JUDGMENT : (STATEMENT OF CASE) This reference application is preferred by the department against the order passed by the Tribunal in I.T.A. No. 12788 of 1966-67 in which a question regarding the assessment of the income of the assessee for the assessment year 1962-63 arose. 2. The reference application is filed late by three days, but the explanation of the department is that the reference application was dispatched by registered post on August 9, 1968, but it could not reach the Tribunal's office at Bombay by August 14, 1968, because of the dislocation of the railway traffic caused by heavy floods at Broach and Surat in August, 1963. It may be mentioned that, if the application had reached the Tribunal's office on August 14, 1968, it would have been within time but since it has reached the Tribunal's office on August 17, 1968, it is late by three days. It is, however, clear that the department has dispatched the application through post quite in time and that it has reached the Tribunal's office late on account of circumstances which were beyond the control of the department. Under the circumstances, the delay in question is sufficiently explained and, therefore, the same is condoned under Section 256(1) of the Act, 1961. 3. Following are the brief facts relating to this case: The assessee, M/s. Western India Engineering Co., Ahmedabad, is a firm registered under the Indian Income-tax Act and does the business of building contract. It has its branch at Baroda also. However, the assessee maintains separate sets of account for its Ahmedabad and Baroda business. In this case, we are concerned only with the Ahmedabad business of the assessee. 4. While the Income-tax Officer was going through the accounts of the assessee for the purpose of the previous assessment year 1961-62, he found that the assessee had made certain provisions for different works account in his Ahmedabad set of books. These provisions were claimed by the assessee to be kasars (deductions or rebates) payable to the parties concerned in respect of certain items of work. So far as the assessment year 1961-62 was concerned, this kasar amounted to Rs. 1,05,900. A similar provision for kasar was found even for the assessment year 1962-63 and its amount was Rs. 26,000. These provisions were claimed by the assessee to be kasars (deductions or rebates) payable to the parties concerned in respect of certain items of work. So far as the assessment year 1961-62 was concerned, this kasar amounted to Rs. 1,05,900. A similar provision for kasar was found even for the assessment year 1962-63 and its amount was Rs. 26,000. The Income-tax Officer felt that the amounts so kept back in the works account for possible kasar really represented reserves and did not amount to outgoings of the business and, therefore, they were not admissible deductions in computing the taxable income of the assessee. He, therefore, added the entire amount of kasar during the course of the assessment for the assessment years 1961-62 and 1962-63. This view of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner in appeal but when the matter came before the Tribunal, the Tribunal took the view that the additions made by the Income-tax Officer and the Appellate Assistant Commissioner were unjustified. It is against this order of the Tribunal that the present reference is sought by the department. 5. Following are the brief facts relevant to the disputes between the parties: The assessee undertakes contract works on the basis of tenders submitted by it to customers and accepted by the latter. The specific items of work to be carried out and the rates to be charged are agreed to in advance by the assessee and the customers before the work commences on individual contracts. Often, however, in the course of execution of a contract, alterations and additions to the work are made at the request of customers to suit their requirements. The rates to be charged for the work undertaken as a result of alterations or additions to the prior contract are settled after the contract work as a whole is completed. On the completion of work on a particular contract, the assessee makes out a bill for both the tendered items of work at the agreed rates as well as for additional work undertaken at the request of the customer at the rates which the assessee considers reasonable. The assessee pitched its claim a little higher to permit it to climb down in the course of settlement of the rates. The assessee pitched its claim a little higher to permit it to climb down in the course of settlement of the rates. As it never expected its bill in respect of uncontracted items of work to be fully approved by its clients and as it always expected to suffer some cut in its claim, it did not take the full amount of such portion of its bill into account in computing profits, but only took credit for remuneration which it considered reasonable and which it expected to be approved by the other side. This was the practise, which it followed from the beginning. The revenue accepted this practise till the year under appeal. The entire amount of the bill is immediately credited to the account in respect of a particular work and debited to the customer's account. At the end of the accounting year the surplus in each works account over the expenses incurred on the work is transferred to the profit and loss account. The assessee keeps a works account in its books for each contract. Where the full amount of the bill made out in respect of a specific works contract has not been received by the end of the accounting year, the assessee does not necessarily transfer the entire surplus in that works account to the profit and loss account. Only the amounts due in respect of items covered by the tender are transferred to the profit and loss account. In respect of the amount due for additional work done in the course of execution of the contract and included in the bill sent to the customers, the assessee retains a portion in the works account itself towards possible kasars (rebate or deduction) and transfers the balance to the profit and loss account. 