4 A similar issue arose in Raymond Synthetics Ltd. & Ors. v. UOI & Ors., 1992 AIR 847(SC), where the company issued shares and was required to make allotment within 10 weeks of the closure and refund the excess share application money within 8 days of the company becoming liable to repay. Allotment was made before the expiry of permitted period of 10 weeks and the issue arose whether interest is payable from the expiry of 10 weeks or from the date of allotment. The Court considered the issue together with the provisions of S. 73(1A) of the Companies Act, whereunder in the event of permission not being granted by the Stock Exchange before the expiry of ten weeks from the closure, the allotment is to become void and held that a debt remains contingent till the permission is received or the period of ten weeks is over. In the facts of the case it was held that the debt became due on expiry of 10 weeks.
5. The issue generally arises in matters of income taxation where there is change of ownership of business or managing agency rights in the middle of the accounting period. In E. D. Sassoon & Co. Ltd. v. the CIT, (1954 AIR 470) where the managing agency was transferred by the appellant before the completion of the definite period of one year service which was a condition precedent to their being entitled to receive the remuneration or commission.
The question arose as to whether the appellant was chargeable to tax in respect of the commission for the broken period up to which they rendered services. It was held that no debt payable by the companies was created in favour of transferor. No remuneration or commission could, therefore, be said to have accrued to them at the date of transfer. Even though they rendered services as managing agents for the broken period, their contribution or parenthood cannot be said to have brought into existence a debt or a right to receive the payment or in other words I debitum in presenti solvendum in futuro’.
6. Similar issue was decided in Cottons Agents Ltd. Bombay v. CIT Bombay, 1960 AIR 1279 (SC), where answering the question as to whether any income accrued to the transferor from transfer of managing agency agreement before the end of the financial year, the Court observed, “On our view of the managing agency agreement, the commission of the managing agents became due at the end of financial year and that is when it accrued; and there were neither any debt created nor any right to receive payment when each transaction of sale took place.”
7. An interesting question came for decision in J. Jermons v. Aliammal & Ors., (1999) INSC 275. The tenant in that case was served with a prohibitory order restraining payment of debt due from him to the defaulter viz. the landlord. The tenant in compliances to the notice stopped payment of rent after the receipt of notice. Thereafter, on receipt of notice u/s.226(3), he made payment to the TRO. The landlord sued him for eviction on ground of default in payment of rent to him. Accepting the argument that the rent which became due after the receipt of notice was not a debt covered by the notice, the Court held that the word ‘debt’ in the said prohibitory order is used in the sense that it is ‘debitum in presenti’ or ‘debitum in presenti, solvendum in futuro’. In that sense, rent that would become due and payable in future is in the nature of contingent debt and was not covered by the notice which was good only for rent that had become due up to the date of notice.
8. The relevance of ‘debitum in presenti’ was elaborately discussed and applied in Kesoram Industries and Cotton Mills Ltd. v. CWT, (1966) 59 ITR 767 (SC). In this case the dividend proposed to be distributed was shown in P & L A/c. but declared at the general meeting held after the close of the year. The question arose as to whether the amount set apart as dividend was a debt owed by the company on the valuation date. It was held that nothing had happened as on the valuation date beyond a mere recommendation of the directors as to the amount that might be distributed as dividend, there was no debt owed by the company on that date. A further question arose as to whether the provision made for taxes in respect of the year was a debt. Even though the judgment was divided, both majority as well as minority decision examined the issue of creation of ‘debitum in presenti’. Whereas the majority decision held that it was a present liability of ascertained amount and, therefore a debt, the minority view was that the liability to pay tax arises only on the 151 day of April of the assessment year and hence was not a debt on the valuation date.
9. In tax matters ‘debitum in presenti’ is the basis for determining accrual of income and expenditure under mercantile system. The material point is I whether any debt became due to or from the assessee. As held by the Supreme Court in Morvi Industries Ltd. v. CIT, 82 ITR 835 (SC), income accrues when if becomes due. The postponement of the date of payment does not affect accrual of income. The fact that the amount of income is not subsequently received would also not detract from or efface the accrual of the income.
