Contractual liability accrues when the obligation arises; RBI permission for remittance does not make know-how fees contingent for tax purposes.

Know-how fees payable under a collaboration agreement accrued when the contractual obligation arose, and a later requirement of Reserve Bank of India permission for remittance did not postpone that accrual or make the liability contingent for income-tax purposes. Under the accounting method regularly employed, income and expenditure must be computed consistently under section 145, and a mixed or piecemeal method cannot be applied to the same source. The foreign exchange restriction affected only the mode of payment, not the existence or enforceability of the liability. On that basis, the expenditure was not allowable in the assessment year in question because the liability had already accrued in an earlier year.

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Issues: Whether the know-how fee payable to a foreign collaborator was deductible in the assessment year in question when the liability had arisen in an earlier year and the assessee relied on the need for Reserve Bank of India permission under foreign exchange law.

Analysis: Under section 145 of the Income-tax Act, 1961, income and expenditure must be computed according to the method of accounting regularly employed, and a piecemeal or mixed method cannot be adopted for the same source of income or expenditure. The liability to pay the know-how fee arose under the collaboration agreement and was not made contingent by section 9 of the Foreign Exchange Regulation Act, 1973. The requirement of prior permission for remittance regulated the mode of payment, but did not postpone accrual or enforceability of the contractual obligation.

Conclusion: The expenditure was not allowable in the assessment year in question because the liability had accrued in the earlier year and could not be treated as contingent.

Ratio Decidendi: A contractual liability accrues when the obligation arises under the agreement, and a statutory requirement governing the mode or permission for payment does not make that liability contingent for income-tax purposes.

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