# KESHAV MILLS LTD.' v. COMMISSIONER OF INCOME-TAX, BOMBAY

- **Citation:** [1953] 1 S.C.R. 950
- **Court:** Supreme Court of India
- **Decided:** 1953
- **Case number:** Civil Appeal Commissioner ~rNo. 151 of 1951
- **Bench:** Mmm CHAND MAHA.JAN, S. R. Da~, VrnAN BosE, Bhagwati
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/keshav-mills-ltd-v-commissioner-of-income-tax-bombay-230
- **Pages:** 23

## Headnote

Indian Income-ta.•r Act (XI o/1922), ss. 4 (1) (a) and (c), 18J\-ron-resident-Accoz~nts in 11icrcantile systern-Sale of goods in
British Inrli<t throuah agents-Assessability of profits derived front
wch sale-Provision of law apvlicable to such cases-Inc01ne-tax
outhori.ties, whether bound to compute incorne according to mercantile
.•11stein-Avvlicablit?1 of s.13 to non-1·esidents.
A non-resident company manufactured textile goods at Poutside British India and sold the goods ex-mills. A firm, R & Co.,
guaranteed the sale-price of goods sold ex-mills by the company to
purchasers at Ahmedabad
within British India.
As the company maintained its accounts according to the mercantile system,
the company debited R & Co., with the price of goods sold and
credited the sales account with the amount of \be bills. R & Co.,
collected the amounts of the bills from the purchasers on behalf
of the company and c1·edited the snms realised in the company's
"°count with banks at Ahmedabad and also disbursed them to
creditors of the company in British India. These payments were
credited by the company to R & Co. During tbe relevant accounting year the company thus received Rs. 12,68,480.
The company
also received Rs. 4,40,878 from sales to purchasers· in British
India. The amount of the sales bills for which hundis were drawn
on \lie purchasers in favour of banks were debited by the company
to the accounts of the respective merchants and credited to the
~ales account and the sums roceivec1 by the ba.nks fro1n the purchasers against delivery of tho rail,vay receipts \Vere credited by
the company to the accounts of the respective purchasers. In
either case there \Vas no change in the relationship of vendor and
purchaser bet\veen the company and the purchasers by reason of
the entries made in the company's hooks.
The question as reframed by the High Conrt was whether these two sums were sale
proceeds of the goods sold by the assessees to merchants in British
India and whether they were received in British India and could
be included in the assessable income of tho company in British
India:
Held, per llfelw Chand Mahajan, S. R. Das and Bhagwati J J.,
(Vivian Bose J. dissenting) that tbe two amounts in question were
sale proceeds of the goods sold and delivered by the company to
merchants in British India; that they were neither received by
the company nor could be deemed to have been received by it
w!ien the entries were μiacje in the books of account at P but \iad
•
..
•
S.C.R.
SUPREME COURT REPORTS
951
196J
merely accrued ot arisen to it there; that they were first received
by R & Co. and by the banks through whom the railway receipts
were negotiated on behalf of the company in British India; <tnd
Kesliav Mills
that they were therefore liable to t<tx under s. 4(1) (a) of the
Lt4,
Indian Income.tax Act as having been t•eceived in 13ritish India on
v.
its behalf.
Oonunissioner of
Though it is true that in the case of residents, if the assessee
employs the mercantile system regularly it is obligatory on the
income-tax authorities to compute the income according to that
system, it is doubtful whether that position would be available to
a non-resident who maintains his books of account outside British
India according to the mercantile system.
Section 13 would only he relevant where the total profits of
the assessee have to be computed and in that event the assessee
would he entitled to claim that they should be computed according
to the system of accounts maintained by him ; it would not be
relevant v.'hen stray iten1s of income are sought to he assessed in
the taxable territories as received in the taxable territories by a
non-resident.
Bvse J.-In the case of accounts kept in the mercantile system,
the profit or loss at the end of the accounting year is based not
on a difference between \Vhat \Vas actually received and what was
actually paid out, but on the difference between the right to
receive and the liability to pay.
'I1he taxation in such cases is

## Text

_Characters 0–39,775 of 50,455. This is a partial read: ask again with offset=39775 for what follows._

•
195::
J anuar,Y .10.
950
SUPREME COURT REPORTS
[1953]
KESHAV MILLS LTD.'
v.
COMMISSIONER OF INCOME-TAX, BOMBAY
[Mmm CHAND MAHA.JAN, S. R. DA~, VrnAN BosE and
BHAGWATI JJ.)
Indian Income-ta.•r Act (XI o/1922), ss. 4 (1) (a) and (c), 18J\-ron-resident-Accoz~nts in 11icrcantile systern-Sale of goods in
British Inrli<t throuah agents-Assessability of profits derived front
wch sale-Provision of law apvlicable to such cases-Inc01ne-tax
outhori.ties, whether bound to compute incorne according to mercantile
.•11stein-Avvlicablit?1 of s.13 to non-1·esidents.
A non-resident company manufactured textile goods at Poutside British India and sold the goods ex-mills. A firm, R & Co.,
guaranteed the sale-price of goods sold ex-mills by the company to
purchasers at Ahmedabad
within British India.
