Messrs. Calcutta Company Ltd vs The Commissioner Of Income-Tax, West Bengal

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeal No. 213 of 1955

Decision Date: 12 May 1959

Coram: Natwarlal H. Bhagwati, M. Hidayatullah

In the matter titled Messrs Calcutta Company Ltd. versus The Commissioner of Income-Tax, West Bengal, the Supreme Court of India delivered its judgment on 12 May 1959. The judgment was authored by Justice Natwarlal H. Bhagwati, who sat on the bench together with Justice M. Hidayatullah and Chief Justice Sudhi Ranjan Das. The case was reported in 1959 AIR 1165 and subsequently in the 1960 volume of the Supreme Court Reports at page 185. The dispute concerned the application of section 10(1) of the Indian Income-Tax Act of 1922 to an expense claimed by the appellant, a company engaged in the business of developing land and subsequently selling the developed plots for profit.

The appellant maintained that it had sold several parcels of land during the assessment year in question and that, under the mercantile method of accounting which it employed, it recorded the entire amount receivable under each sale in the credit side of its books. Accordingly, the company entered the full sale price of Rs 43,692-11-9 as revenue, even though it had actually received only Rs 29,392-11-9 in cash during the year. In addition, the appellant debited an amount of Rs 24,809, representing the estimated expenditure required to complete the development of the sold plots. This estimate was based on covenants incorporated in the deeds of sale, which obliged the company to carry out the remaining development work within six months of each sale. Although no portion of the estimated development expense had been actually incurred during the assessment year, the company claimed a deduction of the full Rs 24,809 in computing its taxable profits for that year.

The Income-Tax Officer, while accepting the appellant’s mercantile accounting system, disallowed the deduction on the ground that the claimed expense had not been actually incurred and was only a probability. The appellant appealed this decision, but both the Appellate Assistant Commissioner and the Income-Tax Appellate Tribunal affirmed the disallowance. The matter then proceeded to the High Court, which, on a reference made under section 66(1) of the Income-Tax Act, also held against the appellant. The central question before the Supreme Court was whether the deduction claimed for the estimated development expense could be treated as a legally allowable expense of the assessment year.

The Court held that the liability undertaken by the appellant under the deeds of sale constituted an accrued liability rather than a contingent one. Although the six-month period for completing the development was not a condition precedent to the sale, the undertaking was described in the deeds as unconditional and absolute in its terms. Consequently, the liability accrued at the moment the deeds of sale were executed, even though the actual discharge of the liability would occur at a later date. The Court referred to the decision in Keshav Mills Ltd. v. Commissioner of Income-Tax, Bombay, [1953] S-C-R 950, and distinguished the earlier authority of Peter Meychant Ltd. v. Stedeford (Inspector of Taxes), (1948) 30 T.C. 496. The Court observed that the difficulty in estimating such a liability for purposes of debit under the mercantile system could not render the accrued liability a contingent one, because the tax authorities were always empowered to arrive at a proper estimate based on all the circumstances of the case.

The Court held that the liability could not be treated as a conditional one because the tax authorities were always free to arrive at a proper estimate of the liability by considering all the circumstances of the case. In support of this view, it referred to the decision in Gold Coast Selection Trust Ltd. v. Humphrey (Inspector of Taxes), [1948] A.C. 459. Taking into account the prevailing commercial practice and the principles of trade, the Court observed that an estimated deduction, even if it did not fall under any of the specific provisions of section 10(2) of the Income-Tax Act, was nevertheless permissible under section 10(1) of the Act. The Court emphasized that the statute contained no express or implied prohibition against such an estimated deduction, and therefore the answer to the question of its allowance was affirmative. The Court also cited several authorities that supported this reasoning, namely Badridas Daga v. The Commissioner 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; Pondicherry 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. The judgment related to a civil appeal, specifically Civil Appeal No. 213 of 1955, which was an appeal from the judgment and order dated 26 June 1953 of the Calcutta High Court in I.T.R. No. 34 of 1952. Counsel for the appellant comprised A.V. Viswanatha Sastri, Y. C. Talukdar and Sukumar Ghose, while counsel for the respondent consisted of K.N. Rajagopal Sastri and D. Gupta. The appeal, decided on 12 May 1959, was delivered by Justice Bhagwati. The appeal, supported by a certificate under Article 135 of the Constitution read with section 66A(2) of the Indian Income-Tax Act, sought to determine whether the appellant was entitled to a deduction of Rs 24,809 in computing its profits and gains for the assessment year 1948-49. The appellant was engaged in the business of buying land, developing it for building purposes, and selling the developed plots at a profit. The principal developments undertaken by the appellant included laying out roads, providing a drainage system, and installing street lights, which were to be maintained until the municipal authorities took over. The entire development was not completed before the land was sold, nor was the whole sale price received in cash at the time of sale. The usual practice was that the purchaser paid approximately twenty-five per cent of the purchase price in cash and agreed to pay the balance with interest in ten annual installments, securing the payment by creating a charge on the purchased land. In turn, the appellant undertook to carry out the developments within six months of the sale date; however, the contract did not make time of the essence, and the appellant’s obligation was to complete the developments within a reasonable time, a condition that was incorporated in the deed of sale.

