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Commissioner of Income-tax, West Bengal Vs. Shewbux Jahurilal. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 62 of 1957
Reported in[1962]46ITR688(Cal)
AppellantCommissioner of Income-tax, West Bengal
RespondentShewbux Jahurilal.
Cases ReferredAssociated Printers (Madras) Private Ltd. v. Commissioner of Income
- g.k. mitter j. - in this matter a single question of law depending on the method of accounting used by the assessee has been referred to this court under section 66(1) of the indian income-tax act. the facts are very simple. the assessee entered into ten several forward contracts with sri lachminarayan jute manufacturing company limited in april, 1946, to supply loose jute at specified rates, delivery to be effected in september, october, november and december, 1946. under the terms of the contracts the buyers had the option, in the event of non-delivery of goods by the due dates, of canceling the on the fifth working day after the due date and recovering the difference between the price specified in the contracts and the market prices as on the date of cancellation of the contracts. it.....

G.K. MITTER J. - In this matter a single question of law depending on the method of accounting used by the assessee has been referred to this court under section 66(1) of the Indian Income-tax Act. The facts are very simple. The assessee entered into ten several forward contracts with Sri Lachminarayan Jute Manufacturing Company Limited in April, 1946, to supply loose jute at specified rates, delivery to be effected in September, October, November and December, 1946. Under the terms of the contracts the buyers had the option, in the event of non-delivery of goods by the due dates, of canceling the on the fifth working day after the due date and recovering the difference between the price specified in the contracts and the market prices as on the date of cancellation of the contracts. It would appear that the due dates of the contracts were extended up to February 28, 1947. As the assessee did not effect delivery the buyers served notices on March 1, 1947, stating in respect of each contract that as the assessee had failed to hand over the documents in fulfillment of its obligation the buyers declared their option to cancel the contract and to charge the difference between the contract price and the market price prevailing on the fifth working day after the due date. It should be noted here that in April, 1946 where the contracts were entered into the Jute Control Order of 1944 was in force in West Bengal regulating the prices of all kinds of loose jute. By this order the maximum and the minimum price for jutes of various kinds grown in various areas were fixed within certain specified limits and no person could enter into a valid contract for sale or purchase of such jute beyond the price limits specified. This order came to an end on September 30, 1946, and immediately the prices of all kinds of jute shot up with the result that a large number of seller were unable or unwilling to deliver the goods to their buyers. All the jute contracts which had to be entered into with jute mills were to be on certain terms and conditions including an arbitration clause. The buyers in this case referred the matter to the Bengal Chamber of Commerce claiming a sum of Rs. 3,58,997 as payable by the assessee to them for the failure of the latter to supply the goods. The case of the assessee was that there were no valid and subsisting contract between it and the seller and the contracts, if any, were frustrated as a result of the discontinuance of the order controlling the prices thereof. According to the assessee the very basis of the contracts having been destroyed the same became void and the sellers were relieved of all obligations thereunder. After a certain amount of litigation in this court the arbitrations were proceeded with and awards were made against the assessee for total sum of Rs. 3,58,997 besides costs. These awards were made between the months of May and August, 1948. Judgments were passed by this court in terms of the awards early in 1949. Thereafter, the assessee entered into a settlement with the buyers on April 25, 1949, whereby it was agreed that the buyers claim including costs would be settled at Rs. 1,35,000, Rs. 90,000 of which was to be paid immediately and the balance of Rs. 45,000 to be paid in certain installments between December, 1949, and April 1950, provided however that if the first three installments of Rs. 10,000 each were paid on the respective due dated the last installment of Rs. 15,000 due on or before April, 1950, would be written off and the buyers would accept Rs. 1,20,000 in full satisfaction of their claim. This settlement was given effect to and the installments of Rs. 90,000 besides the three of Rs. 10,000 were duly paid by February, 1950. The assessee which maintained its books of account under mercantile system made no mention of any claim against it by Sri Lachminarayan Jute Manufacturing Company Limited in 1946, but debited Rs. 1,20,000 paid to the said company in the assessment year 1950-51 as a loss. According to the department the assessee should have shown the loss of Rs. 3,58,997 in the assessment year 1947-48 and should have sought for adjustment in the assessment year 1950-51. The question of law which has been referred to this court is :

'Whether, on the facts and in the circumstances of the case, the loss of Rs. 1,20,000 claimed by the assessee was admissible in the assessment year 1950-51 or whether it was admissible in the assessment year 1946-47 ?'

