V. Bhargava, J.
1. The assessee company was dealing in the manufacture of leather goods during the accounting period, from 1-7-1945 to 30-8-1946 relevant to the assessment year 1947-48. In the year 1940, the War Risks (Goods) Insurance Ordinance had been promulgated under which the assessee company was required to insure its stock-in-trade. The company insured its goods for certain amounts in the years preceding the account year in question but, during the account year in question mentioned above, it appears that the Government detected that the assessee had failed to pay the proper insurance premium for the earlier years and not properly insured its goods.
The Government, therefore, started a case against the company and eventually the Government demanded the premium, which had remained unpaid, in addition to the penalty for commission of the default. The demand originally was for a sum of Rs. 1,54,830/-. This demand was, however, reduced and the matter was ultimately compromised for a sum of Rs. 1,03,220/-. It has been found from the correspondence produced before the Income-tax Appellate Tribunal that, out of this sum, a sum of Rs. 51,610/- had been taken by the Government as representing the premium which the assessee company should have paid if the company had correctly insured its goods in accordance with the War Risks (Goods) Insurance Ordinance in the earlier years.
The balance of Rs. 51,610/- was taken as composition money for the criminal offence, which, it was alleged, the company had committed in failing to comply with the requirements of the Ordinance. So far as the latter amount is concerned, it was not contended before the Income-tax Appellate Tribunal on behalf of the assessee that it was also deductable as an expenditure under Section 10 of the income-tax Act, so that there is at present, no case before us with regard to that amount. The assessee company, however, contended that the other sum of Rs. 51,610/-, paid in respect of the insurance premium which the assessee company had defaulted in paying in earlier years, was an expenditure which the assessee company was entitled to deduct in computation of its income for the relevant account year, mentioned above.
The Tribunal held that this amount could not be deducted as an expenditure in the account year in question, as the liability had arisen in earlier years at the time when 'the company had failed to insure the goods to their full value, so that this amount could have been claimed as deductions in those earlier years only.
The contention of the company, however, was that this sum was actually paid during the account year in question and that, in any case, the exact liability to this amount had not been ascertained in the earlier years, but was ascertained during the account year in question, so that it was an expenditure, which the assessee company was entitled to deduct in the assessment of the income of the account year in question. In these circumstances, the Tribunal has referred the following two questions for opinion of this Court:
1. Whether the word 'paid' as defined in Section 10(5) means actual payment in the year under assessment in a case where the accounts are kept on mercantile system?
2. Whether in the facts and circumstances of the case the amount of Rs. 51,610/- was allowable as an expense under Section 10(2) (iv) of the Act in the assessment year 1947-48?
2. The first of the two questions referred to us by the Tribunal is in a very general form and seeks the opinion of this Court on a point which does not in the form arise in this case. This Court, in answering a question in an income-tax reference, confines itself only to those questions of law which arise in a particular case and does not go out of the way to lay down general principles of law for the guidance of the Income-tax Authorities.
The question, as framed, is not an appropriate question which need be answered by this Court. The definition of the word 'paid', in so far as it is relevant for the purposes of the present case, has to be considered and will be considered when answering the second question, because in answering that question it would be necessary to look to the definition of the word 'paid'.
In the circumstances, we are of opinion that the first question is one that does not arise out of the appellate order of the Tribunal, and consequently we decline to answer it.
3. The second question, which relates to the specific circumstances of the present case, recognises that the sum of Rs. 51,610/- was paid by the assessee in respect of the amount of premium which the assessee was liable to pay in respect of the insurance, which the assessee should have done in the years preceding the relevant account year in which this amount is claimed as a legitimate deduction. This fact is not contested on behalf of the assessee.
The contention of the assessee is twofold; firstly, that the amount was actually paid in the relevant account year and, secondly, that even the liability for the payment of this amount was ascertained in the account year in question, so that, even in accordance with the mercantile system of accounting, it could not have been treated as an expenditure for the earlier years.
