12 May 1959
Supreme Court
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MESSRS. CALCUTTA COMPANY LTD. Vs THE COMMISSIONER OF INCOME-TAX,WEST BENGAL

Case number: Appeal (civil) 213 of 1955


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PETITIONER: MESSRS.  CALCUTTA COMPANY LTD.

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX,WEST BENGAL

DATE OF JUDGMENT: 12/05/1959

BENCH: BHAGWATI, NATWARLAL H. BENCH: BHAGWATI, NATWARLAL H. DAS, SUDHI RANJAN (CJ) HIDAYATULLAH, M.

CITATION:  1959 AIR 1165            1960 SCR  (1) 185

ACT:        Income-tax-Assessment of land-developing  Company-Mercantile        method  of  accounting adopted by assessee and  accepted  by        Incometax  Officer-Accrued liability for future  development        expenses, if an allowable deduction in the accounting  year-        lndian Income-tax Act (XI Of 1922), S. 1O(1).

HEADNOTE:        The  appellant company carried on  land-developing  business        and  sold land after development on a profit.  The whole  of        the development was not carried out before the land was sold        nor the whole of the sale price received in cash at the time        of  the  sale.   In  the accounting  year  in  question  the        appellant  sold a number of plots and received a portion  of        the  sale  price but as it maintained its  accounts  in  the        mercantile  method  it entered the whole  price  receivable,        viz.,  Rs.  43,692-11-9,  in credit  side  though  only  Rs.        29,392-11-9  was actually received and debited a sum of  Rs.        24,809, being the estimated expenditure for the developments        it  had, by terms incorporated in the deeds of sale,  under-        taken  to carry out within six months thereof,  although  no        part  of  it  was  actually spent  during  that  year.   The        appellant claimed a deduction of the said sum of RS.  24,809        in  computation  of the profits and gains  of  its  business        during  the assessment year.  The Income-tax Officer,  while        accepting the method of accounting adopted by the appellant,        disallowed  the  ’claim on the ground that no  expenses  had        actually been incurred and the estimate was only a  probable        one.   The Appellate Assistant Commissioner as well  as  the        Income-tax Appellate Tribunal confirmed the disallowance  on        appeals and the High Court, on a reference under S. 66(1) of        the Income-tax Act held against the appellant.  The question        was  whether the deduction claimed was a  legally  allowable        expense of the year in question.        Held, that the liability which was undertaken by the  appel-        lant  under the deeds of sale was an accrued  liability  and        not  a contingent one.  Although the time of six months  was        not  of the essence of the contract, the undertaking it  had        given  was  unconditional  and absolute  in  terms  and  the        liability  must be held to have accrued on the execution  of        the deeds of sale though it was to be discharged at a future

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      date.        Keshav  Mills  Ltd. v. Commissioner of  Income-tax,  Bombay,        [1953] S-C.R. 950, referred to.        Peter  Meychant  Ltd.  v. Stedeford  (Inspector  of  Taxes),        (1948) 30 T.C. 496. distinguished.        24        186        The  difficulty in estimating such a liability for  purposes        of debit under the mercantile system of accounting could  be        no ground for treating an accrued liability as a conditional        one, since it was always open to the Income-tax  authorities        to arrive a proper estimate thereof having regard to all the        circumstances of the case.        Gold  Coast  Selection Trust Ltd.  v.  Humnphrey  (Inspector        Taxes), [19481 A.C. 459, referred to.        Regard  being  had, therefore, to  the  accepted  commercial        practice  and trading principles, the  estimated  deduction,        even if it did not come under any of the specific provisions        Of S. 10(2) of the Act, was certainly an allowable deduction        under  s.  10(1)  of the Act, there  being  no  prohibition,        either  express  or  implied, against it  in  the  Act  and,        consequently,   the  question  must  be  answered   in   the        affirmative.        Badridas Daga v. The Conimissioncr of Income-tax, (1958)  34        I.T.R. 10 ; Russel v. Town and Country Bank Ltd., (1888)  13        App.  Cas. 418 ; Gyesham Life Assurance Society, v.  Styles,        (1892)   3   T.C.  185;  Pondichcry  Railway  co   Ltd.   v.        Commissioner  of Income-tax, Madras, (1913) L.R. 58 .A.  239        and  Income-tax  Commissioner v. Chitnavis, (1932)  L.R.  59        I.A. 290, referred to.

