Income Tax Appellate Tribunal - Kolkata
Shaktigarh Textiles And Industries ... vs Income-Tax Officer on 31 March, 1986
Equivalent citations: [1986]18ITD145(KOL)
ORDER
Egbert Singh, Accountant Member
1. This is an appeal by the assessee in which the first ground is that the Commissioner (Appeals) erred in holding that deduction of Rs. 26,09,102 on account of gratuity on actuarial valuation claimed under Section 37(1) of the Income-tax Act, 1961 ('the Act') was not allowable. It is the appeal by the assessee that this claim is not hit by the provisions of Section 40A(7) of the Act. At the time of hearing it is pointed out by the learned counsel for the assessee that this point is covered by the decision of the Hon'ble Calcutta High Court in the case of CIT v. New Swadeshi Mills of Ahmedabad Ltd. [1984] 147 ITR 163 which was against the assessee.
2. We have heard both the sides. We are of the opinion that the Commissioner (Appeals) was justified in holding that the deduction of provision for gratuity liability was not admissible in view of the specific provisions contained in Section 40A(7) and the decision of the Hon'ble High Court referred to earlier.
3. The second ground of appeal is that the Commissioner (Appeals) erred in not allowing deduction of Rs. 9,03,665 being liability to the Cotton Corporation of India Ltd. for liquidated damages. The appeal by the assessee is that the liability had been arisen during the year and even if the assessee did not accept the liability, deduction claimed was allowable.
4. It is seen that the assessee has filed an additional ground of appeal by a letter dated 29-1-1985. It is clarified before us by the assessee's learned counsel that the additional ground was taken in order to incorporate the correct amount of the loss claimed which should be at Rs. 22,62,475 in place of Rs. 9,03,665.
5. From the assessment order it is seen that the assessee claimed deduction of Rs. 9,03,665 being the difference of debit notes and credit notes issued by the Cotton Corporation of India Ltd. for imported cotton the delivery of which was not taken by the company. The ITO noted that the liability has not been accepted by the assessee and the same has not been provided for in the accounts also and, therefore, the claim was not entertainable.
6. The assessee took up the matter before the Commissioner (Appeals) contending that the ITO erred in allowing the claim. It was clarified that in 1977 the assessee made several contracts for purchase of different imported cotton with the Cotton Corporation of India Ltd. and that subsequently there was considerable delay in sending of the goods by the Cotton Corporation of India Ltd. and the market value was down and the company refused to take delivery of the goods. It was further clarified before the Commissioner (Appeals) that the Corporation claimed damages of Rs. 9,03,665 which the company did not accept. Thereafter a suit was filed by the Corporation before the Hon'ble Bombay High Court some time in March 1979 which is still pending. It was contended before the Commissioner (Appeals) that mere non-acceptance of the liability by the assessee and non-provision in the accounts would not mean that the liability did not exist. The Commissioner (Appeals), in the circumstances, agreed with the ITO when the matter has not been accepted by the assessee and the issue was pending for adjudication. He pointed out that no evidence in the form of an agreement or otherwise was produced that the liability was accepted during the year under consideration, as in fact the assessee-company completely denied the liability. The Commissioner (Appeals) noted that it was not the case of the assessee that statutory liability was disputed. In short, the Commissioner (Appeals) sustained the disallowance. Hence, this appeal before us.