As the company maintained its accounts according to the mercantile system,
the company debited R & Co., with the price of goods sold and
credited the sales account with the amount of \be bills. R & Co.,
collected the amounts of the bills from the purchasers on behalf
of the company and c1·edited the snms realised in the company's
"°count with banks at Ahmedabad and also disbursed them to
creditors of the company in British India. These payments were
credited by the company to R & Co. During tbe relevant accounting year the company thus received Rs. 12,68,480.
The company
also received Rs. 4,40,878 from sales to purchasers· in British
India. The amount of the sales bills for which hundis were drawn
on \lie purchasers in favour of banks were debited by the company
to the accounts of the respective merchants and credited to the
~ales account and the sums roceivec1 by the ba.nks fro1n the purchasers against delivery of tho rail,vay receipts \Vere credited by
the company to the accounts of the respective purchasers. In
either case there \Vas no change in the relationship of vendor and
purchaser bet\veen the company and the purchasers by reason of
the entries made in the company's hooks.
The question as reframed by the High Conrt was whether these two sums were sale
proceeds of the goods sold by the assessees to merchants in British
India and whether they were received in British India and could
be included in the assessable income of tho company in British
India:
Held, per llfelw Chand Mahajan, S. R. Das and Bhagwati J J.,
(Vivian Bose J. dissenting) that tbe two amounts in question were
sale proceeds of the goods sold and delivered by the company to
merchants in British India; that they were neither received by
the company nor could be deemed to have been received by it
w!ien the entries were μiacje in the books of account at P but \iad
•
..
•
S.C.R.
SUPREME COURT REPORTS
951
196J
merely accrued ot arisen to it there; that they were first received
by R & Co. and by the banks through whom the railway receipts
were negotiated on behalf of the company in British India; <tnd
Kesliav Mills
that they were therefore liable to t<tx under s. 4(1) (a) of the
Lt4,
Indian Income.tax Act as having been t•eceived in 13ritish India on
v.
its behalf.
Oonunissioner of
Though it is true that in the case of residents, if the assessee
employs the mercantile system regularly it is obligatory on the
income-tax authorities to compute the income according to that
system, it is doubtful whether that position would be available to
a non-resident who maintains his books of account outside British
India according to the mercantile system.
Section 13 would only he relevant where the total profits of
the assessee have to be computed and in that event the assessee
would he entitled to claim that they should be computed according
to the system of accounts maintained by him ; it would not be
relevant v.'hen stray iten1s of income are sought to he assessed in
the taxable territories as received in the taxable territories by a
non-resident.
Bvse J.-In the case of accounts kept in the mercantile system,
the profit or loss at the end of the accounting year is based not
on a difference between \Vhat \Vas actually received and what was
actually paid out, but on the difference between the right to
receive and the liability to pay.
'I1he taxation in such cases is
not on income, profits or gains which \Vere received but on profits
which "accrued or arose" to the assessee in the accounting yea.r.
This view excludes s. 4(1) (a) and this means that a resident is
taxed in such cases under s. 4(l)(b) and a non-resident under s. 4(1)
(c).
Applying s. 4(1) (c) to the present case, in the case of the
Rs. 4 lakbs odd the profits accrued or arose in British India where
the right to take delivery of the goods accrued and where the price
was actually paid, but what is really taxable under s. 4 (1) (c) is
not the Rs. 4 lakhs odd, but the figures entered in the accounting
year as the p\"ice of the various transactions which the Rs. 4 lakhs
represented. Similarly, in the case of Rs. 12 lakhs odd, it is the
figure entered in the books in the accounting year relating to the
transactions which is taxable.
By the Fnll Conrt.-The expression "deewed to be received"
in s. 4 (1) (a) means deemed by the provisions of the Act to be
received.
Subramaniyan Chettiar v. Commissioner of Income·tax (2 I.T.C.
365), Ahmed Din Alladitta v. Commissioner of Income-tax, P1mjab
(2 I.T.R. 369), Kanwal Naya" Ha·mir Singh v. Commissioner of Jn.
come-ta.r, Ajmer-iYierwara (6 I.T.R. 675), Commissioner of Tncomc·
tax v. Singari Bai (13 I.T.R. 224) distinguished.
B. ill. Kamdar, In re (1946 I.T.R .. 14), Pondicherry Railway Co.
v. Commissioner of Income·tax (58 I.A. 239) and Commissioner of
Jnco·m.e.eax,
Botnbay.
1953
Keshav Mills
Ltd;
952
SUPREME COURT REPORTS
[1953]
Income-tax v. Mathias (66 I.A. 23), Comrnissioner1Jf Income-tax v.
Kameswar Singh (1933 I.T.R. 94), Commissionei· of Income-tax v.
Chu11ilal Mehta (1938 I.T.R. 521) referred to.
v.
CtVIL
APPELLATE
JURISDICTION:
Civil
Appeal
Commissioner ~rNo. 151 of 1951.
Income-tax,
Appeal from a Judgment and Order dated 14/15th
Bornbay.