JUDGMENT:        Civil, APPELLATE JURISDICTION: Civil Appeal No. 213 of 1955.        Appeal  from the judgment and order dated June 26,  1953  of        the Calcutta High Court in I.T.R. No. 34 of 1952.        A.V.  Viswanatha Sastri, Y.  C. Talukdar and Sukumar  Ghose,        for the appellant.        K.N Rajagopal Sastri and.  D. Gupta, for the respondent.        1959.  May 12.  The Judgment of the Court was delivered by        BHAGWATI J.-This appeal with a certificate under Art. 135 of        the  Constitution read with s. 66A(2) of the Indian  Income-        tax Act raises the question as to whether the appellant ",as        entitled to a deduction of Rs. 24,809 in the computation  of        its profits and gains for the assessment year 1948-49.        The appellant deals in land and property and carries on land        developing business and in the course of the said  business,        it buys land, develops it so as to make it fit for  building        purposes   and  sells  it  at  a  profit  in   plots.    The        developments undertaken are in the main,        187        that  roads  are  to be laid out, a drainage  system  to  be        provided  and  street lights installed and they  are  to  be        maintained   till   the  sample  are  taken  over   by   the        Muncipality.   The whole of the development is  not  carried        out before the land is sold, nor the whole of the sale price        received  in cash at the time of the sales.   The  procedure        followed  is  that when a plot is sold, the  purchaser  pays        about  25 % of the purchase price in cash and undertakes  to        pay  the  balance  with interest at a certain  rate  in  ten        annual installments which he secures by creating a charge on        the land purchased.  The appellant, in its turn,  undertakes        to  carry  out the developments within six months  from  the        date of the, sale but this time is not of the essence of the

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      contract  and what the appellant undertakes is to carry  out        the  ’developments within a reasonable time.  The  tinderbox        is  incorporated  in the deed of sale  itself,  whereas  the        security  is given by the purchaser by means of  a  separate        document.        In the accounting year relating to the assessment year 1948-        49  the  appellant  sold a number of plots  and  received  a        portion  of the sale price from the purchasers according  to        the  scheme  mentioned above.  The appellant  maintains  its        accounts  in  the mercantile method under  which  money  not        actually received but only treated as received on the  basis        that  it was due and receivable is entered in the  books  of        account  on the credit side.  Even though the appellant  did        not  receive the whole of the price, viz., Rs.  43,692-11-9,        it  entered in the credit side of its books of  account  the        whole  of that sum representing the full sale price  of  the        lands  sold during the accounting year though only a sum  of        Rs.  29,392-11-9  was  actually received in  cash  from  the        purchaser  and  the balance of Its. 14,300  represented  the        unpaid  balance  retained by the purchasers the  payment  of        which  was secured by creating charge on the said  lands  as        also  the  interest received or receivable in  the  year  of        account  tinder the deeds of charge.  The whole of this  sum        of  Rs. 43,692-11-9 was, however, credited in the  books  of        account by the appellant according to the mercantile  system        of accounting adopted by it.        188        In  so  far  as under the terms of the  deeds  of  sale  the        appellant  had  undertaken  to carry  out  the  developments        within  six months from the date of sale it estimated a  sum        of Rs. 24,809 as the expenditure for the developments to  be        carried  out  in respect of the plots which  had  been  sold        during the year and debited the same in its books of account        on  the  ground that the liability for the said sum  of  Rs.        24,809  had  actually arisen, the appellant being  bound  to        provide the facilities it had undertaken to do, even  though        no part of that amount represented any expenditure  actually        made during that year.        In  the course of its assessment to income-tax for the  year        1948-49,  the appellant claimed a deduction of the said  sum        of Rs. 24,809 in the computation of the profits and gains of        its business.  The Income-tax Officer disallowed that  claim        on  the  ground  that the expenses  had  not  been  actually        incurred in the year of account and also on the ground  that        the  estimate  had  not  been  proved  to  be  based  on   a        consideration  of the real expenses which the Company  would        have  to  incur for the purpose.   The  Appellate  Assistant        Commissioner,  on appeal, confirmed the disallowance by  the        I.T.O.  on  the  ground that there was  as  yet  no  accrued        liability and on the further ground that as the  development        would  be  carried  out  in  the  future,  the   expenditure        estimated at current prices could not be allowed.        On  appeal  taken by the appellant before  the  Income.  tax        Appellate  Tribunal,  the Tribunal, held that it was  by  no        means  certain  what  the  actual cost  would  be  when  the        developments   were  carried  out  and  that  although   the        appellant had undertaken to carry out certain  developments,        it could bring expenses into account only when the  expenses        were actually incurred.  The Tribunal accordingly  dismissed        the appeal.        The  appellant  thereafter made an  application  before  the        Tribunal  requiring it to refer to the High Court  under  s.        66(1) of the Income-tax Act certain questions of law arising        out of its order.  The Tribunal thereupon stated a case  and        referred  the following question to the High Court  for  its