6. During the course of the proceedings before the Income-tax Officer the assessee contended that it had two types of business contracts, (i) tender business and (ii) non-tender business. It was the assessee's contention that when bills are prepared, they include tender as well as non-tender items. However, since there are sometimes disputes about such bills with reference to non-tender business, it makes provision for probable kasars in respect of such items. It was the assessee's contention that when bills are prepared, they include tender as well as non-tender items. However, since there are sometimes disputes about such bills with reference to non-tender business, it makes provision for probable kasars in respect of such items. It was further contended by the assessee that, in view of its past experience and judging the circumstances of the business in question, it sets apart a reasonable amount of the bills as probable kasar and the account of the contract work is also maintained accordingly. According to the assessee only the balance which is left after keeping apart this Kasar is transferred to the profit and loss account offered for tax purposes. However, when the bill is finally settled with the customers, further amount of Kasar which the assessee has to suffer is debited to the profit and loss account and if the provision made for the Kasar is more than the actual amount settled with the customer then the balance is credited to the profit and loss account and the tax is paid on the same. According to the assessee, its system of accounting was a mercantile system in respect of tender items and a hybrid system with respect to non-tender items of work. 8. The Income-tax Officer rejected this contention but in appeal the Appellate Assistant Commissioner came to the conclusion that the method of accounting which the assessee was following was a mercantile system and that, since the assessee credited the amount of bills issued to the customers to the works account, the obvious inference was that the appellant considered the amount of the bill as having accrued due to it on the date of the bill. The Appellate Assistant Commissioner thereafter made the following observation in paragraph 5 of his order: "I think the amounts claimed as kasars cannot be deducted before arriving at the true profits and gains of the appellant's business during the previous year. Only actual expenses can be deducted and not provisions. The Income-tax Act nowhere provides that provisions are admissible deductions in computing the profits of business and in practise no such deductions are allowed in any case. Only actual expenses can be deducted and not provisions. The Income-tax Act nowhere provides that provisions are admissible deductions in computing the profits of business and in practise no such deductions are allowed in any case. This claim cannot be put on a par with the claim of bad debts because it cannot be said that at the end of the accounting year the amount due from the customers had become bad kasars; even when they are actually allowed when settling bills they are in the nature of discounts given by traders as a matter of commercial practise and not bad debts in the strict sense. In any case they cannot be so considered before they are actually allowed. In my opinion, therefore, there is no question of allowing kasars as bad debts before the settlement of the bills takes place......." 7. Since even the Appellate Assistant Commissioner decided against the assessee, the matter was taken up to the Tribunal in second appeal. Before the Tribunal it was contended on behalf of the assessee that, even if the asseseee accepted the work for which no rates were fixed in advance, it prepared and submitted a bill for such uncontracted work at rates which it considered reasonable and anticipating that the customer concerned would always try to obtain a deduction of a portion of the bill on the ground that it was excessive, the assessee invariably pitched its claim a little higher so as to keep some margin for arriving at a settlement with such a customer. Under these circumstances, it was contended that the bill which the assessee prepared in respect of uncontracted items of work were not binding on the customer and, therefore, could not be treated as representing the gross receipts of the assessee. 8. The Tribunal accepted this contention of the assessee. 9. The Tribunal further observed that it was not unbelievable that the assessee must have claimed little higher amounts than what is actually considered reasonable under the hope that it would be obliged to cut down its bills for arriving at an amicable settlement. On this reasoning the Tribunal ordered that the addition of Rs. 26,000 in the assessment year in question was unjustified. The Tribunal accordingly allowed the appeal. 10. It is thus obvious that the dispute between the parties centres round the question: whether the disputed kasar amounting to Rs. On this reasoning the Tribunal ordered that the addition of Rs. 26,000 in the assessment year in question was unjustified. The Tribunal accordingly allowed the appeal. 10. It is thus obvious that the dispute between the parties centres round the question: whether the disputed kasar amounting to Rs. 26,000 represents the income earned by the assessee during the accounting year in question. 11. We, therefore, find that the following question of law arises to be considered in this matter: "Whether, in the facts and circumstances of the case, the Tribunal was correct in holding that the addition of the above referred amount of Rs. 26,000 for the assessment year 1962-63 made by the lower authorities was unjustified?" 