September, 1949, of the High Court of Judicature at
Bombay (Chagla C.J. and Tendolkar J.) in Income-tax
Reference No. 2 of 1949.
R. J. Kolah and N. A. Palkiwalla for the appellant.
C. K. Daphtary, Solicitor-General for India (P.A.
Mehta, with him) for the respondent.
1953. January 30. The judgment of Mehr Chand
Mahajan J., Das J. and Bhagwati .J. was delivered by
Bhagwati J. Bose J. delivered a separate judgment.
BHAGWATI J.-This is an appeal from the judgment
and order of the High Court of Judicature at Bombay
upon a reference by the Income-tax Appellate Tribunal under Section 66 ( 1) of the Indian Income-tax Act,
1922, whereby the High Court upheld the decision of
the Appellate
Tribunal that
two
amounts of
Rs. 12,68,480 and Rs. 4,40,878 were the sale proceeds
of goods sold by the appellant to merchants in British
India, were received in British India and were liable
to income-tax in British India.
The appellant is a company registered in the Baroda
State, as it then was, prior to its merger with India. It
manufactmes textile goods in Petlad in the Baroda
State and after the goods are manufactured they are
sold by the company ex-mills. The company employs
Messrs. Jagmohandas Ramanlal & Co. as guaranteed
brokers. That firm guarantees the sale price of goods
sold by the company ex-mills to the purchasers from
Ahmedabad and receives commission as consideration
for the guarantee and the work which it does for the
company. The company is a non-resident and its
accounts are maintained according to the mercantile
system.
•
..
•
S.C.R.
SUPREME COURT REPORTS
953
195.J
In the assessment year 1942-43 (the previous year
being the calendar year 1941) the total sales of the
d b
h
d
Ke8ha·v Mills
goo s y t e company amounte to Rs. 29,68,808. In
making the assessment on the company for that assessL~~·
. ment year the following three amounts were considered Commissioner of
for the purpose of determining the company's liability
Income-wx,
to British Indian tax.
Bombay.
(a) Sale
proceeds
recovered
through Messrs. Jagmohandas
Ramanlal & Co.
(b) Sale proceeds through British
Indian banks and shroffs re·
ceived by means of drafts or
hundies drawn by the company
(Railway receipts handed over
to British Indian merchants by
the banks on payment).
Rs. 12,68,480
Rs.
4,40,878
( c) Sale proceeds received by cheques on British
Indian banks and hundies on British Indian shroffs
and merchants, and collected by the banks and
shroffs
Rs. 6,71,735
Total
Rs. 23,81,093
As regards item(a)the company debited the account
of the firm of Messrs. Jagmohandas Ramanlal & Co.
with Rs. 13,41,744 which represented sales made by the
company to merchants ofAhmedabad whose payments
were guaranteed by that firm, and credited the sales
account with the amount of the bills. }fossrs. Jagmohandas Ramanlal & Co. collected the amounts of the
bills from the merchants at Ahmedabad and credited
the sums recovered in the company's accounts with
banks and/ or shroffs at Ahmedabad and also made disbursements under instructions of the company to the
creditors of the company in British India. All these
payments were credited by the· company to the account of Messrs. Jagmohandas Ramanlal & Co. and
during the relevant accounting year the company thus
Bhagwati J.
954
SUPREME COURT REPORTS
[1953]
19!iJ
received Rs. 12,68,480 agai115t the total debits of
Rs. 13,41,744.
Keshav Mills
Ltd.
As regards item (b) the eompany received Rs .
. v:
4,40,878 by drawing hundies or drafts for the amounts
Oointni8Bioner of of its sales bills (including the forwarding charges and
Income.tax
h
f
't fj
th
·n
· t
h
·
)
Bombay. '
t e cost o trans1 _rom
e m1 ~premises o t e station
on the merchants m favour of recognised banks and
Bhaywati J. shroffs in British India, by sending the same to those
banks or shroffs with the railway receipts duly endorsed in favour of the merchants and by instructing
the banks or shroffs to recover the amounts including
the costs of transmitting the same to them. The
amounts of these sales bills were debited by the company to the accounts of the respective merchants and
credited to the sales a.ecount and the sums recovered by
the banks or shroffs from the merchants in British
India against the delivery of the relative railway
receipts were on receipt of the same by the company
credited to the accounts of the respective merchants
in their books of account.
As regards item (c), the
company received
Bs. 6,71,735 from the merchants by cheques and
hundies drawn on banks and shroffs in British
India in favour of the company.
These cheques
and hundies were negotiated by the company in
Petlad and sent back for credit to its accounts with
those banks and shroffs. The said cheques and hundies were cashed in British India and the sale proceeds
remitted by the banks and shroffs to the company. The
amounts of the sales bills were debited to the accounts
of the merchants in the books of the coml)any when
the goods were invoiced to the merchants and these
accounts were credited with the moneys thus received
by the company from the merchants.
'l'he Income-tax Officer brought to tax the profits
derived by the company represented by the said three
items in the assessment year on the basis that the sale
proceeds having been received in British India the profits were received in British India. The Appellate
Assistant Commissioner on appeal held that profits
J
•
•
S.C.R.