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      decision:-        189        Whether on the facts and circumstances stated above, the sum        of  Rs. 24,809 can legally be allowed as an expense  of  the        year under consideration."        The  statement  of case drawn by the Tribunal  was  severely        criticized by the High Court as under: -        "  Unfortunately,  the  treatment of  the  question  by  the        authorities below has been of a somewhat summary  character,        presumably because it was raised and argued before them in a        superficial  form.  But even if such was the case, there  is        hardly any justification for the Tribunal failing to realise        it  least what facts were required to be found  and  stated.        The  statement of case is sketchy and bare and like most  of        the statements we have to deal with during this session, has        hardly any appearance of a case seriously stated."        In spite of the above observations the High Court dealt with        the  question  and  after  dealing  exhaustively  with   the        arguments which were urged be-fore it by the learned Counsel        for the appellant answered the question in the negative.  On        an  application  made by the appellant,  however,  the  High        Court  granted the requisite certificate under Art.  135  of        the  Constitution to appeal to this Court and  lience,  this        appeal.        The  question which really arises for our  determination  in        this  appeal is whether having regard to the fact  that  the        appellant’s  method  of  accounting,  viz.,  the  Mercantile        method  was  accepted  by the Income  Tax  Officer  and  the        receipts  appearing  in the books of  account  included  the        unpaid  balance of the sale price of the plots in  question,        the amount of liability undertaken by the appellant to  earn        those receipts was to be deducted even if there had not been        actual  disbursement made by it during the accounting  year.        Put in other words, the question was whether in view of  the        fact that the sum of Rs. 43,692-11-9 had been entered on the        credit  side in the books of account even though it was  not        money  actually received but only money treated as  received        on the basis that it. was due and receivable, the sum of Rs.        24,809 which had been entered as debit, being the  liability        of the appellant        190        undertaken by it to earn those receipts, should be  deducted        in  determining  the  taxable  profits  and  gains  of   the        appellant.        The  mercantile system of accounting is well-known and  this        method  has  been explained in a judgment of this  Court  in        Keshav Mills Ltd. v. Commissioner of Income-tax, Bombay (1).        " That system 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.  "        The  main  ground on which the claim of  the  appellant  for        deducting this sum of Rs. 24,809 ",as disallowed by all  the        authorities below was that the expenditure was not  actually        incurred in the year of account, it was by no means  certain        what  the actual cost would be when the  developments  "-are        carried  out and that there was as yet no accrued  liability        but only a contingent liability undertaken by the appellant,        even though the undertaking was incorporated in the deeds of        sale themselves.        The following were the developments undertaken to be carried        out  by  the  appellant as appears from  the  order  of  the        Appellate Assistant Commissioner:-        "  There  was a condition in the Conveyance deeds  that  the

