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TMI Blog1962 (1) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... ere extended up to February 28, 1947. As the assessee did not effect delivery the buyers served notices on March 1, 1947, stating in respect of each contract that as the assessee had failed to hand over the documents in fulfillment of its obligation the buyers declared their option to cancel the contract and to charge the difference between the contract price and the market price prevailing on the fifth working day after the due date. It should be noted here that in April, 1946 where the contracts were entered into the Jute Control Order of 1944 was in force in West Bengal regulating the prices of all kinds of loose jute. By this order the maximum and the minimum price for jutes of various kinds grown in various areas were fixed within certain specified limits and no person could enter into a valid contract for sale or purchase of such jute beyond the price limits specified. This order came to an end on September 30, 1946, and immediately the prices of all kinds of jute shot up with the result that a large number of seller were unable or unwilling to deliver the goods to their buyers. All the jute contracts which had to be entered into with jute mills were to be on certain terms an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 1950-51 or whether it was admissible in the assessment year 1946-47? It is now agreed that the last mentioned assessment year in the question should read 1947-48 and the questing is amended accordingly. The Income-tax Officer who had to deal with the matter disallowed the assessee's claim on the ground that it was a loss pertaining to the calendar year 1946. The Appellate Tribunal held that the amount was loss arising out of trade in jut and not expenses and that in the year 1946 when there was a failure on the part of the assessee to carry out its part of the agreement the cause of action no doubt arose but as the assessee was disputing the buyers' claim upon various grounds the loss could not be ascertained then. It further held that they buyers' claim was certainly qualified as result of the judgment of this court on the awards, but the actual and ascertained loss accrued at the time when the settlement was made by virtue of which the amount was paid. The Tribunal accordingly was of opinion that the loss was an admissible loss of the assessee against the business profits. Omitting the proviso under section 13 of the Income-tax Act, income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee will have to write up his books of account not according to his views of the transaction he has entered into but according to the claims made on him by others irrespective of the question as to whether he admitted the same or not. This, in my view, is a proposition which has only got to be stated to be rejected. The assessee may be denying the liability under a contract without good cause but then it would be his duty to record his liability as soon as there is adjudication of it or as soon as he enters into a settlement in respect of it. The mercantile system of accounting was explained by the Supreme Court in Keshav Mills Ltd. v. Commissioner of Income-tax [1953] 23 I.T.R. 230; [1953] S.C.R. 950. The observations made there are pertinent to the mercantile system of bookkeeping as a whole and it is not necessary to examine the facts of that case in detail. The assessee there was a non-resident company manufacturing textile goods in Petlad outside British India. It sold goods ex-mills and the sale prices were guaranteed by the firm of R. Co. of Ahmedabad in British India. The assessee maintained its books of account according to the mercantile system and debited the br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but it was also pointed out that such computation is only possible after the debit expenditure for which a legal liability has been incurred is brought in, even though there has been no actual disbursement. I fail to see why an assessee should be compelled to bring into debit expenditure for which he denies liability. His books of account must reflect the position of this affairs according to his judgment and not according to what other people may seek to make him liable for. Of course if his liability is anticipated or admitted it must be brought into account. Reference was made by learned counsel for the department to the case of Calcutta Co. Ltd. v. Commissioner of Income-tax [1953] 24 I.T.R. 454, which went up in appeal to the Supreme Court [1959] 37 I.T.R. 1; [1960] 1 S.C.R. 185. The assessee in this case dealt in land and property. It bought blocks of land, developed the same so as to make them fit for building purposes and sold them at a profit in plots. These developments included laying out roads, providing for drainage system and installation of street lights. Naturally, the developments could not be carried on as soon as the land was sold but had to be done in stages. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page 471 it would seem that debit entries of undisbursed expenditure which the mercantile method of accounting authorities and which are in practice made under that method, are only entries of accrued and perfected liabilities. Even the mercantile method does not seem to permit the inclusion of debits which concern merely an estimated expenditure, likely to be incurred in carrying out a promise which has been made in connection with a transaction that has brought in certain receipts. What is permitted is a debit in respect of a definite liability which has accrued and about which all preliminary proceedings causing the accrual of the liability in a concluded form have already been gone through, although the actual disbursement has not yet taken place. The Supreme Court referred to the judgment of Peter Merchant Ltd. v. Stedeford [1948] 30 Tax Cas. 496 to point out the distinction between an actual legal liability which was deductible and liability which was future or contingent and for which no deduction could be made even in accounts kept under the mercantile system. There the company carried on a business of managing factory canteens and had contracted with