1967 (7) TMI 53 - HC - Income Tax

Amount reserved for the purpose of construction of the roads - It is not a case where a definite liability had been incurred - It was a case where the amount had been provisionally kept in reserve - so assessee had not incurred any enforceable liability

Summary

Issues: Assessment of liability for expenditure on construction of roads in the mercantile system of accounts.

Analysis:
The judgment pertains to a reference made by the Income-tax Appellate Tribunal to the High Court under section 66(2) of the Income-tax Act. The case involves the assessment of liability for expenditure on the construction of roads by an assessee company, Bharat Stores Ltd., during the assessment year 1947-48. The assessee had purchased land, subdivided it for residential construction, and reserved a sum of Rs. 50,000 for road construction without actually incurring the expenditure in the relevant year. The Income-tax Officer added back this amount to the assessee's profit, leading to subsequent appeals and the current reference before the High Court.

The Tribunal had dismissed the assessee's appeal, stating that the reserved amount was an unascertained contingent liability not fulfilled in the relevant year. The High Court analyzed the nature of the liability, emphasizing that for an expenditure to be deductible for income tax purposes, it must be towards a liability actually existing and enforceable in a court of law. The Court distinguished the present case from a precedent where liabilities were clearly incorporated in sale deeds, making them enforceable. In this instance, the Court found that the liability to construct roads was not enforceable in a court of law as no such undertaking was present in the sale deeds executed by the assessee.

The Court highlighted the requirement in the mercantile system of accounts that liabilities must be ascertained and enforceable, not merely reserved for future potential expenditure. Citing legal precedents, the Court emphasized that merely setting aside money that may become expenditure in the future does not qualify as deductible expenditure for income tax purposes. Consequently, the Court answered the first question in the negative, ruling against the assessee and in favor of the department. As a result, the need to address the second question did not arise, and no answer was provided. The Court directed the assessee to pay costs to the Commissioner of Income-tax and assessed the counsel's fee accordingly.