In the accounting year that corresponded to the assessment year 1948-49, the appellant sold several plots and received only a part of the sale price from the purchasers according to the payment scheme previously described. The appellant maintained its accounts using the mercantile method, which required that any money deemed due and receivable be entered on the credit side of the books even if it had not yet been actually received. Consequently, although the total sale price of the lands sold during that year was Rs 43,692-11-9, the appellant recorded the entire amount as credit in its accounts. In reality, only Rs 29,392-11-9 was received in cash, while the remaining Rs 14,300 represented the unpaid balance that the purchasers had secured by creating a charge on the land, together with any interest that was receivable in that year under the deeds of charge. The whole sum of Rs 43,692-11-9 was therefore credited in the books in accordance with the mercantile system adopted by the company. Under the terms of the deeds of sale, the appellant had undertaken to complete certain developments within six months of each sale. For the plots sold during the year, the appellant estimated that the expenditure required for these developments would be Rs 24,809 and entered this amount as a debit, asserting that the liability for this sum had arisen because the company was bound to provide the facilities it had promised, even though no actual spending of that amount occurred during the year. When the income-tax assessment for 1948-49 was prepared, the appellant claimed a deduction of Rs 24,809 in computing its profits and gains from business. The Income-Tax Officer disallowed the deduction on the ground that the expenses had not been actually incurred in the relevant accounting year and that the estimate was not shown to be based on a realistic calculation of the costs the company would have to bear. The Appellate Assistant Commissioner, on appeal, affirmed the disallowance, holding that no accrued liability existed and that, because the development would be carried out in the future, an expense estimated at current prices could not be allowed. The appellant then appealed to the Income-Tax Appellate Tribunal. The Tribunal observed that it was by no means certain what the actual cost would be when

The Tribunal held that the appellant could recognise expenses only when those expenses were actually incurred, and therefore it dismissed the appeal. After that dismissal, the appellant filed an application with the Tribunal requesting that certain questions of law arising from the Tribunal’s order be referred to the High Court under section 66(1) of the Income-tax Act. In response, the Tribunal framed a case and referred the following specific question to the High Court for decision: whether, on the facts and circumstances described, the amount of Rs 24,809 could lawfully be allowed as an expense for the year under consideration. The High Court criticised the Tribunal’s statement of the case, describing it as overly concise and superficial, and observing that the Tribunal had failed to identify the necessary facts that should have been found and set out. The Court remarked that the statement was sketchy, bare, and, like many other statements it had examined during the session, gave the impression of a case that had not been seriously stated. Notwithstanding this criticism, the High Court examined the question in detail, hearing the extensive arguments presented by the counsel for the appellant, and ultimately answered the question in the negative, holding that the amount could not be allowed as a deduction. Subsequently, the appellant applied for and obtained a certificate under article 135 of the Constitution, which authorized an appeal to this Court, and the appeal was duly licensed. The core issue now before this Court is whether, given that the appellant’s accounting method—known as the mercantile method—had been accepted by the Income-Tax Officer and that the books of account showed receipts that included the unpaid balance of the sale price of the plots, the liability that the appellant had undertaken in order to earn those receipts should be allowed as a deduction even though no actual payment had been made by the appellant during the accounting year. In other words, the question is whether, because an amount of Rs 43,692-11-9 was entered on the credit side of the books as a receivable (although the cash had not yet been received, it was treated as due and therefore legally enforceable) and an amount of Rs 24,809 was entered on the debit side as the liability the appellant assumed to generate those receivables, that debit amount should be deducted in computing the appellant’s taxable profits and gains. The mercantile system of accounting, which operates on the principle of bringing into credit amounts that are due and into debit amounts for which a legal liability has arisen before actual disbursement, is well-known and has been explained in the Court’s earlier judgment in Keshav Mills Ltd. v. Commissioner of Income-tax, Bombay.

