1980 (9) TMI 69 - HC - Income Tax

Summary

Issues Involved:
1. Whether the loss of Rs. 80,491 was a speculation loss or incidental to the assessee's business and allowable as revenue expenditure.
2. Whether the liability for Rs. 80,491 accrued and became ascertained only in 1955 when the claim was settled, given the assessee maintained its books on the mercantile system.

Summary:

Issue 1: Speculation Loss vs. Business Expenditure
The Tribunal held that the loss of Rs. 80,491 was not a speculation loss but incidental to the assessee's business and allowable as revenue expenditure. The Income Tax Officer (ITO) had disallowed the claim, stating that the contracts were speculative and did not relate to the accounting year. The Appellate Assistant Commissioner (AAC) found that the forward contracts in foreign exchange were a normal part of the assessee's export and import business. The AAC concluded that the loss was not speculative as it did not involve the purchase or sale of any commodity or stock. The Tribunal upheld this view, noting that the loss was incidental to the business and allowable as a deduction. The High Court agreed, stating that the loss was referable to the business carried on by the assessee and was not speculative under s. 24, Expln. 2 of the Indian I.T. Act, 1922.

Issue 2: Accrual of Liability
The Tribunal held that the liability for Rs. 80,491 accrued and became ascertained only in 1955 when the claim was settled and the assessee's account was debited by the bank. The AAC noted that the liability arose on December 17, 1952, but was disputed and ultimately settled in the relevant accounting year. The High Court agreed, stating that the liability to pay damages under dispute could not be said to have arisen until it was adjudicated or settled. Therefore, the loss was referable to the year of settlement, 1955, and not the year when the breach occurred.

Conclusion:
Both questions were answered in the affirmative and in favor of the assessee. The loss was deemed incidental to the business and allowable as revenue expenditure, and the liability was considered to have accrued in the year of settlement. Each party was ordered to bear its own costs.