It is now agreed that the last mentioned assessment year in the question should read 1947-48 and the questing is amended accordingly.

The Income-tax Officer who had to deal with the matter disallowed the assessees claim on the ground that it was a loss pertaining to the calendar year 1946. The Appellate Tribunal held that the amount was loss arising out of trade in jut and not expenses and that in the year 1946 when there was a failure on the part of the assessee to carry out its part of the agreement the cause of action no doubt arose but as the assessee was disputing the buyers claim upon various grounds the loss could not be ascertained then. It further held that they buyers claim was certainly qualified as result of the judgment of this court on the awards, but the actual and ascertained loss accrued at the time when the settlement was made by virtue of which the amount was paid. The Tribunal accordingly was of opinion that the loss was an admissible loss of the assessee against the business profits.

Omitting the proviso under section 13 of the Income-tax Act, income, profits and gains have to be computed for the purpose of sections 10 and 12 in accordance with the method of accounting regularly employed by the assessee. Under section 10(1) tax has to be paid by the assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits and gains of any business, profession or vocation carried on by him. Sub-section (2) of the section sets forth the allowances which can be claimed by an assessee. Under clause (xv) thereof the assessee can claim any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.

There is no dispute before us that the loss of Rs. 1,20,000 in this case does not fall under item (xv) but can be claimed only under section 10(1) as a loss suffered in business. The question then is whether it was for the assessee to anticipate the loss on the basis of the claim by buyers in March, 1947, and show that loss in its books of account denying the liability therefor at the same time, and claim to have the matter adjusted if and when the dispute between the assessee and the buyers was settled either by litigation or by negotiation.

Apart from the authorities cited at the bar I should think that an assessee is not bound to show an anticipated loss in his books of account when he is challenging the very contract under which he is sought to be made liable. I do not see why an assessee should be obliged to state in this books of account that a claim was being made against him which he did not admit. It is the duty of an assessee maintaining accounts on the mercantile system to show all admitted loss to the extent of his admission but I do not see why he should go further than that. It was, however, argued by the learned counsel for the department that under the mercantile system an assessee has to show all anticipated loss as and when claims are made and pay the tax on the net result of the income of the year taking into account the anticipated loss and have the matter readjusted if and when the anticipated loss is quantified at some other figure afterwards. If the argument of the department is to be accepted the result would be that an assessee will have to write up his books of account not according to his views of the transaction he has entered into but according to the claims made on him by others irrespective of the question as to whether he admitted the same or not. This, in my view, is a proposition which has only got to be stated to be rejected. The assessee may be denying the liability under a contract without good cause but then it would be his duty to record his liability as soon a there is adjudication of it or as soon as he enters into a settlement in respect of it.

The mercantile system of accounting was explained by the Supreme Court in Keshav Mills Ltd. v. Commissioner of Income-tax. The observations made there are pertinent to the mercantile system of book-keeping as a whole and it is not necessary to examine the facts of that case in detail. The assessee there was a non-resident company manufacturing textile goods in Petaled outside British India. It sold goods ex-mills and the sale prices were guaranteed by the firm of R. & Co. of Ahmedabad in British India. The assessee maintained its books of account according to the mercantile system and debited the brokers with the prices of goods sold and credited the sales account of the bills. The brokers collected the amount of the bills from the purchasers and credited the sum realised in the assessees account with banks at Ahmedabad and also disbursed them to the assessees creditors in British India. During a particular year the assessee received Rs. 12,68,480 in this manner besides another sum of Rs. 4,40,878 from sales to purchasers in British India. The question in that case was whether these two sums were proceeds of goods sold by the assessee to merchants in British India and whether they were received in British India and could be included in the assessable income of the assessee in British India. The Supreme Court held that the amounts were not received by the assessee nor could be deemed to have been received by it when entries were made in the books of account at Petlad but that they had merely accrued or arisen to the assessee there. The following relevant observations made by Bhagwati J., delivering the judgment of the majority of the judges of the Supreme Court, appear at page 239 :

'The mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of book-keeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. The profits or gains of the business which are thus credited are not realised but having been earned are treated as received though in fact there is nothing more than an accrual or arising of the profits at the stage. They are book profits. Receipt being not the sole test of chargeability and profits and gains that have accrued or arisen or are deemed to have accrued or arisen being also liable to be charged for income-tax the assessability of these profits which are thus credited in the books of account arises not because they are received but because they have accrued or arisen.'

