1971 (2) TMI 6 - HC - Income Tax

Loss estimated on supply of sugar under compulsory demand - method of accounting followed is mercantile system - whether such loss is allowable as deduction

Summary

Issues:
Interpretation of loss as a deductible expense in income tax assessment for the year 1959-60 based on an estimated loss on sugar export, application of mercantile method of accounting, consideration of liability accrual date for accounting purposes.

Analysis:
The judgment pertains to the deduction of a loss amount in the income tax assessment for the year 1959-60. The case involved an estimated loss on sugar export by the assessee, which was initially recorded at Rs. 53,310 in the profit and loss account. However, the actual loss was later quantified at Rs. 49,516, leading to a credit adjustment in the subsequent year. The Income-tax Officer disallowed the full claim, arguing it was an unascertained loss and a provision only. The Appellate Assistant Commissioner allowed a deduction of Rs. 49,516, the actual loss ascertained by the assessment finalization. The core issue was whether the loss was a legitimate deduction against the profits of the year. The Tribunal found that the loss was determined and ascertained when the demand for sugar export was made, as the assessee was under a legal obligation to export at a lower price than market value, resulting in a quantifiable loss. The Tribunal dismissed the Income-tax Officer's appeal, emphasizing the accrual of the liability upon demand and the method of accounting used by the assessee.

The judgment highlighted the significance of the mercantile system of accounting in determining the accrual date of liabilities for accounting purposes. It referenced the Supreme Court decision in Calcutta Co. Ltd. v. Commissioner of Income-tax, where the Court held that liabilities accruing unconditionally, even if estimated and to be discharged in the future, could be accounted for at the time of accrual. The Court emphasized that the difficulty in estimating the liability did not make it conditional, and proper estimation could be made by tax authorities. The judgment drew parallels between the present case and the principles laid down in the Supreme Court decision, supporting the inclusion of the quantified loss as a deductible expense based on the accrual date of the liability.

In conclusion, the High Court answered the reference question in the affirmative, allowing the deduction of the quantified loss of Rs. 49,516 in the income tax assessment for the year 1959-60. The assessee was granted costs, and the judgment reiterated the importance of considering the accrual date of liabilities in cases involving estimated losses under the mercantile method of accounting.