JUDGMENT
1. This is a reference under Section 256(1) of the Income-tax Act, 1961, (for brevity, hereinafter, “the Act”) at the instance of the Revenue to decide the following question of law :
“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the difference of Rs. 2,29,524 between the guaranteed amount and the actual purchase of country liquor was allowable as a trading loss in the computation of the assessee’s total income for the assessment year 1968-69 ?”
2. The relevant assessment year is 1968-69. The assessee-firm carries on business of purchase and sale of country liquor. There was a minimum guarantee clause requiring the assessee to purchase liquor of the value of Rs. 5,07,640. . The assessee lifted liquor of the value of only Rs. 2,67,745 and there was a shortfall of Rs. 2,29,525. The assessee accordingly incurred a liability to pay this amount. Towards discharge of that liability, a sum of Rs. 50,772 deposited by the assessee as security was forfeited. The assessee did not debit the amount of shortfall of Rs. 2,29,525 in the books of account showing it as business loss. All the same, the assessee claimed deduction of this amount as business loss. The Income-tax Officer disallowed it taking the view that the assessee had not paid the amount of which he claimed deduction and, therefore, it was not an expenditure incurred during the relevant accounting year. The Appellate Assistant Commissioner of Income-tax confirmed the order of the Income-tax Officer dismissing the assessee’s appeal. The assessee’s further appeal to the Tribunal succeeded and the Tribunal held that notwithstanding the fact that this amount was not shown as business loss in the assessee’s books of accounts and there being no evidence to show that the same was paid by the assessee, this amount was to be deducted as business loss. Aggrieved by the view taken by the Tribunal, the Revenue sought a reference which has been made to decide the above-quoted question of law.
3. Learned counsel for the Revenue does not dispute that the deduction should be allowed to the assessee to the extent of Rs, 50,772 which was a security deposit by the assessee and had been forfeited towards the liability for payment of Rs. 2,29,525 incurred by the assessee. He further contends that the deduction in excess of Rs. 50,772 cannot be made under Section 37(1) of the Act, since the amount in excess thereof had admittedly neither been paid by the assessee nor shown by debiting the same in the assessee’s books of accounts.
4. None has appeared on behalf of the assessee to oppose this reference. One of the conditions necessary for making such allowance is that it should have been an expenditure incurred in the particular accounting year in which the deduction is claimed. The expenditure incurred by the assessee during the relevant period was only to the extent of Rs. 50,772 on account of the forfeiture of the security amount. It is, therefore, obvious that the assessee can be given benefit of deduction as business expenditure
only of the amount of Rs. 50,772 and not more. The Tribunal was not, therefore, justified in allowing the deduction in excess of Rs. 50,772. Consequently, the reference is answered partially in favour of the Revenue as under:
“The Tribunal was not justified in allowing deduction as business expenditure of the amount in excess of Rs. 50,772 while computing assessee’s total income during the relevant assessment year.”
5. No order as to costs.