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Interpretation of liability arising from a requisition order under the Income-tax Act, 1961. Analysis: The case involved an assessee, a limited company engaged in the manufacture and sale of jute articles, specifically gunny bags. The issue pertained to a requisition order served upon the assessee under rule 114(2) of the Defence of India Rules, 1971, by the Director-General of Supplies and Disposals, Calcutta. The order required the supply of 7,110 bales of jute bags at a notified price lower than the market price. However, the assessee manufactured only 5,270 bales, out of which 3,405 bales were supplied to the government, leaving 1,865 bales unsupplied. The assessee claimed a loss of Rs. 2,28,548 due to the order, which was accepted by the Income-tax Officer but revised by the Commissioner of Income-tax under section 263 of the Act. The central question was whether the liability for the loss arose from the requisition order itself or only upon actual sale of the goods. The Tribunal, relying on previous court decisions, held that the liability arose on the date of the requisition order due to the mercantile system of accounting followed by the assessee. The Revenue argued that a sale should be a prerequisite for claiming a loss, and the mere service of a requisition order did not constitute a sale. The court acknowledged the Revenue's argument but ultimately sided with the assessee based on precedent. Citing the decision in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 and CIT v. Burhwal Sugar Mills Co. Ltd. [1971] 82 ITR 784, the court emphasized that under the mercantile system of accounting, the date of accrual of liability is crucial for accounting purposes. In the Burhwal Sugar Mills case, it was held that a liability to supply arose when a demand was made, and the sale could be deemed to have occurred on that date. The court concluded that in cases like these, actual facts could be ascertained in subsequent years for necessary adjustments, such as adding back unsold goods to income. In light of the above reasoning and the binding precedent, the court answered the question in favor of the assessee, ruling that a sale could be deemed to have taken place on the date of the requisition order. The judgment highlighted the importance of accounting principles and the timing of liability accrual in determining deductible losses.
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