2002 (9) TMI 70 - HC - Income Tax

Court allows deduction for accrued liability to foreign consultant without actual remittance

The court held in favor of the assessee, ruling that the entire accrued liability for commission payable to the foreign consultant should be deductible, ... 'Whether, on the facts and in the circumstances of the case, the Tribunal was right in directing the Income-tax Officer to allow the deduction of only such amounts in respect of commission payable to Miss Nellie Melson during the relevant year, as were allowed to be remitted by the Reserve Bank of India in the relevant year?' - since the liability of the assessee to pay commission to the lady accrued under the agreement dated May 5, 1970, and the assessee was maintaining its accounts on the mercantile system of accounting, it was entitled to deduct such liability which had accrued during the period for which profits and gains were being computed and, therefore, the Tribunal was not right in law in restricting the deduction in respect of the commission to the amount actually remitted during the relevant year. - we answer the question referred in the negative, i.e., in favour of the assessee and against the Revenue. Issues Involved:1. Deduction of commission payable to a foreign consultant.2. Requirement of Reserve Bank of India's permission for remittance.3. Accrual of liability under the mercantile system of accounting.4. Applicability of statutory restrictions on liability accrual.Detailed Analysis:1. Deduction of Commission Payable to a Foreign Consultant:The primary issue was whether the Income-tax Appellate Tribunal was correct in directing the Income-tax Officer to allow the deduction of only those amounts in respect of commission payable to Miss Nellie Melson that were permitted by the Reserve Bank of India (RBI) for remittance during the relevant year. The assessee, a private limited company, claimed commission payments to Miss Nellie Melson, a technical consultant from Denmark, for securing export orders. The Income-tax Officer disallowed the claimed amount of Rs. 1,72,462, questioning the genuineness of the agreement and the services rendered. The Appellate Assistant Commissioner upheld the disallowance due to the lack of clarity on the assistance provided by Melson.2. Requirement of Reserve Bank of India's Permission for Remittance:The Tribunal observed that the RBI had granted permission to remit 5% of the commission on the FOB value of goods shipped. The Tribunal directed that only the amounts allowed by the RBI for remittance should be deducted. The assessee contested this, arguing that the liability to pay commission should be recognized based on the agreement and not limited to the remitted amounts approved by the RBI.3. Accrual of Liability under the Mercantile System of Accounting:The court examined whether the assessee's liability to pay commission under the agreement should be recognized in the year it accrued or only when the RBI permitted the remittance. The court highlighted that under the mercantile system of accounting, an expenditure is allowable in the year the liability accrues. The court noted that the agreement to pay commission did not require RBI's approval, and the restriction was only on the remittance of money abroad. Therefore, the liability accrued as per the agreement, irrespective of the RBI's permission for remittance.4. Applicability of Statutory Restrictions on Liability Accrual:The court referred to the Supreme Court's decision in Nonsuch Tea Estate Ltd. v. CIT, which held that liability accrues only upon approval by a statutory authority if such approval is required. However, in this case, the court found that the agreement to pay commission did not require RBI's approval, and the restriction was only on the remittance. The court distinguished this case from Nonsuch Tea Estate Ltd., emphasizing that the liability to pay commission was independent of RBI's permission for remittance.Conclusion:The court concluded that since the liability to pay commission accrued under the agreement and the assessee followed the mercantile system of accounting, the Tribunal erred in restricting the deduction to the amount actually remitted with RBI's approval. The court held that the assessee was entitled to deduct the entire accrued liability in the relevant assessment years. The court answered the referred question in the negative, in favor of the assessee and against the Revenue, disposing of the references with no order as to costs.