2010 (1) TMI 191 - HC - Income Tax

Business Expenditure- the assessee had made a payment of Rs. 1,36,767 to the Bhilai Engineering Corporation in respect of certain jobs done by them from December, 1988, to June, 1989. The bills were raised by the party in the month of August, 1989. According to the assessee, as he was not aware of the actual liability on the last date of the accounting period, he claims this deduction only when the bills were submitted by the Corporation. The Assessing Officer has, however, held that as the assessee was following the mercantile system of accounting, the expenditure should have been claimed as deduction in the earlier year and not in the subsequent year and accordingly, disallowed the claim. The Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer. However, the Tribunal held that the assessee was entitled for deduction. In the light of the decision of CIT v. Pretty cycle Industries reported in 1980 123 ITR 227, held that- the expenditure was deductible in the assessment year 1990-91.

Summary

Issues:
Interpretation of Income-tax Act, 1961 - Accrual of liability in mercantile system of accounting - Deduction claim for payment made to Bhilai Engineering Corporation.

Analysis:
The High Court of Chhattisgarh was presented with a reference under section 256(1) of the Income-tax Act, 1961, regarding the accrual of liability in the mercantile system of accounting and the deduction claim for a payment made to Bhilai Engineering Corporation. The Tribunal had referred the question of law to the High Court concerning the justification of holding that a payment made to the Corporation pertained to the financial year 1989-90. The case involved the assessee making a payment to the Corporation for certain job works done between December 1988 and June 1989, with bills raised in August 1989. The Assessing Officer disallowed the claim, stating that under the mercantile system, the expenditure should have been claimed in the earlier year. However, the Tribunal, considering the practical difficulties in ascertaining liabilities, allowed the deduction based on the guidelines of the Institute of Chartered Accountants and a precedent from the High Court of Punjab & Haryana. The applicant/Revenue argued that the accrual of liability should not be postponed due to difficulty in ascertaining the exact liability under the mercantile system. The amicus curiae pointed out the lack of factual inquiry by the Assessing Officer to rebut the assessee's claim of unascertainable amounts, supporting the Tribunal's decision to delete the disallowance. The High Court, after reviewing the submissions and records, upheld the Tribunal's decision, stating the absence of material to conclude that the amount was ascertainable, thereby ruling in favor of the assessee.