The attention of the Supreme Court in that case was directed to the amounts which have to be credited for the purpose of computing the assessable profit but it was also pointed out that such computation is only possible after the debit expenditure for which a legal liability has been incurred is brought in, even though there has been no actual disbursement. I fail to see why an assessee should be compelled to bring into debit expenditure for which he denies liability. His books of account must reflect the position of this affairs according to his judgment and not according to what other people may seek to make him liable for. Of course if his liability is anticipated or admitted it must be brought into account.

Reference was made by learned counsel for the department to the case of Calcutta Co. Ltd. v. Commissioner of Income-tax, which went up in appeal to the Supreme Court. The assessee in this case dealt in land and property. It bought blocks of land, developed the same so as to make them fit for building purposes and sold them at a profit in plots. These developments included laying out roads, providing for drainage system and installation of street lights. Naturally, the developments could not be carried on as soon as the land was sold but had to be done in stages. The procedure followed by the assessee was that when it should a plot of land, the purchaser had to pay about 25% of the purchase price in cash and undertake to pay the balance with interest at a certain rate in annual installments which were secured by creation of a charge on the land purchased. The assessee undertook to carry out the developments within six months from the date of the sale but time was not the essence of the contract. This undertaking was incorporated in the deed of sale itself. During a particular accounting year the company sold a number of plots and entered in its books a sum of Rs. 43,692-11-9 as receipts on account of those sales. This figure, however, did not represent cash receipt but was made up of a portion of the sale price received in cash, the unpaid balances retained by the purchasers as debts and the interest received or receivable in the year of account under the deeds of charge. Against this credit entry the assessee made a debit entry in its books of a sum of Rs. 24,809 as the estimated expenditure for the developments to be carried out in respect of the plots which had been sold during the year. No part of that amount represented any expenditure actually made and it was only an estimate of the anticipated expenditure which the company thought it would have to make in future years for carrying out the developments in respect of which it had undertaken a liability during the year of account. Before this court it was contended that the deduction of Rs. 24,809 was allowable under section 10(1) of the Act as also under section 10(2)(xv). Both these contentions were repelled by this court but the Supreme Court took the view that the assessee could properly debit the sum of Rs. 24,809 as against the sum Rs. 43,692-11-9 under section 10(1) of the Act. Chakravartti C.J. who delivered the judgment of this court, was of opinion that the amounts of the sale price not received in cash were also received and 'for the purpose of earning the receipts the assessee spent, besides giving the lands, nothing more than a promise. Since the whole amount was actually received in the year of account before and without making the promised expenditure, no question of allowing a deduction of any expenditure from such receipts of the year arises.' With regard to the figure of Rs. 24,809 Chakravartti C.J. went on to observe at page 471 'it would seem that debit entries of undisbursed expenditure which the mercantile method of accounting authorities and which are in practice made under that method, are only entries of accrued and perfected liabilities. Even the mercantile method does not seem to permit the inclusion of debits which concern merely an estimated expenditure, likely to be incurred in carrying out a promise which has been made in connection with a transaction that has brought in certain receipts. What is permitted is a debit in respect of a definite liability which has accrued and about which all preliminary proceedings causing the accrual of the liability in a concluded form have already been gone through, although the actual disbursement has not yet taken place.'

The Supreme Court referred to the judgment of Peter Merchant Ltd. v. Stedeford to point out the distinction between an actual legal liability which was deductible and liability which was future or contingent and for which no deduction could be made even in accounts kept under the mercantile system. There the company carried on a business of managing factory canteens and had contracted with the factory owners to maintain the cutlery, crockery and utensils used in the canteen in their original quantity and quality. It was impossible of the company to obtain replacement in some cases and the obligation under the contract with the factory owners remained t performed. The company claimed deductions in its account not only of the amounts actually expended on replacements but also those for which it was liable to replace when equipment became available. The former were allowed as deduction, but the Court of Appeal in England held the latter not to be deductible on the ground that the real liability under the contract was contingent and not actual as the company could not be sued for the cost of replacements at the then current prices but could only be sued for possible damages for breach of contract in the event of the factory owner preferring a claim under it and since no legal liability could arise until such a claim was made, the liability could only be regarded as contingent and not deductible. Dealing with the facts in Calcutta Companys case the Supreme Court pointed out that the undertaking of these assessee was not dependent on any condition being fulfilled or the happening of any event and 'if that undertaking imported and liability on the appellant the liability had already accrued on the dates of the deeds of sale, though that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could very will be deducted from the profits and gains of the business. Inasmuch as the liability which had thus accrued during the accounting year was to be discharged of that liability would have to be estimated in order that under the mercantile system of accounting the amount could be debited before it was actually disbursed.' The Supreme Court concluded the 'the sum of Rs. 24,809 represented the estimated amount which would have to be expended by the appellant in the course of carrying on its business and was incidental to the same and having regard to the accepted commercial practice and trading principles was deduction which, if there was no specific provision for it under section 10(2) of the Act, was certainly allowable deduction, in arriving at the profits and gains of the business of the appellation under section 10(1) of the Act, there being no prohibition against it, expressed or implied, in the Act.'

