D. K. Seth, J. - (1.) The assessee, a private limited company, sold yarn on behalf of M/s. Bilaspur Spinning Mills and Industries, a sister concern, on consignment basis. The assessee earned commission on such sales and claimed that the "carrying charges" were to be paid to the bankers of M/s. Bilaspur Spinning Mills and Industries (Bilaspur Industries for short) towards utilisation of certain credit facilities by the assessee. The carrying charges generally included bank charges, bank interest, etc., which the assessee was allegedly required to reimburse. As such, carrying charges has been disallowed in the past to the assessee as well as other assessees of this group, the Assessing Officer has disallowed the carrying charges for the assessment year under consideration which come to a sum of Rs. 27,90,717. In appeal the Commissioner of Income-tax (Appeals) confirmed the same since they were being disallowed in the earlier years. The assessee preferred an appeal before the Tribunal. The Tribunal had affirmed the order of the Commissioner of Income-tax (Appeals). In this context, the present appeal has been filed. The appeal was admitted on the grounds as quoted below : (i) Whether the Tribunal was justified in law in holding disallowance of carrying charges of Rs. 27,90,717 ? (ii) Whether the finding of fact is perverse ?
(2.) Mr. Khaitan, appearing on behalf of the appellant, contends that the amount which was payable to Bilaspur Industries was retained by the assessee, who utilised the same for the purpose of its business. The income earned out of this retained amount was shown as its income under the head "Income from business or profession" and was so taxed. In the process, it had shown the amount payable by Bilaspur Industries to its bankers from which Bilaspur Industries had borrowed the capital, payable as carrying charges by the assessee to Bilaspur Industries. In effect this was attempted to be shown as interest payable on the amount retained by it though described as carrying charges. According to him, this amount was laid out or expended wholly and exclusively for the purpose of earning the income. As such the assessee is entitled to a deduction permissible under Section 37 of the Income-tax Act, 1961.
(3.) He relied on a decision in Calcutta Co. Ltd. v. CIT to contend that whether the amount is paid or not the moment the liability accrues, according to the accepted commercial practice and trading principles, the amount is to be treated as expended by the assessee in the course of carrying on its business and incidental to the business and thus allowable as deduction in arriving at the profits and gains of the business in the absence of any prohibition against it expressed or implied in the Act. Relying on the decision in Bharat Earth Movers v. CIT, he contended that the liability in praesenti is to be treated as an expenditure laid out or expended for the purpose of earning the income solely and exclusively for the purpose of business even though such liability may be discharged at a future date. He placed reliance in Amrish and Co. v. CIT in order to contend that while computing taxable profits for the year under consideration, it is required to deduct not only the payments actually made but also the payments though payable in a subsequent year, in case such liability could be satisfactorily estimated. Merely because subsequently there may be a reduction or even extinction of liability it would not have the effect of converting such accrued liability into a contingent liability. Just as receipts though not actual receipts but accrued dues are brought in for income-tax assessment so also liabilities accrued dues would be taken into account while working out the profits and gains of the business. Under the mercantile system of accounting, a liability already accrued though to be discharged at a future date would be a proper deduction while working out the profits and gains of the business. He further contended that even if it can be presumed that ultimately the amount may not be paid either by the assessee but that such a contingency is covered under Section 41 of the Income-tax Act, 1961, inasmuch as in such event, it would again be eligible for being assessed.;