TMI Blog2005 (8) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... ject, however, to section 41 of the Income-tax Act, 1961. - - - - - Dated:- 2-8-2005 - Judge(s) : D. K. SETH., MAHARAJ SINHA. JUDGMENT D.K. Seth J.- The question: The question involved in this appeal is: "Whether, on a true and proper construction of the contract with the Indian Railways and their letters dated May 3, 1986, and April 15, 1988 the appellant is entitled to deduction in respect of the demand of Rs. 46,82,142 made by the Indian Railways during the previous year relevant to the assessment year 1987-88 and the purported findings of the Tribunal that the liability had not crystallized and rejecting the said claim are based on any material and/or even arrived at by ignoring the relevant materials and or by taking into consideration irrelevant and/or extraneous materials and or are otherwise arbitrary, unreasonable and perverse?" The facts: In order to appreciate the situation, we may briefly refer to the facts. The assessee had entered into a contract with the Railways for supplying certain materials. The contract contained a condition that in case of rejection of the material supplied, the replacement would be at the cost of the assessee/contractor. In thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mits the liability. According to him, the admission of such liability is something different from the acknowledgment contemplated under section 18 of the Limitation Act. It has nothing to do with the recoverability of the amount by the creditor of the assessee. There is a distinction between an acknowledgment of liability in the accounts maintained by the assessee for the purpose of income-tax and an acknowledgment for the purpose of recoverability of such amount extending the period of limitation under section 18 of the Limitation Act by the person entitled to enforce such liability against the assessee. He relied on the decision in CIT v. Shewbux Jahurilal [1962] 46 ITR 688 (Cal) and Sutna Stone and Lime Co. Ltd. v. CIT [1991] 192 ITR 478 (Cal). Relying upon the decision in Shewbux Jahurilal [1962] 46 ITR 688 (Cal), Mr. Khaitan submitted that the assessee has a duty to maintain accounts if he follows the mercantile system to show all admitted loss to the extent of his admission and it goes no further than that and such admission can be reflected in the accounts on the date when the admission is made by the person against whom the assessee admits the liability. According to hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation under which the Railways would be entitled to file a suit at least till 2012 if not till 2016. That apart the question of application of the Arbitration and Conciliation Act, 1996, may also be imported in the facts and circumstances of the case by demanding an arbitration after the 1996 Act has come into operation which would bring about the applicability of the 1996 Act in the present case which is an issue complicated and can be decided in an appropriate proceeding. Therefore, we need not dilate on all those questions and leave it at that simply by holding that the point that has been raised by Mr. Shome is of academic interest and will not be of any importance to the question now we are supposed to answer. Whether in the mercantile system of accounts the loss could be reflected: So far as the question of maintenance of accounts is concerned, if the assessee follows the mercantile system, in that event, he is bound to reflect all admitted loss to the extent of his admission and no further. In Shewbux Jahurilal [1962] 46 ITR 688 (Cal), the court was concerned with the question as to whether the assessee was liable to reflect anticipated loss in his account maintained un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct the same when he chooses to admit the liability, i.e., either when the demand is made or when the liability is ascertained or when he admits the liability. This reflection of the loss in the accounts under the mercantile system is well taken care of by section 41 of the Income-tax Act, 1961, which empowers the income-tax authority to charge the liability so reflected in any earlier years to income-tax as soon or in the assessment year the liability ceases to exist. Therefore, the entry made can neither be said to be without any substance nor can be ignored by the Assessing Officer. Admission vis-a-vis acknowledgement of liability: The admission contemplated for the purpose of reflection in the accounts maintained in the mercantile system has to be construed differently for the purpose of income-tax than that is to be construed under the Limitation Act for the purpose of extending limitation under section 18 of the Limitation Act. Under the Limitation Act, an acknowledgment extends the period of limitation enabling the creditor to recover the amount from the debtor. Even then section 18 of the Limitation Act refers to an acknowledgment in writing signed by the parties against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said decision proceeded where the assessee did not admit the liability. Conclusion: The admission of liability for the purpose of making entry of loss or reflection of liability in the accounts maintained in the mercantile system for the purpose of claiming deduction of loss in the course of assessment is distinct from acknowledgment of liability vis-a-vis the creditor. Inasmuch as if the amount becomes recoverable vis-a-vis the creditor, i.e., the liability ceases to be recoverable, the loss becomes income of the assessee chargeable to tax in the year of such accretion. The assessee is entitled to make such entry in the accounts maintained in the mercantile system as soon as he admits the liability. Therefore, he is entitled to the deduction of the loss in computing the income of the assessment year in which such entry is made, subject, however, to section 41 of the Income-tax Act, 1961. Order: The appeal is allowed. In the circumstances, we answer the question in the affirmative. The order of the learned Tribunal is set aside and that of the Commissioner (Appeals) is affirmed. There will, however be no order as to costs. Let xerox certified copies of this judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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