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      appellant  does hereby covenant with the purchaser that  the        appellant shall complete the construction of roads,  drains,        provide  suitable pucca surface drains on both sides of  the        roads  and shall also make arrangements for lighting up  the        said roads and shall maintain the said roads, drains, lights        till the same are taken over by the Municipal        Besides  provision  for  roads,  drains,  etc.,  t˜he  ˜Deed        provides for filling u˜p of low lands and there is a  clause        in  the  Conveyance Deed which shows that  the  ˜appellant’s        shall  at  his own cost ˜fi.11 the low lands and  tank  with        earth and bring the same to road level.  "        (˜1) II9531 ˜S.C.R. ˜95o, 958˜-        191        This  undertaking having been incorporated in the  deeds  of        sale  themselves there was certainly a liability  undertaken        by the appellant to carry out these developments within  six        months  from the dates of those deeds.  Time was  of  course        not  of  the  essence  of the  contract  and  the  appellant        therefore  was  at  liberty to carry  out  that  undertaking        within a reasonable time.  That, however, did not absolve it        in any manner whatever from carrying out the undertaking and        the purchasers were in a position to enforce the undertaking        by taking appropriate proceedings in that behalf.        Reliance was placed on behalf of the Revenue on the case  of        Peter Merchant Ltd. v. Stedeford (Inspector of Taxes) (1) in        which a distinction was drawn between an actual i.e.,  legal        liability,  which  is deductible, and a liability  which  is        future or contingent and for which no deduction can be made.        The  facts of that case were that the Company which  carried        on the business of managing factory canteens, had contracted        with  a factory owner to maintain the crockery, cutlery  and        utensils  used in the canteen otherwise known as  the  light        equipment in its original quantity and quality.  The cost of        replacement  was admittedly a proper deduction in  computing        profits,  as  was also any sum paid to a  factory  owner  in        settlement  of the value of shortages on termination of  the        contract.   Owing  to war and. other  circumstances  it  was        impossible  or  impracticable  for  the  Company  to  obtain        replacements  in some cases, and the obligations  under  the        contracts  with  the  factory owners in  those  cases  still        remained  to  be  performed. in the accounts  for  the  year        deductions  had  been  made both  of  the  amounts  actually        expended  on replacements and the amounts which the  company        was  liable to expend when the equipment  became  available.        The  Company claimed to be entitled to deduct  in  computing        its  profits  amounts representing at  current  prices,  the        liability  to  effect replacements as soon as  the  required        equipment  became  obtainable.   The  former  amounts   were        allowed  as deductions, and the latter the Court  of  Appeal        (reversing the decision        (1)  (1948) 30 T.C. 496.                                    192        of the Court below) held not to be deductible.  The basis of        the decision was that the real liability under the  contract        was  contingent,  not actual, since the obligations  of  the        company were not such that it might be sued for the cost  of        ’replacements  at  current  prices, but  only  for  possible        damages  for breach of contract in the event of the  factory        owner  preferring a claim under the contract, and  since  no        legal liability could arise until such a claim was made, the        liability   had-to  be  regarded  as  contingent   and   not        deductible.        It   is  clear  from  the  above  that  on  the  facts   and        circumstances of that case the Court held that it was not an        accrued  liability  but was merely a contingent one  and  if

