Arijit Pasayat, C.J.
At the instance of revenue, following question has been referred for opinion of this court by the Appellate Tribunal, New Delhi (hereinafter referred to as the ‘Tribunal’), under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) :
“Whether on the facts and in the circumstances of the case, the Tribunal is correct in allowing the assessee’s claim for deduction to the extent of Rs. 22,88,905 as representing a liability which was correctly claimed by the assessee as a deduction against the business profits for the assessment year 1975-76.”
2. Factual position as indicated in the statement of the case is as follows :
The assessee is a private limited company which, for the relevant assessment year, i.e., 1975-76, was carrying on the business in the manufacturing and sale of beedis. Originally, the business was carried on by a partnership firm by name M/s Brij1al Manilal & Co. of which one Shri Chintamanrao was the managing partner. The company was incorporated in the year 1971. Shri Chintamanrao became the chairman and the agreed arrangement was that company would take over the manufacturing operations and sale of beedis to the firm which was then to handle the outside sales. Assessee followed the mercantile system of accounting and its previous year ended on Diwali, 1974. Assessee raised a debit of Rs. 38,56,618 as provision for wages and bonus payable to the workers in terms of Beedi and Cigar Workers (Conditions of Employment) Act, 1966 (hereinafter referred to as `the Beedi Act’), which received the Presidential assent on 30-12-1966. Assessee had its registered office in Delhi and factory in Sagar in Madhya Pradesh. The Beedi Act was applicable to the State of Madhya Pradesh with effect from 1-4-1968. The Income Tax Officer rejected assessee’s claim for deduction except to the extent of Rs. 10,69,393 which related to the assessment year in question. The deductions claimed related to three accounting years and the quantum was as follows
Quantum of accrued liability
Year ending Diwali 1972
Year ending Diwali 1973
Year ending Diwali 1974
Validity of the Beedi Act was upheld by the Apex Court. Assessee took the stand that since the position in law as regard to the liability was in a state of uncertainty, after the Apex Court’s judgment, liability was quantified and deduction was claimed. As noted above Income Tax Officer did not accept the stand on the ground that the liability for two previous years accrued during those years, and not during the year under consideration. Matter was carried in appeal before the Appellate Assistant Commissioner. He dismissed the appeal. Matter was carried in further appeal by the assessee before the Tribunal. It was submitted that because of transitional problems, no quantification could be done and, therefore, the entire amount was allowable as expenditure in the year it was claimed. Tribunal held that though normally the liability is to be reckoned in the year of accrual, in view of the peculiar circumstances, the liability to be allowed as a deduction in the year under consideration. However, to work out the details, the Tribunal remanded the matter to the Income Tax Officer to examine the claims relating to Rs. 2,34,702 and Rs. 2,63,818 for the assessment years 1972-73 and 1973-74 respectively. On being moved for reference question as set out above has been referred.
3. Learned counsel for revenue submitted that in view of the settled position of law as laid down by the Apex Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC), there is no scope for adopting the view as done by the Tribunal learned counsel for assessee, on the other hand, submitted that the liability was crystallized during the year in question after the decision of the Apex Court and, therefore, the Tribunal was justified in its conclusions.
4. In Kedarnath Jute Mfg.’s case (supra), few observations are of great relevance at p. 366 of the reports, it was observed as follows
“It is not possible to comprehend how the liability would cease to be one because the assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail with regard to the quantum of liability, etc. As assessee who follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed. It can again not be disputed that the liability to payment of sale-tax had accrued during the year of assessment even though it had to be discharged at a future date.”
5. It is fairly accepted by learned counsel for assessee that, for the purpose of accrual, the decision by any court cannot be the foundation. But he tried to make a distinction in a case where there was divergence of views and the final view of the Apex Court comes during a particular assessment year. We find no justification to make this distinction in view of the position of law as laid down by the Apex Court in Kedarnath Jute Mfg. case (supra). The stand as taken by assessee is clearly not acceptable.
6. Our answer to the question is in negative, in favour of revenue, and against the assessee.