SUPREME COURT REPORTS
955
from items (a) and ( c) were exempt from British Indian
19,;3
tax while thos!l represented by item (b) were rightly
Kesha• Mills
taxed. The Department filed an appeal to the AppelLtd.
late Tribunal against the decision of the Appellate
v.
Assistant Commissioner in regard to items (a) and (c) Commissioner of
and the company filed an appeal in respect of item (b ).
Incmne-tax,
The Appellate Tribunal held in regard to item (a) that
Bombay.
the merchants in British India were not absolved either
in law or in-fact from their responsibility to pay to the
company its dues by virtue of the debit entries in the
accom1t of Messrs. Jagmohandas Ramanlal & Co. and
in regard to item (b) that the payment of the amounts
dne was a condition precedent to the delivery of goods
by the banks in British India on behalf of the company. The Tribunal therefore held that profits arising
from items (a) and (b) were rightly subjected to tax.
As regards item (c) the Tribunal held that Rs. 6,71,735
"were received by the assessee company directly from
the merchants in British India by chequesandhundies
drawn on banks and shroffs in British India in favour
of the company but were negotiated in Petlad and sent
for credit to the company's account. The amounts
were received at Petlad and once they were received
there, they could not be held to have been received
again in British India ".
The Department asked the Tribunal to refer to the
High Court the question of law arising on item ( c) and
the company asked the Tribunal to refer to the High
Court the question of law arising on items (a) and (b)
and the Tribunal therefore referred the following
question of law to the High Court:--
" Whether on the facts and in the circumstances
of the case, the sums of Rs. 12,68,480, Rs. 4,40,878
and Rs. 6,71,735, or any of them, which, represents
receipts by the assessee company of its sale proceeds
in British India, include any portion of its income in
British India ? "
The High Court held that Rs. 12,68,480 were
received in British India and included the profits and
gains of the business of the assessee company. It held
t,hat Rs. 4,40,878 also were received in British India
Bhagwati J.
•
956
SUPREME COURT REPORTS
[1953]
1os.1
and the company was liable in respect of that amount.
K<BhavMills In regard to the item of Rs. 6,71,735, the High Court
found that the facts stated by,· the Tribunal were not
Ltd.
v.
sufficient to enable it to reach a decision and therefore
Oommissione1· of directed that the Tribunal should submit a suppleb1em11e-1ax,
mentary statement of case setting out the several
B 01•1bay.
aspects set out in the judgment. 'l'he High Court
Bhagwati .J. reframed the question in regard to the two items of
Rs. 12,68,480 and Rs. 4,40,878 in the manner following:-
(1) ·whether the sums of Rs. 12,68,480 and
Rs. 4,40,878 were sale proceeds of the goods sold
by the assessee to merchants in British India or were
debts due by the said merchants?
(2) Whether if they were sale proceeds, they were
received in British India ?
and answered them by stating that they were sale
proceeds and they were received in British India.
There was also a third question which was comprised
in the reference and that question was framed as
under:-
Whether the profits of the assessee's business are
included in the
sums
of
Rs.
12,68,480
and
Rs. 4,40,878 ?
This question was also answered by stating that
they were included in these two sums. The company
obtained leave from the High Court to appeal against
the decision in regard to the two sums of Rs. 12,68,480
and Rs. 4,40,878 and hence this appeal.
It is common ground that the company is a nonresident and its accounts have been regularly kept according to the mercantile system. Its balance sheets
were also prepared on that basis. The company was
assessed to tax in British India on the basis that these
two sums of money were received in British India by
or on behalf of the company. In regard to the item
of Rs. 12,68,480, even though the amounts of the sales
bills were in the first instance debited by the company
in its books to the account of Messrs. Ja,gmohandas
Ramanlal & Co, the sale proceeds in accordance with
•
J
•
S.C.R.
i'lUPREllfE COl'RT REPORTS
957
the terms of the sales hills were pitid by the respective
1953
merchants to -Yiessrs. J agmohandas Ramanlal & Co. in
Keshav Mills
British India and were either credited bv Messrs.
Ltd .
• Tagmohandas Ramanlal & Co. in the comp~ny's acv ..
counts with banks or shroffs in British India or were Oommisswner of
l. b
d b
h
.
d
. h h .
.
Incom,,-taz,
c JS urse
y t em m accor ance wit t e mstruct10ns
Bombay.
of the company in British India. In regard to the
item of Rs. 4,10,878 even though the amounts of the
Bhagv•ati J.
sales bills were debited in the first instance by the company to the accounts of the respective merchants in
the books of account at Petlad the relative railway
receipts were sent by the company to banks or shroffs
in British India together with drafts or hundies in connection with the same with instructions that deliverv
of the railway receipts should he given to the respective merchants against payment and the amounts of
the s<tles bills were thus paid by the respective merclrnn ts to the banks or shroffs in British India and were
tmtrnmitted under the instructions of the company by
the banks and shroffs in British India to the company
at Petlad. Prima facie therefore the amounts of the
sales bills in both the citses whether they were paid to
)fo,:irn .. fagmohandas Ranmnlal & Co. or to the banks
or Rhroffs through \1·hom the railway receipts were
negotiated were paid by the mercha1its in British India
and were received by Messrs .. Tagrnohandas Ramanlal
& Co. and the banks or shroffs on behalf of the company in British Indin.
