G. K. MITTER J. - The main question which arises on this references is whether a payment made to the widow of the chairman of the board of directors of the assessee company by way of compensation in view of the circumstances attending on the death of the said chairman was admissible as an expense under section 10(2)(xv) of the Indian Income-tax Act Incidental thereto is another question as to whether the said payment was related as an expenditure to the year of account of the assessee relevant to the assessment year 1951-52.
The facts are as follows :
The assessee is a company which keeps accounts on the mercantile system according to the calendar year. The assessment year in question is 1951-52, the corresponding accounting year being the calendar year 1950. On March 26, 1950, Mr. Cameron, the chairman of the board of directors of the assessee company lost his life by the action of a riotous crowd while proceeding from Bandel to Calcutta. The travel was not occasioned by any business of the assessee. On June 5, 1950, the board of directors of the assessee recorded in a resolution passed that it felt that 'the company was under an obligation to pay Mr. Camerons widow a sum as compensation and that if compensation was not paid there was likely to be unfavourable criticism of the company and repercussions from other employees particularly in view of the circumstances of Mr. Camerons death. The chairman recommended that pending a decision as to what the full amount of compensation should be, an interim payment of Rs. 1,20,000 should be made to Mrs. Cameron.....it was the feeling of all directors that the company was under a definite obligation to pay compensation.' The above quotation is from the minutes of the board meeting of the assessee which further show that the chairman of that meeting had represented to the board that had Mr. Cameron lived he would, in the normal course of events, have served the company for some years to come. The above minutes do not show clearly any basis on which the board was going to fix the amount of compensation. It would appears however from the order of the Tribunal that the interim payment was related to an insurance policy effected by the company on Mr. Camerons life to the extent of Rs. 1,20,000. At a further meeting of the said board of directors of the assessee company held on January 22. 1951, reference was made to the above minutes and the question of the amount of compensation to be paid Mrs. Cameron was discussed again. At this meeting the chairman said that 'in this opinion a further and final payment of Rs. 2,00,000 would be fair reasonable'. The chairman also added that 'he had consulted the companys auditors who agreed with his view. After full discussion by the board it was resolve that the sum of Rs. 2,00,000 should be paid to Mr. Cameron as compensation'. Again the quotations are from the minutes of the board meeting. When exactly the auditors were consulted over this matter does not appear from the record but a letter dated December 9, 1955, from Messrs. Price Waterhouse Peat & Co., the auditors of the assessee, addressed to the company shows that the question of fixation of compensation had been discussed prior to the date of the board meeting and that the auditors had opined that the sum of Rs. 3,20,000 based on approximately two years total emoluments of the late Mr. Cameron was in the circumstances fair and reasonable. The Income-tax Officer disallowed the payment of Rs. 2,00,000 as an expenditure on the ground that it was merely gratuitous although connected with the employment of Mr. Cameron by the company. The Appellate Assistant Commissioner upheld that order of the Income-tax Officer and further held that the liability was not ascertained in the year of account and could not therefore be allowed as an admissible expense in that year. Before the Tribunal it was argued on behalf of the assessee that the payment had been made to satisfy the other employees against such risks of life and therefore the expense so incurred was solely for the purpose of the business of the assessee. It was claimed that Mr. Cameron would in the normal course of things have been in the service of the company for another year receiving emoluments to the extent of Rs. 1,35,000. Besides this, there was a further stipulation in his contract of employment that he should enjoy pension at the rate of Rs. 11,400 per annum continuously for 20 years. Thus in the normal way the company would have to meet an expense of about Rs. 3,56,000 against which the compensation was fixed at Rs. 3,20,000. The Tribunal held that the expenses were laid out for the business purpose of the assessee and if it had been incurred in the accounting year the amount could have been allowed as an expense under section 10(2)(xv) of the Act. The Tribunal further recorded that 'in fact having considered the quantum of the compensation as against the emoluments receivable by the said Mr. Cameron, we are of opinion that the amount paid as compensation was reasonably based on business expediency alone and for no other purpose.' The Tribunal was, however, unable to hold that the liability for compensation was ascertained and/or quantified in the year of account noting that the basis of payment arose from the resolution dated January 22, 1951. The account referred to the assessees balance-sheet and the profit and loss account which went on to show that it was the practice of the company to reserve out sums of money from its profits against contingencies and that 'when the account were made up the amount was debited to the contingencies reserve account crediting the current liabilities and provision account'. It observed that an assessee maintaining accounts on the mercantile system could legitimately include 'the debt in respect of a definite liability which had accrued and about which all preliminary proceedings causing the accrual of the liability in a concluded from had already been gone through, although the actual disbursement had not taken place.' But as the liability for compensation was not ascertained in the year of account it could not be allowed as an expense of that year. As against this, however, there is another letter of the auditors of the company addressed to the assessee on December 9, 1955, wherein the auditors gave their opinion to the effect that the liability of Rs. 2,00,000 was correctly taken in the accounts for the year ended on December 31, 1950. The auditors reasoned that the board of directors had decided to pay compensation to Mrs. Cameron on June 5, 1950, and that the payment of Rs. 1,20,000 was only an interim one pending a decision as to what the full amount of compensation should be. Further the commitment came into existence on June 5, 1950, although the balance of the quantum was not ascertained till a later date. The amount of the liability was known when the accounts for the year ended December 31, 1950, was prepared and in the opinion of the auditors the balance of the compensation of Rs. 2,00,000 was correctly included in those accounts in conformity with normal accountancy principles and in accordance with the mercantile system of accounting regularly employed by the company.
