V.K. Singhal, J. - (1.) THE Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, has referred the following question of law arising out of its order dated January 9, 1981, in respect of the assessment year 1968-69 : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that though the shortfall was a trading liability, that could not be the claim in the order under appeal as the liability was yet to be settled and crystallised ?"
(2.) THE brief facts of the case are that the assessee is a partnership firm and carries on the business as a liquor contractor. During the previous year relevant to the assessment year 1968-69 (ending on July 31, 1968), the assessee entered into a contract with the Government of Rajasthan to carry on business in country liquor under the guarantee system. THE liquor contracts are given by the Excise Department of the State Government in public auction and the contract was for a period of one year. Under the contract, the contractor has to lift goods of the value for which the guarantee is given and if such quantity is not lifted and lesser purchases are made, then the difference amount becomes recoverable from the contractors under the terms of the contract. THE guarantee amount in this case was Rs. 23,00,000 against which the actual purchases made were of Rs. 11,28,585 and thus there was a shortfall of Rs. 12,91,250. A sum of Rs. 2,30,000 was deposited by the assessee as security for the purpose of the contract for the financial year "1967-68 which was forfeited and the balance amount of Rs. 10,61,250 was recoverable from the assessee. THE Income-tax Officer disallowed the claim of the assessee on the ground that the liability of Rs. 12,91,250 is a disputed liability and that the assessee has filed a suit in the Court of the District and Civil Judge, Kota, for refunding the security which was forfeited by the Government and the suit was decreed for Rs. 3,30,000 by the said court on the ground that the breach was on the part of the State Government and not on the part of the assessee. It was observed that the State Government failed to supply adequate liquor to the assessee. THE claim for the liability was rejected in these circumstances by the Income-tax Officer. THE appeal of the assessee was allowed by the appellate authority and when the matter was taken up by the Revenue before the Tribunal, it was held that the liability to pay the deficiency is a trading loss and is allowable. It was further held that, in the instant case, the quantification of the liability is not in dispute but the assessee has assailed the claim of the State Government for the recovery of shortfall or the deficiency of Rs. 12,91,250 and, therefore, it cannot be said that the liability crystallised in the financial year 1967-68 relevant to the assessment year 1968-69. It can be said to have crystallised only in the year when either the assessee admits the liability or the dispute is settled by the High Court in the pending writ and, therefore, it was held that though the liability in respect of the shortfall is a trading liability, it cannot be claimed as it is yet to be settled and crystallised by the High Court where the writ petition is pending. The submission of learned counsel for the assessee is that this court in CIT v. Shri Chunnilal Tak [1986] 160 ITR 617, has held that the difference between the minimum guaranteed amount and the actual purchase of country liquor is allowable as a trading loss. So far as the application of the principles of this judgment is concerned, it cannot be denied that the loss which has been suffered by the assessee on account of the stipulation contained in the contract/licence to lift a particular quantity and his obligation to make the payment of the loss to the Government would certainly be a liability which arose from carrying on the business and was laid out wholly and exclusively for purposes of business. The said amount was allowable as a trading loss. The Punjab and Haryana High Court in Sirsa Industries v. CIT [1989] 178 ITR 437, has held "wherever an assessee follows the mercantile system of accounting, deduction is claimable only in the year in which sales tax liability accrues and not in the accounting year in which the liability is finalised or the amount is actually paid". The Allahabad High Court has held in CIT v. Poonam Chand Trilok Chand [1976] 105 ITR 618 that "where an assessee follows the mercantile system of accounting, he is entitled to claim a deduction even though the expenditure is not actually incurred. It is enough if the liability for such expenditure accrues. The fact that the assessee did not pay the amount to the Government in the relevant accounting year did not alter the position. Similarly, the fact that the assessee did not make appropriate entries in its books of account but kept the amount in a reserve account would also not alter the position. The assessee is entitled to a deduction when the liability accrues and the liability accrues as soon as a transaction of sale or purchase took place. In CIT v. Investigation and Security Service (India) P. Ltd. [1990] 182 ITR 358, the Andhra Pradesh High Court has held that "where the assessee is following the mercantile system of accounting and even if the liability is disputed and challenged in the court and the appeal is pending against that judgment in the High Court, no finality is reached and, therefore, the deduction has to be allowed". It was further observed that "if the matter is decided in favour of the assessee finally and no liability remains, it will be open to the Department to invoke the provisions of Section 41(1) of the Income-tax Act, 1961, and bring the amount allowed as deduction to assessment of tax". This matter has been considered by the apex court in Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363, wherein it was held that, "where the assessee followed the mercantile system of accounting, he was entitled to deduct from the profits and gains of its business, the liability which arose during the relevant previous year. That liability did not cease to be a liability because the assessee had taken proceedings before the higher authorities for getting it reduced or wiped out, so long as the contention of the assessee did not prevail". The Calcutta High Court, however, in CIT v. Soorajmull Nagarmull [1981] 129 ITR 169, has held "the settlement of liability" is to be allowed in the year in which the dispute was settled". The submission of learned counsel for the Revenue that the liability is a disputed liability and could not be allowed as a deduction because it was on account of breach of contract has no force in view of the judgment given by this court referred to above.
