PATHAK J. - The Income-tax Appellate Tribunal has referred the following question :
'Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in treating the sum of Rs. 49,516 as a loss allowable as a deduction in the assessment year 1959-60 ?'
The reference related to the assessment year 1959-60, the relevant previous year being the accounting year ending September 30, 1958. The method of accounting is mercantile.
The Government of India in the Ministry of Food and Agriculture framed a scheme for the promotion of the export of sugar. In pursuance of that scheme the Sugar Export Promotion Ordinance, 1958, was promulgated. On June 27, 1958, a notification was issued by the government fixing 50 thousand tons of sugar as the quantity for export out of India during the period ending October 31, 1958. On June 27, 1958, the Government issued an order under clause 5 of the Ordinance informing the assessee that 179.48 tons of sugar had been allotted in its case as its quota for export. On July 17, 1958, the export agency division of the Indian Sugar Mills Association addressed a letter to the assessee making a demand for the supply of specified number of bags of sugar representing the assessees quota. The assessee estimated the price which it expected to receive in respect of the sugar so demanded, and calculating the loss at Rs. 53,310 it debited its profit and loss account on September 30, 1958, by that figure and made a corresponding entry in the contingency account. The entry narrated that it represented the estimate loss on sugar to be exported out off the production of the year 1957-58 under the orders of the Government. The amount appeared in the balance-sheet of the assessee on September 30, 1958, on the liability side under the heading 'provision for contingency on export of sugar'. In the subsequent year, the loss was actually quantified at Rs. 49,516 and, therefore, the assessee credited the profit and loss account with Rs. 3,794 in the subsequent year.
In assessment proceedings for the assessment year 1959-60, the assessee claimed a loss set at the original figure of Rs. 53,310. The Income-tax Officer disallowed the claim on the ground that it related to an unascertained loss and was in the nature of a provision only. The assessee appealed The Appellate Assistant Commissioner held that the loss amounting to Rs. 53,310 could not be allowed entirely and that the sum which could be allowed was Rs. 49,516 being the actual loss ascertained by the time the assessment was finalised. The Income-tax Officer carried the case in appeal to the Income-tax Appellate Tribunal. The principal submission before the Tribunal on behalf of the Income-tax Officer was that the loss was in the nature of a contingent liability or an unascertained liability during the year under consideration and, therefore, could not be legitimately claimed as a deduction against the profits of that year. The Tribunal found that upon the demand made by the letter of July 17, 1958, the assessee was under a legal obligation to export a specified quantity of sugar at a stipulated price and that the assessee would suffer a loss on the transaction. It observed the the loss was occasioned by the circumstance that the assessee had value of the stock of sugar at market price while the export was to be made at a much lower price. In the opinion of the Tribunal, the loss accrued as soon as the demand was made upon the assessee to supply the sugar. Having regard to the regular method of accounting on the basis of which the assessee computed its profits and gains, the Tribunal held that the loss was determined and ascertained. Accordingly, it dismissed the Income-tax Officers appeal.
There is no dispute before us that, as a result of the demand made by the export agency division of the Sugar Mills Association for the supply of sugar in accordance with the quota fixed by the Government of India the assessee was bound to sugar a loss, the price which it received in respect of such supply being below the market price. Now, having regard to the circumstance that the assessee was bound in law to comply with the demand made on July 17, 1958, a liability to supply the sugar demanded must be taken in reality to have arisen in law on that date. The assessee could not refuse to supply the sugar, and it may be assumed, therefore, that the sale tool place on that date. The question next arises, whether the assessee would suffer a loss, and if it did, what should be the estimate of such loss. The assessee had valued the stock in its account books according to the market price. There being no dispute that the price fixed by the Government was lower than the market price, a loss was bound to arise. The assessee estimated the loss, and it is apparent the basis adopted by it was not arbitrary. Subsequently in the following year when the price was actually fixed and it was possible to quantify the loss suffered by the assessee the loss so quantified had to be substituted for the loss estimated by the assessee, and it is the finally quantified figure of loss which alone could be taken into consideration for the purpose of the claim made by the assessee. It is settled law, we think, that when an assessee maintains his account books on the mercantile system of accounting, the date on which liability accrues is the date to be considered for the purpose of entering that liability in the accounts. That is so, even though the liability is capable of estimate only and its actual quantification has to be postponed. Reference may be made to the decision of the Supreme Court in Calcutta Co. Ltd. v. Commissioner of Income-tax. In that case the appellant bought lands and parceled them out in plots for building purposed undertaking to develop them by laying out roads, providing a drainage system, install in lights and so on. When the plots were sold, the appellant, who maintained his books on the mercantile system. Credited the account with the full sale price of the land (although in fact he had received a part of it only), and at the same time debited an estimated sum on account of the expenditure anticipated towards the development which he had undertaken to carry out even though he had not laid out any amount yet towards that expenditure. The Supreme Court held that, in view of the undertaking to carry out the development unconditionally, there was a liability on the appellant in that regard which had accrued on the dated of the deeds of sale even though that liability was to be discharged at a future date. It was an accrued liability and the estimated expenditure which was expected to be incurred in discharging it could be deduct from the profits and gains of the business and could be debited in the accounts even though it had not been actually disbursed. The Supreme Court observed that the difficulty in making the estimate did not convert the accrued liability into a conditional one, because it was always open to the income-tax authorities to arrive at proper estimate thereof having regard to all the circumstances of the case. We derive considerable support from the law laid down by the Supreme Court in the opinion to which we have come.
We answer the question referred in the affirmative.
The assessee is entitled to its costs which we assess at Rs. 200. Counsels fee is assessed in the same figure.
Question answered in the affirmative.