It appears to us that, at the time when the Income-tax Appellate Tribunal decided the appeal, the Tribunal did not take the trouble of looking into the provisions of the War Risks (Goods) Insurance Ordinance, 1940, under which payment had become due. The question when this sum became an ascertained liability of the assessee company could only be determined after examining the provisions of the Ordinance and the various notifications issued thereunder.
Section 7 of the Ordinance lays down a prohibitory provision under which persons, dealing in certain types of goods, are prohibited from carrying on any business as a seller of these goods, unless there is in force a policy of insurance against war risks, issued in accordance with the War Risks (Goods) Insurance Schemes in respect of such goods, for a sum not less than the value thereof for the time being. The War Bisks (Goods) insurance Scheme has to be prepared by the Government under Section 5 of the Ordinance.
According to Section 5, the Central Government was to undertake the liabilities of insuring such persons against war risks, and the scheme had to be such that the liability of the Central Government as insurers under the scheme was determined by a policy of insurance issued in the prescribed form. The premium under the policy so issued was payable at such rate as might be prescribed.
It is to be noticed that, according to the language used in Section 5, the liability to pay the premium arises under a policy 'issued' in accordance with the scheme indicating that there would be no liability to pay the premium until the policy had been issued.
4. The scheme actually promulgated by the Government was notified by Notification No. 9 W. R. I./40, printed at page 1316 of Part I of the Gazette of India dated 14-9-1940. The rate at which the premium was payable was laid down in clause 6 of this notification. Clause 10 of the notification laid down the procedure to be adopted for insuring the goods.
Under Sub-clause (1) of that clause, every application for insurance under the scheme had to be in the form given in the third schedule to the rules and had to be made to a Government agent or to such officer as might be authorised by a Government agent in that behalf. Under Sub-clause (2) of that clause, every such application had to be accompanied by the requisite premium which might be remitted by bank draft, cheque, money order or postal order, or delivered in cash.
The third schedule to the notification, which prescribed the form of the application for insurance, required the assured to mention the goods, to be insured, the situation of the goods, the estimated full value of the goods, which was to be the sum for which insurance must be effected, and the date on which the insurance was to commence.
This shows that, under the scheme when any person carrying on the business in goods liable to be insured under the ordinance had to apply for insurance, he had to put down the estimated full value of the goods to be insured and to remit with the application the amount of the premium due on that estimated value.
Under clause 12 of the notification, if the amount accompanying the application fell short of the premium due on the sum for which the goods were proposed for insurance, a policy for such proportion of the sum proposed as the amount paid bore to the premium due was to be issued, and the applicant was to be required to make a further application for insurance of the balance.
Insurance policies had thus to be issued only on the basis of the estimated full value of the goods to be insured, which estimate had to be made by the assured himself. These provisions left an option to a person to insure his goods at any value which he considered to be the estimated value of his goods without laying down any provision for ensuring that this estimate really represented the correct value.
It appears that, in order to fill up this gap, the War Risks (Goods) Insurance Ordinance, 1940, was amended by the War Risks (Goods) Insurance Amendment Ordinance, No. VIII of 1943. By this amending Ordinance, Section 7A was introduced in the ordinance No. IX of 1940. Under the original Ordinance No. IX of 1940, if any person did not insure the goods for the full value, he was liable to be prosecuted for contravention of the provisions of the ordinance under Section 7(2) and punished with fine.
Section 7-A, introduced by the amending Ordinance, laid down that without prejudice to the provisions of Sub-section (2) of Section 7, where any person had failed to insure as, or to the full amount, required by the Ordinance and had thereby evaded payment by way of premium of any money which he would have had to pay but for such failure, an officer authorised in that behalf by the Central Government might determine the amount the payment of which had been so evaded.
The amount so determined was then payable by such person and recoverable from him as an arrear of land revenue and was to be a first charge on the property in respect of which the default had been made.