7. It is submitted by the learned counsel for the assessee that both the authorities below erred in rejecting the claim of the assessee although there was a liability to pay the damages to the Cotton Corporation of India Ltd. on the basis of the contracts made between the assessee and that Corporation. Reference is made by the assessee's learned counsel to the various papers in the paper book to indicate that there were various contracts made by the assessee and the Cotton Corporation of India Ltd. for supplying the goods and that the assessee has appointed Cotton Corporation of India Ltd. as its agent on the basis of the contract made between them, copy of which has been placed at page 16 of the paper book. It is, therefore, urged that it was not a case of transaction between principal and principal as in fact Cotton Corporation of India Ltd. acted on the direction or otherwise of the assessee on the basis of the contracts made with it. It is also submitted that Clause (4) of the contract provides that if delivery is not taken, the assessee would have to compensate for the damages, if any, incurred by the Corporation and that according to Clause (7) of the said contract the assessee would indemnify the Corporation against all actions, claims, proceedings, damages and losses, etc., in respect of or in connection with or in relation to or arising out of any matter under this agreement. It is, therefore, urged that the authorities below failed to consider the terms of the contracts and the obligations of the assessee in case delivery of the goods was not taken on the basis of the delivery orders. It is also contended that the Commissioner (Appeals) erred in stating that no evidence in the form of any agreement or otherwise has been shown to establish that the liability was accepted during the previous year. It is also submitted that the mere fact that the liability was in dispute the claim of the assessee cannot be dismissed on that ground, particularly when the issue is sub judice in the Court of law. In short, it is urged that the claim of the assessee may be allowed.
8. The learned departmental representative resists the submissions made on behalf of the assessee. Reference being made to the decisions of the Hon'ble Allahabad High Court in the case of Swadeshi Cotton Mill Co. Ltd. v. CIT [1980] 125 ITR 33. It is argued that there was no condition to enable the assessee to refuse to take delivery as the contract was for a particular purpose as provided by the law of contract. According to the learned departmental representative, the damages may have to be paid for the breach of contract, but for such payment no deduction would be admissible for the income-tax purposes particularly when such damages did not arise in the normal course of the contract. It is also submitted that there is no paper or indication that the assessee accepted the liability to pay the damages. According to the learned departmental representative, the ITO considered the various aspects of the matter keeping in view that the assessee was maintaining mercantile method of accounting and in the absence of any provision, the claim cannot be allowed. It is also urged that the case before the Hon'ble Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 was in connection with the claim for the sales tax deduction which is a statutory liability, whereas this liability of the assessee in the present case was not a statutory one. It is argued, however, that later on if the liability was accepted and quantified, it is for the assessee to put the claim at the relevant point of time but not for the year under appeal. In short, it is urged that the appeal by the assessee may be rejected.
9. In reply, the assessee's learned counsel stressed the claim that the Cotton Corporation of India Ltd. is only an agent of the assessee and that as per Clause (15) of the contract the goods became the property of the assessee on shipment. The assessee's learned counsel also refers to the decisions in Kedarnath Jute Mfg. Co. Ltd.'s case (supra) with emphasis at page 367, Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) with emphasis at page 5, Prafulla Kumar Malik v. CIT [1967] 63 ITR 62 (SC), CIT v. Shantilal (P.) Ltd. [1983] 144 ITR 57 (SC), CIT v. Surya Prabha Mills (P.) Ltd. [1980] 123 ITR 654 (Mad.), CIT v. Reliable Water Supply Service of India (P.) Ltd. [1980] 124 ITR 199 (All.), CIT v. R.D. Sharma & Co. [1982] 137 ITR 333 (Bom.) and AM. CIT v. Arvind Mills Ltd. [1977] 109 ITR 212 (Guj.). According to the learned counsel for the assessee, the liability on account of damages was quantified and accordingly, the same was an allowable liability on the date as soon as the Corporation sold the goods to the other parties. He refers to the other decisions in CIT v. Sugar Dealers [1975] 100 ITR 424 (All.), Motilal Padampat Sugar Mills v. CIT [1977] 106 ITR 988 (All.), CIT v. Swadeshi Mining & Mfg. Co. Ltd. [1978] 112 ITR 276 (Cal.), CIT v. Orient Supply Syndicate [1982] 134 ITR 12 (Cal.) and CIT v. Century Enka Ltd. [1981] 130 ITR 267 (CaL). It is urged, therefore, that in the circumstances the claim of the assessee was wrongly disallowed by the authorities below.