Reference was made by the learned standing counsel to certain cases of assessment of excess profits duty in England for the purpose of showing that reopening of accounts is allowed freely when there is a change in the circumstances of the case and the amount of liability originally estimated is altered or annihilated. The first of these case is that of H. Ford & Co Ltd. v. Commissioners of Inland Revenue. The facts of the case taken from the head-note are as follows :

'During a period which included the year 1920, the Royal Commissioner upon Wheat Supplies entered into purchase contracts with the Appellation Company and other grain merchants for the supply of grain from the Argentine, the seller undertaking liability - apparently unqualified -for demurrage for detention of the carrying ships, which the Wheat Commission itself chartered upon terms which included liability by the Commission to pay demurrage to the shipowners, except in certain circumstances.

Between February and June, 1920, loading operations were delayed by labour troubles in the Argentina, and in consequence claims for demurrage were made by the shipowners against the Wheat Commission and by the Commission against the Appellant Company, the claims against the Company totalling Pounds 33,847 for the period April to July, 1920. Immediately the claims were made the Company protested against them and at no time admitted them, eventually the Commission agreed to refund sums they had deducted in respect of demurrage from the Companys invoices and to hold over the claims until the relevant facts could be fully ascertained. The company, however, included the amount of Pounds 33,847 as an ascertained liability in its accounts for the year to 30th September, 1920.

Ultimately, after the negotiations, the Commission on the 7th March, 1922, agreed to make no claim for demurrage on the Appellant Company if it furnished certain evidence as to the availability of supplies of grain, etc., which the Commission required for the purpose of resisting the claims made against them by the shipowners. This evidence was supplied and the Appellant Company did not pay the Pounds 33,847 in question or any sum. The sum of Pounds 33,847 was credited in its accounts for the year to the 30th September, 1922.

The Company contended that the Commission had in law an irrefutable claim against them for the payment of Pounds 33,847 and that that sum was a liability subsequently satisfied by services rendered, and claimed that the sum in question was a proper deduction in computing the profits of the Company for the accounting period of twelve months ending on the 30th September, 1920.

The Special Commissioners refused the claim, holding that the Appellant Company had never admitted its liability for the sum of Pounds 33,847 which was no more than a continent liability, and that what the Wheat Commission gave up for services rendered was not an ascertained debt due to them of Pounds 33,847, but merely their right to prosecute their claim further for that sum.'

Rowlatt J. agreed with the finding of the Special Commissioners and held that the sum in question was not an admissible deduction in computing profits of the accounting period depending September 30, 1920, being a contingent liability only. The learned judge observed :

'When this claim was made in 1920, it may be that there was a argument open upon the point as to whether there was not some exception available to these sellers by the incorporation of the charterparty. It may have been an argument the result of which would be doubtful, or it may be that a really good lawyer would say : well, it is quite hopeless, but at any rate it was not nonsensical from the point of view of any adjustments that there might be an opportunity of making. Secondly, the position was that one state of facts might be that the Government would not have to pay any demurrage upon the ships at all, and then would be claiming profits demurrage, if I may use that expression, from these sellers.'

The reasoning employed by Rowlatt J. in the above case may well be applied by the assessee in the case before us. It is well known that innumerable sellers of loose jute took the plea taken by the assessee in this case, namely, that the contracts for sale of the said goods had been frustrated as result of the withdrawal of the Jute Price Control Order of 1944. No doubt this plea did not find favour with this court but I can see no reason why a seller must be obliged to treat the contract as subsisting for the purpose of accounting when in truth and in fact he was contesting the liability thereunder.

