Case 1

Cn Lhe above facLs Lhe querlsL seeks oplnlon as Lo wheLher expendlLure lncurred on
acqulslLlon of raw maLerlal can be dlsallowed on Lhe ground LhaL lL has also beneflLed lLs
slsLer concern
Cbservat|on
O L ls prerogaLlve of Lhe assesse Lo carry on Lhe buslness ln Lhe manner ln whlch he
llkes 1he 1 AcL nowhere sLaLes LhaL Lhe assesse cannoL purchase Lhe goods from
relaLed parLles
O 1he 1 AcL nowhere sLaLes LhaL each assesse has Lo make maxlmum proflLs
O 1here ls enough safeguard provlded ln Lhe 1 AcL by enacLlng secLlon 40A(2)(a) whlch
sLaLes LhaL where Lhe assesse lncurs any expendlLure ln respecL of whlch paymenL
has been or ls Lo be made Lo any person referred Lo ln sec 40A(2)(b)(relaLed parLles)
and lf Lhe assesslng offlcer ls of Lhe oplnlon LhaL such expendlLure ls excesslve or
unreasonable havlng regard Lo falr markeL value of Lhe goods servlces or faclllLles
for whlch Lhe paymenL ls made or Lhe leglLlmaLe needs of Lhe buslness of Lhe
assesse or Lhe beneflL derlved by or accrulng Lo Lhe assesse Lhere from so much of
Lhe expendlLure as ls consldered Lo be excesslve or unreasonable would be
dlsallowed n Lhe lnsLanL case Lhere ls no flndlng LhaL Lhe querlsL has pald excesslve
or unreasonable amounL havlng regard Lo falr markeL value Pence Lhe assesslng
offlcer has rlghLly noL dlsallowed any amounL u/s 40A (2) of Lhe 1 AcL
O or Lhe purpose of any expense Lo be allowed u/s 37(1) Lhe followlng condlLlons are
Lo be fulfllled
1 xpendlLure should noL be as descrlbed u/s 3036
2 L should noL be a caplLal expendlLure
3 L should noL be personal expenses
4 xpendlLure should be lald ouL or expended wholly and excluslvely for Lhe
purpose of buslness
O 1he querlsL company saLlsfles all Lhe above condlLlons 1he expendlLure ls lncurred
Lowards purchase of raw maLerlal requlred for manufacLurlng goods 1he
expendlLure ls noL ln Lhe naLure as menLlon ln sec 3036 and ls also noL a caplLal
expendlLure or personal expense 1he expendlLure ls made excluslvely for Lhe
purpose of buslness When Lhe LransacLlon ls aL arm's lengLh prlce Lhe assesslng
offlcer cannoL dlsallow Lhe expendlLure lncurred Mr karla has rlghLly relled on Lhe
declslon of asLern nvesLmenLs LLd v C1 20 18 1 (SC) whereln lL ls observed
MosL commerclal LransacLlons are enLered lnLo for Lhe muLual beneflL of boLh sldes
or aL any raLe each slde hopes Lo galn someLhlng for lLself 1he LesL for presenL
purposes ls noL wheLher Lhe oLher parLy was beneflLed nor lndeed wheLher Lhls was
a prudenL LransacLlon whlch resulLed ln ulLlmaLe galn Lo Lhe appellanL buL wheLher lL
was properly enLered lnLo as a parL of Lhe appellanL's leglLlmaLe commerclal
underLaklng ln order lndlrecLly Lo faclllLaLe Lhe carrylng on of lLs buslness As such
once expense ls lncurred for beneflL of querlsL's buslness lL ls lmmaLerlal LhaL lL has
beneflLed company x a slsLer concern
O Also see C1 v Chandulal keshavlal Co 38 18 601 (SC) C1 v 8a[aram 8andekar 208 18
303 (8om)
O 1he LesL lald down ln Lhe case of asLern nvesLmenLs LLd v Commlssloner of
