2007 (9) TMI 189 - HC - Income Tax

Amounts payable to raw material supplier H for purchases in 1975 dispute regarding liability continued suit for recovery was filed by H in 1978 mercantile system held that deduction can t be disallowed for year 1979-80 merely because liability wasn t a statutory one deduction allowed

Summary

Issues:
Disputed liability deduction for Assessment Year 1979-80.

Analysis:
1. The case involved a disputed liability of Rs.50,761 debited to the raw material account during the Assessment Year 1979-80. The Assessing Officer disallowed the claim, but the Commissioner of Income Tax (Appeals) allowed it based on the principle established in Kedarnath Jute Manufacturing Company Limited v. Commissioner of Income Tax. The issue was whether the liability accrued during the relevant accounting year.

2. The Income Tax Appellate Tribunal reversed the decision, stating that the liability would only accrue when a court decree was made or an amicable settlement was reached. Citing Swadeshi Cotton Mill Co. Ltd. v. Commissioner of Income Tax, the Tribunal held that as long as the dispute continued, the Assessee could not claim the deduction, even under the mercantile system of accounting.

3. The Assessee argued that the liability accrued when the purchases were made, and even if disputed, it remained a liability. The Revenue contended that the liability was contractual and not ascertained. Reference was made to Kedarnath Jute Manufacturing Company Limited to differentiate statutory liabilities from contractual ones.

4. Various legal precedents were cited, such as J.K. Synthetics v. CIT and Bharat Earth Movers v. Commissioner of Income Tax, to establish principles for determining ascertained liabilities. The Supreme Court's stance on accrued liabilities under the mercantile system of accounting was highlighted to support the Assessee's claim.

5. Ultimately, the court held that the disputed liability was an ascertained one and could be estimated with reasonable certainty when the recovery suit was filed. Following established legal principles, the court allowed the Assessee's claim for deduction of Rs.50,761 in the Assessment Year 1979-80, ruling in favor of the Assessee and against the Revenue.

This detailed analysis of the judgment highlights the legal arguments, precedents, and principles considered by the court in deciding the disputed liability deduction issue for the Assessment Year 1979-80.