12. The draft statement of the case has been placed before the parties and the same has been accepted with slight modifications suggested by them. We, therefore, refer the above question for decision by the hon'ble High Court, Gujarat, Ahmedabad. T.U. Mehta, J. This reference relates to the assessment of the respondent's income for the assessment year 1962-63, the accounting year being S.Y. 2015. The only question which is involved in this reference is whether the amount known as kasar regarding non-tender items of building contract would amount to "gross receipt" even though bills including the kasar amounts are prepared by the assessee and sent to its customers. 14. In order to understand the real controversy between the parties, it would be necessary to state the relevant facts and the system of accounting adopted by the respondent-assessee since last many years. These facts are as under: The assessee is a firm doing business of keeping private contracts for buildings. The rates at which the contract work is undertaken by the assessee are settled with different customers. But it is an admitted position that very often it so happens that the assessee is called upon to carry out some additional work, which is not covered by the contract between the parties. For the sake of convenience, we shall call the work covered by the contract as "tender" work and the additional work which is not covered by the contract as "non-tender" work. 15. Now, whenever an occasion for undertaking non-tender work arises, the rates are very often not settled between the assessee and its customers. For the sake of convenience, we shall call the work covered by the contract as "tender" work and the additional work which is not covered by the contract as "non-tender" work. 15. Now, whenever an occasion for undertaking non-tender work arises, the rates are very often not settled between the assessee and its customers. However, the assessee executes the extra work covering non-tender items, and, it is found from evidence, that it later on submits its bills for the extra work done by it. The rates which are mentioned in these bills for non-tender work are pitched a little high because it has been the experience of the assessee that at the time of ultimate settlement of these bills, the customers would insist on making allowance for some deductions. 16. It is an admitted position that the assessee credits the total amount of the bills for non-tender work which contain a higher rate of charges to the respective works accounts kept by it in its account books. It may be recalled here that the rates which are mentioned in the bills prepared by the assessee for non-tender work are not stipulated in the contract and, therefore, there is always a possibility with regard to such bills that the customers would not accept these rates at the time of final settlement of the bills. What the assessee, therefore, does is that, though it credits the whole amount of such bills to the works account, it transfers only a part of the total amount of these bills to the profit and loss account and retains the balance of the amount in the works account by way of a provision, which is known between the parties as kasar. To explain the position by way of an illustration, if the assessee has done some extra non-tender work and has preferred a bill for Rs. 10,000, this whole amount of Rs. 10,000 would be credited to the works account but, since the past experience of the assessee is that the bill would not be invariably settled by the customers at the figure of Rs. 10,000, what it does is that it makes a reasonable estimate of the possible recovery towards this bill and credits that estimate to the profit and loss account. Suppose, in the given case, its estimate is that he would be able to recover Rs. 10,000, what it does is that it makes a reasonable estimate of the possible recovery towards this bill and credits that estimate to the profit and loss account. Suppose, in the given case, its estimate is that he would be able to recover Rs. 9,000 from his customers then an amount of Rs. 9,000 would be carried to the profit and loss account keeping the remaining amount of Rs. 1,000 in the works account as kasar. 17. Now, if the assessee, subsequently, gets any amount from its customers in excess of the amount estimated by it, such an excess is treated by it as profit in the year of its receipt. Similarly, whenever the actual amount of the bill, which is settled with the customer, falls short of the assessee's estimate, then the difference is deducted as a loss in the year in which this loss is actually suffered. 18. The assessee is found to be adopting this system of accounting ever since the year 1956-57, and the department has accepted this practise till the assessment year 1961-62. The difference between the assessee and the department arose with regard to the assessment of the assessee's income for the assessment years 1961-62 and 1962-63. For both these years, the department took the stand that the amounts of kasar found in the works account of the assessee could not be deducted because the assessee was maintaining the mercantile system of accounting and, therefore, the amounts of the bills preferred by it and credited to the works account accrued to the assessee during the respective periods. According to the department, the assessee's estimate of the amount, which it was likely to receive from its customers, and posting of the profit and loss account on that basis would not alter the fact that the whole amount of the bill preferred by the assessee and credited to the works account represented its accrued right to receive the same from its customers. In this view of the matter, the kasar amounts for the assessment year in question were not allowed to be deducted by the department. So far as the assessment year, which is relevant for the purpose of this petition is concerned, the kasar amount is of Rs. 26,000. The contention of the assessee is that this amount should not be added back for the purpose of assessing its income during the accounting period. 19. So far as the assessment year, which is relevant for the purpose of this petition is concerned, the kasar amount is of Rs. 26,000. The contention of the assessee is that this amount should not be added back for the purpose of assessing its income during the accounting period. 