ncomeLax 20 18 1by Lhls case was LhaL ln Lhe absence of fraud or an obllque
moLlve and lf a LransacLlon ls of a naLure whlch ls enLered lnLo ln Lhe course of
buslness of Lhe assessee and ls commerclally expedlenL Lhen lL does become a
deducLlble allowance f as a resulL of Lhe LransacLlon Lhe assessee beneflLs lL ls
lmmaLerlal LhaL a Lhlrd parLy also beneflLs Lhereby AL page 3 8ose ! observed
O n Lhe absence of a suggesLlon of fraud Lhls ls noL relevanL aL all for glvlng effecL Lo
Lhe provlslons of secLlon 12(2) of Lhe ncomeLax AcL MosL commerclal LransacLlons
are enLered lnLo for Lhe muLual beneflL of boLh sldes or aL any raLe each slde hopes
Lo galn someLhlng for lLself 1he LesL for presenL purposes ls noL wheLher Lhe oLher
parLy beneflLed nor lndeed wheLher Lhls was a prudenL LransacLlon whlch resulLed
ln ulLlmaLe galn Lo Lhe appellanL buL wheLher lL was properly enLered lnLo as a parL
of Lhe appellanLs leglLlmaLe commerclal underLaklngs ln order lndlrecLly Lo faclllLaLe
Lhe carrylng on of lLs buslness
O 1he Supreme CourL ln Lhe case of C1 vs uelhl Safe ueposlL Co LLd has consldered
when expendlLure can be consldered as lald ouL on purely buslness conslderaLlons
and wholly for Lhe purpose of Lhe assessees buslness 1he Supreme CourL has
observed LhaL Lhe Lrue LesL of an expendlLure lald ouL wholly and excluslvely for Lhe
purposes of Lrade or buslness ls LhaL lL ls lncurred by Lhe assessee as lncldenLal Lo hls
Lrade for Lhe purpose of keeplng Lhe Lrade golng and of maklng lL pay and noL ln any
oLher capaclLy Lhan LhaL of a Lrader 1he Supreme CourL has observed LhaL Lhe
quesLlon should be declded on ordlnary prlnclples of commerclal Lradlng and
commerclal expedlency 1he mere facL LhaL Lo some exLenL Lhe expendlLure may
enure Lo a LhlrdparLys beneflL cannoL ln law defeaL Lhe effecL of Lhe flndlng as Lo
Lhe purpose of Lhe expendlLure
Conc|us|on
n vlew of Lhe facL LhaL Lhe querlsL had noL pald excesslve amounL and had pald Lhe markeL
prlce of Lhe goods whlch were necessary for Lhe purpose of lLs buslness and slnce Lhe
expendlLure was lncurred as a Lrader and noL ln any oLher capaclLy and was lald ouL for Lhe
purpose of buslness and Lhe deducLlon clalmed by Lhe querlsL has Lo be allowed ln vlew of
above menLloned declslons

Case 2
Dnder Lhe accrual basls accounLlng revenues and expenses are recognlzed as follows
O 8evenue recognlLlon 8evenue ls recognlzed when boLh of Lhe followlng condlLlons
are meL
a 8evenue ls earned
b 8evenue ls reallzed or reallzable
O 8evenue ls earned when producLs are dellvered or servlces are provlded
8eallzed means cash ls recelved
8eallzable means lL ls reasonable Lo expecL LhaL cash wlll be recelved ln Lhe fuLure
O MercanLlle or Accrual SysLem of AccounLlng
O 1hls ls a sysLem ln whlch accounLlng enLrles are made on Lhe basls of amounLs
havlng become due for paymenL or recelpL 1hls sysLem recognlzes Lhe facL LhaL lf a
LransacLlon or an evenL has occurred lLs consequences cannoL be avolded and
Lherefore should be broughL lnLo books ln order Lo presenL a meanlngful plcLure