Reference was also made by the learned standing counsel to the cases of Commissioners of Inland Revenue v. Hugh T. Barrie Ltd. and Jesse Robinson & Sons v. Commissioners of Inland Revenue. I do not think that these cases advance the matter any further. In the last mentioned case the appellant entered into a contract for the sale of a quantity of yarn at specified rates on March 30, 1920. The contract was cancelled on June 29, 1920, upon a new contract being entered into for the sale of a similar quantity yarn at reduced price and upon the condition of payment by the purchasers of a sum of Pounds 1,875 being the difference between the sums to be received under the original and the substituted contracts. Pounds 500 of this sum was received on January 27, 1921, and Pounds 1,375 on August 16, 1921. In computing the profits of the appellant for the purposes of excess profits duty for the accounting period ending on June 30, 1920, the Commissioner treated the sum of Pounds 1,875 as trading receipts of that period. There were other transactions between the appellant and the said purchasers which too were cancelled and payment made to the appellant in respect thereof. It was held by the learned judge, Rowlatt J., that the treatment of the sum of Pounds 1,875 as profits of the period ending on June 30, 1920, was correct. The learned judge pointed out that a debit note had been given within the period (ending on June 30, 1920), but apart of the sum was not paid until afterwards. The debit note was silent as to dates. But a debit note according to the learned judge meant a debt in praesenti. Therefore, the same clearly fell within that period. In the other case there was a broken contract and an action was commenced in respect of it and settled by payment of damages for breach of contract. According to the learned judge there was no reason why the sum received in that respect for breach of contract was not a sum which was part of the receipts of the business for which that contract was made. His Lordship observed that ' a case like this, the debt is fully earned, everything is done in connection with it and it properly comes into the accounts - unless it is a bad debt, of course - as a debt payable in that future.....' Therefore, according to the learned judge, as soon as the debt is ascertained there is an obligation to enter the effect thereof in the accounts and not before.

On behalf of the assessee reliance was placed on the case of Commissioner of Income-tax v. Mathulal Baldeo Prasad. In this case the assessee entered into several speculative transactions in cotton with another firm (both being partners of a cotton association) and the dates of settlement under the contract fell in January, 1944, March, 1944, and May, 1944, respectively. These dates were all within the accounting year of the assessee ending on July 6, 1944, revelant to the assessment year 1945-46. The first transaction resulted in a profit of Rs. 297-8-0, the second in a loss of Rs. 4,655-13-0 and the third in a loss of Rs. 11,138, the aggregate being a loss of Rs. 14,994. The account was submitted to the assessee but on the latters failure to pay the other firm claimed a sum of Rs. 15,561-8-0 inclusive of interest. As the assessee disputed the correctness of the account the matter was referred to two arbitrators but on their failing to give their award new arbitrators were appointed who made their award on August 29, 1944. By this award the assessee was made liable to pay a sum of Rs. 14,994 with interest from May 25, 1944, till the date of payment. The assessee wrote off this as loss in the year of account relevant to the assessment year 1946-47. It was contended on its behalf that since the loss was determined upon the award of the arbitrators, it could only be said to have been incurred in the assessment year 1946-47. The Tribunal held that the loss had arisen in the assessment year 1945-46. The question before the High Court was whether the loss pertained to the assessment year 1945-46 or to the assessment year 1946-47. Gurtu J. took the view that the contracts were of a wagering nature where no goods were deliverable and contained agreement to refer disputes to arbitration. He observed :

'In speculative contracts with rates varying from minute to minute or hour by hour, there was undoubtedly scope for over-reaching by one party or the other and it is clear that it is for this reason that by the fact of membership of the Cotton Association it was agreed that the machinery of arbitration would be used for determining whether or not a liability had come into existence at all and, if so, to what extent. The parties, therefore, clearly contemplated repudiation of each others claim and in agreeing to a machinery of arbitration agreed that immediately a claim was made it would not be considered to be enforceable in a court of law unless the existence or otherwise of the liability was determined by arbitration. Of course, if the claim was admitted and it was debited in the books of the assessee then there was no question that the assessee accepted the liability. On the other hand, if it was repudiated then even though the repudiation may not subsequently have been found to be justified or even if there was a repudiation mala fide, the claim could not be said to be established and the liability would have to be determined by arbitration........ In my view, it was clearly in the contemplation of the parties that in the first instance their only right would be to get a determination by arbitration as to whether or not liability had come into existence under the contract and it was only after such ascertainment that the so-called liability could be said to have ceased to be a mere claim and to have become an actual liability with a right of enforcement in a court of law.'