10. We have heard both the sides and have perused the orders of the authorities below along with the papers placed before us for our consideration. As mentioned earlier the ITO disallowed the claim of the assessee as the assessee did not accept the liability. The Commissioner (Appeals) sustained the rejection. Before us it is submitted that the liability to the Cotton Corporation of India Ltd. was embedded in the contract itself. It is seen that the ITO and the Commissioner (Appeals) have looked into the various clauses of the contracts before rejecting the claim of the assessee. Of course, the liability of the assessee in the present case cannot be said to be a statutory liability. But even then the terms and the various clauses of the contracts should have been examined vis-a-vis the claim of the assessee itself. It is seen that the matter is still pending before the Hon'ble High Court for adjudication. In these circumstances, we consider it necessary that the ITO should call for the contracts and to examine the terms thereof for verification of the claim of the assessee. It is also necessary to ascertain the dates on which the Cotton Corporation of India Ltd. sold the consignment to other parties as the assessee refused to take delivery of the consignments.
11. In the chart placed in a paper book at page 3, it is seen that there were various claims for other assessment years also on the basis of certain or particular contracts for supplying of different bales of different consignments of the imported cotton. We find that more facts and basic materials are required to be brought on record after considering the various terms of the contracts, before the dispute is finally settled. In the circumstances, it is necessary that the matter should be restored to the file of the ITO for fresh disposal after taking into account our observations made above and after considering the contracts and after giving the assessee an opportunity of being heard. For this purpose we set aside the orders of the authorities below on this point for fresh disposal.
12. The next ground of appeal is regarding the claim of the assessee for relief under Section 80J of the Act for Rs. 8,00,307 as against Rs. 2,62,945 computed in the assessment order. We have heard both the sides and have perused the orders of the authorities below for our consideration. We deem it fit as suggested by the assessee's learned counsel that the matter may be disposed of afresh by the ITO keeping in view the decision of the Hon'ble Supreme Court in the case of Lohia Machines Ltd. v. Union of India [1985] 152 ITR 238. Accordingly the orders of the authorities below are set aside for fresh disposal by the ITO in the light of the decision of the Hon'ble Supreme Court in Lohia Machines Ltd.'s case (supra).
13. There is no other ground of appeal for decision.
14. In the result, the appeal by the assessee shall be treated as partly allowed for the purpose of statistics.
S.K. Jain, Judicial Member
1. I do not fully concur with my learned brother and, therefore, express my view separately.
2. Two grounds out of three taken by the assessee-company in this appeal against the order of the Commissioner (Appeals) arising out of assessment for the assessment year 1979-80 are simple inasmuch as they are not seriously contested.
3. First of them is regarding disallowance of gratuity liability of Rs. 26,09,102 determined on actuarial valuation without any contribution towards an approved gratuity fund. According to the tax authorities below, the said claim was hit by Section 40A(7) ; whereas the stand of the assessee has been that it is allowable under Section 37(1). Such plea as raised by the assessee has been turned down by the Hon'ble Calcutta High Court in the case of New Swadeshi Mills of Ahmedabad Ltd. (supra). The ground of appeal, therefore, fails and I concur with my learned brother on this point.
4. The second of these two points is regarding computation of relief under Section 80J. Law on this point has already been set at rest by the judgment of the Hon'ble Supreme Court in the case of Lohia Machines Ltd. (supra) and, therefore, the ITO is directed to compute the relief accordingly, I thus concur with my learned brother on this point too.
5. Next I come to third ground of appeal. The facts relevant to this point are these. The assessee is a textile industry. Hada Textile Industries Ltd. entered into four contracts detailed below with Cotton Corporation of India Ltd. on its behalf and also for and on behalf of the assessee-company for importing cotton :
(1) Contract No. G/298 dated 7-3-1977 (2) Contract No. G/301 dated 7-3-1977 (3) Contract No. G/546 dated 29-3-1977 (4) Contract No. G/432 dated 18-3-1977.