of proflL earned o r l o s s s u f f e r e d a n d a l s o o f L h e f l n a n c l a l
p o s l L l o n o f L h e f l r m
O n 5ouroshtro cement chemico/ lndustries Ltd v commissioner of lncome 1ox
1993 213 18 323(Cu[araL) Lhe ulvlslon 8ench has expressed Lhus
@e bas|s of tax|ng |ncome |s accrua| of |ncome as we|| as actua| rece|pt If for want of
necessary mater|a| crysta|||z|ng te expend|ture |s not |n ex|stence |n respect of w|c
suc |ncome or expenses re|ate te mercant||e system does not ca|| for ad[ustment |n te
books of account on est|mate bas|s It |s actua||y known |ncome or expenses te r|gt to
rece|ve or te ||ab|||ty to pay w|c as come to be crysta|||zed w|c |s to be taken |nto
account under te mercant||e system of ma|nta|n|ng books of account An est|mated
|ncome or ||ab|||ty w|c |s yet to be crysta|||zed can on|y be ad[usted as a cont|ngency
|tem but not as an accrued |ncome or ||ab|||ty of tat year
O 1he 8ombay hlgh courL ln Lhe case of 8hogllal Laherchand vs C1 reporLed ln
2818919 has observed 1hough lncome may accrue or arlse Lo an assessee before
he acLually recelves lL lncome cannoL accrue or arlse Lo hlm unLll he acqulres a rlghL
Lo recelve Lhe same and unless and unLll Lhere ls creaLed ln favour of Lhe assessee a
debL due by somebody lL cannoL be sald LhaL he has acqulred a rlghL Lo recelve Lhe
lncome"
O Mr karla has rlghLly quoLed Lhe declslon of Lhe Supreme courL namely u Sassoon
vs C1 26 18 27
O 1he clLaLlon of Lhe case C1 v Ashokbhal Chlmanbhal 46 18 42 (SC) ls 36 18 42
O n Lhe glven case ln absence of any conLracL Lhe querlsL could noL clalm any amounL
from Lhe conLracLee 1he amounL due Lo Lhe querlsL goL crysLalllsed ln Lhe
AccounLlng year 20032004 relevanL Lo A? 20042003 and lL was ln LhaL year LhaL Lhe
assessee goL Lhe rlghL Lo recelve Lhe amounL and a debL was creaLed ln hls favour
urLher polnL Lo be noLed ls LhaL Lhe conLracLee has also noL clalmed any expense ln
Lhe A? 20032004 as no conLracL has been enLered lnLo and Lhe exacL expense was
noL known n vlew of Lhe above quoLed declslons and Lhe declslons menLloned by
Mr karla Lhe lncome of Lhe querlsL ls Laxable ln AssL ?r 200403 and noL ln AssL ?r
200304
Conc|us|on
O Applylng Lhe above prlnclples Lo Lhe facLs of Lhe case of Lhe querlsL lL ls only when
Lhe head offlce had agreed Lo quoLaLlon LhaL a debL arose ln favour of Lhe querlsL Lo
recelve Lhe amounL ln quesLlon 1lll such Llme no rlghL had accrued ln favour of Lhe
querlsL raLher local offlce of Lhe cllenL had clearly lnformed LhaL lf approval ls noL
recelved Lhe querlsL would be enLlLled Lo only preapproved raLes 1he facL LhaL
work ls already done ln Lhe prevlous year ls noL relevanL buL Lhe real lssue ls
wheLher any rlghL Lo recelve had accrued ln favour of Lhe querlsL whlch ls noL so
urLher subsequenL approval of Lhe quoLaLlon does noL creaLe a rlghL as on 313
2003 WhaL ls chargeable Lo Lax ln A? 200304 ls lncome accrued or arlslng ln Lhe
relevanL prevlous year and ln Lhe presenL case no lncome had accrued or arlsen
durlng Lhe relevanL prevlous year