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 :
Annual contribution from 1-4-1957 to31-3-58
Pursuant to the General Board'sresolution dated 18-12-1957
11,14,602 spindles @ 86 pies
2,077 looms @ 312 annas
3. 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.
4. 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,
5. 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. : 82ITR363(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 ?'
6. On the other hand, Kanpur Tannery Ltd. v. CIT : 34ITR863(All) , CIT v. Swadeshi Cotton and Flow Mitts P. Ltd. : 53ITR134(SC) and CIT v. Banwari Lal Madan Mohan : 110ITR868(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. : 53ITR134(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. : 34ITR863(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 : 110ITR868(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.
7. Sri Ashok Gupta, learned counsel for the revenue, drew our attention to another Division Bench decision of this court in J. K. Synthetics Ltd v. O.S. Bajpai, ITO : 105ITR864(All) , where it was laid down that since the assessee-company was following the mercantile system of accounting it could legitimately claim deduction in respect of a business liability even if such liability had not been quantified or paid or even if such liability was being disputed. There the liability was of excise duty that is, one which arose as a result of a statutory provision and certainly as held in Kedar Nath Jute Mfg. Co. : 82ITR363(SC) , the accrual of the liability does not depend upon the quantification or the ascertainment of the liability or on the fact that the liability is being disputed or on the fact that no debit has been made in the account books. In our opinion, the present case is clearly covered by the decision of the Supreme Court in Swadeshi Cotton and Flour Mills P. Ltd. : 53ITR134(SC) and the claim of the assessee was clearly allowable. We thus do not agree with the view taken by the Appellate Tribunal.
8. The second question relates to the Pondicherry unit. The assessee had disclosed a net loss of Rs. 10,19,684 in this unit in the profit and loss account. On an examination of the manufacturing and trading accounts the ITO found that there was excessive wastage claimed and production of cloth shown was low. Further, from information gathered from the bank about the goods pledged he found that the goods pledged with the batik were in excess of the stocks as per books. He, therefore, rejected the book result and by applying a gross profit rate of 10% on sales estimated at Rs. 1,28,00,000, made an extra profit addition of Rs. 15,77,643. In the opinion of the ITO that addition would take care of the excess stocks pledged also. The AAC, in appeal, confirmed that addition. When the matter came up in further appeal before the Tribunal it proceeded on the assumption that the addition had been made on account of discrepancies in the stocks as shown in the account books and as declared in the statements submitted to the bank, The Tribunal accepted the assessee's contention, following its order made in the assessee's own case for the assessment year 1958-59, that the chief executive officer of the assessee at Pondicherry had inflated both the quantity and the value of the stocks as declared to the bank for the purposes of getting a larger amount of overdraft. However, the assessee had failed to explain satisfactorily that the entire discrepancy was justified by that necessity. Since no reliable evidence had been given in that behalf, the Appellate Tribunal held that the entire discrepancy had not been necessitated by business expediency. It, therefore, applied a gross profit rate of 3% on the sales estimated by the ITO and the addition worked out to Rs. 3,84,000 and after adding the loss of Rs. 2,97,643 to the same, the total addition sustained came to Rs. 6,81,643.
9. The question for consideration is as to whether in respect of the aforesaid addition the Appellate Tribunal took into account any irrelevant material and omitted to take into account any relevant material because if it is so found then alone can this court differ from the view taken by the Tribunal. According to the learned counsel for the assessee, the relevant material which was omitted from consideration was the chart which had been submitted by the assessee, and in which the alleged discrepancy had been explained. The discrepancies found by the, ITO on a comparison of the statements of stocks declared to the bank with the stocks as per account books were as under :
Particulars of stocksQuantity and value as perbooks of accountQuantity and value declaredto the bank
Raw Materials :QuantityValueQuantityValueCotton in bales901 Bales3,36,458905 bales3,83,515Bonda Boras 160 Bonda Boras36,000
Stock-in-process : Spinning process71,448 Lbs.1,02,436 1,50,000Weaving process49,781 Lbs.82,171 2,50,000Reeled and Unreeled yarn2,421 Lbs.3,204 _Loose cloth in warehouse2,82,238 yds.1,66,657 _Fonts, Rays6,586 Lbs.8,452 8,50,422Chindies34,415 Lbs.12,379 -
Finished products : Yarn in godown :10 bales6,08046 bales & 3609 Lbs31,498 121 bales91,675135 bales1,32,609
Grand Total8,09,312. 18,54,043
10. It would be seen that the discrepancies were in regard to raw materials, stock-in-process, loose cloth in warehouse and yarn in godown and the details of the same were as under :
Loose cloth in warehouse
Yarn in godown
11. Further, the discrepancies were not only in the price of the goods but also in the quantity thereof. For the assessment year 1958-59 almost similar discrepancies and suppression of stock had been found and that aspect was discussed in detail by the Tribunal in its appellate order for that year. The explanation in both the years given by the assessee was that its chief executive officer at Pondicherry had inflated the value and quantity of the stocks with a view to obtain a larger overdraft from the bank. The explanation was accepted by the Tribunal, but at the same time it was held that it was for the assessee to explain satisfactorily that the entire inflation, both of stock and value, was warranted by the necessity to obtain larger overdraft. The assessee, however, had failed to furnish any particulars to justify the action of the chief executive officer in regard to the entire discrepancy and hence on the basis of the estimate a certain addition was maintained. For the year under consideration the Tribunal, since the facts and circumstances were in pari materia, relied on that finding to uphold the action of the revenue authorities in rejecting the disclosed book results and thereafter the Tribunal made its own estimate in regard to the rate of gross profit. After the decision on the appeal by the Tribunal on September 25, 1972, an application for rectification was given by the assessee on November 24, 1972, a copy of which is at pages 145 to 147 of the paper book, in which it was stated that the assessee had furnished full facts and figures in justification of the inflation of the stocks at page 24 of the paper book filed at the time of hearing of the appeal and the extract of the same was reproduced in the application and it was prayed that suitable rectification might be made in the light of that chart. While disposing of that application the learned Judicial Member observed that they had considered the entire gamut of the facts in this case and that the finding was entirely one of fact and was also based on the finding for the earlier year. Since all the facts had been taken into consideration before recording the finding, in the opinion of the learned Judicial Member, there was no mistake apparent from the record which could be rectified. The learned Accountant Member wrote a separate order in which he observed that he would not have been a party to the impugned observations of the Tribunal in para. 24 of its appellate order if the figures given at page 24 of the assessee's paper book or the facts and figures noted by the AAC in para. 26 of his appellate order had not escaped his notice and in his opinion there was certainly a mistake in para. 24 of the Tribunal's appellate order. However, since the mistake was not one which could be rectified under Section 35 of the Act of 1922, he agreed with the learned Judicial Member that the application was liable to be rejected in so far as this question was concerned. It may be noted that the learned Accountant Member did not disagree with the observation made by the learned Judicial Member in para. 7 of his order that while rejecting the book profit the entire gamut of the facts as disclosed ITI paras. 19 to 23 had been taken into consideration and the conclusion had been arrived/at that the proviso to Section 13 of the Act of 1922 was applicable. It would appear, therefore, that both the learned members while disposing of the assessee's application for rectification agreed that the finding recorded in the appellate order that the proviso to Section 13 of the Act of 1922 was applicable had been arrived at after a consideration of all the facts of the case. That is a pure finding of fact which cannot be questioned in reference before this court.
12. In view of the above discussion our answer to question No. 1 is in the affirmative, in favour of the assessee and against the department and our answer to question No. 2 is in the negative, in favour of department and against the assessee. In view of the divided success and failure of the parties, we make no order as to costs.