Copy of Contract No. G/298 dated 7-3-1977 has been placed before us in the paper book at page 16 and it is stated by the learned counsel for the assessee that the other contracts were in identical terms. According to the said contract, the Cotton Corporation of India Ltd. was to import cotton as the agent of Hada Textiles Industries Ltd. and the con-tractee had furnished bank guarantee to the Cotton Corporation of India Ltd. for 25 per cent of the approximate value of the guarantee of cotton to be imported. It was also term of the contract that price of the said goods should be paid by the Contractee and in default thereof, the Corporation would be entitled to forfeit the deposit paid by the contractee and also to take delivery of the goods and to sell them and the contractee would be liable for the losses suffered by the Corporation. It is said that the assessee and so also Hada Textiles Industries Ltd. did not clear off bill of lading and as such did not take delivery of cotton imported under the aforesaid four contracts. The Cotton Corporation of India Ltd. thereby suffered loss. The Cotton Corporation of India Ltd. thereafter filed four civil suits in ordinary original civil jurisdiction of the High Court at Bombay as detailed below :
SI Suit No. Filed on Contract No. Amount
No. Rs.
1. 1337 of 1980 28-8-1980 G/298 8,67,339.82
2. 1325 of 1980 22-8-1980 G/301 1,25,572.86
3. 1338 of 1980 28-8-1980 G/546 18,13,141.15
4. 322 of 1981 25-2-1981 G/432 6,66,836.63
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34,72,890.46
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Out of the said claim of Rs. 34,72,890 made in those suits, it is said by the assessee that the loss and interest due thereon in the sum of Rs. 22,62,475 pertained to the accounting period relevant to the assessment year 1979-80. According to the learned counsel for the assessee, claim for the trading loss should, therefore, have been made by the assessee for Rs. 22,62,475 but by mistake the claim was made for Rs. 9,03,665 only. He has, therefore, filed an application for permission to take an additional ground of appeal that the loss of Rs. 22,62,475 should have been allowed by the Commissioner (Appeals).
6. It is contended by the learned counsel for the assessee that the liability is ascertained liability. According to him, the assessee is contesting in all the four civil suits before the Bombay High Court only for the sake of making delay in discharging the liability, but nonetheless the liability stands and, therefore, it should have been allowed by the tax authorities below. He in support placed reliance upon the following judgments of the Hon'ble Supreme Court and the High Courts :
Kedarnath Jute Mfg. Co. Ltd.'s case (supra), Motilal Padampat Sugar Mills' case (supra), Swadeshi Mining & Mfg. Co. Ltd.'s case (supra), Century Enka Ltd.'s case (supra), Orient Supply Syndicate's case (supra), CIT v.J.K. Cotton Spg. & Wvg. Mills Co. [1980] 123 ITR 911 (All.), R.D. Sharma & Co.'s case (supra), Prafulla Kumar Malik's case (supra), Sugar Dealers' case (supra), Arvind Mills Ltd.'s case (supra), Surya Prabha Mills (P.) Ltd.'s case (supra), Reliable Water Supply Service of India (P.) Ltd.'s case (supra), Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC), Sutlej Cotton Mills Ltd.'s case (supra) and Shantilal (P.) Ltd.'s case (supra).
7. The learned departmental representative, on the other hand, refuted the claim on the ground that it was not ascertained liability in praesenti. He placed reliance upon Swadeshi Cotton Mills Co. Ltd.'s case (supra).
8. Before I reach the conclusion it is necessary to advert to the written statement of the assessee filed in the Bombay High Court. The claim of Cotton Corporation of India Ltd. has been contested by the assessee on all scores. Following preliminary objections have been raised by the assessee in its written statement :
(1) The Court has no jurisdiction to entertain and try the suit.
(2) The suit is barred by limitation.
(3) The suit is bad for misjoinder of causes of action and misjoinder of parties.
The assessee further challenged the stand of the Cotton Corporation of India Ltd. that any contract was entered into for and on behalf of it by Hada Textile Industries Ltd. It is also alternatively alleged that the Cotton Corporation of India Ltd. had played fraud on Hada Textile Industries Ltd. The assessee denied privity of contract between it on the one hand and the said corporation on the other. Even on merit of the claim each and every fact has been denied by the assessee throwing all the blame on the Cotton Corporation of India Ltd. for importing cotton and incurring loss therein.