The questions which have been referred to this court are as follows :
'(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,00,000 was admissible as an expense under section 10(2)(xv) of the Indian Income-tax Ac ?
(2) If the answer to question No. 1 be in the affirmative then whether on the facts and in the circumstances of the case the said sum of Rs. 2,00,000 can be related as an expenditure to the year of account relevant to the assessment year 1951-5 ?'
There was some controversy with regard to the scope of the first question. According to the assessee the Tribunal had found that the amount paid by way of compensation to Mr. Cameron was a reasonable one 'based on business expediency alone and for no other purpose'. It was argued that this was a finding of fact not open to review by this court the only question being whether on this finding the expense was admissible under section 10(2)(xv) of the Act. On the other hand it was argued on behalf of the revenue that to justify the deduction of an expense under section 10(2)(xv) it must be shown by the assessee not only that the money was paid but that the nature of the payment was such as to entitle it to admissibility under section 10(2)(xv) is a question of law and open to review under section 66(1) notwithstanding any finding by the Tribunal. Apart from the authorities cited, which I shall presently consider, it seems to me that the finding is open to review.
Section 10 of the Income-tax Act lays down how computation of the profits and gains of a business is to be done for the purpose of assessment of tax. Under sub-section (2) such profits or gains have to be computed after making the allowances set down seriatim in clauses (i) to (xiv). The legislature felt that there might be other expenses which ought in reason to be allowed although not specifically covered by the said items. Section 10(2)(xv) provides for the deduction of 'any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly or exclusively for the purpose of such business profession or vocation'.
To merit exemption under clause (xv) it is essential that the expenditure should not be in the nature of a capital one or personal expenses of the assessee. Very often it becomes extremely difficult to determine whether an expense incurred is capital or revenue in nature and many fine tests had been evolved from time to sift the matter. Once it is determined that the expenditure does not bear the characteristics of a capital expense or personal expenses of the assessee the further question arises as to whether it is laid out or expended wholly or exclusively for the purpose of the assessees business. To solve this a test of the following nature has to be applied, viz., 'has the expense been incurred with the sole object of furthering the trade or business interest of the assessee unalloyed or unmixed with any other consideration'. If the expense is found to bear an element other than the trade of business interest of the assessee the expenditure is not an allowable one. To arrive at the conclusion that the expenditure was dictated solely by business consideration one has to consider the nature of the business the way it is conducted and any likelihood of the business being adversely affected or its interest being promoted by the refusal or the incurring of the expenditure as the case may be. When the assessee places all the facts and circumstances before the revenue authorities the latter must examine the same and must make up their minds as to whether the expenditure was necessitated or justified by commercial expediency. The ultimate finding that the expense is allowable under section 10(2)(xv) is an inference of law to be deduced from the facts of the case. The question is a mixed one of law and fact.