the factory owne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Act, there being no prohibition against it, expressed or implied, in the Act. Reference was made by the learned standing counsel to certain cases of assessment of excess profits duty in England for the purpose of showing that reopening of accounts is allowed freely when there is a change in the circumstances of the case and the amount of liability originally estimated is altered or annihilated. The first of these cases is that of H. Ford Co Ltd. v. Commissioners of Inland Revenue [1926] 12 Tax Cas. 997. The facts of the case taken from the head-note are as follows: During a period which included the year 1920, the Royal Commissioner upon Wheat Supplies entered into purchase contracts with the Appellation Company and other grain merchants for the supply of grain from the Argentine, the seller undertaking liability apparently unqualified-- for demurrage for detention of the carrying ships, which the Wheat Commission itself chartered upon terms which included liability by the Commission to pay demurrage to the shipowners, except in certain circumstances. Between February and June, 1920, loading operations were delayed by labour troubles in the Argentina, and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poration of the charterparty. It may have been an argument the result of which would be doubtful, or it may be that a really good lawyer would say: 'well, it is quite hopeless', but at any rate it was not nonsensical from the point of view of any adjustments that there might be an opportunity of making. Secondly, the position was that one state of facts might be that the Government would not have to pay any demurrage upon the ships at all, and then would be claiming 'profits' demurrage, if I may use that expression, from these sellers. The reasoning employed by Rowlatt J. in the above case may well be applied by the assessee in the case before us. It is well known that innumerable sellers of loose jute took the plea taken by the assessee in this case, namely, that the contracts for sale of the said goods had been frustrated as result of the withdrawal of the Jute Price Control Order of 1944. No doubt this plea did not find favour with this court but I can see no reason why a seller must be obliged to treat the contract as subsisting for the purpose of accounting when in truth and in fact he was contesting the liability thereunder. Reference was also made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t before. On behalf of the assessee reliance was placed on the case of Commissioner of Income-tax v. Mathulal Baldeo Prasad [1961] 42 I.T.R. 517. In this case the assessee entered into several speculative transactions in cotton with another firm (both being partners of a cotton association) and the dates of settlement under the contract fell in January, 1944, March, 1944, and May, 1944, respectively. These dates were all within the accounting year of the assessee ending on July 6, 1944, revelant to the assessment year 1945-46. The first transaction resulted in a profit of ₹ 297-8-0, the second in a loss of ₹ 4,655-13-0 and the third in a loss of ₹ 11,138, the aggregate being a loss of ₹ 14,994. The account was submitted to the assessee but on the latter's failure to pay the other firm claimed a sum of ₹ 15,561-8-0 inclusive of interest. As the assessee disputed the correctness of the account the matter was referred to two arbitrators but on their failing to give their award new arbitrators were appointed who made their award on August 29, 1944. By this award the assessee was made liable to pay a sum of ₹ 14,994 with interest from May 25, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of jute contracts like those entered into by the assessee before us it is not obligatory on the parties to the contract to have their claims quantified by arbitration. As a matter of fact arbitration is resorted to because litigation in courts of law takes a much longer time but where the contract is admitted and there is no scope for dispute as to the debt payable by the defaulting party the parties need not go to arbitration. In may opinion, the observations made by the learned judge in the above case do not apply to the facts of the case before us mutatis mutandis. The case of Manavala Naidu v. Commissioner of Income-tax [1961] 41 I.T.R. 725 was clearly one in which there was no fixation of liability until some time alter the happening of the loss. In this case the assessee used to supply garments to military authorities out of material supplied for making the same from them and received prices fixed by the authorities which were slightly higher than the ordinary market prices. In the accounting year relevant to the assessment year 1943-44 the authorities demanded a sum of ₹ 15,845 from the assessee to make good the value of garments short delivered. The assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uing in that year of account and that in the earlier years it was at best a contingent liability. It was contended on behalf of the department that accounts can be reopened at the instance of the assessee whenever there is an alteration of liability by reason of litigation of settlement but that it is the duty of the assessee to estimate his loss and debit the same in the accounts as soon as a claim is made. It was argued that the Income-tax Act made provision therefor by section 33 and 33A as also by section 35. I do not think it is necessary to go into this question on the facts of this case. When the assessee admits loss or when the loss is ascertained it certainly is his duty to bring the same into debit as soon as the admission is made or the ascertainment takes place. The mercantile system of book-keeping does not seem to cast on the assessee any obligation to take note of whatever claims good or bad may be raised against him. According to the judgment of the Supreme Court in Calcutta Company's case [1959] 37 I.T.R. 1; [1960] 1 S.C.R. 185 the liability must accrue or arise in order that a sum of money may be deductible in respect therefor. It may be that in a particula ..... X X X X Extracts X X X X X X X X Extracts X X X X
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