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TMI Blog2002 (9) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... e court was delivered by D.K. JAIN J.-At the instance of the assessee, the Income-tax Appellate Tribunal, Delhi Bench-D (for short "the Tribunal") has referred under section 256(1) of the Income-tax Act, 1961 (for short "the Act"), the following question, arising out of cross appeals, being I.T.A. Nos. 691/Delhi of 1976-77 and 434/Delhi of 1977-78, for the opinion of this court: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in directing the Income-tax Officer to allow the deduction of only such amounts in respect of commission payable to Miss Nellie Melson during the relevant year, as were allowed to be remitted by the Reserve Bank of India in the relevant year?" The factual position, as delineated in the statement of the case is as under: During the relevant previous years, ending on the immediately preceding the financial year for each of the assessment years 1972-73 and 1973-74, the assessee, a private limited company, was engaged in the business of manufacture of concrete mixtures, concrete vibrators and other machinery used for construction of building, dams, etc. The issue relates to the disallowance of Rs. 1,72,462 claimed to hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Assistant Commissioner felt that the lady had probably done some work on behalf of the assessee he held that since the exact nature and extent of the assistance rendered by her to the assessee-company could not be ascertained, the disallowance made by the Income-tax Officer on this account was in order. However, in so far as the assessment year 1973-74 is concerned, the position is slightly different. For the said assessment year, the Income-tax Officer had referred the matter to the Inspecting Assistant Commissioner (for short "the IAC") under section 144B of the Act, seeking his approval for the proposed disallowance in respect of the commission claimed as payable to the lady. Before the Inspecting Assistant Commissioner, the assessee produced one Mr. Tarek Foda, who admitted that the payment shown to have been made to the lady was in fact received by him under an arrangement between both of them in respect of these payments. He, however, refused to divulge the details of his bank account on the plea that this being a foreign income in his hands, under the local laws of his country, it was not necessary to declare the foreign income in his return. The Inspecting Assistant Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt that the assessee is aggrieved and, therefore, on their moving an application under section 256(1) of the Act, the Tribunal has referred the aforenoted question. The Revenue seems to have accepted the decision of the Tribunal. We have heard Mr. B.B. Ahuja, learned senior counsel for the assessee, and Mr. Sanjiv Khanna, learned senior standing counsel for the Revenue. From the aforenoted factual matrix it is evident that presently there is no dispute with regard to the existence and the genuineness of the agreement dated May 5, 1970, stated to have been entered into between the assessee and Miss Nellie Melson. As noticed above, the Revenue is not in reference against the order of the Tribunal and, therefore, it has no objection to the commission being allowed as business expenditure but limited to the amount actually remitted to the lady after obtaining permission of the Reserve Bank of India. Therefore, the sole question which survives for consideration is whether the assessee's liability to pay commission under the aforementioned agreement and consequently to claim the same as business expenditure while computing the profits and gains of the business for the relevant previ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not claim deduction for the entire amount, determined to be payable to the lady, in the relevant assessment years. The controversy with regard to the year of accrual of liability in view of some statutory restrictions came up for consideration before the Supreme Court in Nonsuch Tea Estate Ltd. v. CIT [1975] 98 ITR 189 and it was held that where accrual of liability is dependent upon some approval and/or sanction of a statutory authority, it will accrue and/or arise on such approval. The apex court said that even an assessee following the mercantile system of accounting is not entitled to claim a deduction until the liability for the sum for which deduction is claimed is accrued. In that case it was held that in view of section 326 of the Companies Act, 1956, which contained an absolute prohibition against the appointment or reappointment of the managing agent before the approval of the Central Government was obtained, the appellant company's liability to pay the remuneration of the managing agent arises only when the Government conveys its approval and not prior to that date. Placing strong reliance on the decision in Nonsuch Tea Estate Ltd.'s case [1975] 98 ITR 189 (SC) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n payments and dealings in foreign exchange, etc., but the embargo placed in these provisions regarding remittances to be made abroad has nothing to do with the amount of disallowance under the Act. In our opinion, therefore, since the liability of the assessee to pay commission to the lady accrued under the agreement dated May 5, 1970, and the assessee was maintaining its accounts on the mercantile system of accounting, it was entitled to deduct such liability which had accrued during the period for which profits and gains were being computed and, therefore, the Tribunal was not right in law in restricting the deduction in respect of the commission to the amount actually remitted during the relevant year. Support to this view is lent by a decision of the Gujarat High Court in CIT v. Super Scientific Clock Co. [1999] 238 ITR 731, wherein rejecting the stand of the assessee that it was entitled to claim deduction on the basis of actual payment on receipt of the Reserve Bank of India's approval, it was held that under the mercantile system of accounting liability accrues and is deductible in the year in which the same is payable and not in the year in which the assessee actually pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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