JUDGMENT B.P. Jeevan Reddy, C.J.
1. The Income-tax Appellate Tribunal, Allahabad, has referred the following question under Section 256(1) of the Income-tax Act, 1961 :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the source of the liability was neither in manufacture nor in supply but in requisition andthereby setting aside the order of the Commissioner of Income-tax passed under Section 263 of the Income-tax Act, 1961 ?"
2. The assessee is a limited company engaged in manufacture and sale of jute articles, especially gunny bags. The assessment year concerned is 1973-74. During the relevant previous year, an order was served upon the assessee under Rule 114(2) of the Defence of India Rules, 1971, issued by the Director-General of Supplies and Disposals, Calcutta, calling upon the assessee to supply 7,110 bales of jute bags during the period November, 1971, to September, 1972. The supply was to be made at a notified price which was lower than the market price. As against 7,110 bales ordered to be supplied, the assessee manufactured 5,270 bales during the relevant previous year, out of which only 3,405 bales were supplied to the Government. The remaining 1,865 bales remained unsupplied on the last day of the accounting year. 1,840 bales were not even manufactured during the relevant previous year. All the same, the assessee claimed a sum of Rs. 2,28,548 as the loss suffered by it by virtue of the said order of the Director-General of Supplies and Disposals during the relevant previous year. The Income-tax Officer accepted the same and allowed the claim. However, the Commissioner of Income-tax revised his order under Section 263 of the Act. He was of the opinion that the loss should be worked out on the basis of the supplies actually made with reference to the cost of production and the cost of supply. Accordingly, he remitted the matter to the Income-tax Officer for passing orders afresh. The assessee carried the matter in appeal to the Tribunal, which allowed his appeal following a decision of this court in CIT v. Burhwal Sugar Mills Co. Ltd. [1971] 82 ITR 784. Thereupon, the Revenue obtained this reference.
3. Shorn of authority, we are inclined to say that mere service of an order of requisition does not amount to, nor does it bring about, a sale. The order of requisition is only an order directing the person concerned to sell certain articles at a certain notified price. Sale may not be a voluntary one, yet it is a sale, which fact is no longer in dispute. It has been repeatedly held by the Supreme Court that even a non-voluntary sale, like the present one, does amount to a sale. But sale there must be for the assessee to claim the resulting loss as a deduction. Without a sale, there is no loss. As a fact, in the relevant previous year, sale was only of 3,405 bales and not of 7,110 bales. The Tribunal has taken the view that since the requisition order created a liability to supply, the loss arose on the date the said order was served upon the assessee, because the assessee was maintaining its accounts on the mercantile basis. It is the correctness of this view that is in question before us. Learned standing counsel for the Revenue argues, and with a good amount of justification, that it may be that the order served upon the petitioner is a statutory order, that he was bound to obey it, and that its infraction may have exposed him to the risk of prosecution. But, all this does not mean that a sale came about the moment the order of requisition was served. After the service of the requisition order, it may happen that the factory itself is closed, the goods may never be manufactured and may never be supplied. All this may expose the person concerned to prosecution, penalty and even imprisonment; but it may be difficult to say that notwithstanding the non-supply, a sale of goods does come about on the service of the order of requisition. He also points out that even if the assessee follows the mercantile system of accounting, it does not mean that where there is no sale as a fact, such a sale must be presumed on the basis of entries in the account books. In spite of our appreciation of the said argument, however, we are constrained to answer the question in favour of the assessee in view of the decision of the Supreme Court in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 and the decision of this court in CIT v. Burhwal Sugar Mills Co. Ltd. [1971] 82 ITR 784 in particular. In Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1, the assessee was dealing in land and property. He was developing the land by building roads, drainage, etc. He entered into sale agreements with certain purchasers undertaking to carry out the development within a reasonable time and sell the plots thereafter. The price was agreed, but only a part of the price was paid to him during the relevant previous year. The assessee was maintaining the mercantile system of accounting. Though he received only a part of the sale price, he entered on the credit side the full sale price. Similarly, on the