9. It is thus obvious that the liability in respect of which the assessee claims deduction is a contractual liability. By no stretch of imagination it can be a statutory liability. Difference between the statutory liability and contractual liability has to be borne in mind. Simply because a contractual liability, between the principal and the agent, is enforceable in the Court of law it cannot become statutory liability. Statutory liability is determined by the provisions of the statute itself. It is settled law that no contractual liability can be said to arise until it is ascertained in praesenti either by admission of the parties to the dispute or is adjudicated in appropriate proceedings. There are several judgments of the Hon'ble Supreme Court and the High Courts on this point. To begin with, reference may be made to the judgment of the Hon'ble Supreme Court in CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd. [1964] 53 ITR 134. In that case, the assessee paid bonus to its employees for the calendar year 1947 in terms of an award made in 1949 under the Industrial Disputes Act, 1947. The Hon'ble Supreme Court held that since the claim of bonus was settled by an award of the Industrial Tribunal only in 1949, the liability could be attributed to only that year. In the case of CIT v. Roberts McLean & Co. Ltd. [1978] 111 ITR 489, the Hon'ble Calcutta High Court held that since the dispute was settled by arbitration by award in March 1960, the liability arose only in March 1960, though pertained to the earlier period. In the same terms is the judgment of the Hon'ble Calcutta High Court in the case of CIT v. Soorajmull Nagarmull [1981] 129 ITR 169. In that case, the assessee followed mercantile system of accounting and the loss was held allowable only in the year in which the dispute was settled. Reference can advantageously be also made to the judgments of the Hon'ble Allahabad High Court in CITv. Oriental Motor Car Co. (P.) Ltd. [1980] 124 ITR 74, CIT v. Lachhman Das Mathura Das [1980] 124 ITR 411 and Swadeshi Cotton Mills Co. Ltd.'s case (supra). In the case of A.P.S. Cold Storage & Ice Factory v. CIT [1979] 119 ITR 709, the Hon'ble Allahabad High Court held that the liability did not arise for being claimed as a deduction even though the award was given by the arbitrator since the said award was also disputed by the assessee and it did not become the rule of the Court.
10. The judicial pronouncements cited by the learned counsel for the assessee are not in point. Kedarnath Jute Mfg. Co. Ltd.s case (supra), Motilal Padampat Sugar Mills' case (supra), Swadeshi Mining & Mfg. Co Ltd.'s case (supra), Century Enka Ltd.'s case (supra) and Orient Supply Syndicate's case (supra) pertain to statutory liability and not the contractual liability. In the cases of J.K. Cotton Spg. & Wvg. Mills Co. (supra) and R.D. Sharma & Co. (supra) liability was not disputed by the assessee and was as such an ascertained amount because of admission of the assessee. In the cases of Prafulla Kumar Malik (supra), Sugar Dealers (supra), Arvind Mills Ltd. (supra), Surya Prabha Mills (P.) Ltd. (supra) and Reliable Water Supply Service of India (P.) Ltd. (supra), there was no question before the High Courts as to in which year liability should be allowed. The cases of Calcutta Co. Ltd. (supra) and Sutlej Cotton Mills Ltd. (supra) and Shantilal (P.) Ltd. (supra) are not at all in point.
11. The matter for consideration is quite plain and simple, namely, that the assessee has incurred certain liabilities for breach of contract for which civil suits have been filed which are being contested by the assessee and, thus, the question is whether under these facts and circumstances, the liability can be said to have arisen in praesenti. In view of above discussion, answer to this question is in the negative. Such a plain and simple question does not require any further investigation of facts as to what was the contract between the assessee and the Cotton Corporation of India Ltd. or whether the assessee is in the fact liable or not. I am, therefore, with respect unable to agree with my learned brother that the orders of the AAC and the ITO should be set aside for ascertaining the various clauses of the contract and the dates on which the Cotton Corporation of India Ltd. sold the consignment to other parties. It is needless to mention that the power of remand should be exercised judiciously and not capriciously. It should not be exercised when all the basic materials necessary for the disposal of the matter are already on record-United Commercial Bank v. CIT [1982] 137 ITR 434 (Cal). Enquiry as to various terms of contract between the assessee on the one hand and the Cotton Corporation of India Ltd. on the other and the dates on which the Cotton Corporation of India Ltd. sold the consignments to other parties would not serve any purpose since that material has no bearing on the issue involved in this case. Further it is pertinent to note that the assessee has denied the contract in toto in the written statement filed before the Hon'ble High Court. According to the assessee, there was no privity of contract between it and the Cotton Corporation of India Ltd.