The question of the admissibility of an expense under section 10(2)(xv) and the nature of the finding to that effect has come up for consideration before the Supreme Court in a number of cases. It will serve no useful purpose to examine them all and I shall confine myself only to those which were cited at the bar. In Commissioner of Income-tax v. Chandulal Keshavlal & Co., the question which arose was whether a sum of Rs. 3,09,114 being a portion of the commission due to the managing agents of a company waived by the interest of the managed company was assessable in the hands of the assessee, namely, the managing agents. After taking the consideration all the facts of the case the Appellate Tribunal had found that the forgoing of the commission was on business considerations, the amount being given up or expended for reasons of commercial expediency and that it was not a bounty by the managing agent to the managed company. It was held further that the business of the managing agent was so linked up with that of the managed company that if the latter was put on a sounder position the managing agent would also get larger commission in further and that the managing agent had accepted Rs. 1,00,000 only out of Rs. 3,09,114 at the instance of the chairman of the board of directors of the managed company. The Bombay High Court on a reference under section 66(1) upheld the finding of the Tribunal. The Commissioner of Income-tax went up to the Supreme Court on special leave. In upholding the findings of the Bombay High Court the Supreme Court observed (at page 610) :
'The cases we have discussed above show that it is a question of fact in each case whether the amount which is claimed as a deductible allowance under section 10(2)(xv) of the Income-tax Act was laid out wholly and exclusively for the purpose of such business and if the fact-finding tribunal comes to the conclusion on evidence and to give the finding then it will become an admissible deduction. The decision of such questions is for the Income-tax Appellate Tribunal. The decision must be sustained if there is evidence upon which the Tribunal could have arrived at such a conclusion.
Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one had to take into consideration questions of commercial expediency and the principles of ordinary commercial trading..... in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee.'
On behalf of the assessee reliance was placed on the above in support of the contention that once the Tribunal takes the view as it has done in this case that the amount paid to Mrs. Cameron was reasonable compensation based on business expediency alone and for no other purpose the finding was not open to review.
It should be noted however that in a later case the authority of the above proposition has been considerably shaken. In Commissioner of Income-tax v. Royal Calcutta Turf Club the question referred to this court under section 66(1) of the Income-tax was whether the Appellate Tribunal was right in holding that a sum of Rs. 61,818 spent by the assessee to train Indian boys as jockeys, did not constitute expenses of the business of the assessee allowable under section 10(2)(xv). The assessee lost all along before the income-tax authorities as also before the Appellate Tribunal. This court found in favour of the assessee. The expenses had been incurred by the assessee for establishing and maintaining a school for the training of Indian boys as jockeys so that after their training they might be available for purpose of race meetings held under its auspices. The assessee did not own any horse and did not employ any jockey but it was a matter of importance to it that there should be jockeys available to the owners with sufficient skill and experience and the assessee thought that there was a risk of jockeys becomings unavailable in which event its own business would be seriously affected. With regard to the dictum of Chandulal Keshavlal & Co. case the Supreme Court said 'but those observations must be read in the context. In that case the assessee firm was the managing agent of a company and, at the request of the directors of the latter, agreed to accept a lesser commission for the year of account than it was entitled to. It was found by the Appellate Tribunal there that the amount was expended for reasons of commercial expediency and was not given as a bounty but to strengthen the managed company.... In that case the Tribunal had not misdirected itself as to the true scope and meaning of the words wholly and exclusively laid out for the purpose of the assessees business. In the present case the Income-tax Appellate Tribunal had misdirected itself as to the true scope and meaning of those words. In our opinion, in the circumstances of this case, it cannot be said that the findings of the Tribunal was one of fact.'
It would, therefore, appear that the findings can be upheld only if the Tribunal correctly directs itself as to the true scope and meaning of the words 'wholly an exclusively laid out for or the purpose of the assessees business'. In other words the Tribunal must not deviate from the test laid down in section 10(2)(xv) and any deviation would therefore amount to an incorrect finding based on a mis-appreciation of the law.
It is significant to note that in Dharamvir Dhir v. Commissioner of Income-tax the Supreme Court came to a different conclusion from that arrived at by the Appellate Tribunal as also by the Patna High Court on a reference under section 66(1). It is not necessary to examine the facts of the case and it is sufficient to state that in the view of the Supreme Court the Tribunal and the Patna High Court had made an erroneous approach to the question. In effect this meant that the law had not been properly applied. In my view, these three cases are enough to dispose of the contention that the finding of the Tribunal in this regard is one of fact and not open to review.
