TMI Blog2005 (9) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... delivered by Rajes Kumar J.- At the instance of the Revenue, the Income-tax Appellate Tribunal, Allahabad has referred the following question under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") relating to the assessment year 1982-83 for opinion to this court: "Whether in law and in circumstances of the case, the hon'ble Income-tax Appellate Tribunal was justified in allowing the assessee's claim of Rs. 2,76,419 representing car price difference, holding that the liability accrued and arose during the accounting period relevant to the assessment year under consideration as a result of final agreement dated September 20, 1981?" The brief facts of the case are as follows: The assessee-opposite party (hereinafter referred to as "the assessee") deals in sales of motor cars and their spare parts as a dealer of M/s. Premier Automobiles Ltd. During the course of the assessment proceedings for the assessment year 1982-83, it was noticed that the assessee had debited a sum of Rs. 2,76,419 in the profit and loss account under the head "Car price difference paid to M/s. Premier Automobiles Ltd." and accordingly claimed it as deduction during the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s deduction from its income on the ground that they had denied the liability which had arisen during the period September 1969 to 1971 and had accepted it in September 1981, which accrued only after the receipt of the letter dated September 20, 1981, The Assessing Officer declined to accept this contention of the assessee and, accordingly, rejected the assessee's claim of Rs. 2,76,419 mainly on the ground that the recovery had been made from the customers from October 1970 onwards, which is evident from the facts that out of Rs. 3 lakhs, a claim of Rs. 2,76,419 only was made after adjustment of an amount of Rs. 23,580 recovered from the customers in the earlier years. The Assessing Officer had held that the liability in question did not relate to the assessment year under consideration, but it relates to the period 1969 to 1971, therefore, the liability accrued in the year 1971 when the claim of Rs. 3,39,571 was made vide demand notice dated November 30, 1971, just after the judgment of the hon'ble Supreme Court which was delivered. Being aggrieved by the aforesaid decision of the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. CIT reported in [1980] 125 ITR 33 (All). Learned counsel for the assessee submitted that the dispute relating to the price between M/s. Premier Automobiles Ltd. and the Government arose and M/s. Premier Automobiles has challenged the notification issued by the Government of India dated September 21, 1969, fixing the price of the Fiat car and the assessee was not the party to the said case. He submitted that after the interim order dated November 24,1971, a demand has been raised vide letter dated November 30, 1971 for Rs. 3,39,571 relating to the sales of vehicle for the period September 1969 to April 1971 representing difference in the selling price of the car as fixed by M/s. Premier Automobiles Ltd. and the notification of the Government. He submitted that after the receipt of the letter the assessee objected to the demand vide its letter dated January 20, 1982, which was not accepted by M/s. Premier Automobiles Ltd. and further letter dated February 18, 1982, was written. Thereafter, the quota of the car has been reduced by M/s. Premier Automobiles Ltd. Thus, the assessee felt constrained to settle the issue and, accordingly, wrote a letter dated August 13,1981, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain differences arose between the company and its sole-selling agents, which were referred to an arbitrator. The award was made against the company on March 14, 1960 for Rs. 1,05,285.43 with interest thereon at the rate of 5VS per cent, from January, 1959, up to the date of the award. The company then transferred part of the said interest to the interest account of the earlier year and Rs. 1,08,370. 55 as principal sum and balance interest to the profit and loss account for the year ending July 31, 1960. For the assessment year 1961-62, the Income-tax Officer disallowed the claim of deduction of Rs. 1,08,370 made by the company, which was subsequently allowed in the first appeal and by the Tribunal. In the reference, the Calcutta High Court upheld the view of the Tribunal. The Calcutta High Court has held that the company has incurred business liability not in the earlier year but in the accounting year when the matter has been settled in arbitration. In the case of CIT v. Oriental Motor Car Co. P. Ltd. [1980] 124 ITR 74 (All) it has been held that in the previous year relevant to the assessment year 1972-73, the assessee was a dealer of cars, tractors, cycles, scooters and spare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cturing Co. Ltd. v. CIT [1971] 82 ITR 363 and the decision of this court in the case of CIT v. Sugar Dealers [1975] 100 ITR 424. The case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) is clearly distinguishable, for, in that case, the liability for sales tax arose by virtue of the statute as soon as the sale was effected. Such is not the case here. The assessee's case is not that the liability arose as soon as it supplied the tractors to the public works department at Lucknow. His contention is that the liability