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      that  was the case only the sums actually expended could  be        deducted  and  not  those which the company  was  liable  to        expend in the future.        Simon in his " Income-tax ", Second Edition, Vol.  II, at p.        204  under  the caption " Accrued Liability  "  observes  as        under, after citing the case mentioned above:-.        "In cases, however, where an actual liability exists, as  is        the  case with accrued expenses, a deduction  is  allowable;        and this is not affected by the fact that the amount of  the        liability  and  the deduction will subsequently have  to  be        varied.  A liability, the amount of which is deductible  for        income-tax  purposes, is one which is actually  existing  at        the  time of making the deduction, and is distinct from  the        type  of  liability  accruing in  Peter  Merchant8  Ltd.  v.        Stedeford  (lnspector of Taxes) which although allowable  on        accountancy principles, is not deductible for the purpose of        income-tax.  "        Approaching  the  question  before us in the  light  of  the        observations  made above we have got to determine  what  was        the  nature  of the liability which was  undertaken  by  the        appellant  in  regard  to the development of  the  lands  in        question,  whether  it was an accrued liability or  was  one        which was contingent on the happening of a certain event  in        the future.        There  is  no doubt that the undertaking to  carry  out  the        developments within six months from the dates of                                    193        the  deeds  of  sale  was  incorporated  therein  and   that        undertaking was unconditional, the appellant binding  itself        absolutely  to carry out the same.  It was not dependent  on        any condition being fulfilled or the happening of any event,        the  only  condition  being that it was to  be  carried  out        within  six months which in view of the fact that  the  time        was  not of the essence of the contract meant  a  reasonable        time.   Whatever may be considered a reasonable  time  under        the  circumstances of the case, the setting up of that  time        limit  did not prescribe any condition for the carrying  out        of  that  undertaking  and  the  undertaking  was   absolute        interms.  If that undertaking imported any liability on  the        appellant the liability had already accrued on the dates  of        the  deeds  of  sale,  though  that  liability  was  to   be        discharged  at  a  future  date.  It  was  thus  an  accrued        liability  and  the  estimated expenditure  which  would  be        incurred in discharging the same could very well be deducted        from the profits and gains of the business.        Inasmuch as the liability which had thug accrued during  the        accounting  year was to be discharged at a future  date  the        amount  to  be expended in the discharge of  that  liability        would  have  to  be  estimated  in  order  that  under   the        mercantile system of accounting the amount could be  debited        before it was actually disbursed.        The  difficulty  in the estimation thereof again  would  not        convert an accrued liability into a conditional one, because        it is always open to the Income-tax authorities concerned to        arrive at a proper estimate thereof having regard to all the        circumstances  of  the  case.  That it can  be  so  done  is        illustrated  by Gold Coast Selection Trust Ltd.  v  Humphrey        (Inspector  of  Taxes) (1) where a  particular  asset  which        could not be immediately realised in a commercial sense  was        valued  in money for income-tax Purposes in the year of  its        receipt and it was observed by Viscount Simon:-        "  It  seems  to me that it is not correct to  say  that  an        asset,  such  as this block of shares, cannot be  valued  in        money for income-tax purposes in the        (1)  [1948] A.C. 459, 469.