debit side, he debited the entire estimated expenditure required for development of the land, though, as a matter of fact, he had not spent all that amount during the relevant previous year, but only a part thereof. The question was whether he was entitled to deduction of the entire estimated expenditure or only of that amount which he had actually spent during the relevant previous year. Having regard to the system of accounting and the method of entries on the credit side and the debit side, the Supreme Court held that the assessee was entitled to debit the entire estimated expenditure during the relevant previous year notwithstanding the fact that he had not actually spent all that amount during that year. The Supreme Court observed that the fact that the expenditure was only an estimate made no difference since, after the entire work was done, adjustments could be made. This decision was followed by this court in CIT v. Burhwal Sugar Mills Co. Ltd. [1971] 82 ITR 784. The facts in this case were the following ;
"The Government of India devised a scheme for the promotion of export of sugar contained in the Sugar Export Promotion Ordinance, 1958. A notification was issued under the Ordinance fixing 50 thousand tons of sugar as the quantity to be exported during the period ending October 31, 1958. On June 27, 1958, the Government issued an order informing the assessee that the quota allotted to it was 179.48 tonnes. On July 17, 1958, the export agency division of Indian Sugar Mills Association addressed a letter to the assessee making a demand for the supply of a specified number of bags of sugar representing the assessee's quota. Since the notified price was expected to be lower than the market price, the assessee calculated the resulting loss at Rs. 53,310 and debited the same to its profit and loss account on September 30, 1958. For the assessment year 1959-60, the assessee claimed to set off the said loss, which was disallowed by the Income-tax Officer. The matter was carried in appeal. The Appellate Assistant Commissioner held that the loss to be allowed is not Rs. 53,310, but only Rs. 49,516. The latter figure was worked out on the basis of the price actually fixed by the Government in the following year. This was confirmed in appeal by the Tribunal whereupon the matter was brought to this court by way" of reference. This court approved the reasoning of the Tribunal in the following words (at p. 787) :
"Now, having regard to the circumstance that the assessee was bound in law to comply with the demand made on July 17, 1958, a liability to supply the sugar demanded must be taken in reality to have arisen in law on that date. The assessee could not refuse to supply the sugar, and it may be assumed, therefore, that the sale took place on that date. The question next arises, whether the assessee would suffer a loss, and if it did, what should be the estimate of such loss. The assessee had valued the stock in its account books according to the market price. There being no dispute that the price fixed by the Government was lower than the market price, a loss was bound to arise. The assessee estimated the loss, and it is apparent that the basis adopted by it was not arbitrary. Subsequently, in the following year, when the price was actually fixed and it was possible to quantify the loss suffered by the assessee the loss so quantified had to be substituted for the loss estimated by the assessee, and it is the finally quantified figure of loss which alone could be taken into consideration for the purpose of the claim made by the assessee. It is settled law, we think, that when an assessee maintains his account books on the mercantile system of accounting, the date on which the liability accrues is the date to be considered for the purpose of entering that liability in the accounts. That is so, even though the liability is capable of estimate only and its actual quantification has to be postponed."
4. For the above proposition, the Bench relied upon the decision of the Supreme Court in Calcutta Co. Ltd. v. CIT [ 1959] 37 ITR 1. It would be evident from the above extract that the Bench proceeded on the assumption that on the date on which the notice of demand was served, the liability to supply arose and since the assessee could not refuse to supply, it could be deemed that the sale took place on that date. Since the said decision is binding upon us, we follow the same and since the facts are broadly identical, we must hold that, in the present case too, a sale can be deemed to have taken place on the date the requisition order was served upon the assessee. In all such cases, it is evident that, in the subsequent years, actual facts can be ascertained and necessary adjustments made, to wit, if the remaining number of bales are not sold in the subsequent years, the proportionate amount can be added back to the income.
5. For the above reasons, the question referred is answered in the affirmative, that is, in favour of the assessee and against the Revenue. There shall be no order as to costs.