12. I, therefore, express my inability, with respect, to agree with my learned brother. In my judgment, the assessee is not entitled to the claim of deduction of the liability. I, therefore, propose the appeal to be dismissed on all grounds with the observation that the ITO shall verify that the computation of the relief is done in accordance with the amended provision of Section 80J.
ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 Since we differ in opinion on the following point, the case be placed before the President for appropriate orders under Section 255(4) of the Act :
Whether under the facts and circumstances of the case it is necessary to refer the case back to the Income-tax Officer for examination of various terms and clauses of the contract and the dates on which the Cotton Corporation of India Ltd. sold the consignments to other parties on refusal by the assessee to take delivery of the consignments, or without such enquiry the appeal of the assessee on the point of claim for trading loss can be decided and deserves to be dismissed ?
THIRD MEMBER ORDER T.D. Sugla, President
1. On a difference of opinion between the learned Members who heard the appeal originally, the following point of difference :
Whether under the facts and circumstances of the case it is necessary to refer the case back to the Income-tax Officer for examination of various terms and clauses of the contract and the dates on which the Cotton Corporation of India Ltd. sold the consignments to other parties on refusal by the assessee to take delivery of the consignments, without such enquiry the appeal of the assessee on the point of claim for trading loss can be decided and deserves to be dismissed ?
Was stated for reference by the President to a Third Member within the meaning of Section 255(4). The President having assigned the matter to himself, the case came up before me as the Third Member for hearing.
2. I have heard the parties at length and have gone through the facts on record and the catena of case laws cited by the parties of both the sides. The controversy is in a narrow compass. There does not appear to be any decision squarely covering the point at issue. The claim for liability, admittedly, arose out of four contracts between the Cotton Corporation of India Ltd. and Hada Textile Industries Ltd. The contracts are for purchase of cotton to be imported and are said to have been executed by Hada Textile Industries Ltd., on their own behalf and on behalf of the assessee. The shipping documents had arrived but were not retired by the assessee during the previous year. After due notices to the assessee, the cotton imported under the contracts was sold by the Cotton Corporation of India Ltd. in the open market at loss during the previous year itself. In one case, even demand for loss, interest, etc., was made by the Cotton Corporation of India Ltd. during the previous year. In other cases, the demands have been raised in the following previous year. The assessee is maintaining its accounts on mercantile system.
3. On the above facts, if the assessee had considered itself liable for the loss, interest and damage under the contracts, estimated its liability and made a provision for it in its books, the decision of the Supreme Court in the case of Calcutta Co. Ltd. (supra) would be normally applied and the assessee would be entitled to the deduction on account of loss, damage, etc. Also, if the assessee had considered itself tentatively liable, made a provision for the liability but had at the same time proposed to contest the liability on various grounds, there would have been no difficulty in accepting the assessee's claim for deduction, it being a settled law that the mere fact that the assessee is contesting the liability does not matter in the case of a person following the mercantile system of accountancy; what matters is the legal view of the liability.
4. The case herein is materially different. The assessee has not considered itself liable at all. It has made no provision for the liability in its books of this year or in any of the following years till the date of the hearing before me. The liability under the contracts is vehemently contested as is evident from the copy of the written statement filed by the assessee before the Hon'ble Bombay High Court in which the suits filed by the Cotton Corporation of India Ltd. are pending. Some of the objections taken by the assessee are fundamental as noted by the Judicial Member in his order.
