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Interpretation of deduction claim for business loss due to contractual dispute. Detailed Analysis: The case involves a reference under section 256(1) of the Income-tax Act, 1961, regarding a deduction claim by an assessee-company for a business loss arising from a contractual dispute with the Director-General of Supplies and Disposals. The question referred to the court was whether the Appellate Tribunal was justified in allowing the deduction of Rs. 3,16,061 as claimed by the assessee in their business income for the assessment year 1972-73. The background of the case reveals that the assessee-company failed to fulfill the terms of a contract for the supply of refractories to Chittaranjan Locomotive Works, leading to the cancellation of the contract by the Director-General of Supplies and Disposals. The Director-General then demanded Rs. 3,16,061 from the assessee as the extra expenditure incurred due to the contract cancellation and subsequent repurchase from another entity. The assessee claimed this amount as a deduction in their business income, citing it as a penalty for non-fulfillment of the contract. Initially, the Income-tax Officer disallowed the deduction, stating that the liability of the assessee regarding the demanded sum had not been determined during the relevant year as arbitration proceedings were still pending. The Appellate Assistant Commissioner upheld this decision, emphasizing that a disputed contractual liability could only be allowed as a deduction once settled. Upon further appeal, the Tribunal considered the nature of the demand made by the Director-General and concluded that it was not frivolous and was directly related to the assessee's business activities. However, the High Court disagreed with the Tribunal's approach, emphasizing that the liability of the assessee was contingent as it was disputed and pending arbitration. Referring to the decision in CIT v. Roberts McLean and Co. Ltd., the court highlighted that a liability must be definitely incurred in the accounting year to be allowed as a deduction, and in this case, the liability was contingent until the arbitration award was delivered. Ultimately, the High Court ruled in favor of the Revenue, denying the deduction claim of the assessee-company due to the contingent nature of the liability pending arbitration. The court held that until the arbitrator delivered the award, the liability could not be considered as definitively incurred, aligning with the commercial sense interpretation of "profits and gains." In conclusion, the judgment clarifies the principles governing the allowance of deductions for contingent liabilities arising from contractual disputes, emphasizing the need for a definite incurrence of liability within the relevant accounting year for tax purposes.
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