In explaining the mercantile system of accounting, the Court noted that this method records a credit when a receivable becomes legally due even before actual receipt, and it records a debit for an expenditure when a legal liability has arisen even before any actual payment is made. The appellant’s claim for a deduction of Rs 24,809 was rejected by every lower authority on the ground that the outlay had not actually been incurred during the accounting year, that the precise cost of the proposed developments was uncertain, and that at the relevant time there existed only a contingent liability rather than an accrued liability, despite the fact that the undertaking was expressly incorporated in the sale deeds. The order of the Appellate Assistant Commissioner set out the specific works that the appellant was required to carry out. The conveyance deeds contained a covenant whereby the appellant promised the purchaser that it would complete the construction of roads and drains, provide suitable pucca surface drains on both sides of the roads, arrange for lighting of those roads, and maintain the roads, drains and lights until they were taken over by the municipal authority. In addition, the deed required the appellant, at its own expense, to fill up low-lying lands and a tank with earth and to bring them to road level. Because these covenants were embedded in the sale deeds, the Court held that the appellant had indeed undertaken a liability to execute the specified developments within six months of the deed dates. Although time was not treated as being of the essence of the contract, the appellant was nevertheless free to perform the obligations within a reasonable period, and this freedom did not release it from the duty to fulfil the covenant. The purchasers, consequently, retained the right to enforce the covenant by instituting appropriate legal proceedings. The Revenue relied on the decision in Peter Merchant Ltd. v. Stedeford (Inspector of Taxes) to distinguish between an actual legal liability, which is deductible, and a future or contingent liability, for which no deduction is permissible. The Court recounted the material facts of that case: the company, which operated factory canteens, had entered into a contract with a factory owner to maintain crockery, cutlery and other utensils, collectively described as “light equipment,” in the original quantity and quality. The cost of replacing such equipment was recognised as a proper deduction in computing profits, as was any payment made to the factory owner to settle shortages when the contract terminated. However, because of the war, the company could not obtain replacements in certain instances, leaving the contractual obligations unperformed. In its accounts for the year, the company deducted both the amounts actually spent on replacements and the amounts it was liable to spend once the equipment became available. The company claimed a deduction for the liability at current prices, even though the equipment was not yet obtainable. The Court of Appeal, overturning the lower court, held that the latter deduction could not be allowed because the true liability under the contract was contingent rather than actual; the company could be sued only for damages for breach of contract, not for the cost of replacements at current prices.

In certain situations the Company could not obtain replacement items because doing so was either impossible or impracticable, yet the contractual obligations to the factory owners continued to exist. In the accounting year under consideration the Company recorded deductions for two separate categories: first, the actual amounts that had been spent on obtaining replacements, and second, the amounts that the Company anticipated it would have to spend once the necessary equipment became obtainable. The Company argued that, for the purpose of computing its taxable profits, it should be allowed to deduct, at current market prices, the liability representing the future expenditure required to replace the equipment as soon as it could be obtained. The deductibility of the amounts already spent was upheld, but the Court of Appeal, overturning the lower court’s decision, held that the prospective amounts were not deductible. The Court’s reasoning was that the true liability under the contracts was contingent rather than actual. The Company could not be sued for the cost of replacements at contemporary prices; instead, it could only face potential damages for breach of contract if the factory owner chose to enforce a claim. Because a legal liability could arise only after such a claim was made, the liability was deemed contingent and therefore non-deductible. Consequently, the Court concluded that, based on the facts of that case, the liability was not an accrued one but a contingent liability, and only the sums actually expended could be deducted, not the amounts the Company expected to spend in the future. Simon, in his text “Income-Tax”, Second Edition, Volume II, page 204, under the heading “Accrued Liability”, after referring to the same case, observes that where an actual liability exists, as with accrued expenses, a deduction is permissible and is not altered by any later variation in the amount of the liability or the deduction. He explains that a liability deductible for income-tax purposes must exist at the time the deduction is claimed, distinguishing it from the type of liability described in Peter Merchant Ltd. v. Stedeford (Inspector of Taxes), which, although allowable under accounting principles, is not deductible for income-tax purposes.

