Court affirms settlement as genuine, allows deduction under mercantile accounting.

The court affirmed the Tribunal's findings that the settlement of Rs. 10 lakhs between Todi Tea Co. Ltd. and Taurus Foundry Pvt. Ltd. was genuine, with the liability admitted and paid by the assessee. The court also upheld the Tribunal's decision that the assessee's move to set aside the arbitrator's award for the balance amount of Rs. 7,00,000 was supported by material evidence. Additionally, the court ruled in favor of the assessee, allowing the deduction of Rs. 10 lakhs in the assessment year 1984-85, in accordance with the mercantile system of accounting.

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Issues Involved:
1. Whether the finding of the Tribunal regarding the settlement of Rs. 10 lakhs is based on any material or perverse.
2. Whether the Tribunal's finding about the assessee moving the High Court to set aside the arbitrator's award is based on any material or perverse.
3. Whether the Tribunal was justified in law in allowing Rs. 10 lakhs as an allowable deduction in the assessment year 1984-85.

Summary of Judgment:

Issue 1: Settlement of Rs. 10 Lakhs
The Tribunal found that the assessee, Todi Tea Co. Ltd., had entered into a contract with Taurus Foundry Pvt. Ltd. and failed to supply the agreed quantity of tea, leading to a compensation claim of Rs. 30 lakhs by Taurus. The arbitrator awarded Rs. 17 lakhs, but the matter was settled out of court for Rs. 10 lakhs. The Tribunal and the Commissioner of Income-tax (Appeals) concurred that the transaction was genuine and the liability of Rs. 10 lakhs was admitted and paid by the assessee. The court found no justification to interfere with this finding, affirming that the settlement was genuine and the liability was admitted.

Issue 2: Setting Aside Arbitrator's Award
The Tribunal's finding that the assessee moved the Calcutta High Court to set aside the arbitrator's award concerning the balance amount of Rs. 7,00,000 was supported by the memorandum of settlement dated March 26, 1984. The settlement stated that Taurus Foundry Pvt. Ltd. would not insist on the payment of the balance sum, and the assessee would apply to the court to set aside the award for the balance amount. The court found this finding to be based on material evidence and not perverse.

Issue 3: Allowable Deduction of Rs. 10 Lakhs
The court considered whether the Rs. 10 lakhs liability could be allowed as a deduction in the assessment year 1984-85. The assessee followed the mercantile system of accounting, and the liability was admitted and created in the books during the relevant year. The court referenced CIT v. Shewbux Jahurilal [1962] 46 ITR 688, which supports the allowance of admitted liabilities in the year they are created under the mercantile system. The court affirmed that the Tribunal and the Commissioner of Income-tax (Appeals) were justified in allowing the deduction of Rs. 10 lakhs in the assessment year 1984-85.

Conclusion:
The court answered:
- Question 1: Misconceived as there was no finding by the Tribunal on March 14, 1984, regarding the full and final settlement.
- Question 2: The finding was not perverse and was based on material evidence.
- Question 3: Affirmative, in favor of the assessee and against the Revenue, allowing the deduction of Rs. 10 lakhs in the assessment year 1984-85.

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