5. It is true that the law in this regard is that the claim in the case of an assessee following mercantile system of accountancy is to be allowed on the basis of accrual of liability and not on the fact whether the entries regarding the liability are made or not. It is also true that in this regard the legal view of the liability is material rather than the view the assessee takes of it. However, this is an oversimplification of the issue. If the assessee really follows mercantile system of accountancy, it is bound to make a provision for the liability accrued even if it challenges it on some technical ground. If the provision is not made in the accounts of the year in which the liability is said to have been incurred nor in any of the following seven-eight years, there are only two possible inferences : (i) the assessee might have considered itself not liable at all and (ii) chances of the liability being fastened on the assessee are so remote that it has decided to debit the liability to its profit and loss account only when it has to suffer the liability actually. To my mind, when the Courts observed that in the case of a person following the mercantile system of accountancy uniformly the fact that entry about the liability is not made in the books is not material, the cases under contemplation were where the entry was not made through inadvertence and not those where the entries were not made consciously. In fact non-making of entries of alleged accrued liabilities in the books over the years, leads to the inference of a change in the method of accounting, there being no dispute about the fact that it is seldom that the accounts are maintained by an assessee purely on mercantile or cash system. Therefore, it may not be improper to hold that vis-a-vis these contracts the assessee has started following cash system. Besides, there is good reason in this case, to accept the assessee's stand taken before the Bombay High Court that it is not liable at all because of a number of flaws in the execution of the contracts themselves and in the other steps taken by the Cotton Corporation of India Ltd. In either case, the alleged liability cannot be allowed as loss or liability of the year.
6. It may be true that the assessee can claim deduction on the basis of liability accrued and yet contest the liability tooth and nail. So far as the case laws on the issue are concerned, they are all with regard to the statutory liabilities. For the present, I am in agreement with the assessee's counsel that that fact by itself would not mean that the said principle cannot be applied in the case of a contractual obligation. However, it cannot, perhaps, be disputed that that would only mean that the question as regards the contractual liability is wide open and will have to be decided on the basis of first principles.
7. Assuming that the fact that the assessee has not yet made any entry about the alleged liability in its books cannot be attributed to a mistake and yet it will not stand in the way of its claiming deduction provided the alleged liability is in praesenti and not de futuro or contingent. I am inclined to agree with the counsel for the assessee that the ITO has to decide whether the liability has or has not accrued in terms of the contracts as for matters coming up before him, the ITO has exclusive jurisdiction as held by the Supreme Court in the case of Chhatrasinhji Kesarisinhji Thakore v. CIT [1966] 59 ITR 562. No doubt, the job is difficult inasmuch as the ITO does not have the necessary expertise to interpret the terms of the contract for the purpose of determining mutual obligations of the parties having regard to their subsequent conduct. The job has become all the more difficult in this case as the assessee who has contested the liability before the High Court absolutely, is taking just a contrary stand in these proceedings. The other party, i.e., the Cotton Corporation of India Ltd., will naturally support its stand. Therefore, in order to decide the question of the nature of liability I have to depend upon the available material, .i.e., the terms of the contracts, the correspondence exchanged between the parties, the plaint filed by the Cotton Corporation of India Ltd. and the written statement filed by the assessee. On going through the available material carefully, I agree with the learned Judicial Member that this is, certainly, not a case of liability in praesenti. The alleged liability cannot, therefore, be allowed as deduction even on this score.
8. The learned counsel, it may be stated and also contended that the mere fact that the assessee was disputing its liability and eventually no liability might be fastened on it should not go against his client's claim for deduction. According to him, the purpose of Section 41(1) of the Act was to take care of such a situation. Here again, the argument advanced has not impressed me. If there is no liability in praesenti and still a liability is allowed as a deduction, firstly, the payment of tax on the alleged liability gets postponed up to the time of the final settlement of the dispute which may take ten to fifteen years if not more. Secondly, the assessee having not made an entry about the alleged liability in its books, it is difficult, if not impossible, to conceive a situation when the ITO after ten or fifteen years when the assessee is eventually found not liable in this regard at all, will have any means to know about it and apply the provisions of Section 41(1). Therefore, even the balance of convenience is in favour of not allowing such a claim for deduction.
9. Having regard to the above discussion, I am inclined to agree with the learned Judicial Member that the assessee's claim for deduction requires to be rejected.
My order will now go to the Division Bench for decision according to the majority view.