(3.) THE Income-tax Officer has proceeded in this case on the basis that, when the assessee was given an opportunity to prove the liability of shortfall of Rs. 12,91,250, the assessee submitted that stay was granted by the Rajasthan High Court on August 20, 1974, and the Writ Petition No. 2350 of 1974 is pending. It was also submitted that a suit was filed as Civil Suit No. 7 of 1971 against the Government of Rajasthan and the same was decreed on May 18, 1973, wherein it was held "the forfeiture of the security deposits was not justified because the Government failed to perform its duty of supplying the liquor. THE Income-tax Officer thus found that there was no liability at all and on the other hand a decree has been given in favour of the assessee against the forfeiture of the security deposits in which it has been held by the District and Civil Judge, Kota, that the assessee is entitled to refund of the amount forfeited along with the interest payable thereon. Thus, on the basis of the document produced by the assessee, an opinion was formed that there was no liability in existence at all which could be allowed as a trading loss. It has been provided under Section 41(1) of the Income-tax Act, that where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure of trading liability incurred by the assessee and, subsequently, during any previous year, the assessee has obtained any benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him shall be deemed to be the profits or gains of business or profession and accordingly chargeable to income-tax as the income of that previous year whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. Thus, according to Section 41(1), the said income could have been brought to tax if the matter was decided in favour of the assessee. In the present matter, for claiming any deduction, the burden was on the assessee and when he himself has produced the documents that there was no liability of payment of difference of shortfall of the guarantee amount and a decree has been given by a competent court in his favour, then it would mean that the liability was not in existence. Had it been a case where a liability was created as a business or trading liability by the Government, then simply because the entry in respect thereof was not made in the books of account or was challenged in an appeal, the deduction thereof could not have been refused. THE ultimate decision in the matter could have given the jurisdiction for invoking the provisions of Section 41(1). The Income-tax Appellate Tribunal has proceeded on the basis of documents produced by the assessee and it was found that there is no liability in existence since the decree has already been passed by the court in favour of the assessee. According to the submission of learned counsel for the petitioner, the petitioner has filed another writ petition in the High Court wherein it was submitted that the mistake was on the part of the Government in not supplying the country liquor and, therefore, there is no liability and till then the decision was not given. It is possible that the assessee might have claimed deduction in the subsequent years. No document or judgment of the Rajasthan High Court or the ultimate decision in the matter has been produced. Even the copy of the judgment in the civil suit has not been annexed or produced before us. So far as the legal position is concerned, it has already been explained above that, if there is a liability and simply because it has been challenged in appeal or in a court of law, it will not disentitle the assessee from claiming deduction for such liability when the accounts are maintained on the mercantile basis. Since considerable time has already passed and the present reference does not contain full facts, it would be in the interest of justice that the reference be returned unanswered to the Tribunal for deciding the same in accordance with law. Accordingly, the reference is returned unanswered and the Tribunal shall hear the parties afresh when all documents shall be produced and then an order in accordance with law shall be passed by the Tribunal. ;