TMI Blog1957 (12) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... commission of the default. The demand originally was for a sum of ₹ 1,54,830. This demand was, however, reduced and the matter was ultimately compromised for a sum of ₹ 1,03,220. It has been found from the correspondence produced before the Income-tax Appellate Tribunal that, out of this sum, a sum of ₹ 51,610 had been taken by the Government as representing the premium which the assessee company should have paid if the company had correctly insured its goods in accordance with the War Risks (Goods) Insurance Ordinance in the earlier years. The balance of ₹ 51,610 was taken as composition money for the criminal offence which, it was alleged, the company had committed in failing to comply with the requirements of the Ordinance. So far as the latter amount is concerned, it was not contended before the Income-tax Appellate Tribunal on behalf of the assessee that it was also deductible as an expenditure under section 10 of the Income-tax Act, so that there is, at present, no case before us with regard to that amount. The assessee company, however, contended that the other sum of ₹ 51,610, paid in respect of the insurance premium, which the assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er it. The second question, which relates to the specific circumstances of the present case, recognises that the sum of ₹ 51,610 was paid by the assessee in respect of the amount of premium which the assessee was liable to pay in respect of the insurance, which the assessee should have done in the years preceding the relevant account year in which this amount is claimed as a legitimate deduction. This fact is not contested on behalf of the assessee. The contention of the assessee is two, fold; firstly, that the amount was actually paid in the relevant account year and, secondly, that even the liability for the payment of this amount was ascertained in the account year in question, so that, even in accordance with the mercantile system of accounting it could not have been treated as an expenditure for the earlier years. It appears to us that, at the time when the Income-tax Appellate Tribunal decided the appeal, the Tribunal did not take the trouble of looking into the provisions of the War Risks (Goods) Insurance Ordinance, 1940, under which payment had become due. The question when this sum became an ascertained liability of the assessee company could only be determined a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which the insurance was to commence. This shows that, under the scheme, when any person carrying on the business in goods liable to be insured under the Ordinance had to apply for insurance, he had to put down the estimated full value of the goods to be insured and to remit with the application the amount of the premium due on that estimated value. Under clause 12 of the notification, if the amount accompanying the application fell short of the premium due on the sum for which the goods were proposed for insurance, a policy for such proportion of the sum proposed as the amount paid bore to the premium due was to be issued, and the applicant was to be required to make a further application for insurance of the balance. Insurance policies had thus to be issued only on the basis of the estimated full value of the goods to be insured, which estimated had to be made by the assured himself. These provisions left an option to a person to insure his goods at any value which he considered to be the estimated value of his goods without laying down any provision for ensuring that this estimate really represented the correct value. It appears that, in order to fill up this gap, the War Risks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear in question. The demand for it was also made during the same year. The composition of the offence also took place during the same year, and ultimately the actual payment was also made by the assessee during the same year. Since the detection itself took place in the account year in question, it necessarily follows that the amount actually payable must have been determined by the Officer, authorised under section 7-A, also during this very account year. Thus the facts clearly lead to the conclusion that this sum of ₹ 51,610 paid by the assessee company in respect of the premium, which had been evaded in earlier years, was determined and was actually paid during the year of accounting in question. It is on these facts that we have to consider the applicability of the provisions of section 10(2)(iv) of the Income-tax Act. Under this provision, an assessee is entitled to deduct the amount of any premium paid in respect of the insurance against risk of damage or destruction of buildings, machinery, plant, furniture, stocks or stores, used for the purpose of the business. The word paid used in this provision of law had been defined in sub-section (5) of section 10 of the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, it could be entered as an expenditure only in this year. This is an aspect of the case which the Tribunal does not seem to have examined. The Tribunal proceeded on the basis that the liability having arisen in the earlier years, the amount had to be shown as an expenditure, according to the mercantile system of accounting, during those very years and could, therefore, be claimed as a deduction in those years only. In giving this decision, the Tribunal, in our opinion, went wrong as under the mercantile system of accounting also a liability incurred cannot be entered in the accounts as an expenditure unless the liability has become an ascertained sum of money. Until ascertained, the liability no doubt exists, but proceedings have yet to be taken in some way or the other to determine the exact amount. A vague liability to make payment cannot be entered in the accounts, as that would clearly make the accounts imperfect. While an exact amount cannot be entered in the accounts, it is certainly not possible to work out the correct balance and thus it is necessary that every entry should precisely mention the amount to which it relates. In our view that this principle is applicab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on put forward that any part of the sum of ₹ 51,610 represented premium which was due on the estimated value which had been shown by the assessee in its application for insurance in the earlier years. The facts found by the Tribunal show that this amount was actually realized from the assessee as repersenting the amount of the premium evaded by it in the earlier years by incorrectly putting down the estimated value of the goods. So far as that evaded premium is concerned, the only provision for ascertaining it and for realising it is contained in section of 7-A of the Ordinance; section 7-A of the Ordinance is thus the only other provision under which the liability for payment of the premium can be ascertained. The act of ascertainment is to be done by an officer appointed by the Central Government in that behalf. In the present case, this sum of ₹ 51,610, realised during the account year in question from the assessee, is clearly the amount determined in accordance with the provisions section 7-A. Having been determined under that provision, the amount was ascertained for the first time when the determination took place and its way only when it was thus determined that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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