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      25        194        year  of  its  receipt because it cannot,  in  a  commercial        sense,  be  immediately  realized.  That is  no  reason  for        saying that it is incapable of being valued, though, ’if its        realization cannot take place promptly, that may be a reason        why  the  money figure set against it at  the  earlier  date        should  be  reduced  in order to allow  for  an  appropriate        interval.   Supposing, for example, the contract  conferring        the  asset on the taxpayer included a stipulation  that  the        asset  should  not be realized by the  transferee  for  five        years, and that if an attempt was made to realise it  before        that  time,  the  property  in  it  should  revert  to   the        transferor.   This might seriously reduce the value  of  the        asset  when  received, but it is no reason for  saving  that        when received it must be regarded as having no value at all.        The Commissioners, as its seems to me, in fixing what  money        equivalent  should be taken as representing the asset,  must        fix  an appropriate money value as at the end of the  period        to-which the appellant’s accounts are made up by taking  all        the  circumstances  into consideration."        As in the case of assets received during the accounting year        which  could  not be immediately realized  in  a  commercial        sense,  so  in the case of liabilities  which  have  already        accrued during the accounting year, though they may not have        to be discharged till a later date.  It will be always  open        to  the Income-tax authorities to fix an  appropriate  money        value  of  that liability as at the end  of  the  accounting        period  by taking all the circumstances  into  consideration        and the estimate of expenses given by the assessee would  be        liable  to scrutiny at their hands having regard to all  the        facts and circumstances of the case.        The High Court was, therefore, clearly in error        when it stated:-        " In view of all the circumstances of the case it must in my        opinion,  be  held  that  the  amounts  of  sale-price,  not        received in cash, were also received and for the purpose  of        earning the receipts the assessee spent, besides giving  the        lands, nothing more than a promise.  Since the whole  amount        was actually received in the year of account before and                                    195        without  making  the promised expenditure,  no  question  of        allowing  a deduction of any expenditure from such  receipts        of the year arises."        If  then  the  estimated expenses which  would  have  to  be        incurred  in  duly  discharging  that  liability  which  was        undertaken  by  the appellant and was  incorporated  in  the        deeds  of  sale  could be deducted in  accordance  with  the        mercantile system of accounting adopted by the appellant and        accepted by the I.T.O., is there anything in the  Income-tax        Act  which  would  prevent this debit  being  allowed  as  a        deduction in the computation of the profits and gains of the        appellant’s  business?   The  appellant,  had,  it  appears,        claimed  this deduction as and by way of expenditure  wholly        laid out for the purposes of its business under s. 10(2)(xv)        of  the  Income-tax  Act.   On  an  interpretation  of  that        provision,  the-High Court was inclined to hold,  though  it        did  not  decide  the question, that to the  extent  that  a        definite  liability had accrued about which all  preliminary        proceedings  causing  the  accrual of  the  liability  in  a        concluded  form had already been gone through  although  the        actual  disbursement had not yet taken place,  s.  10(2)(xv)        would  cover accrued liabilities though the amount  may  not        actually  have  been  expended  on  the  footing  that   the        liability being certain, the amount was as good as spent and

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      on  that basis there would be room in the clause for  debits        which  are  proper  debits under the  mercantile  system  of        accounting.  It, however, distinguished the present case  on        the ground that the liability here was a floating liability,        the measure of which depended upon the will of the appellant        and the discharge of which rested only in a promise and that        the expenses were entirely at large and the development work        itself merely so.        Apart,  however, from the question whether s. 10(2) (xv)  of        the  Income-tax Act would apply to the facts of the  present        case, the case is in our opinion, well within the purview of        s.  10  (1) of the Income-tax Act.  The  appellant  here  is        being.  assessed in respect of the profits and gains of  its        business and the profits and gains of the business cannot be        determined  unless and until he expenses or the  obligations        which have been        incurred are set off against the receipt’s The expression        profits  and  gains has to be understood in  its  commercial        sense  and there can be no computation of such  profits  and        gains  until  the  expenditure which is  necessary  for  the        purpose  of  earning  the receipts  is  deducted  therefrom-        whether   the  expenditure  is  actually  incurred  or   the        liability in respect thereof has accrued even though it  may        have to be discharged at some future date.  As was  observed        by  Lord  Herschell  in  Bussel v.  Town  and  County  Bank,        Ltd.(’):        "  The duty is to be charged upon I a sum not less than  the        full  amount of the balance of the profits or gains  of  the        trade,  manufacture, adventure, or concern’; and it  appears        to  me  that that language implies that for the  purpose  of        arriving  at  the balance of profits  all  that  expenditure        which is necessary for the purposes of earning the  receipts        must be deducted, otherwise you do not arrive at the balance        of  profits,  indeed, otherwise you do not  ascertain,  and’        cannot ascertain, whether there is such a thing as profit or        not.   The profit of a trade or business is the  surplus  by        which  the  receipts from the trade or business  exceed  the        expenditure  necessary  for  the purpose  of  earning  those        receipts.  That seems to me to be the meaning of the word  "        profits " in relation to any trade or business.  Unless  and        until  you  have ascertained that there is such  a  balance,        nothing  exists to which the name " profits can properly  be        applied."        A similar opinion was expressed in the Gresham Life        Assurance Society V. Styles (2) :-        " When we speak of the profits or gains of a trader we  mean        that  which  he had made by his trading.  Whether  there  be        such  a thing as profit or gain can only be  ascertained  by        setting against the receipts the expenditure or  obligations        to which they have given rise."        These  are  no  doubt observations from  the  English  cases        dealing with English statutes of Income-tax, but the general        principles which can he deduced therefrom        (1) (1888) 13 App.  Cas. 418, 424        (2) (1892) 3 T. C. 185        197        are, nevertheless, applicable here and it was stated by Lord        Macmillan  in Pondicherry Railway Co., Ltd. v.  Commissioner        of Income-tax, Madras (1)        "  English authorities can only be utilised with caution  in        the  consideration of Indian Income-tax cases owing  to  the        difference  in the relevant legislation, but  the  principle        laid  down  by  Lord Chancellor  Halsbury  in  Gresham  Life        Assurance   Society  v.  Styles  (supra),  is   of   general        application  unaffected by the specialities of  the  English

