9911796707
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Issues:
1. Allowability of claim for liability arising from raw materials taken on loan. 2. Treatment of liability provision in the accounting year. 3. Compliance with mercantile method of accounting. Detailed Analysis: 1. The appeal concerned the assessment year 1981-82, where the assessee, a private limited company manufacturing aluminium conductors, claimed a loss of Rs. 1,38,705 arising from liability for raw materials taken on loan. The Income-tax Officer disallowed the claim, stating it was only a provision and not allowable. The Commissioner (Appeals) upheld the disallowance, stating the liability did not accrue during the previous year. The Tribunal considered the customary practice of borrowing aluminium ingots, noting that the provision made by the assessee represented a present obligation to be discharged in the future. Ultimately, the Tribunal held that the provision made by the assessee was permissible as a deduction in computing taxable profits, following the mercantile method of accounting consistently. The Tribunal reversed the orders of the authorities and directed the Income Tax Officer to allow the claim as a deduction for the assessment year 1981-82. 2. The assessee borrowed aluminium from dealers, with the intention of returning it in kind. The prices of aluminium increased during the relevant year, leading to a claimed liability of Rs. 1,38,705. The Commissioner (Appeals) held that the provision made by the assessee was anticipatory and not admissible, as the increase in price should be set off against profits in the year of return. However, the Tribunal noted that the provision made by the assessee reflected an extra liability to be borne in the course of business. The Tribunal emphasized that the provision for the liability was in accordance with the mercantile method of accounting followed by the assessee, as required by the Companies Act. Citing the Supreme Court's decision in CIT v. Gemini Cashew Sales Corpn., the Tribunal allowed the claim as a permissible deduction in computing taxable profits for the assessment year 1981-82. 3. The Tribunal considered the practice of borrowing aluminium ingots and the subsequent treatment of the liability provision in the accounting year. It noted that the provision made by the assessee represented the present value of an obligation to be discharged in the future. The Tribunal highlighted that the provision made by the assessee was consistent with the mercantile method of accounting, as it reflected the price differential, an extra liability to be borne by the assessee in the course of carrying on business. By following the mercantile method of accounting, the Tribunal found the provision made for the liability to be a permissible deduction in computing taxable profits.
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