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TMI Blog1965 (4) TMI 119X X X X Extracts X X X X X X X X Extracts X X X X ..... and when Shaw Wallace and Co. came to know of the assessee's decision, they informed the assessee that they would help it in the winding up of the mutual banianship matters and for an early settlement of its dealings with the assessee to the benefit of all concerned. While sending their letter, they attached a statement showing the outstandings position as on December 13, 1957, at ₹ 5,54,105 which the assessee had guaranteed. They expected to realise a major portion of the outstandings from the merchants directly, and they considered that a sum of ₹ 75,000 being the expected balance amount due from the outstandings would be bad debt. Shaw Wallace and Co. suggested in that letter that they would receive ₹ 75,000 from the assessee and relieve it of all its obligations of guarantee and indemnity. They also suggested that, in case they recovered even that debt, they would refund the sum of ₹ 75,000 or such sum as may be found due after giving credit to the amounts realised. They further informed the assessee that the said arrangement would enure up to January 1, 1961. By that time, they would try to recover and after the expiry of the said date whatever amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave a bearing for our purpose are these: 15(f) To be responsible in all cases of delivery on credit authorised by the banians for payment to the firm of the price of the goods so delivered such authority to be deemed to have been duly given by the counter-signature of the delivery order by the banians or their duly authorised representative as in paragraph 6 hereof mentioned. (g) To be responsible to the firm for any loss or damage which the firm may sustain by reason of any variation of or addition to the terms of any indents, offers, orders or contracts made without the consent of the firm thereto. (h) In the event of the failure of any buyer to pay for or take delivery of any merchandise, commodities or goods and/or documents relative to any merchandise, commodities or goods on the due date, to pay forthwith to the firm in cash the contract price of such merchandise, commodities or goods and/or documents relative to any merchandise, commodities or goods and all other sums (if any) payable by the buyer so failing in respect thereof and all charges and expenses incurred by the firm in respect thereof under the provisions of paragraph 14 hereof. (i) To guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would sell sugarcane to the company at current market rates and adjust the advances towards the price of sugarcane they supplied to the company. Due to drought, the sugarcane growers did not deliver sugarcane to the company and it did not work on account of the non-supply of sugarcane, with the result the company incurred heavy loss in respect of the advances made to the sugarcane growers. The Government of Mysore appointed a committee and they commented that the assessee-company should waive its rights in respect of the amounts advanced which came to ₹ 2,87,422. The company claimed this amount as a deduction under sections 10(1) and 10(2) (xv) of the Income-tax Act. The question was whether that amount represented a loss of capital or was a revenue expenditure. Their Lordships of the Supreme Court decided in favour of the assessee-company on the ground that the amount, so far as the company was concerned, represented the current expenditure towards the purchase of sugarcane, and it made no difference that the sugarcane thus purchased was grown by the growers with the seedlings, fertiliser and money taken on account from the assessee-company, that in so far as the assessee-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their business nor is it a case of any legal obligation to pay a sum of ₹ 75,000 on the date when they entered into the agreement. According to the terms of the agreement, the assessee had to guarantee Shaw Wallace and Company the due fulfilment by all merchants of several indents and other liabilities and obligations and to indemnify Shaw Wallace and Company against any loss in respect thereof. In the case of guarantee, there is an existing debt or duty the performance of which is guaranteed by a surety, while in the case of indemnity, the possibility of risk of any loss happening is only contingent against the indemnifier who undertakes to indemnify. The surety's liability is often said to be secondary, accessory or contingent liability. The assessee in the instant case used to settle the account with Shaw Wallace and Co. at the end of every year, the actual amount being paid by him on the default of the principal debtors. In the course of the assessment proceedings for the year in question, the Income-tax Officer allowed a sum of ₹ 32,811 and a sum of ₹ 20,103 which the assessee had to pay to Shaw Wallace and Co., on account of the default committed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... know of for a claim such as that made by the appellants in the present case, although all commercial enterprise is subject to vicissitudes which may be, and now and then are, serious enough to cause grievous loss and even disaster. I confess to thinking that it would be a dangerous innovation to allow apprehended losses in futuro to constitute proper matter for deduction from the present profits of commercial undertakings. Numerous cases had come for decision both in the Court of Appeal and the House of Lords, on the question what is contingent liability and when and how it is permissible to deduct it from the income of the assessee. In Alexander Howard and Co. Ltd. v. Bentley (H.M. Inspector of Taxes) [1948] 30 Tax Cas. 334, the company was formed in 1933 to take over the business of one Howard, who became the governing director. He agreed to accept 2,000 per annum provided that an annuity was secured to his widow. The directors later considered that the obligation to pay the annuity would be detrimental to the company. Howard surrendered all right to the annuity, in consideration of the payment of 4,500 by the company. The company contended that the sum of 4,500 was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lump sum on the termination of their employment. In each case, the right to lump sum was contingent on certain conditions being fulfilled. The employee could forfeit his right to payment by wrongful conduct, such as dishonesty or insubordination. The liability therefore remained contingent until service was actually ended. So the lump sum could not be regarded as an earning in any particular year of service. The House of Lords observed at page 759: ... I should have thought that the charges for retirement benefits which the appellant has claimed to make in the four relevant years were well on the wrong side of what was permissible. When account is taken of all the circumstances, I should have thought that the sums charged were a very long way from affording a scientific appraisement of the additional burden arising in respect of the year's services ; and were, therefore, in the nature of a rough reserve against the future rather than a measured provision. In the instant case, a similar situation has arisen. By a rough and ready method, the assessee and Shaw Wallace and Company had fixed a sum of ₹ 75,000 as the probable amount that would have to be indemnified b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuity reserve account a sum of ₹ 5,600, being approximately fifteen days' wages of all employees and workmen who were in its service during the year of account, with the object of maintaining a fund to meet its eventual liability under the provisions of the Industrial Disputes Act and claimed this amount as business expenditure under section 10(2) (xv) of the Act. The claim was disallowed, on the ground that it was only a prospective liability of a contingent nature. When the matter came up to this court, the Bench, to which one of us was a party, held: ...we are of opinion that the liability of the assessee in respect of retrenchment compensation under section 25F of the Industrial Disputes Act is not a liability in praesenti, but is only a contingent liability, which cannot be taken into account as an accrued liability. . . . We are further of opinion that even if it is permissible to charge the year's profits to build up the sinews to withstand the result of an uncertain event of retrenchment, the actual provision made is so over-generous, and is so improper an appraisement of the present value of a future liability that it has to be struck down as an over-res ..... X X X X Extracts X X X X X X X X Extracts X X X X
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