5. The result of the introduction of Section 7-A by the amending Ordinance was that, if any person evaded payment of the premium either by not insuring the goods under the Ordinance of 1940 at all or not insuring goods to the full amount of their value, two different proceedings could be taken against him.
The first proceeding was permitted by Section 7(2) of the Ordinance under which he could be prosecuted and fined. The other proceeding was for determination, by an officer authorised in that behalf, of the amount of the premium the payment of which had been evaded and then this amount could be recovered from the person concerned.
6. In the present case, the facts, as we have given above, indicate that the two amounts of Rs. 51,610/- each, which the assessee company had to pay the Government, were two separate amounts taken from it in respect of these two proceedings. One sum was taken as the composition money in respect of the offence under Section 7(2) of the Ordinance of 1940.
The other sum was taken as representing the amount of the premium, the payment of which had been evaded by the assessee company in the years preceding the account year in question. The facts, however, show that this evasion was detected for the first time during the account year in question. The demand for it was also made during the same year.
The composition of the offence also took place during the same year, and ultimately the actual payment was also made by the assessee during the same year. Since the detection itself took place ,in the account year in question, it necessarily follows that the amount actually payable must have been determined by the officer, authorised under Section 7-A, also during this very account year.
Thus the facts clearly lead to the conclusion that this sum of Rs. 51,610/-, paid by the assessee company in respect of the premium, which had been evaded in earlier years, was determined and was actually paid during the year of accounting in question. It is on these facts that we have to consider the applicability of the provisions of Section 10(2) (iv) of the Income-tax Act.
Under this provision, an assessee is entitled to deduct the amount of any premium paid in respect of the insurance against risk of damage or destruction of buildings, machinery, plant, furniture, stocks or stores, used for the purposes of the business. The word 'paid' used in this provision of law has been defined in Subsection (5) of Section 10 of the Income-tax Act. 'Paid' has been defined to mean actually paid or Incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section.
7. There is no dispute at all between the parties that, so far as the actual payment is concerned, this sum of Rs. 51,610/- was actually paid in the account year in question. The whole composition money of Rs. 1,03,220/- was paid in two instalments of Rs. 51,610/- each. The first instalment was paid on 12-10-1945 and the other on 8-6-1946.
Both these dates fell within the account year in question and consequently whichever payment be held to be the payment of the evaded premium, the payment in any case, was within this account year. In order to arrive at the decision that this amount should have been claimed as an expenditure in earlier years, the Tribunal has relied upon the alternative definition of the word 'Paid' mentioned above. It is the common case of the parties that the assessee maintains its accounts on the mercantile system and its assessment was also based on that method of accounting.
The contention on behalf of the department is that the liability to pay the premium arose in the earlier years when, in accordance with the War Risks (Goods) Insurance Ordinance, 1940, it had become compulsory for the assessee to insure the goods, and since the liability arose during those earlier years, the amount, even if paid later, could only be claimed as a deduction in those earlier years, as under the mercantile system, a liability which has arisen on a particular date becomes an expenditure on that date as a sum paid on that date and it has to be entered as such in the accounts.
There is, of course, no doubt that the liability to pay the premium on the goods, which had to be insured in the earlier years by the assessee company, did arise in the earlier years, but the assessee company has taken its stand on the principle that, under the mercantile system of accounting, even a liability which arose earlier can be entered as an expenditure in the accounts only when that liability has been ascertained as an exact sum of money.
The contention, in the present case, is that during the earlier years this particular liability, which had been evaded, had not been ascertained and, since the ascertainment itself took place in the year of accounting in question, it could be entered as an expenditure only in this year. This is an aspect of the case which the Tribunal does not seem to have examined.
The Tribunal proceeded on the basis that the liability having arisen in the earlier years, the amount had to be shown as an expenditure, according to the mercantile system of accounting, during those very years and could, therefore, be claimed as a deduction in those years only.
