TMI Blog2005 (3) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... l having accepted that the liability was a contractual liability and had not been discharged during the year under consideration, committed an error in law in holding that it was a business loss allowable for the year under consideration. - - - - - Dated:- 22-3-2005 - Judge(s) : D. A. MEHTA., MS. H. N. DEVANI. JUDGMENT The judgment of the court was delivered by D.A. Mehta J.-The following question has been referred by the Income-tax Appellate Tribunal, Ahmedabad Bench, under section 256(1) of the Income-tax Act, 1961 ("the Act"), at the instance of the Commissioner of Income-tax: "Whether the Appellate Tribunal is right in law and on facts, in allowing relief of Rs. 20,78,000 as revenue expenditure though the claim was disputed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il court and ultimately, the dispute was referred to a sole arbitrator. It is recorded in the orders that till the appeals were decided, the arbitrator had not pronounced his award. The Assessing Officer disallowed the claim treating the same to be a notional loss and not a real trading loss based on the judgment in the case of Tripty Drinks P. Ltd. v. CIT [1978] 112 ITR 721 (Orissa). He also assigned additional reasons to the effect that no provision had been made in the account books even though the assessee was following the mercantile system of accounting and in fact, the amount had not been paid. The assessee carried the matter in appeal and the Commissioner of Income-tax (Appeals) held that the amount was allowable as revenue expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income-tax (Appeals) is fully justified and hence confirmed. The Departmental appeal fails on this ground." Mrs. M.M. Bhatt, learned standing counsel appearing on behalf of the applicant-Revenue, submitted that no liability had accrued during the accounting period and only a demand had been raised, which was disputed by the assessee; in other words, it was a liability which had not crystallised. It was further submitted that the liability was contractual in nature and not statutory, and, that the loss was only a notional loss as it was neither final nor paid and, thus, the claim was based on a contingent liability. That the Tribunal had erred by proceeding on the footing that once demand had been raised during the year, lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been withheld and in these circumstances, the assessee was justified in making decision not to supply the goods. That merely because the liability was disputed, it did not cease to be an accrued liability. Responding to the reason assigned by the Assessing Officer that no provision had been made in the accounts, he submitted that an absence of entry or making of entry would not determine the allowability of an item, if it was otherwise allowable, and, on the other hand, taxability of an item, if it was otherwise taxable. He placed reliance on the observations made by this court in Deputy CIT v. Core Healthcare Ltd. [2001] 251 ITR 61 in this context. He also placed reliance on the decision in the case of Madira Kraya Vikraya Sangh v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities, including the Tribunal, were called upon to decide the issue, the dispute between the parties was pending adjudication before the sole arbitrator. In the circumstances, the reason which weighed with the Tribunal, namely, that if the assessee had continued to supply goods, it would have suffered more losses than the damages that the assessee may be required to pay, is besides the point. Though the Tribunal has termed it as a business loss, in fact, no loss has been incurred during the year under consideration. A demand from a third party calling upon the assessee to make the payment would not result in a situation whereby the assessee would incur a loss, if the assessee is disputing the demand so made. The Tribunal having accepted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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