The receipt of these itmounts
thus fe!l within section 4 (1) (a) of the Act and the -
profits or gains of this business thus were received in
British India by or on behitlf of the company.
The company however sought exemption from liability to tax on the grounds (a) that the accounts of the
company were kept on the mercantile or book profit
basis under which the accrual of profit as shown in the
account was the criterion of taxability and section 4(1)
(a) had no application at all; (h) that it was obligatory on the authorities under section 13 of the Act to
accept that systPm of maintaining accounts except
under the proviso to that section and that the method
of computation there was made the very basis of
124
958
SUPREME COlJRT REPORTS
[1953]
19.13
chargeability and section 10 read with section 13
operated to save these amounts from chargeability and
Keshan Mills
d
' d
(c) that the amounts having been treate as receive
Ltd.
v...
when credit entries were made in the books of account,
OommiBaioner ~I and chargeability having crystallised on the date when
Income-tax,
the income accrued or was treated as received, there
8 1:!.nbay.
was no further scope for a charge when the amounts
were su bsequentl.Y actually· received and the subseBhagwati J, quent handling of the amounts by the company and
the receipt thereof in British Indir1 were of no consequence.
The mercantile system of accounting or what is
otherwise known as the double entry system is opposed
to the cr1sh system of book keeping under which fl
record is kept of actual cash receipts and actual cash
payments, entries being made only when money is
actlrnlly collected or disbursed. 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
profits or gains of the business which 'are thus credited
are not realised but having been earned are treated as
received though in fact there is nothing more than an
accrual or arising of the profits at that stitge.
They
are book profits.
Receipt being not the sole test of
chargeability and profits and gains that have accrued
or arisen or are deemed to have accrued or arisen being
also liable to be charged for income-tax, the assessability of these profits which are thus credited in the
books of account arises not because they are received
but because they have accrued or arisen.
Mr. Kolah appearing for the company drew our
attention to the following cases:~
·
Subramaniyan Chettiar v. Commissioner of Incometax('), Ahmed Din Allad-itta v. Commissioner. of In·
come-tax, Punjab('), Kanical Nayan Hnmir Singh v.
Commissioner of Income-tax, Ajmei<Merwara(') and
(r) (1927) i l.T,C. 365.
(2) (1934] 2 l,T.R. 369,
(3) (1938] 6 I.T.R. 675.
.... .
J
s.c.R.
SUPRE~IE UOU1-t1' REPORTS
959
Cornmissioner of 1 ncome-tax v. Shrimati Singari
1963
Bai(').
Keshav Mills
The assessees there were all residents in British India
Ltd.
and maintained their books of account according to
v.
the mercantile system. Except in the case of Commis- Commi••ioner of
sioner of Income-tax v. Singari Bai(') where the assessIncome-tax,
ment was in respect of the total ineome or profits,
Bombay.
stray items of income treated as received in British
Bhagwati J.
India were sought to be charged for tax and they were
all assessed for tax not on the basis of actual receipts
in British India but on the basis of their having accrued or arisen in British India. The cases were decided with reference to the law as it stood before the
amendment in 1939 which under seution4(1) rendered
liable to tax all income, profits or gains from whatever
source derived, accruing or arising or received in
British India or deemed under the provisions of the
Act to accrue, arise or to be rec~iYed in British India.
The question that arose for the determination of the
courts was whether under the mercantile system, profits which were credited in the books could be taxed
even though they had in fact not been received and
the conclusion reached by the courts was that these
profits credited in the books of account were earned
and could be charged as having accrued or arisen within British India even though they were in fact not
received. In none of these cases were the courts concerned with a non-resident claiming to have received
profits or gains outside British India under the mercantile system of accounting and claiming exemption
from liability to tax under section 4 (1) (a) in respect
of profits actually received in British India.
It follows from the above that the mercantile system
of accounting treats profits or gains as arising or accruing at the date of the transaction notwithstanding
the fact that they are not received or deemed to be
received and umler that system, book -profits are
assessed as liable to tax. lf an assessee therefore regularly adopts the mercantile system of accounting he
would be liable to tax on the profits thus credited by
(1) [1945) 13 I.f,R. 224.
•
960
SUPREME COURT Rj~f>ORTS
ll953]
1953
him in his books of account subject to all deductions
for bad debts as provided in section 10' (2) (xi). SecKeshav M ill8 tion 4 (1) (a) has nothing to do with this basis of taxLtd.
l
j
v.
ation. Section 13 which is an integra part oft te comOommissioner ofputation of the total income of the assessee and is
Income-ta.•,
compulsory on the income-tax authorities as well when
Bombay.
computing the total income (vide section 2 (15) ) does
Bhagwati J. not lay down ri,ny exemption from liability. It only
sets up a mode of computation of the income which is
liable to assessment and imposes upon the income-tax
authorities an obligation to accept the mode of accounting regularly adopted by the assessee except in
the cases where the proviso to that section comes into
operation. The profits earned and credited in the
books of account being thus taken tts the basis of computation, the system of accounting postulates the existence of debts in so far as moneys remain due and
payable by the parties to whom they have been debited and when it is realised that these debts are not recoverable the assessee gets a deduction fdr the bad
debts under section 10 (2) (xi).