In giving this decision, the Tribunal, in our opinion, went wrong as, under the mercantile system of accounting also, a liability incurred cannot be entered in the accounts as an expenditure unless the liability has become an ascertained sum of money. Until ascertained, the liability no doubt exists, but 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, as that would clearly make the accounts imperfect. While an exact amount cannot be entered in the account, it is certainly not possible to work out the correct balance and thus it is necessary that every entry should precisely mention the amount to which it relates.
8. In our view that this principle is applicable, we are supported by a decision of the Madras High Court in the case of M. S. P. Senthikumara Nadar and Sons v. Commr. of Income-tax, Madras, : 32ITR138(Mad) (A). The learned Judges held, 'whether the liability was discharged or not by payment, only an ascertained liability would have justified an entry in the accounts of the assessee maintained on a mercantile basis'. The same principle was also recognised by the Calcutta High Court in the case of Calcutta Co., Ltd. v, Commr. of Income-tax (Central) Calcutta, : 24ITR454(Cal) (B).
9. In the case before us, consequently, even though the liability to pay the premiums which were evaded, had arisen in years preceding the account year in question, the sum, which was ultimately determined in the year of account in question, could not have been entered by the assessee in its books as an expenditure in earlier years and could not, therefore, have been claimed as a deduction. The ascertainment of the amount clearly took place in the year of account in question.
The Scheme of the War Risks (Goods) Insurance Ordinance, 1940, as indicated above, clearly shows that in order to ascertain the amount payable as premium for insuring the goods, there were only two methods. Initially the amount payable was determined by the value of the goods as put down in the application for insurance by the person seeking the insurance. He was, no doubt, required to put down the full value of the goods to be insured, but, even if the estimate was below the full value, the liability to pay the premium at that stage was restricted to the value put down by 'him in the application.
In cases where the amount of the premium, accompanying the application, was short of the amount due on the estimated value shown by the person himself, the insurance policy had to be issued for the proportionate value, and, for the balance of the value, the assessee was required to make a fresh application, when again this fresh application had to be accompanied by the amount of the premium due.
Whatever amount thus became payable on the estimated value did become an ascertained amount as soon as the application for insurance was made and to that extent the liability to pay the premium became an ascertained liability and had to be entered in the books of accounts.
It appears from the judgment of the Income-tax Appellate Tribunal that at no stage was any contention put forward that any part of the sum of Rs. 51,610/- represented premium which was due on the estimated value which had been shown by the assessee in its application for insurance in the earlier years. The facts found by the Tribunal show that this amount was actually realised from the assessee as representing the amount of the premium evaded by it in the earlier years by incorrectly putting down the estimated value of the goods.
So far as that evaded premium is concerned, the only provision for ascertaining it and for realising it is contained in Section 7-A of the Ordinance. Section 7-A of the Ordinance is thus the only other provision under which the liability for payment of the premium can be ascertained.
The act of ascertainment is to be done by an officer appointed by the Central Government in that behalf. In the present case, this sum of Rs. 51,610/-, realised during the account year in question from the assessee, is clearly the amount determined in accordance with the provisions of Section 7-A. Having been determined under that provision, the amount was ascertained for the first time when the determination took place and it was only when it was thus determined that the liability became a liability in terms of an ascertained sum, which the assessee then had to enter immediately in its books of account as an expenditure, as it was maintaining its accounts under the mercantile system.
This sum, therefore even under the alternative definition of the word 'paid' which we have been considering, can be held to have been incurred only on the date of the determination under Section 7-A of the Ordinance, which date also fell in the account year in question.
10. Consequently, whichever alternative definition of the word 'paid' be applicable to the case of the assessee, it has to be held that this amount was 'paid' by the assessee in the year of account in question on a correct interpretation of the word 'paid' as used in Section 10(2) (iv) of the Income-tax Act. The assessee was entitled to claim this amount as a legitimate deduction in the year of account in question and consequently in the assessment for the relevant assessment year. Our answer to the second question is thus in the affirmative.
11. The assessee will be entitled to its costs from the department, which we fix at Rs. 400/-.