1960 (10) TMI 93 - HC - Income Tax

Summary

Issues Involved:
1. Determination of the assessment year to which the loss of Rs. 14,994 pertains.
2. Interpretation of the mercantile system of accounting in relation to contingent and ascertained liabilities.
3. Applicability of section 10(2A) of the Indian Income-tax Act, 1922.

Detailed Analysis:

1. Determination of the Assessment Year:
The primary issue was whether the loss amounting to Rs. 14,994 should be considered for the assessment year 1945-46 or 1946-47. The assessee argued that the liability arose when the arbitrator's award was given in August 1944, thus making it relevant to the assessment year 1946-47. The Tribunal, however, held that the loss was incurred in the assessment year 1945-46, as the speculative transactions in cotton were settled in January, March, and May 1944.

2. Interpretation of the Mercantile System of Accounting:
The court examined whether the liability was contingent or ascertained. The assessee contended that the liability was contingent until the arbitrator's award was given, making it an ascertained liability only in the assessment year 1946-47. Several cases were cited to support this contention:

- Kanpur Tannery Ltd. v. Commissioner of Income-tax [1958] 34 I.T.R. 863: The court held that a liability could only be entered in the books as an expenditure when it had become an ascertained sum of money.
- Ford & Co. Ltd. v. Commissioners of Inland Revenue [1926] 12 Tax Cas. 997: The court ruled that a liability which was contested and not admitted by the assessee was a contingent liability, not an ascertained one.
- James Spencer & Co. v. Commissioners of Inland Revenue [1950] 32 Tax Cas. 111: It was held that a liability becomes actual when it is admitted or determined by a competent court.
- Rajarathina Nadar v. Commissioner of Income-tax [1956] 29 I.T.R. 834: The court indicated that a mere ascertained liability with a corresponding entry in the accounts was sufficient for claiming revenue expenditure.

The court concluded that, given the speculative nature of the transactions and the arbitration agreement, the liability was not enforceable until determined by the arbitrators. Thus, the loss amounting to Rs. 14,994 was relevant to the assessment year 1946-47.

3. Applicability of Section 10(2A):
The Department cited section 10(2A) of the Indian Income-tax Act, which deals with the inclusion of amounts received in respect of previously allowed deductions. However, the court noted that this provision was introduced by the Indian Finance Act 1955 and was not applicable to the assessments for the years 1945-46 and 1946-47. The court emphasized that the liability should be deducted when incurred, but in this case, the liability was determined only after the arbitration award, making it relevant to the assessment year 1946-47.

Conclusion:
The court answered the reference by concluding that the loss amounting to Rs. 14,994 was a loss pertaining to the assessment year 1946-47. The assessee was awarded costs assessed at Rs. 200, and the fee for the Department's counsel was fixed at the same amount. The judgment was pronounced under Chapter VII, rule 1(2), of the rules of Court.