19. Being dissatisfied with this decision of the Income-tax Officer, the assessee preferred an appeal before the concerned Appellate Assistant Commissioner who also agreed with the view taken by the Income-tax Officer. The assessee thereupon preferred a second appeal before the Tribunal and the Tribunal took the view that the bills submitted by the assessee in regard to the non-tender items of works done by it, did not necessarily represent its claim legally enforceable against its clients, and, therefore, the disputed amounts of kasar could not be taken as representing the real income of the assessee earned by it during the accounting period. The Tribunal also found, as a matter of fact, that the estimate made by the assessee at the time of carrying a portion of the amounts of bills credited to the works account, to the profit and loss account, is not found to be unreasonable and, therefore, the amount of kasar which is left in the works account was not the real profit which can be said to have been earned by the assessee during the accounting year in question. Thus, the Tribunal allowed the second appeal preferred by the assessee and held that the addition of Rs. 26,000 made by the department was not correct. 20. Being dissatisfied with this decision of the Tribunal, the department has sought this reference. In the statement of case prepared by the Tribunal the following question is referred to this court for its opinion : "(1) Whether, in the facts and circumstances of the case, the Tribunal was correct in holding that the addition of the above-referred amount of Rs. 26,000 for the assessment year 1962-63 made by the lower authorities was unjustified ?" 21. On consideration of the peculiar facts of the case, we are inclined to accept the view which is taken by the Tribunal for reasons which follow : 22. 26,000 for the assessment year 1962-63 made by the lower authorities was unjustified ?" 21. On consideration of the peculiar facts of the case, we are inclined to accept the view which is taken by the Tribunal for reasons which follow : 22. Now, the main contention of the learned Advocate-General, who appeared on behalf of the department, was that, admittedly, the assessee has been maintaining the mercantile system of accounting and it is for this reason only that the assessee has been crediting the whole amount of the bills preferred by it to the works account. Having thus credited the whole amount of the bills to the works account, it would not be open to the assessee subsequently to make estimates of the amount at which the bills were likely to be settled, and even if he is found to be making such estimates at the fag end of the year, and posting the same in the profit and loss account, it would not make any difference, in view of the fact that under the mercantile system of accounting, the amount which is credited at the initial stage furnishes very strong evidence to show that amount had accrued to the assessee. 23. Mercantile system of accounting has been explained in many cases. This 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. Therefore, the central idea which is involved in this system is that, if a certain amount has actually accrued due to the assessee, then it does not matter that it is not actually received. The accrual of the amount would justify the assessee in crediting the same in his account books. If he does so, then the evidence of that credit entry would, in ordinary circumstances, be considered as sufficient evidence to show that the assessee concerned has earned that amount. However, mere posting of an entry in the account books of the assessee would not always supply a conclusive nature of evidence on the question whether the disputed amount has accrued to the assessee or not. However, mere posting of an entry in the account books of the assessee would not always supply a conclusive nature of evidence on the question whether the disputed amount has accrued to the assessee or not. If there are other facts going to throw light on the question, whether the amount has really accrued to the assessee or not, then the posting of a credit entry in the account books of the assessee should be appreciated in the light of that evidence. If that is so, the mere fact that a mercantile system of accounting is adopted by an assessee would not conclude the matter. Each case should be decided on its own peculiar facts and, if these facts reveal that even though the amount in question is credited in the account books of the assessee, the amount had in fact not accrued to him, then it would be open to the assessing authorities to come to the conclusion that, in spite of the adoption of the mercantile system of accounting, the amount has not accrued to the assessee. Mercantile system of account would undoubtedly furnish prima facie evidence to show whether the amount has accrued or not. But that evidence cannot be treated as conclusive if there are other facts and circumstances going to show what income has really accrued or arisen to the assessee. To take an instance, if the assessee had intentionally under-estimated the value of the construction work done by it and had accordingly prepared the bills and posted account entries in his account books, and if there was definite evidence to show that such an under-estimate was made by the assessee with a view to evade tax liability, it would have been open to the department not to be guided merely by the account entries posted by the assessee following the mercantile system of accounting. In such a case, the department could have legitimately taken a stand that the entries posted by the assessee do not represent the real income accrued to it. The reason is that under Section 5 of the Indian Income-tax Act, what is to be included in the total income of an assessee is the income which really and actually "accrues or arises" to him. The reason