There is a close similarity between the law on this point in India and in England. The deductions permissible to a trader are not stated affirmatively in the English Income-tax Act of 1918 as they are in the Indian Act of 1922. Under the English Act they are to be ascertained by an examination of the deductions which are not allowed by rule 3 of the Rules applicable to Case I and II of Schedule D. In Anglo-Persian Oil Co. Ltd. v. Dale the Special Commissioners found that a sum of Pounds 300,000 paid by a company to its agents for putting an end to the agency agreement and taking up the distribution of their manufactured products in their own hand, was an expenditure of a capital nature to secure an enduring benefit for the companys trade by getting rid of an onerous contract and was not an admissible deduction in computing the companys profits. This was upset by Rowlatt J. and his judgment was upheld by the Court of Appeal. It had been argued before the Court of Appeal that 'the finding of the Commissioner ... ought to be accepted as one of fact within their own sphere, and so not the subject of appeal as a question of law.' This was dispelled by Lord Hanworth, Master of the Rolls, who observed 'this arguments is not, to my mind, well-founded. The cases upon this point of what is attributable to revenue, and what to capital account, run upon fine lines of distinction and the Commissioners have to direct themselves correctly upon the questions of law that are involved. The deductions that are permissible must be examined from the point of view of law. They cannot be said to be simply questions of fact irrespective of the principles of law. It is, therefore, necessary to consider the principles upon which items have been held to belong to capital of revenue, and the characteristics which have been held to turn a particular item into the one category or the other.'
In my opinion, the above remarks are also apposite when the question is whether the expenditure is attributable solely to business expediency or whether there is an extraneous element in the picture.
There is no suggestion here that the expenditure was of a capital nature or that it was a personal expense of the assessee.
In support of this contention that the payment to the widow of a servant of the assessee cannot be an expenditure within the meaning of section 10(2)(xv), Mr. Meyer relied strongly on the case of Alexander Howard & Co. Ltd. v. Bentley. The facts as taken from the headnote are as follows :
'The assessee company was formed in 1933, to take over a business carried on by Howard, who became governing director. In the discussions leading up to the formation of the company the question of the sale, the remuneration to be paid to Howard and an annuity to be paid to his widow, were all discussed and decided at the same time. Howard originally demanded a salary of Pounds 3,000 per annum but later agreed to accept Pounds 2,000 per annum provided that an annuity was secured to his widow. The articles of association of the company and the service agreement entered into by Howard provided for the payment to his widow of an annuity of Pounds 1,000 per annum so long as his legal personal representatives held at least 10,000 shares. The directors later considered that the obligation to pay this annuity would be detrimental to the company if it wanted to dispose of its business and in 1943 Howard surrendered all rights to the annuity in consideration of the payment to him by the company of Pounds 4,500.'
The question which arose was whether a sum of Pounds 4,500 was allowable as a deduction in computing its profits for income-tax purposes. The Special Commissioners found against the company and this was upheld by Singleton J. Under the relevant rules of Schedule D of the English Income Tax Act 'in computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of - (a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession, employment or vocation.... any annual interest, or any annuity, or other annual payment payable out of the profits or gains.' On behalf of the appellant company it was argued that as the company was under a liability by reason of article 107 of its articles of association and that clause 3 of the agreement of service created a liability or a contingent liability to pay to the widow of Howard Pounds 1,000 a year during her life, the same would have been a proper deduction to be made before computation of tax if the annuity had become payable. It was further submitted that the payment of Pounds 4,500 in order to release the company from its obligation or contingent liability to pay the annuity was a deduction which ought to be made following the decision in the case of Hancock v. General Reversionary and Investment Co. Ltd. and Anglo-Persian Oil Co. Ltd. v. Dale. The learned judge referred to the findings of the Special Commissioners :
'(1) The obligation undertaken by the company to pay the annuity was not part of the consideration for the purchase of Mr. Howards business. To quote the exact words of the Commissioners the sale agreement provides for a consideration which was a proper price based on the value of the assets as shown in a balance-sheet, and it does not refer to the annuity, which is provided for separately in the service agreement.
(2) They accepted the evidence of Mr. Howard to the effect that during negotiations he had demanded a salary of Pounds 3,000 but had later agreed to reduce it to Pounds 2,000 provided the annuity was secured to his widow. The Special Commissioners, however, did not draw the inference therefore that the annuity contract was part of the remuneration to Mr. Howard for his service as managing director.
