R.N.GURTU, J. - (1.) THIS is a reference under section 66(1) of the Indian Income-tax Act, 1922, read with section 21 of the Excess Profits Tax Act, 1940, made by the Income-tax Appellate Tribunal at the instance of the assessee Messrs. Mathulal Baldeo Prasad, Kanpur.
(2.) THE facts stated by the Appellate Tribunal in the statement of the case drawn up and referred to this court are as follows : THE assessee is a registered firm. THE assessment year is 1946-47 and the accounting year is from July 7, 1944, to July 14, 1945. It carried on speculative transactions in cotton. Three such transactions were entered into with a firm Chaturbhuj Piramal and in these three transactions the date of settlement in the first one was January, 1944, the second in March, 1944, and the third in May, 1944. In other words these dates of settlement were all in the accounting year ending on July 6, 1944, relevant to the assessment year 1945-46. THE first one resulted in a profit of Rs. 297-8-0, the second in a loss of Rs. 4,655-13-0, and the third in a loss of Rs. 11,138; the aggregate being a loss of Rs. 14,994. THE said firm of Chaturbhuj Piramal submitted an account to the assessee but the assessee firm having failed to pay, claimed a sum of Rs. 15,561-8-0 inclusive of interest of Rs. 65-2-6. THE assessee disputed the correctness of the account and the matter was referred to two arbitrators appointed by each of the parties but the arbitrators having failed to give their award new arbitrators were appointed by the East India Cotton Association Ltd. according to the terms of the association of which both the assessee and Chaturbul Piramal were members. THE arbitrators so appointed gave their award on August 29, 1944. Copy of the award is made annexure A" of the statement of the case. By this award the assessee was made liable to pay a sum of Rs. 14,994 with interest at the rate of 4 1/2% per annum from May 25, 1944, till date of payment. THE assessee wrote off this amount of Rs. 14,994 as loss in the year of account relevant to the assessment year 1946-47. It is contended that since the loss was determined upon the award of the arbitrators it can only be said to have been incurred in the assessment year 1946-47. THE Tribunal held by its order which is made a part of this case as annexure B" that the loss claimed was incurred in the assessment year 1945-46. In its opinion the assessees claim was fictitious in order to put off the payment as would be clear from the award of the arbitrators. It, therefore, held that there was no ground to claim the loss in 1946-47 assessment year only on the point that the award was passed in the said assessment years. The additional facts found stated in annexures A" and B" will also be referred to later in the course of this order. The question formulated for our consideration and referred to us with the statement of the case is as follows : Whether the loss amounting to Rs. 14,994 was loss pertaining to the assessment year 1945-46 or to the assessment year 1946-47 ?
(3.) THE question is whether this loss of Rs. 14,993 odd was an ascertained liability in and a loss pertaining to the assessment year 1945-46 or to the assessment year 1946-47. THE system of accounting being mercantile, the answer to this question would depend upon whether an enforceable liability had arisen in the assessment year 1945-46 or whether it could be said that the liability had arisen in the year 1946-47. It was contended before us on behalf of the assessee that the liability arose when the award of the arbitrator was given, and that before that date the liability was at best only a contingent liability. Alternatively, it was contended that there existed a mere possibility of a liability coming into existence before the award was given and that it was when the award was given that an actual liability came into existence, inasmuch as there was no admission by the assessee of the claim put forward by the constituents but a denial of the same. It was said that until acceptance by admission or determination by an award the amount claimed could only be debited as an ascertained liability when the award was given and the liability came to be fixed and quantified. In support of this contention several cases were cited before us. The case of Kanpur Tannery Ltd. v. Commissioner of Income-tax, 1958 34 ITR 863 was a case where the assessee was required to insure his stock-in-trade with the Central Government under section 7 of the War Risks (Goods) Insurance Ordinance, 1940, and to pay the proper insurance premium. It was found that he had not paid the proper premium in the accounting year in which it was said to have become exigible by virtue of section 7. The High Court referred to section 7A introduced by the Amending Ordinance, which enacted that if any person evaded payment of the premium either by not insuring the goods under the Ordinance of 1940 at all or not insuring the goods to the full amount of their value, then an officer authorised in that behalf would determine the amount of premium which had been evaded and this amount could be recovered from the person concerned; and it held that in the circumstances until the evaded premium was determined as aforesaid it could not be said under the mercantile system of accounting that a liability had been incurred which could be entered in the books as an expenditure, for that could only be done when the liability had become an ascertained sum of money and that until ascertained the liability no doubt existed but proceedings had to be taken in some way or other to determine the exact amount. The High Court relied for its view upon the principle enunciated in the cases of Senthikumara Nadar Sons v. Commissioner of Income-tax, 1957 32 ITR 138 and Calcutta Co. Ltd. v. Commissioner of Income-tax, 1959 AIR(SC) 1165.;