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      Tax  system.  " The thing to be taxed", said  his  Lordship,        "is the amount of profits or gains ". The word " profits  ",        I think, is to be understood in its natural and proper sense        in a sense which no commercial man would misunderstand."’        It may be useful to observe at this stage that prior to  the        amendment  of  the Indian Income-tax Act in  1939,  bad  and        doubtful debts were not treated as deductible allowance  for        the  purpose  of  computation  of  profits  or  gains  of  a        business,  The Privy Council in the Income-tax  Commissioner        v. Chitnavis observed:-        " Although the Act nowhere in terms authorises the deduction        of bad debts of a business, such a deduction is  necessarily        allowable.  What are chargeable to income-tax in respect  of        a  business  are  the profits and gains of a  year;  and  in        assessing  the  amount of the profits and gains  of  a  year        account  must  necessarily be taken of all  losses  incurred        otherwise  you  would  not arrive at the  true  profits  and        gains."        The High Court in disallowing the claim of the appellant  in        the  present  case only considered the provisions of  s.  10        (2)(xv)  of  the Act and came to the conclusion  that  on  a        strict  interpretation  of those provisions the sum  of  Rs.        24,809  was not an allowable deduction.  Its  attention  was        drawn  by  the  learned Counsel for  the  appellant  to  the        provisions of s. 10(1) of the Act also but it negatived this        argument  observing that under the Indian Act,  the  profits        must be        (1) (193i) L. R. 58 1. A. 239, 252.        (2) (1932) L. R. 59 I. A. 290, 296.        198        determined by the method of making the statutory  deductions        from  the  receipts  and any  deduction  from  the  business        receipts, if it was to be allowed, must be brought under one        or  the  other of the deductions mentioned in s.  10(2)  and        that there was no scope for any preliminary deduction  under        general principles.  It was, however, held by this Court  in        Badridas Daga v. The Commissioner of Income-tax(1)        " It is to be noted that while s. 10(1) imposes a charge  on        the  profits  or gains of a trade, it does not  provide  how        those profits are to be computed.  Section 10(2)  enumerates        various items which are admissible as deductions, but it  is        well settled that they are not exhaustive of all  allowances        which could be made in ascertaining profits taxable under S.        10(1)."        Venkatarama  Aiyar, J., who delivered the Judgment  of  this        Court then proceeded to discuss the cases of Commissioner of        Income-tax  v. Chitnavis(2), Gresham Life Assurance  Society        v.  Styles  (3) and Pondicherry Railway Co.  v.  -Income-tax        Commissioner(4),  and observed:"        The result is that when a claim is made for a deduction  for        which there is no specific provision in s. 10(2), whether it        is  admissible or not will depend on whether, having  regard        to  accepted commercial practice and trading principles,  it        can be said to arise out of the carrying on of the  business        and  to be incidental to it.  If that is  established,  then        the  deduction must be allowed, provided of course there  is        no prohibition against it, express or implied, in the Act.        Turning  now to the facts of the present case, we find  that        the sum of Rs. 24,809 represented the estimated  expenditure        which  had to be incurred by the appellant in discharging  a        liability which it had already undertaken under the terms of        the  deeds  of  sale of the lands in  question  and  was  an        accrued  liability which according to the mercantile  system        of  accounting  the appellant was entitled to debit  in  its        books of account