(3) The Commissioner also found that the promised annuity could not be regarded as in any sense deferred remuneration and that it was more in the nature of an additional right appertaining to any shares which might be held by his personal representative.'
Having regard to the findings of fact Singleton J. went on to add (see page 342) that 'all findings of fact are for the Commissioners. The question is really what is the proper inference to be drawn from the documents and from the evidence given by Mr. Howard before the Commissioners.... The way in which I look at the case is this. Mr. Alexander Charles Howard owned a business; he decided to hand that business over to a company upon terms as to remuneration for himself and his brothers as managing directors and upon terms as to dividend provided for in the agreement together with further terms as to commission, and one provision he wished to be made was a pension or annuity for his widow in the event of his death; and to that term his brothers agreed. The position, in my view, is different from the case of a company providing an annuity or pension for an employee for the wife of Mr. Alexander Charles Howard had nothing whatever to do with the company. There were various reasons entering into the mind of Mr. Alexander Charles Howard as to why he wanted to provide for her in that way, but it cannot be said that in the event of the annuity becoming payable to her it would have been money wholly or exclusively laid out or expended for the purpose of trade.'
Mr. Meyer relied on the above in support of his contention that the payment to the widow of an employee can never be deductible as an expense under section 10(2)(xv). I doubt whether the proposition in such wide terms is justified.
Speaking for myself I cannot hold that payment of compensation to the widow of Mr. Cameron on the facts of this case is an expense laid out wholly for the purposes of the assessees business. The company certainly behaved very generously towards the widow of a person who had served it faithfully and efficiently for many years. His death in the circumstances attending it was a great tragedy. The loss of this valuable life certainly affected both the assessee and Mr. Camerons dependents very seriously. It cannot be denied that the payment of the compensation was likely to engender a feeling in the minds of other servants of the assessee that the company would look after their dependents if anything untoward happened to them. However this may be, I fail to see how the payment can be said to be an expense incurred for the companys business. It Mr. Cameron had met his death in the course of a travel for the purposes of the companys business, the more so if the conditions in the country were so unsettled at the time as would lead one to hold that Mr. Cameron was taking a risk in the interest of the company, reasonable compensation paid to his widow for the loss of his life might be a justifiable expense. Nothing of the kind however happened here. Mr. Camerons death had nothing to do with the object or purposes of the company.
In this case the Tribunal has given no reason for the finding that the expenses were laid out wholly for the business purpose of the assessee. It has noted in detail the argument put forward on behalf of the assessee and observed : 'In fact having considered the quantum of the compensation as against the emoluments receivable by the said Mr. Cameron, we are of opinion that the amount paid as compensation was reasonably based on business expediency alone and for no other purpose.'
The only reason adduced for the payment is that contained in the resolution of the board of directors dated March 5, 1950. The payment though generous cannot be upheld as a deductible expense under section 10(2)(xv) of the Act.
In my view the answer to question No. 1 can only be in the negative. Consequently, question No. 2 does not fall to be answered. But inasmuch as the matter may not rest here it is necessary to indicate our views on the second question as well. The finding of the Tribunal on this question is against the assessee. The Tribunal has held that the liability for compensation was not ascertained or quantified in the year of account and that the basis of the payment arose from the resolution dated January 22, 1951, that is to say, beyond the year of account. The contention of the assessee was that the liability arose under the resolution of June 5, 1950, and that the figure of Rs. 2,00,000 as compensation was determined when the accounts for the year ended December 31, 1950, were prepared and correctly included in conformity with normal accountancy principles. On the other hand it was contended on behalf of the revenue that before January 22, 1950, even the directors of the company had not quantified the payment beyond the sum of Rs. 1,20,000 already paid. It was argued that the directors might easily have fixed upon a higher or a lower figure as the amount to be paid to Mrs. Cameron and it could therefore be said that only on January 22, 1951, and not before the liability to pay further compensation had been ascertained.
Two questions arise in this connection. First, whether it is necessary that the quantum of liability or at least the basis of it should be determinable in the year of account. Secondly, whether an assessee would be entitled to claim the expenditure as a deduction even if the entry relating thereto is not made in the books within the year of account. The first question is a question of law and the second belongs to the domain of accountancy.