This however does not
mean that the transaction ltS it has been recorded in
the books of account under the mercantile system of
accounting or the double entry system is metamorphosed or the relationship between the parties assumes
a different character. What was in its inception a
transaction of sale and purchase is not converted into
another transaction as between creditor and debtor.
The relationship as between vendor and purchaser still
subsists and there dues not come into existence a new
relationship as between creditor and debtor with all its
necessary consequences. The transaction as it has been
recorded in the books of account has got to be worked
out to its fullest extent. _;\forely because the goods
have been supplied and the price thereof has been debited to the purchaser the rights and obligations of the
vendor and purchaser inter se arc not in any manner
affected. The vendor is bound tu fulfil all his obligations under the contract and continues to be liable for
all the consequences of his default including rejection
of his goods by the purchaser or a claim for d1images
'
•
s.c.R.
SUPREME COURT REPORirs
96i
1953
for breach of wal'l'anty by him. The purchaser is
equallv entitlec'l to reJ· ect the 0aoods or to claim the
.J
Keshav M il'1s
damages as on breach of warranty by the vendor and
Ltd.
all these rights and obligations have got to be worked
v.
out in spite of the fact that the entries are made in Oonunis•ion" of
the books of account by the vendor in ;1ccordance with
Incorne-tax,
the mercantile system of accounting adopted by him.
Bombay.
The vendor could not say tha.t he is under no further
Bhagwati J.
obligation to the purchaser and that the purchaser
must pay the price of the goods debitPd to him as a
debt arising out of the book entry.
The count in any
action filed by the vendor against the purchaser would
be a count for the price of goods sold <ind delivered
and would not be a count on an assumpsit for recovery of a debt due by the debtor to him.
It is clear that under these circumstances there is no
receipt of the moneys !Lt all, either actual or constructive, in cash or in kind, by actual payment or by
adjustment or settlement of accounts. There is also
no scope for the <irgurnent, that even though these
sums ma v not be said to be either actuallv or constructively re~eived they should be "deemed to be received". The expression "deemed to be received" only
meam; deemed by the provisions of the Act to be received. The phrase statutory receipt might be conveniently employed to cover income which is "deemed
to be received'', and instances of such statutorv receipts are to be found in the provisions of the Ac:t,"e.g.,
section 18 (4), seetion 58 (E), section 58 (J) (3), section 7(2), section 16(1) (c) and sections 19 (2) (vii) and
HJ(2). (See the observations of Beaumont ('.J. in Commissioner of lncorne-ta;c, Bombay v. New India Assw1·-
ance Co. Ltd.(1 ).
An amount cannot be "deemed to
be received" merely by the volition or sweet will of an
indiYidual. In all the cases which we have mentioned
above the profits earned which >rnre credited in the
books of account according lo the mercantile system
of accounting were at best "treated as having been received" which is neither "received" nor "deemed to be
received" and therefore not within the purview of
section.4(1) (a).
(1) [1938] 6 I.T.R. 603 at p. 614.
•
962
SUPRE.VIE COUR'i; nEPORTS
[1953]
1953
If then profits which have Leen thus credited cannot
be said to be received nor deemed to have been receivKP,shav A!ifls ed when the entries were made in the books of account,
Ltd.
v.
the contention urged before us by Mr. Kolah that
Goin1ni . .aioner of there could not be a second receipt of the amount in
Income-la.>:,
British lndia does not survive. [t is true that the
llombay.
words used in section 4(1) (a) rnlate to the first receipt
after the accrual of the income. Once it is received bv
BhugwatiJ.
"
the party entitled to it, in respect of any subsequent
dealing with the said amount it cannot be said to be
"received" as income on that occasion. [Per Kania J,
in B. ;JI. Kamdar (1)J.
The "receipt" of income refers
to the first occasion when the recipient gets the money
under his own control. Once an amount is received as
income, any remittance or transmission of the amount
to another place does not result in "receipt", within
the meaning of this clause, at the other place. 'l'his
was definitely established by the Privy Council in
Pond-icherry Rail1cay Co. v. Commis8-ioner of lncome-
'J'ax (') :i,ml in Commissioner of Income-tax v. J.Vlathias (3). If, therefore, the income, profits or gains have
been once received by the assessee even though outside British India they do not become chargeable by
reason of the moneys having been brought in British
India, because what
is
chargeable
is the first
receipt of the moneys and not a subsequent
dealing by the assessee with the said amount.
In that event they are brought by the assessee
as his own moneys which he has already received and
had control over and they cease to enjoy the character
of income, profits or gains.
