1980 (2) TMI 59 - HC - Income Tax

Summary

Issues Involved:
The judgment addresses the issue of whether the Tribunal was correct in allowing the sum of Rs. 32,660 as infringement commission in the accounting period relevant to the assessment year 1972-73.

Details of the Judgment:

The assessee, a private limited company dealing in Standard Cars, Tractors, Motor Cycles, Scooters, and spare parts, supplied 42 tractors to the Public Works Department in the relevant year. The principal company, M/s. Escorts Ltd., demanded an infringement commission on the sale of these tractors to dealers outside Lucknow. Initially, a higher rate was demanded, but after negotiations, the amount was settled at Rs. 650 per tractor, totaling Rs. 32,650. The Income Tax Officer (ITO) rejected the deduction claim, stating that the liability had not been accepted in the relevant previous year. The Appellate Authority Commission (AAC) allowed a deduction of Rs. 22,650, considering the business relationship dynamics and fear of termination of agency. Both the revenue and the assessee appealed. The Tribunal, noting the mercantile basis of accounts and the demand by M/s. Escorts Ltd., allowed the entire amount as deduction, dismissing the revenue's appeal and allowing the assessee's appeal.

The High Court analyzed the liability issue, emphasizing that a liability can only be debited if certain and present. The liability in this case crystallized when the assessee agreed to pay Rs. 650 per tractor, after the relevant previous year had ended. The Court distinguished the case from Kedarnath Jute Manufacturing Co. Ltd.,v. CIT [1971] 82 ITR 363, where liability arose immediately upon sale due to statute. The Court held that the liability here arose when the assessee admitted to the payment, not when the claim was made. As the liability was negotiable and settled later, it did not arise until the agreement on the reduced amount. The Court also differentiated the case from CIT v. Sugar Dealers [1975] 100 ITR 424, where the liability had already been suffered in the previous year. In this case, the liability did not arise in the relevant previous year, thus the deduction was disallowed.

The Court answered the question in the negative, in favor of the department and against the assessee, awarding costs to the department.

Conclusion:
The High Court ruled against allowing the deduction of the infringement commission, emphasizing that the liability only arose when the assessee agreed to the payment after the relevant previous year had ended.