With regard to the question of law the first thing to be noted is that an assessee observing the mercantile system of accounting must make an estimate of the liability which has been incurred by him. In explaining the mercantile system of accounting the Supreme Court observed in Keshav Mills Ltd. v. Commissioner of Income-tax : '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.' This dictum goes to show that a general admission of liability without anything more is not enough and that the assessee must show that he had become more is not enough and that the assessee must show that he had become legally liable to pay the amount which he places at debit. In Calcutta Company Limited v. Commissioner of Income-tax, the assessees business was to buy up plots of land, frame a development scheme, partition the land into small plots and sell them to various purchasers. The documents of conveyance by the assessee in each case mentioned that it would provide certain amenities by way of roads, lighting, etc., but the cost thereof was not mentioned in the seeds. The 'statement of case' further shows that the assessee used to make entries in its account books estimating the cost of these amenities and for the year in question it had entered Rs. 24,809 as the estimated costs against a sum of Rs. 433,692-11-9 as receipt on account of the sales. In reversing the judgment of this court the Supreme Court observed that the undertaking to provide these amenities having been incorporated in the deeds of sale themselves the assessee had undertaken a liability to carry out the development within six months from the dates of these deeds. It should be noted that the deeds in favour of the purchasers did not give specific details with regard to the width of the roads or those of the drains, etc., but in the absence of any suggestion that the assessees estimation of the expenses was exaggerated or fantastic the court proceeded upon the basis that they were correct. In Calcutta Companys case the Supreme Court cited with approval a passage from Simons Income Tax, second edition, volume 2, page 204, under the caption 'accrued liability' reading -'In cases, however, where an actual liability exists, as is the case with accrued expenses, a deduction is allowable; and this is not affected by the fact that the amount of the liability and the deduction will subsequently have to be varied. A liability, the amount of which is deductible for income tax purposes, is one which is actually existing at the time of making the deduction, and is distinct from the type of liability accruing in Peter Merchant Limited v. Stedeford, which although allowable on accountancy principles, is not deductible for the purpose of income-tax'. The Supreme Court held that once the liability accrued during the accounting year the fact that it was to be discharged at a future date was not material and observed that 'the 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 difficulty in the estimation thereof again would not convert as accrued liability into a conditional one, because it is always open to the income-tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case'. It was noted that the appellant had led evidence before the income-tax authorities in regard to the estimated expenditure of Rs. 24,809 and not exception had been taken to the same in regard to the quantum.
Examining the facts of this case in the light of the above, all that can be said was that on June 5, 1950, the assessee has made up its mind to pay compensation to the widow of Mr. Cameron and had assumed an indeterminate liability in that regard. It does not appear that the directors of the assessee entered into any discussion as to what the amount of liability should be and it was only on January 22, 1951, after having consulted the auditors they formed the opinion that a further sum of Rs. 2,00,000 should be paid to Mrs. Cameron. Clearly the amount of liability was not determined in the year of account nor did the assessee make up its mind as to the basis for fixation of the liability. In the absence of the resolution of January 22, 1951, no one could say what further amount the assessee would be liable for.
In regard to the second question our attention was drawn to section 13 of the Indian Income-tax Act and it was argued that computation of income, profits and gains had to be in accordance with the method of accounting regularly employed by the assessee. The Tribunal noted that 'when the accounts were made up the amount was debited to the contingencies reserve account crediting the current liabilities and provision account. It appears from the assessees balance-sheet and profit and loss account that it was the practice of the company to reserve out sums of money from its profits against contingencies. Reference was also made to the note of the auditors that 'the amount of the liability was known when the account for the year ended December 31, 1950, was prepared and in our opinion the balance of the compensation of Rs. 2,00,000 was correctly included in that account in conformity with normal accountancy principles and in accordance with the mercantile system of accounting regularly employed by the company.'
Although the opinion of auditors like Price Waterhouse Peat & Co. are entitled to respect, our attention was not drawn to any such principles of accountancy in any standard book on the subject. In deference to the said opinion, we are prepared to accept that if the basis of liability had been determined during the year of account computation made within a few days after the close of the year but included in the balance-sheet and profit and loss account for the year in conformity with the practice regularly followed by the assessee would entitled it to include the same in the year of account. But as the very basis of liability was not determined in the year of account the answer to the second question also must be in the negative.
The assessee must pay the costs of the reference.
LAIK J. - I agree.
Question answered in the negative.