This ratio however does not apply to the facts of
the present case before us.
The moneys were neither
received by the company nor could be deemed to have
been received by it when the entries were made in the
books of account at Petlad. They had merely accrued
or arisen to it and so far as the receipt thereof is concerned they were first received in British India when
\hey were received by Messrs. Jagmohandas Ramanlal
(r) [r946] r4 l.T.R. 14 at p. 39,
(z) [1931] 58 l.A. z39.
(3) [1939] 66 I.A. z~.
, , .
•
S.C.R,.
SUPREME COURT REPORTS
963
1953
& Co. or by the various banks or shroffs in British
India through 'whom the railway receipts were negoti-
-
Keshav i.ll1'll8
ated. The first receipt of the moneys was therefore
Ltd.
when they were paid as such by the merchants to
v.
Messrs. J agmohandas Ramanlal & Co. or to the various GommiBBioner of
banks or shroffs as above.
W'hatever paid by the
Income·tox,
merchants to these several parties were the sale proBombay.
ceeds of the goods which had been sold and delivered
Bhagu·atiJ.
by the company to them and they were received within the meaning of section 4 (1) (a) of the Act by these
several parties on behalf of tho company in British
India at the time when these payments were made by
the merchants to them.
Mr. Kolah pressed into service the argument based
on section 13 of the Act that the mercantilo svstem of
accounting regularly adopted by the assessec \vas obliga.tory on the income-tax authorities for computation
of his income. l'Vhile agreeing generally with that submission in case of residents, we doubt whether that
position would be available to a non-resident, who
maintains his books of account outside British India
according to the mercantile system. The section would
only be relevant where the total profits of the assessee
have to be computed, in which event he would be
entitled to claim that they should be computed according to the syHtem of accounts maintained hy him. But
the section would hardly be relevant where stra.y items
of income are caught iu taxable territories as received
in taxable territories by a non-resident. The entries in
the present ease were put in merely to prove that the
sale proceeds were received outside British India where
the entries were made. That contention however
could not be sustained, as section 4 (1) (a) is concerned
with cases of actual receipt and not with cases of paper receipts.
Having regard to the observations. made above we
have come to the conclusion that the High Court was
right in holding that the two sums of Rs. 12,68,480
and Rs. 4,40,878 wBre the sale proceeds of the goods
sold and delivered by the appellant to merchants in
British India, that they were received by Messrs,
•
964SUPREME COt'RT REPORTS
[1953]
1953
J agmohanclas Itamanlal & Co. and by the banks and
Ke&hav Mills shroffa through whom the railway receipts were nego·
L
tiatecl, on behalf of the appellant in British lnclia, that
td.
v.
they were liable to tax under section4(1) (a) of the
Gommi . .,ioner of Act as having been received in British India on its be·
Income-tax,
half, that there is nothing either in the facts and circumBombay.
stances of 1ohe ease or in law why they should be exflhagwatiJ.
empted from such liability, that the a.nswers given to
the questions which were ultimately considered by the
High Comt were correct, and the appellant was rightly
held liable for the tax on these two amounts subject
to all just deductions and allowances.
The appeal
therefol'e fails
and must stand dismissed with
costs.
Bo.SE, J.-I respectfully disagree.
Section 3 of the Indian Income·t8~x Act provides
that the "total income" is to be charged in accordance with the provisions of the Act.
We have therefore to see what "total income" means.
"Total income" is defined in section 2(15). It
means (not" inclmles" but means) the total amount
of income, profits and gains "referred to in sub-section
(I) of section 4 computed in the manner laid down in
this Act." Then-fore, the computation of all income
referred to in section 4( 1) has to be "in the manner
laid down in the Act ".
Section 4 (apart from the provisos and explanations)
is divided into three clauses, (a), (b) and (c).
Clause
(b) deals with residents and (c) with non-resident5. As
(a) is general, it is legitimate to infer that it refers to
both. Therefore, the words "received" and "deemed
to be received " must be constrned in tho same sense
in both cases except of course where it is otherwise
provided in the Act, for sub-section (1) is made subject
to the provisions of the Act.
'N' ow the words "deemed to be received" can be
exduded from consideration at once because I agree
that they are confined, and are intended to he confined
to what I may call the deeming sections in the Act., that
is to say, to cases where the deeming must be clone
' . '
•
S.C.R.
SUPREME COURT REPORTS
965
under the express provisions of the Act. That leaves
1953
us with the wdrd "received" (I am of courne only dealKeshav Mills
ing with section 4(1) (a) which deals with "receipts"
Ltd.
and not with section 4( 1) ( c) which refers to "accruals"
v.
and "arisals" and to that which is deemed to "accrue" Commissioner of
or ''arise").
Now this, in my opinion, is to be contrasted with
the words "accrue" and "arise" which are used in
clauses (b) and (c).
Though there may be overlapping
in some cases, I do not think the three are intended to
mean the same thing. The Privy Council thought in
Commissioner of Income-ta.r v. 1Jiathia8( 1) that there is
some variation in meaning between them and in Commissioner of Income-tax v. Chun-ilal B. Mehta(') they
drew attention to the antithesis between "accruing
and arising in" and "received in'', though they also
said in the earlier case that there is not a complete
disjunction between them and that they are not three
mutually exclusive qualifications (page 56); that is,
that there may be some overlapping in cert:i,in cases.