Applying the principles outlined above to the matter before this Court, it was necessary to ascertain the character of the liability undertaken by the appellant in connection with the development of the specified lands. The question was whether the liability constituted an accrued liability, existing at the relevant accounting date, or whether it was contingent upon the occurrence of a future event. The Court observed that the deed of sale incorporated an unequivocal undertaking to complete the developments within six months of the date of the deed. This undertaking was unconditional, imposing upon the appellant an absolute obligation to carry out the work. The only temporal stipulation was the six-month period, which, given that time was not treated as a vital term of the contract, was interpreted as a reasonable period. The imposition of this time limit did not introduce any conditionality or dependence on external events; the obligation remained absolute. Accordingly, if this undertaking gave rise to any liability on the part of the appellant, such liability had already accrued at the date of the deed of sale, even though its performance was to be effected at a later date. Therefore, the liability was an accrued liability, and the estimated expenditure required to discharge it could appropriately be deducted from the appellant’s profits and gains.

In this case, the Court observed that the undertaking undertaken by the appellant was not conditioned upon the fulfilment of any event or circumstance. The sole stipulation attached to the undertaking was that the development work had to be completed within six months. Because the contract did not treat time as of the essence, the six-month period was interpreted as a reasonable time rather than a strict deadline. The Court explained that whatever may be regarded as a reasonable time under the facts, the imposition of that time limit did not create any additional condition for performing the undertaking; the promise remained absolute in its terms. The Court further held that, if the undertaking gave rise to any liability for the appellant, that liability had already accrued at the date of the deeds of sale, even though the actual performance and discharge of the liability were to occur at a later date. Accordingly, the liability was characterised as an accrued liability. The Court said that the estimated expenditure required to satisfy that liability could be allowed as a deduction from the appellant’s profits and gains of business. Since the accrued liability arose during the accounting year but would be discharged only in the future, the Court noted that the amount of expenditure needed for its discharge had to be estimated. Under the mercantile system of accounting, such an estimate enabled the liability to be debited in the accounts before the cash outflow actually took place. The Court rejected the argument that difficulty in estimating the amount would transform an accrued liability into a conditional liability. It asserted that the Income-Tax authorities were always empowered to arrive at a proper estimate of the liability, taking into account all relevant circumstances. To illustrate this principle, the Court referred to Gold Coast Selection Trust Ltd. v. Humphrey (Inspector of Taxes) [1948] A.C. 459. In that case, a particular asset could not be immediately realised in a commercial sense, yet the Court allowed it to be valued in monetary terms for income-tax purposes in the year of receipt. Viscount Simon was quoted as saying that it is incorrect to claim that an asset which cannot be promptly realised has no monetary value for tax purposes. He explained that while the inability to realise the asset quickly may justify reducing its monetary figure to reflect a suitable interval, it does not render the asset valueless at the time of receipt. The Court thereby reinforced the view that the Commissioners may fix an appropriate monetary equivalent for such assets, and by analogy, may also determine a suitable monetary value for accrued liabilities at the end of the accounting period, considering all facts and circumstances.

In this matter the Court observed that when an asset is represented by a monetary figure, the tax authorities must determine a suitable monetary value at the conclusion of the period for which the appellant’s accounts are prepared, and they must do so after considering every relevant circumstance. The Court explained that the same principle applies not only to assets received during an accounting year that cannot be immediately realised in a commercial sense, but also to liabilities that have already accrued within the same accounting year even though the actual discharge of those liabilities may be postponed to a later date. Accordingly, the income-tax authorities are always empowered to assign an appropriate monetary value to such a liability as of the end of the accounting period, taking into account all the surrounding facts and circumstances. The estimate of expenses submitted by the assessee, therefore, is subject to scrutiny by the authorities, who must evaluate it in light of the complete factual matrix of the case. The Court further held that the High Court had erred in its finding that, because the sale price had been received in a non-cash form and the appellant had given only a promise to spend the proceeds, no deduction of expenditure could be allowed for that year. The Court pointed out that if the estimated expenses necessary to discharge the liability—expenses that were expressly undertaken by the appellant and incorporated into the deeds of sale—could be deducted according to the mercantile system of accounting adopted by the appellant and accepted by the Income-Tax Officer, there was no provision in the Income-Tax Act that would prohibit treating that debit as a permissible deduction in computing the appellant’s profits and gains. The appellant had, in fact, claimed such a deduction as an amount wholly laid out for the purposes of its business under section 10(2)(xv) of the Income-Tax Act. In interpreting that provision, the High Court was inclined, though it did not finally decide, to hold that where a definite liability has accrued and all preliminary proceedings leading to that accrual have been completed, section 10(2)(xv) would encompass such accrued liabilities even if the actual outflow of cash has not yet occurred. The Court reasoned that a certain liability is, for tax purposes, as good as spent, and therefore the clause could admit debits that are proper under the mercantile accounting system. However, the High Court distinguished the present case on the basis that the liability involved was a floating liability, whose amount depended on the appellant’s discretion and whose discharge rested solely on a promise, rendering the claimed expenses uncertain and not readily quantifiable.

