment of the mining lease dated 11th December, 1948, granted to the assessee-company, it had the first option of refusal for the grant of licence for other deposits of gypsum on terms which were to be mutually agreed upon. Without first offering the new deposit to the assessee-company and without first obtaining the company's refusal of the offer and without any notice to the company, the Tehsildar, Suratgarh, put certain areas under auction and obtained a bid of Rs. 5,600 per year. On this followed a litigation between the assessee-company and the State of Rajasthan. The assessee-company filed a writ petition in the Rajasthan High Court to protect the right it had acquired under the aforesaid lease deed. The assessee-company claimed a sum of Rs. 7,453 in defending the monopoly right enjoyed by it under the aforesaid instrument of assignment of lease as an admissible expense under Section 10(2)(xv) of the Act. This claim was rejected by all the income-tax authorities. The Tribunal has referred question No. 3 on these facts.
(3.) NOTICE of these references were given to the parties and elaborate arguments were addressed by the learned counsel for the parties. We first take up question No. (1) of reference No. 12/63. As mentioned above, the assessee-company has claimed deduction of this amount in the year ending March 31, 1951 (assessment year 1951-52), though this amount of Rs. 81,504 was not spent by the assessee-company in that year but was spent in earlier years. Three-fold arguments have been addressed by learned counsel for the assessee-company for claiming this amount as an allowable deduction under the Act. We proceed to discuss the first argument. It is urged that under Section 13 of the Act, income, profits and gains have to be computed for the purpose of Sections 10 and 12 of the Act in accordance with the method of accounting regularly employed by the assessee and it is contended that the method of accounting which has been regularly employed by the assessee-company was that it charged the expenses which had been incurred by it not in the year in which such expenses were incurred but in the year in which the main part of the contract in which connection the expenses were incurred was performed. It is contended that this method of accounting gives a much more realistic picture of the profit and loss incurred by the company in a particular year and that there was nothing wrong in adopting such a method of accounting. Two main systems of accounting are the cash system and the mercantile system. The method of accounting adopted by the assessee-company in the instant case is neither the cash system nor the mercantile system. It is, however, contended by learned counsel for the assessee-company that an assessee is entitled to adopt any other hybrid system of accounting of his own and his income, profits and gains are to be computed in accordance with the method of accounting regularly employed by him though such method of accounting may not be any of the recognised methods. In this connection he has relied on Gappumal Kanhiyalal v. Commissioner of Income-tax, 1961 42 ITR 416, 453, 454. After referring to a number of authorities and more particularly to the observations of Lord Russell in Commissioner of Income-tax v. Chitnavis, 1932 2 CC 464, 470 their Lordships of the Allahabad High Court observed as follows: "Therefore the general proposition is true that expenses must be claimed as incurred in the relevant accounting year. But the question still remains as to whether in view of the hybrid system of accounting maintained by this assessee he could claim to deduct expenditure incurred in previous years in the assessment year in question ...... When we come to Section 13 of the Income-tax Act we find that income, profits and gains have to be computed for the purposes of Section 10(1) in accordance with the method of accounting regularly employed by the assessee. There is a proviso to that section which says that if no method of accounting has been regularly employed, or if the method employed is such that in the opinion of the Income-tax Officer the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine. It seems, therefore, to follow that if profits are to be computed in accordance with the method of accounting regularly employed by the assessee, then it is to the method of accounting that one must look. And if the method of accounting regularly employed is a method whereby litigation expenditure is, so to say, kept in a suspense account and is brought into the accounts only for the purpose of being claimed as expenditure when the fate of the litigation is clear and nothing can be recovered out of the sum expended then it ought not to matter whether the expenditure which has been kept in the suspense account was actually incurred in earlier years. If according to the regularly employed method of accounting the expenditure is treated as having been incurred in the accounting year, then it should matter little whether the expenditure was actually incurred in years earlier. Of course this does not mean that an assessee would be entitled to the benefits of his accounting system if that were brought into existence for the particular purpose of backing his claim only in the particular year. But if a method of accounting is regularly employed, then the assessee ought to get the advantage and suffer the disadvantage of that system of accounting, provided the accounting system is regularly maintained, and even though it may happen that in a particular year the revenue may gain but in another year the assessee may gain." We have no hesitation in adopting these observations as enunciating the correct law on the point. But this very authority has made it clear that as a general proposition expenses must be claimed in the relevant accounting year and it is only when the assessee is keeping his accounts in accordance with any other method which is regularly employed by it that the income-tax authorities must find out the income, profits and gains of such assessee on the basis of the system of accounting regularly employed by him. The question therefore is : what was the method of accounting regularly employed by the assessee-company in this case ? Neither in the statement of the case nor in any of the orders of the income-tax authorities do we get any finding to the effect that the assessee-company was regularly employing the method of carrying forward the expenses incurred by it to the subsequent years and then charging those expenses in the year in which the contract to which the expenses related was mainly performed. What method of accounting is regularly employed by an assessee is a question of fact and that question is to be determined by the income-tax authorities. There is no finding in favour of the assessee on this point and unless there is such finding on a question of fact in favour of the assessee, we cannot hold that Section 13 of the Act is attracted so as to hold that the expenses of Rs. 82,504 which had been incurred by the assessee-company in the earlier years could be validly allowed as deduction under the Act, Learned counsel for the assessee-company has argued that in the order of the Appellate Assistant Commissioner dated 28th January, 1959, the position of over-burden removal account is given as under. ;