1. The only dispute in this appeal relates to the amount of Rs. 94,926 which the assessee had to pay to the Director General of Supplies and Disposal but the claim was not allowed by the ITO. There is no dispute about the facts of this case. The assessee claims that the amount was deducted from the assessee's balance with the Director General of Supplies and Disposal. According to the assessee, it was a business loss but according to the ITO, it was firstly not a business loss and further in view of the fact that the assessee was having a mercantile system of accounting, it was not allowable in this year. The facts in this behalf are that the assessee had filed a tender for supply of some sophisticated item based on designs. They could not be supplied to the Government because, according to the assessee, the designs were defective. In the meantime the Director General of Supplies and Disposal floated a risk purchase tender and cancelled the contract of the assessee on account of the risk purchase for the alleged breach of the contract. The Government also recovered a sum of Rs. 1,09,701.20 which included Rs. 14,000 in respect of risk purchase against the tender dated 14-10-1973 and Rs. 94,626 which is now the amount in dispute. The recoveries were mostly made between June and August 1978.
The ITO allowed deduction for Rs. 14,000 but rejected the balance claim firstly on the ground that it was not made out wholly and exclusively for earning taxable income ; it was not a determined liability for the current year as the suit was filed in the Court; the loss did not pertain to transactions effected in the current year since the contract was cancelled in 1976 and necessary provision should have been made in 1976'; the loss of Rs. 94,000 was still the subject of dispute.
2. When the matter came up before the Commissioner (Appeals) he was of the opinion that so far as the question of being business loss was concerned, the amount paid by way of damages for compensation to the Government in connection with the contract taken by the assessee, the same had to be considered as a business loss in view of the decision in CIT v. Shantilal (P.) Ltd. (1983 Taxation 166) (sic). However, so far as the year in which the loss could be claimed the Commissioner (Appeals) was of the opinion that this was not a statutory liability but only a contractual liability which too was in dispute and it was not certain whether the assessee at all would be liable to pay the amount to the Government despite of actual recovery having been made, being made, because the assessee's case had been that the breach of contract was not on account of default on the part of the assessee but on account of faulty designs given to him. In view of the fact that the assessee had maintained accounts on mercantile system, the actual recovery of money would not affect the question as to which year the deduction should be allowed. For this purpose, the Commissioner (Appeals) relied upon a decision of the Hon'ble Supreme Court in CIT v.Swadeshi Cotton & Flour Mills (P.) Ltd.  53 ITR 134 which lays down that an employer incurs liability towards bonus when the commission was settled and if the claim for bonus was disputed and referred to the arbitration, it was neither allowable in the year in which the profits were made and in respect of which the bonus was payable nor in the year in which it was debited in the books of acconut, but only in the year in which the dispute was settled by an award of the Industrial Tribunal. This part of the Commissioner (Appeals) conclusion has been challenged by the assessee.
3. We are inclined to uphold the assessee's contention. In this behalf we looked into the letter dated 20-7-1978 on which reliance was placed by the representative of the assessee. The same clearly shows that the Director General of Supplies and Disposal wrote to the assessee that the purchaser was entitled to recover from the assessee a sum of Rs. 94,926 towards the extra expenditure incurred in terms of Clause 14 of the General Conditions of Contract. The assessee was, therefore, called upon to pay the said amount in any branch of the Reserve Bank of India and forward the treasury receipts. The treasury challan was also sent.
Now before this letter was issued, there was only the assessee's liability which had not been quantified. Therefore, the assessee could not claim any deduction on anticipated basis and the ITO's conclusion that the claim relates to an earlier year is obviously wrong. In this behalf we may refer to the decision of the Madras High Court in M.S.P.Senthikumara Nadar & Sons v. CIT  32 ITR 138. The same is the view expressed at pp. 202 and 203 by the Allahabad High Court in ITAT v. B. Hill & Co. (P.) Ltd.  142 ITR 185. This contention also gets support from another decision of the Madras High Court in G.Manavala Naidu v. CIT  41 ITR 725.
4. We now take up the case sent up by the Commissioner. It is not disputed on behalf of the assessee that it was still contesting the liability and had taken up the matter in arbitration, but the liability itself had been fully ascertained. In E.C. Bose & Co. (P.) Ltd. v. ITO  2 ITD 149 decided by the Calcutta Bench 'B' of the Tribunal, the assessee had claimed some liability on account of the claims of employees for compensation payable under the Workmen's Compensation Act, 1923. The ITO allowed the claim. The Commissioner withdrew the allowance on the ground that the claim would accrue only when the compensation was actually adjudicated by the Commissioner under Section 19 of that Act. On appeal the Tribunal held that in spite of the fact that the liability could not be enforced till its quantification by the Commissioner, the same was an allowable deduction because the liability arose as soon as the personal injury was caused to the workers. Here the Government has actually recovered an amount from the assessee's bills and the same has been fully quantified. Again in CIT v. Sugar Dealers  100 ITR 425 (All.), the assessee had committed breach of contract for purchase of rice and on that account the deputy director of food forfeited Rs. 67,290 deposited by the assessee as security. By an award, the regional director of food upheld the forfeiture of the property and the assessee claimed the amount as a deduction. The Tribunal accepted the claim. On a reference, it was held that the contingency relating to breach of contract and the consequent forfeiture of deposit had taken place in the year pertaining to that assessment year and had become a liability in praesenti. The fact that the assessee had contested the liability and took proceeding for recovery of this security amount, did not alter the legal position. As has been rightly observed at p. 429, the law has made ample provision for a situation like this under Section 10(2A) of the Indian Income-tax Act, 1922 corresponding to Section 41(1) of the Income-tax Act, 1961, according to which: (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some 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 profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previo 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.