Next, we turn to section 6 which divides the various
sources of income under various heads for the purposes
of computation and chargeability and states that each
head shall be "chargeable" "in the manner hereinafter :i, ppearing". It is to be observed that the word
"shall" has been user! and not" may" thereby implying that there is no option in the matter.
So far as
business is concerned, the he:i,d is No. (iv) "Profits and
gains of business etc."'
That carries us on to sections 10 and 13 which P.rescribe the method of computation. Here again, the
language is imperative and in the case of a business
the method of computation has to be in accordance
with the method of auuounting regularly employed by
the assessee:
s00 Commissioner of Income-tax v.
Kameshwar Singh(·).
Now in the present case, the method of accounting
was the mercantile system. The essential difference
(r) [1939] 7 J.T.R. 48 at 56.
(3) [1933] I I.T.R. 94 at IOO and IOI,
(2) [1938] 6 I.T.R. 521 at 527.
125
Income-tax,
Bonibay.
•
966
SUPREME COCRT REPORTS
[1953]
19!i3
between this and the cash basis system is that in the
latter actual receipts and disbursements'are taken into
J(e.<;hav Mi'.ll8 account. In the former, sums which are due to the
Ltd.
v.
business are entered on the credit side immediately
Commissioner oJthey are legally due and before they are actually
Income-tax,
received and expenditures are entered the moment a
Bombay.
legal liability to pay arises and before the actual clisBose J.
bursements.
The profit or loss at the encl of the
accounting year is therefore based, not on a difference
between ~hat was actually received and what was
actually paid out, but on the difference between the
right to receive and the liability to pay. I find it
impossible in such a case to say that the taxation is on
income, or profits and gains which were "received".
It can only be on profits which ''accrued" or "arose"
to the assessee in the accounting year: see the Privy
Council in Feroz Shah v. Commissioner of Income-tax(').
That, in my opinion, excludes section 4(1) (a) ttnd
that in turn means that in such a case a resident is
taxed under section 4(1) (b) and r1 non-resident under
section 4( 1) ( c ) .
.N'ow, this to my mind is of vital importance. The
primary object of the Income-tax Act is to tax and
not merely to ascertain rm income. The computation
of the income is subsidiary and is only for the purposes
of ascertaining the quantum of the tax : see Goimnissioner of Income-tax v. Karne8hwar Singh('). Therefore,
if the legislature chooses to lay down different methods
of computation and say that the taxation shall be on
the amount so computed, it is essential that these
methods be adhered to. In some cases this may be to
the advantage of the assessee and in others it may
operate to his disadvantage. But that is immaterial.
The importance lies in this. All that can be taxed
in a given year are the profits and gains which are
received or which arise or accrue in the " previous
year", and if the Act directs that the profits are to bfil
computed in a given case on "accruals" or "arisnls"
and not on actual receipts it is essential that that b@
(1) [1933) l I.T.H. 219 at 224 and 225.
(2) [1933] l l.T.R. 94 at IOO.
' ••
j ••
•
S.C.R.
SUPRE~IE COlJRT RE1)0RTS
967
done ; and it follows from that that the tax in such a
1953
case can only be on the accruals or arisals and not on
Kesha11 Mills
the actual receipts, for clearly you cannot tax on that
LU.
which you are forbidden to compute in a case where
v.
the tax can only be levied on \\·httt is computable Gommiseioner ~I
under the Act.
Income-ta.•.
It is important to draw the distinction for this reaBambav.
son. The rate of tax varies from year to year, thereBo•e J.
fore if the book profits which are dirPcted to be taxed
in a given year are, say, Rs. 10,000 and the actual
receipts only Rs. 100, it makes a lot of difference
which figure is taken; nor does it even itself out in the
long run, for if the rate of taxation inereases in th('
following year and the state of the \rnsiness is just the
reverse, namely that the book profits ?,re only Rs. 100
whereas the actual receipts arising from the previous
year's transiwtions are Its. 10,000, it will make a
considern hie difference to the asses see in the aggregate
of tax payable over the years, whether he pays on the
basis of book profits or actual receipts in the two
years.
I am not able to draw tt di:;tinction between a resident and a non-resident in thrso matters. I can find
no ground for holding that in the case of a resident
the mercantile system must he adopted for computing
the profits if that is
the system of accounting
regularly employed but that that need not be done in
the case of a non-resident. If the assessee had been a
resident company, the taxation would, in my opinion,
have been under section 4(1) (b) on profits and gains
which had accrued or arisen and not under section 4
(1) (a) on profits which had been received. The same
principle must, in my opinion, be applied in the case
of a non-resident and therefo1·e section 4 ( 1) ( c) is
attracted, provided the profits and gains ha Ye actually
accrued or arisen in the taxable ten-itorics or they can,
because of section 42, he deemed to haYc accrued or
arisen there.