The exact nature of the arbitration clause in that case does not appear from the judgment but in case of jute contracts like those entered into by the assessee before us it is not obligatory on the parties to the contract to have their claims quantified by arbitration. As a matter of fact arbitration is resorted to because litigation in courts of law takes a much longer time but where the contract is admitted and there is no scope for dispute as to the debt payable by the defaulting party the parties need not go to arbitration. In may opinion, the observations made by the learned judge in the above case do not apply to the facts of the case before us mutatis mutandis.

The case of Manavala Naidu v. Commissioner of Income-tax was clearly one in which there was no fixation of liability until some time alter the happening of the loss. In this case the assessee used to supply garments to military authorities out of material supplied for making the same from them and received prices fixed by the authorities which were slightly higher than the ordinary market prices. In the accounting year relevant to the assessment year 1943-44 the authorities demanded a sum of Rs. 15,845 from the assessee to make good the value of garments short delivered. The assessee, who maintained his books of account under the mercantile system, claimed that amount as a loss but stated that the garments to which the claim related might have been lost not only in the account year but also in the previous years. The questions was whether the assessee was entitled to deduction of the loss claimed in the particular year. Rajagopalan J., who delivered the judgment of the court, said that 'even if the loss had been spread over a number of years, till the loss was ascertained, there could be no possibility of his showing them in his accounts.... The loss was ascertained in the assessment year 1943-44, and it was only with reference to that year that the assessee could claim that loss. Once the loss was established, the whole of the claim had to be allowed.' In this case clearly the assessee had no knowledge that it would be put to loss before the military authorities made a claim on it and naturally it could no be expected to make a debit entry in respect of loss which might occur by reason of the contingency that some of the garments might be lost in transit.

On behalf of the assessee reference was also made to the case of Associated Printers (Madras) Private Ltd. v. Commissioner of Income-tax. In this case the assessee took over a running business on February 1, 1950, at a time when a dispute between its predecessors-in-interest and the workmen regarding their claim for Deepavali Bonus for the year 1949 was pending adjudication by the Industrial Tribunal. The assessee was also made a party to the industrial dispute and the Tribunal published its award of February 9, 1951, directing the payment of certain sums by way of bonus. The assessee also agreed on June 30, 1951, to pay Deepavali bonus for the year 1950. The total amount of bonus for the year 1949-50 amounting to Rs. 54,140 was debited in the assessees accounts maintained on the mercantile system in the accounting year ending January 31, 1952. The question was whether the sum was an allowable expenditure under section 10(2)(xv) of the Income-tax Act in the relevant assessment year 1952-53. The High Court of Madras held that so far as the assessee was concerned the liability accrued only after the date of transfer of the business and when the assessee provided for the bonus payments in the year ending January 31, 1952, it discharged its own liability accruing in that year of account and that in the earlier years it was at best a contingent liability.

It was contended on behalf of the department that accounts can be reopened at the instance of the assessee whenever there is an alteration of liability by reason of litigation of settlement but that it is the duty of the assessee to estimate his loss and debit the same in the accounts as soon as a claim is made. It was argued that the Income-tax Act made provision therefor by section 33 and 33A as also by section 35. I do not think it is necessary to go into this question on the facts of this case. When the assessee admits loss or when the loss is ascertained it certainly is his duty to bring the same into debit as soon as the admission is made or the ascertainment takes place. The mercantile system of book-keeping does not seem to cast on the assessee any obligation to take note of whatever claims good or bad may be raised against him. According to the judgment of the Supreme Court in Calcutta Companys case the liability must accrue or arise in order that a sum of money may be deductible in respect therefor. It may be that in a particular case an assessees denial of a contract may not avail him and judged in the light of all the circumstances of the case it may said that less had accrued some time before the assessee was prepared to acknowledge it but unless the assessee acts mala fide I can see no reason why he should not be allowed to contest the claim raised against him and make provision therefor in his accounts only when he finds himself in a position not to dispute the liability any further.

In the result I hold that on the facts and in the circumstances of the case the loss of Rs. 1,20,000 was admissible in the assessment year 1950-51 as claimed by the assessee.

The assessee will have the costs of this reference.

RAY J. - I agree.

Reference answered accordingly.

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