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      (1)  (1958) 34 I.T.R. 10, 14.        (2)  (1932) L.R. 59 I.A. 290, 296.        (3)  (1892) 3 T.C. 185.        (4)  (1931) L.R. 58 I.A. 239, 252.        199        for  the  accounting  year as against the  receipts  of  Rs.        43,692-11-9 which represented the sale proceeds of the  said        lands.  Even under s. 10(2) of the Income-tax Act, it might.        possibly be urged that the word " expended   was capable  of        being interpreted as " expendable "or   to be expended "  at        least in a case where a liability to incur the said expenses        had  been actually incurred by the assessee who adopted  the        mercantile system of accounting and the debit of Rs.  24,809        was  thus a proper debit in the present case.  We  need  not        however base our decision on any such consideration.  We are        definitely of opinion that the sum of Rs. 24,809 represented        the estimated amount which would have to be expended by  the        appellant in the course of carrying on its business and  was        incidental  to  the same and having regard to  the  accepted        commercial  practice and trading principles was a  deduction        which,  if  there  was no specific provision  for  it  under        section 10(2) of the Act was certainly allowable  deduction,        in arriving at the profits and gains of the business of  the        appellant  under  section 10(1) of the Act, there  being  no        prohibition against it, express or implied in the Act.        It is to be noted that the appellant had led evidence before        the  Income-tax  authorities  in regard  to  this  estimated        expenditure of Rs. 24,809 and no exception was taken to  the        same in regard to the quantum, though the permissibility  of        such  a  deduction was questioned by them relying  upon  the        provisions of s.10(2) of the Act.        It therefore follows that the conclusion reached by        the  High Court in regard to the disallowance of Rs.  24,809        was wrong and it should have answered the referred  question        in the affirmative.        Before  we  conclude, we are bound to  observe  that  having        accepted- the receipts of Rs. 43,692-11-9 in their  totality        even  though  a  sum of Rs. 29,392-11-9  only  was  actually        received  by  the  appellant  in  cash,  thus  making   the’        appellant liable for income-tax on a sum of Rs. 14,300 which        had  not been received by it during the accounting year,  it        was  hardly open to the Revenue to urge that the sum of  Rs.        24,809  should  not  have  been  allowed  as  a  permissible        deduction before        200        arriving at the profits or gains-of the appellant which were        liable to tax.  Consistently enough with this attitude,  the        Revenue  ought  to have expressed its willingness  to  treat        only  a sum of Rs. 29,392-11-9 as the actual receipt of  the        appellant  during  the  accounting  year  and  made  up  the        computation  of  the profits and gains  of  the  appellant’s        business  on that basis.  The Revenue, however, did  nothing        of  the  sort and insisted upon having its pound  of  flesh,        asking us to delete the whole of the item of Rs. 24,809 from        the  debit  side of the account which it was  certainly  not        entitled to do.        We  accordingly allow the appeal, set aside the judgment  of        the  High  Court  and answer the referred  question  in  the        affirmative.    The  respondent  will  of  course  pay   the        appellant’s costs throughout.        Appeal allowed.