In this matter the Court observed that the question of whether section 10(2)(xv) of the Income-Tax Act applied to the present facts was separate from the broader issue, which the Court held fell clearly within the scope of section 10(1) of the same Act. The appellant was being assessed on the basis of the profits and gains derived from its business operations. The Court explained that such profits and gains could not be computed until the expenses incurred, or the obligations that had arisen, were set off against the receipts earned. The expression “profits and gains” was to be understood in its commercial meaning, meaning that a calculation of profit was impossible unless the expenditures necessary to earn the receipts were deducted, regardless of whether those expenditures had actually been paid or whether the corresponding liability had only accrued and would be discharged at a later date. The Court then quoted the observation of Lord Herschell in Bussel v. Town and County Bank, Ltd., stating that the duty of tax must be levied on a sum not less than the full balance of the profits or gains of the trade, manufacture, adventure, or concern. The Court interpreted this passage to mean that, in arriving at the balance of profits, every expenditure required to generate the receipts must be deducted; otherwise the true balance of profits could not be ascertained, and it would be impossible to determine whether any profit existed at all. Accordingly, the profit of a trade or business was identified as the surplus remaining after the receipts exceeded the necessary expenditures, and the term “profits” was to be given that meaning in relation to any trade or business. The Court further noted that, until such a balance was established, nothing could properly be described as “profits.”

A similar principle was endorsed in the English decision of Gresham Life Assurance Society v. Styles, where it was held that the profits or gains of a trader represented what the trader actually earned from his trading activities, and that the existence of profit or gain could be determined only by setting the receipts against the expenditure or obligations that gave rise to them. Although these observations originated from English cases dealing with English income-tax statutes, the Court held that the underlying principles were nevertheless applicable in the present Indian context. The Court cited Lord Macmillan’s statement in Pondicherry Railway Co., Ltd. v. Commissioner of Income-Tax, Madras, which cautioned that English authorities must be used carefully when applying Indian income-tax law because of legislative differences, yet the fundamental principle laid down by Lord Chancellor Halsbury in Gresham Life Assurance Society v. Styles remained of general application, unaffected by the particularities of the English tax system. The Court thereby affirmed that the notion of “profits or gains” as the surplus after deducting necessary expenditures was the operative concept for assessing tax liability under section 10(1) of the Income-Tax Act.

Chancellor Halsbury, speaking in Gresham Life Assurance Society v. Styles, held that his observation applied generally and was not limited by the particular features of the English tax system. He explained that the object of taxation was “the amount of profits or gains.” He further stated that the term “profits” should be understood in its ordinary and proper meaning, a meaning that no commercial person could misinterpret. The Court found it useful to note at this point that, before the Indian Income-tax Act was amended in 1939, bad and doubtful debts were not allowed as a deductible allowance for computing the profits or gains of a business. The Privy Council, in Income-tax Commissioner v. Chitnavis, had observed that although the statute did not expressly authorize the deduction of bad debts of a business, such a deduction was necessarily permissible. The Council explained that what is chargeable to income tax in respect of a business are the profits and gains of the year, and that in assessing the amount of those profits and gains the accountant must necessarily take into account all losses incurred; otherwise the true profit or gain could not be arrived at. In the present case, the High Court, when rejecting the appellant’s claim, examined only the provisions of section 10(2)(xv) of the Act and concluded that, on a strict construction of those provisions, the amount of Rs 24,809 could not be allowed as a deduction. The learned counsel for the appellant drew the Court’s attention to section 10(1) of the Act as well, but the Court rejected that argument. It observed that, under the Indian Act, profits are to be determined by the method of making the statutory deductions from receipts, and any deduction from business receipts, if permitted, must fall under one of the categories listed in section 10(2). The Court further held that there was no scope for a preliminary deduction based on general principles. However, the Court cited its earlier decision in Badridas Daga v. Commissioner of Income-tax, noting that while section 10(1) imposes a charge on the profits or gains of a trade, it does not prescribe the manner of computing those profits. Section 10(2) lists various items that are admissible as deductions, but it is well settled that the list is not exhaustive of all allowances that may be taken into account in ascertaining the taxable profits under section 10(1). Justice Venkatarama Aiyar, delivering the judgment of the Court, then discussed the authorities of Commissioner of Income-tax v. Chitnavis, Gresham Life Assurance Society v. Styles and Pondicherry Railway Co. v. Income-tax Commissioner, and observed that when a claim for deduction is made for an item not specifically provided for in section 10(2), its admissibility will depend

