JUDGMENT
Arijit Pasayat, C.J.
1. At the instance of the Revenue, the following question has been referred for the opinion of this court by the Income-tax Appellate Tribunal, New Delhi (in short the “Tribunal”), under Section 256(1) of the Income-tax Act, 1961 (in short the “Act”) :
“Whether, on the facts and in the circumstances of the case, the Tribunal is correct in allowing the assessed’s claim for deduction to the extent of Rs. 22,88,905 as representing a liability which was correctly claimed by the assessed as a deduction against the business profits for the assessment year 1975-76 ?”
2. The factual position, as indicated in the statement of the case, is as follows :
The assesses 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 Brijlal Manilal and 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 the company would take over the manufacturing operations and sale of beedis to the firm which was then to handle the outside sales. The assessed followed the mercantile system of accounting and its previous year ended on Diwali, 1974. The assessed raised a debit of Rs. 38,56,618 as provision for wages and bonus payable to the workers in terms of the Beedi and Cigar Workers (Conditions of Employment) Act, 1966 (in short, the “Beedi Act”), which received the Presidential assent on December 30, 1966, The assessed 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 April 1, 1968. The Income-tax Officer rejected assessed’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 :
Accounting
year
Assessinent
year
Quantum
of accrued liability (Rs.)Year
ending Diwali 1972
1973-74
13,53,148Year
ending Diwaii 1973
1974-75
14.34,277Year
ending Diwali 1974
1975-76
10,69,393
Total
38,56.818
3. The validity of the Beedi Act was upheld by the apex court. The assessed took the stand that, since the position in law with 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, the 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. The matter was carried in appeal before the Appellate Assistant Commissioner (in short, “AAC”). He dismissed the appeal. The matter was carried in further appeal by the assessed 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. The Tribunal held that though normally the liability is to be reckoned in the year of accrual, in view of the peculiar circumstances, the liability was 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. 2,31,702 and Rs. 2,63,818 for the assessment years 1972-73
and 1973-74, respectively. On being moved for reference the question as set out above has been referred.
4. Learned counsel for the 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, there is no scope for adopting the view as done by the Tribunal. Learned counsel for the assessed, on the other hand, submitted that the liability was crystallised during’ the year in question after the decision of the apex court and, therefore, the Tribunal was justified in its conclusions.
5. In Kedarnath Jute Mfg. Co. Ltd. v. CIT , a few observations are of great relevance. At page 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 assessed had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assessed did not prevail with regard to the quantum of liability, etc. An assessed 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 sales tax had accrued during the year of assessment even though it had to be discharged at a future date.”.
6. It is fairly accepted by learned counsel for the assessed 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 lute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363. The stand as taken by the assessed is clearly not acceptable.
7. Our answer to the question is in the negative, in favor of the Revenue, and against the assessed.