arose when a claim to that effect was lodged with it by M/s. Escorts Ltd. The assessee did not admit this contractual liability earlier than May 19, 1972. Nothing was brought on the record to show that the agency contract fixed a liability as soon as the infringement took place. It also appears to us that the amount of Rs. 950 per tractor claimed by M/s. Escorts Ltd. was negotiable, for, ultimately, the matter was settled at Rs. 650 per tractor. In such circumstances, it cannot be said that an ascertainable liability arose to the extent of Rs. 950 per tractor as soon as M/s. Escorts Ltd. had made the claim. In our view, the liability for the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee was entitled to the deduction of that sum being the amount of sales tax which it was liable under the law to pay during the relevant accounting year. That liability did not cease to be a liability 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. Further, the fact that the assessee had failed to debit the liability in its books of account did not debar it from claiming the sum as a deduction either under section 10(1) or section 10(2)(xv) of the Act of 1922. The principle laid down was: 'Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relevant thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter?' On the other hand, Kanpur Tannery Ltd. v. CIT [1958] 34 ITR 863 (All); CIT v. Swadeshi Cotton and Flour Mills P. Ltd. [1964] 53 ITR 134 (SC) and CIT v. Banwari Lal Madan Mohan [1977] 110 ITR 868 (All) can be cited as some of the instances of a liability arising as a result of some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt held that although the award was made by the arbitrator on July 29, 1955, enhancing the amount of compensation payable to the respondent, the entire amount was in dispute in the appeal filed by the State Government and the dispute was regarded by the court as real and substantial because the respondent was not permitted to withdraw the amount deposited by the State Government without furnishing a security bond for refunding the amount in the event of the appeal being allowed. There was no absolute right to receive the amount at that stage. If the appeals were allowed in entirety, the right to payment of enhanced compensation would have fallen altogether. The extra amount of compensation was not income arising or accruing to the respondent during the previous year relevant to the assessment year 1956-57. In the present case, admittedly, the liability is not of a statutory nature and was in the nature of a contractual liability. Before the Supreme Court M/s. Premier Automobiles Ltd. has challenged the Government notification fixing the price. The assessee was not a party before the Supreme Court. Vide interim order dated April 16, 1971, for the period from September, 1969 to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legal action to defend their position, but on July 15,1981, the management of Premier Automobiles Ltd. again wrote to the assessee stating that it should settle its account and also demanding from the assessee interest accrued on the aforesaid outstanding amount. In the meanwhile, the quota of the cars of the dealership has been reduced by M/s. Premier Automobiles Ltd. and in such circumstances the assessee felt constrained to accept the claim of the assessee and, accordingly, a letter dated August 13, 1981, was written to the Premier Automobiles Ltd. as follows: "Let me assure you of my utmost sincerity to settle this matter, I myself feel very unhappy about the delay, which unnecessarily causes misunderstandings in our long established and extremely good business relationship. I think it is futile to go into the local aspects of the matter because I find myself unable to see how we can be made liable to pay to you something, which was never recovered by us from the customers. However, in consultation with the other partners of the firm and haying regard to our continuing business relations I am prepared to have a reasonable settlement, which should be fair to both of us. I th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. agreed to accept the discharge of this liability in monthly instalments of Rs. 20,000 (rupees twenty thousand) each payable to the end of each month, the first of such instalment becoming payable in October 1981 and thereafter every month. 4. That it is agreed that no interest shall be payable in respect of the said instalments/liabilities to be discharged by Raj Motors." The aforesaid correspondence clearly shows that it is the claim of the Premier Automobiles Ltd. that the assessee was responsible for making the payment of the differential amount and the assessee has not accepted such liability. In any view of the matter, the nature of the liability was a contractual liability, which was finally settled, vide agreement/letter dated September 20,1981, and, therefore, the liability to make payment accrued only when it has been finally settled on September 20, 1981. The various decisions of the court referred hereinabove, clearly held that the liability of a contractual nature accrues when it is finally settled. The facts of the present case are almost similar to the facts in the decision of this court in the case of CIT v. Oriental Motor Car Co. P. Ltd. [1980] 124 ITR 74, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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