is that under Section 5 of the Indian Income-tax Act, what is to be included in the total income of an assessee is the income which really and actually "accrues or arises" to him. Therefore, if an account entry posted in accordance with the mercantile system of accounting is found to be not representing the real income of the concerned assessee, that entry cannot supply conclusive evidence about the income in question. Therefore, if it is found that the assessee has, for some valid reasons, pitched its claim higher while preferring its bills and has accordingly put the account entries in its books, then, even though the said account entries are found to have been posted on the mercantile system of accounting, they cannot supply conclusive evidence as regards the real income of the assessee. The High Court of Bombay has observed in Commissioner of Income-tax v. Shoorji Vallabhdas and Co., (1959) 36 I.T.R. 25 (Bom.) that the question whether the income has accrued or not is not a mere matter of cogency of the entries made in the account books of the assessee, but is essentially one of substance and of the real nature of what happened because a book entry is not conclusive proof of the question whether the assessee had become entitled to the sums or not. In that case the said High Court was dealing with an assessee who followed the mercantile system of accounting This decision is affirmed by the Supreme Court in Commissioner of Income-tax v. Shoorji Vallabhdas and Co., (1962) 46 I.T.R. 144 (S.C.) holding that, if income does not result at all, there cannot be a tax, though in book-keeping an entry is made about a "hypothetical income", which does not materialise. Their Lordships have in this case further observed that, when the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. Similar view is also taken in the Bombay case of H. M. Kashiparekh & Co. Ltd. v. Commissioner of Income-tax, (1960) 39 I.T.R. 706 (Bom.). 24. Now, so far as the facts of this case are concerned, it is undoubtedly true that the assessee has credited the whole amount of bills preferred by it in the works account. Similar view is also taken in the Bombay case of H. M. Kashiparekh & Co. Ltd. v. Commissioner of Income-tax, (1960) 39 I.T.R. 706 (Bom.). 24. Now, so far as the facts of this case are concerned, it is undoubtedly true that the assessee has credited the whole amount of bills preferred by it in the works account. But the assessee is found to be following the practise of estimating the amounts which it can reasonably expect to receive from its customers at the time of settlement of the bills. This estimate the assessee is found to be carrying to the profit and loss account. It is not the case of the department that such estimates are unreasonable or mala fide so far as the accounting year in question is concerned. If that is so, the system of accounting which the assessee is found to be following since years together, and which is found acceptable by the department ever since the assessment year 1957-58, should be given due consideration. This system clearly shows that the assessee does not treat the amounts which are credited to the works account as representing the real income which it has earned. As a matter of fact, it is found that the assessee is pitching its claim in the bills a little higher in order to enable it to arrive at a reasonable settlement of these bills with its customers. Once this fact is admitted, then it follows that the amounts of bills which are pitched high do not reflect the real amount which the assessee can be said to have earned for the non-tender work done by it for its customers. In that view of the matter, a mere existence of an entry regarding a particular account in the works account, would not reflect the actual amount which has accrued due to the assessee. The system of carrying the estimated amount to the profit and loss account supports this view. The question as to what income has accrued or arisen to the assessee during a particular year is essentially a question of fact. This question of fact should be decided with reference to the peculiar facts and circumstances of each case. The system of carrying the estimated amount to the profit and loss account supports this view. The question as to what income has accrued or arisen to the assessee during a particular year is essentially a question of fact. This question of fact should be decided with reference to the peculiar facts and circumstances of each case. Considering the peculiar circumstances of the present case, we have no hesitation in coming to the conclusion that the amounts which have been credited by the assessee during the accounting period in the works account do not represent the real income which had accrued or had arisen to the assessee during the accounting period. 25. The learned Advocate-General pointed out to a possibility that, if this view is taken, the assessee would be at liberty to adjust his profit and loss account suitably with a view to evade tax liability. It is, however, obvious that if, for any accounting period, the assessee is found to have made unreasonable estimates with a view to avoid tax liability, it would always be open to the concerned assessing authorities to reject the estimates which are carried to the profit and loss account and to come to proper conclusions as regards the real income earned by the assessee. So far as the accounting year in question is concerned, we find that it is an admitted position that the estimates which are carried by the assessee to the profit and loss account are reasonable and bona fide. That being the position, we find that the view which is taken by the Tribunal is correct. 26. Our answer to the question referred to us is, therefore, in the affirmative. This reference is disposed of accordingly and the matter is sent back to the Tribunal to be dealt with according to law. The Commissioner shall bear the costs of the respondent-assessee in this reference. Question answered in the affirmative.