TMI Blog1960 (10) TMI 93X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting year ending on July 6, 1944, relevant to the assessment year 1945-46. The first one resulted in a profit of ₹ 297-8-0, the second in a loss of ₹ 4,655-13-0, and the third in a loss of ₹ 11,138; the aggregate being a loss of ₹ 14,994. The said firm of Chaturbhuj Piramal submitted an account to the assessee but the assessee firm having failed to pay, claimed a sum of ₹ 15,561-8-0 inclusive of interest of ₹ 65-2-6. The assessee disputed the correctness of the account and the matter was referred to two arbitrators appointed by each of the parties but the arbitrators having failed to give their award new arbitrators were appointed by the East India Cotton Association Ltd. according to the terms of the association of which both the assessee and Chaturbul Piramal were members. The arbitrators so appointed gave their award on August 29, 1944. Copy of the award is made annexure A of the statement of the case. By this award the assessee was made liable to pay a sum of ₹ 14,994 with interest at the rate of 4?% per annum from May 25, 1944, till date of payment. The assessee wrote off this amount of ₹ 14,994 as loss in the year of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Income-tax [1958] 34 I.T.R. 863 was a case where the assessee was required to insure his stock-in-trade with the Central Government under section 7 of the War Risks (Goods) Insurance Ordinance, 1940, and to pay the proper insurance premium. It was found that he had not paid the proper premium in the accounting year in which it was said to have become exigible by virtue of section 7. The High Court referred to section 7A introduced by the Amending Ordinance, which enacted that if any person evaded payment of the premium either by not insuring the goods under the Ordinance of 1940 at all or not insuring the goods to the full amount of their value, then an officer authorised in that behalf would determine the amount of premium which had been evaded and this amount could be recovered from the person concerned; and it held that in the circumstances until the evaded premium was determined as aforesaid it could not be said under the mercantile system of accounting that a liability had been incurred which could be entered in the books as an expenditure, for that could only be done when the liability had become an ascertained sum of money and that until ascertained the liability no doubt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 33,847, which was no more than a contingent liability, and that what the Commission gave up for services rendered was not an ascertained debt due to them of ₹ 33,847 but merely their right to prosecute their claim further for that sum. It was held in the High Court that the sum in question was not an admissible deduction in computing the profits for the accounting period ending on September 30, 1920, being a contingent liability only, and that even if it had been an ascertained liability on that date the accounts might properly be reopened on the subsequent abandonment of the claim by the Wheat Commission so as to disallow any deduction made. James Spencer Co. v. Commissioners of Inland Revenue [1950] 32 Tax Cas. 111, 117 is a case in which the facts were that the assessee were a firm of Clyde Stevedores, who at the material time carried on their employers liability risk instead of insuring claims under the Workmen's Compensation Act or at common law. For the purposes of the firm's excess profits tax the relevant chargeable accounting period was a period of nine months ending December 31, 1945. The assessees debited against the profits of the chargeable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability did not affect his legal liability or his legal rights under the Income-tax Act and the Excess Profits Tax Act. On behalf of the revenue authorities the case of Sassoon Co. Ltd. v. Commissioner of Income-tax [1954] 26 I.T.R. 27, 50-51 was cited. The passages relied upon deal with the question of the character of income, and when it may be said to accrue, arise or be received or earned. The case does not seem to be directly to the point. Having indicated the trend of the authorities, let me consider what exactly is the situation in this case. From the facts stated in the case or annexures A and B the following matters are clear. The transactions in question were speculative transactions in cotton. They had to be settled in the months of January, March and May. The constituent of the assessee submitted an account, and the assessee disputed the correctness of the rate and asserted that the constituent had not rendered a true and correct account of the transactions. The dispute was then referred to the arbitration of two persons. One representative of each party, and then under the membership rules of the East India Cotton Association Ltd., both the assessee and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have the question of liability determined in the first instance by arbitration and then such right being determined to go to the civil court thereafter to have the award made a decree of the court so that the amount awarded could be recovered, or was there a right to enforce the claim straightway on the basis that a liability had come into existence the very moment the transactions were completed? In my view it was clearly in the contemplation of the parties that in the first instance their only right would be to get a determination by arbitration as to whether or not liability had come into existence under the contract and it was only after such ascertainment that the so-called liability could be said to have ceased to be a mere claim and to have become an actual liability with a right of enforcement in a court of law. The arbitration clause is a matter of agreement between the parties. In these circumstances since the assessee's books were not debited with the amount claimed and since there was a repudiation of the same immediately the claim was made, I think that it cannot be said that in the first instance there was anything more than a mere assertion of a claim. It could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loss in the assessment for the year 1945-46. It may be noticed that the ascertained liability fixed by the arbitrators could not be known to the assessee at all during the accounting period relevant to 1945-46 assessment and no debit entry in respect of ₹ 14,994, which is the item in dispute, could possible by made in the accounts of that period. Learned counsel for the Department invited our attention to the provisions of section 10(2A) of the Income-tax Act which reads as follows: 10. (2A) Where for the purpose of computing profits or gains under this section, an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee and, subsequently during any previous year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure, or has obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the amount received by him or the value of the benefit accruing to him shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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