R.R. Rastogi, J. - (1.) THIS is a reference under Section 256(2) of the I.T. Act, 1961 (hereinafter referred to as "the Act"). The following two questions have been referred by the Income-tax Appellate Tribunal, Allahabad Bench, for the opinion of this court: "1. Whether, on the facts and in the circumstances of the case, the liability in respect of the sum of Rs. 18,533 paid to Ahmedabad Textile Industry Research Association accrued in the previous year relevant to the assessment year 1960-61 ? 2. Whether the finding of the Appellate Tribunal in respect of the addition of Rs. 6,81,643 to the book results of the Pondicherry Unit stands vitiated because it does -not take into account some relevant material and takes into account some irrelevant material and considerations ? "
(2.) THE brief facts are that the assessee, a public limited company, is carrying on the business of manufacture of cotton yarn and cloth. It has got several units including one at Kanpur and another at Pondicherry. Its head office is at Kanpur. It follows the calendar year as its year of account. In its assessment for the assessment year 1960-61, the assessee in its head office account claimed a deduction of Rs. 18,533, being the sum paid to Ahmedabad Textile Industry Research Association towards its annual contribution for the year ended March 31, 1958. THE bill for that amount was of 18th May, 1957, and it was to the following effect : JUDGEMENT_33_ITR125_1980Html1.htm It appears that there was some dispute between the assessee on the one hand and the aforesaid association on the other with regard to that bill and the payment was ultimately made in the previous year relevant to the assessment year under consideration in terms of the assessee's letter dated September 21, 1959, and oh that account the assessee claimed deduction of that amount in this year. The ITO did not accept the assessee's contention because, firstly, the correct nature, object and purpose of expenditure was not known and so it could not be said that it was of revenue nature and, secondly, that it related to the period April 1, 1957, to March 31, 1958, and could not be allowed in the calendar year 1959. In appeal, the AAC did not agree with the first objection of the ITO as the payment was in the nature of an annual contribution and was hence of a revenue nature. He, however, agreed with the second objection of the ITO and confirmed the disallowance. In its further appeal before the Appellate Tribunal, the assessee again disputed the disallowance of its claim. The Tribunal, agreeing with the view taken by the revenue authorities, that this liability did not relate to the year under consideration, disallowed the claim,
(3.) ACCORDING to Sri Raja Ram Agarwal, learned counsel for the assessee, in the mercantile system of accounting, until a liability has accrued its debit cannot be made in the accounts and accrual depends on the facts and circumstances of each case. It was claimed that this payment was made to an association and was in the nature of an annual contribution, that there was some dispute between the parties about the sum demanded and when after the settlement of the dispute the liability was ascertained then alone it accrued. In our opinion, there is much substance in the submission made before us on behalf of the assessee and we agree that in the case of a statutory liability the quantification or ascertainment cannot postpone its accrual, but if the liability is based on some contractual obligation, it arises only when it is ascertained. The case of Kedar Nath Jute Mfg. Co. Ltd. |1971] 82 ITR 363 (SC) is an instance where the liability arose as a result of a statutory provision. In that case, the assessee-company which followed the mercantile system of accounting incurred a liability of Rs. 1,49,776 on account of sales tax determined to be payable by the sales tax authorities on the sales made by it during the calendar year 1954, the previous year relevant to the assessment year 1955-56. The sales tax demand was raised pending the income-tax assessment for that year and the assessee claimed deduction of that liability in that assessment. The ITO rejected the assessee's claim on the ground that the assessee had contested the sales tax liability in appeals and further had not made any provision in its books in regard to the payment of that amount. The view taken by the Supreme Court was that the assessee was entitled to the deduction of that sum being the amount of sales tax which it was liable under the law to pay during the relevant accounting year. That liability did not cease to be a liability because the assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail. Further, the fact that the assessee had failed to debit the liability in its books of account did not debar it from claiming the sum as a deduction either under Section 10(1) or Section 10(2)(xv) of the Act of 1922, The principle laid down was (p. 367): "Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relevant thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter ?" On the other hand, Kanpur Tannery Ltd. v. CIT [1958] 34ITR 863 (All), CIT v. Swadeshi Cotton and Flow Mitts P. Ltd. [1964] 53 ITR 134 (SC) and CIT v. Banwari Lal Madan Mohan [1977] 110 ITR 868 (All) can be cited as some of the instances of a liability arising as a result of some contractual or similar obligations. In Swadeshi Cotton and Flour Mills P. Ltd., [1964] 53 ITR 134 (SC), the assessee was required to pay profit bonus to its employees and for the calendar year 1947 it made the payment in terms of an award made on January 13, 1949, under the Industrial Disputes Act. It debited the amount in its profit and loss account for the year 1948 but in fact paid it to the employees in the calendar year 1949. That liability was treated as an allowable deduction only in 1949 when the claim to profit bonus was settled by the award of the Industrial Tribunal. The view taken was that an employer who follows the mercantile system of accounting incurs a liability towards profit bonus only when the claim, if made, is settled amicably or by industrial adjudication. In Kanpur Tannery Ltd. [1958] 34 ITR 863 (All), the liability was in respect of deficiency of premium payable to the insurance company. The view taken by this court was that since under Section 7 A of the War Risks (Goods) Insurance Ordinance, 1940, an officer authorised by the Government was to determine the deficiency in the premium, payment of which had been evaded by the assured, the liability was ascertained only on such determination and was then to be an allowable deduction under Section 10(2)(iv) of the Act of 1922. It was held that unless the liability has become an ascertained sum of money, it no doubt exists and proceedings have yet to be taken in some way or the other to determine the exact amount. A vague liability to make a payment cannot be entered in the accounts. Similarly, in Banwari Lal Madan Mohan [1977] 110 ITR 868 (All) a Division Bench of this court, to which one of us was a party, (Hon'ble p. S.P. Singh J.) it was held that the amount paid in excess of what was set apart to meet the sales tax liability arose on its quantification and then alone it could be claimed for deduction in the mercantile system of accounting.;