G.K.MITTER, J. - (1.) IN this matter a single question of law depending on the method of accounting used by the assessee has been referred to this Court under s. 66(1) of the INdian IT Act. The facts are very simple. The assessee entered into ten several forward contracts with Sri Lachminarayan Jute Manufacturing Co. Ltd. in April, 1946, to supply loose jute at specified rates, delivery to be effected in September, October, November and December, 1946. Under the terms of the contracts the buyers had the option, in the event of non-delivery of goods by the due dates, of cancelling them on the fifth working day after the due date and recovering the difference between the price specified in the contracts and the market prices as on the date of cancellation of the contracts. It would appear that the due dates of the contracts were extended upto 28th Feb., 1947. As the assessee did not effect delivery the buyers served notices on 1st March, 1947, stating in respect of each contract that as the assessee had failed to hand over the documents in fulfilment of its obligation the buyers declared their option to cancel the contract and to charge the difference between the contract price and the market price prevailing on the fifth working day after the due date. It should be noted here that in April, 1946, when the contracts were entered into the Jute Control Order of 1944 was in force in West Bengal regulating the prices of all kinds of loose jute. By this order the maximum and the minimum price for jutes of various kinds grown in various areas were fixed within certain specified limits and no person could enter into a valid contract for sale or purchase of such jute beyond the price limits specified. This order came to an end on 30th Sept., 1946, and immediately the prices of all kinds of jute shot up with the result that a large number of sellers were unable or unwilling to deliver the goods to their buyers. All the jute contracts which had to be entered into with jute mills were to be on certain terms and conditions including an arbitration clause. The buyers in this case referred the matter to the Bengal Chamber of Commerce claiming a sum of Rs. 3,58,997 as payable by the assessee to them for the failure of the latter to supply the goods. The case of the assessee was that there were no valid and subsisting contracts between it and the sellers and the contracts, if any, were frustrated as a result of the discontinuance of the order controlling the prices thereof. According to the assessee the very basis of the contracts having been destroyed the same became void and the sellers were relieved of all obligations thereunder. After a certain amount of litigation in this Court the arbitrations were proceeded with and awards were made against the assessee for a total sum of Rs. 3,58,997 besides costs. These awards were made between the months of May and August, 1948. Judgments were passed by this Court in terms of the awards early in 1949. Thereafter, the assessee entered into a settlement with the buyers on 25th April, 1949, whereby it was agreed that the buyers' claim including costs would be settled at Rs. 1,35,000, Rs. 90,000 of which was to be paid immediately and the balance of Rs. 45,000 to be paid in certain instalments between December, 1949 and April, 1950, provided however that if the first three instalments of Rs. 10,000 each were paid on the respective due dates the last instalment of Rs. 15,000 due on or before April, 1950, would be written off and the buyers would accept Rs. 1,20,000 in full satisfaction of their claim. This settlement was given effect to and the instalments of Rs. 90,000 besides the three of Rs. 10,000 were duly paid by February, 1950. The assessee which maintained its books of account under the mercantile system made no mention of any claim against it by Sri Lachminarayan Jute Manufacturing Co. Ltd. in 1946, but debited Rs. 1,20,000 paid to the said company in the asst. yr. 1950-51 as a loss. According to the Department the assessee should have shown the loss of Rs. 3,58,997 in the asst. yr. 1947-48 and should have sought for adjustment in the asst. yr. 1950-51. The question of law which has been referred to this Court is: "Whether, on the facts and in the circumstances of the case, the loss of Rs. 1,20,000 claimed by the assessee was admissible in the asst. yr. 1950-51 or whether it was admissible in the asst. yr. 1946-47 ?" :
(2.) IT is now agreed that the last mentioned assessment year in the question should read 1947-48 and the question is amended accordingly. The ITO who had to deal with the matter disallowed the assessee's claim on the ground that it was a loss pertaining to the calendar year 1946. The Tribunal held that the amount was a loss arising out of trade in jute and not expenses and that in the year 1946 when there was a failure on the part of the assessee to carry out its part of the agreement the cause of action no doubt arose but as the assessee was disputing the buyers' claim upon various grounds the loss could not be ascertained then. It further held that the buyers' claim was certainly quantified as a result of the judgment of this Court on the awards, but the actual and ascertained loss accrued at the time when the settlement was made by virtue of which the amount was paid. The Tribunal accordingly was of opinion that the loss was an admissible loss of the assessee against the business profits. Omitting the proviso under s. 13 of the IT Act, income, profits and gains have to be computed for the purpose of ss. 10 and 12 in accordance with the method of accounting regularly employed by the assessee. Under s. 10(1) tax has to be paid by the assessee under the head "profits and gains of business, profession or vocation" in respect of the profits and gains of any business, profession or vocation carried on by him. Sub-s. (2) of the section sets forth the allowances which can be claimed by an assessee. Under clause (xv) thereof the assessee can claim any expenditure [not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee] laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.
(3.) THERE is no dispute before us that the loss of Rs. 1,20,000 in this case does not fall under item (xv) but can be claimed only under s. 10(1) as a loss suffered in business. The question then is whether it was for the assessee to anticipate the loss on the basis of the claim by the buyers in March, 1947, and show that loss in its books of account denying the liability therefor at the same time, and claim to have the matter adjusted if and when the dispute between the assessee and the buyers was settled either by litigation or by negotiation. Apart from the authorities cited at the bar I should think that an assessee is not bound to show an anticipated loss in his books of account when he is challenging the very contract under which he is sought to be made liable. I do not see why an assessee should be obliged to state in his books of account that a claim was being made against him which he did not admit. It is the duty of an assessee maintaining accounts on the mercantile system to show all admitted loss to the extent of his admission but I do not see why he should go further than that. It was, however, argued by the learned counsel for the Department that under the mercantile system an assessee has to show all anticipated loss as and when claims are made and pay the tax on the net result of the income of the year taking into account the anticipated loss and have the matter readjusted if and when the anticipated loss is quantified at some other figure afterwards. If the argument of the Department is to be accepted the result would be that an assessee will have to write up his books of account not according to his views of the transaction he has entered into but according to the claims made on him by others irrespective of the question as to whether he admitted the same or not. This, in my view, is a proposition which has only got to be stated to be rejected. The assessee may be denying the liability under a contract without good cause but then it would be his duty to record his liability as soon as there is adjudication of it or as soon as he enters into a settlement in respect of it.;