The Court observed that the test for allowing a deduction under section 10(2) of the Income-Tax Act was whether, having regard to accepted commercial practice and trading principles, the expenditure could be said to arise out of the carrying on of the business and to be incidental to it; if that condition was satisfied, the deduction had to be allowed provided that there was no express or implied prohibition in the Act. Turning to the facts of the present case, the Court found that the sum of Rs. 24,809 represented the estimated expenditure which the appellant would have to incur in discharging a liability that it had already undertaken under the terms of the deeds of sale of the lands in question. This amount was an accrued liability which, according to the mercantile system of accounting, the appellant was entitled to debit in its books of account for the accounting year, and it was set off against the receipts of Rs. 43,692-11-9 which represented the sale proceeds of the said lands. The Court noted that, even under section 10(2), it might be argued that the word “expended” could be interpreted as “expendable” or “to be expended” at least in a case where a liability to incur the expense had actually been incurred by the assessee who followed the mercantile system of accounting, making the debit of Rs. 24,809 a proper debit. However, the Court held that it did not need to base its decision on that consideration. It was firmly of the opinion that the sum of Rs. 24,809 represented the estimated amount which would have to be expended by the appellant in the ordinary course of carrying on its business and was incidental to that business; consequently, having regard to accepted commercial practice and trading principles, the expenditure was a deductible amount even though no specific provision for it existed in section 10(2). There was no express or implied prohibition in the Act against allowing the deduction in computing the profits and gains of the appellant’s business under section 10(1). The Court further observed that the appellant had led evidence before the Income-tax authorities concerning this estimated expenditure of Rs. 24,809 and that no exception was taken to the quantum of the estimate, although the authorities had questioned the permissibility of the deduction on the ground of section 10(2). Accordingly, the Court concluded that the High Court’s decision to disallow the amount of Rs. 24,809 was erroneous and that the referred question should have been answered in the affirmative. Finally, the Court noted that the appellant had accepted the receipts of Rs. 43,692-11-9 in their totality even though only a sum of Rs. 29,392-11-9 had actually been received in cash, thereby rendering the appellant liable for income-tax on a sum of Rs. 14,300 which had not been received by it during the accounting year.

The Court observed that the amount of Rs. 24,809 had not actually been received by the appellant during the accounting year. Consequently, the Revenue could not justifiably argue that this sum should be excluded as a permissible deduction before calculating the appellant’s taxable profits or gains. In line with this reasoning, the Revenue ought to have expressed its willingness to recognize only the amount of Rs. 29,392-11-9 as the genuine cash receipt of the appellant for that financial period. It should then have based the computation of the appellant’s business profits and gains on that actual figure. However, the Revenue failed to adopt such an approach; instead it persisted in demanding that the entire entry of Rs. 24,809 be removed from the debit side of the account. The Court held that such a demand was without any legal authority and could not be sustained under the provisions of the Act. Consequently, the Court allowed the appeal, set aside the judgment of the High Court, and answered the reference question affirmatively, thereby confirming that the deduction of Rs. 24,809 was permissible. By permitting the deduction, the taxable income of the appellant was computed after reducing the gross receipts by the amount of Rs. 24,809, consistent with the provisions of the Act as interpreted by the Court. The Court emphasized that the Revenue’s refusal to accept the deduction amounted to an unreasonable insistence on an excessive tax demand, which the Court could not sanction. The Court further directed that the respondent should bear the costs of the appellant throughout the proceedings, and accordingly recorded that the appeal was allowed.