1962 (1) TMI 68 - HC - Income Tax

Assessee's Claim of Rs. 1,20,000 Allowed for Assessment Year 1950-51

Commissioner of Income-Tax, West Bengal Versus Shewbux Jahurilal

Commissioner of Income-Tax, West Bengal Versus Shewbux Jahurilal - [1962] 46 ITR 688 Issues Involved:1. Determination of the correct assessment year for the loss of Rs. 1,20,000 claimed by the assessee.2. Application of the mercantile system of accounting for anticipated losses.3. Legal obligation of the assessee to record disputed claims in the books of account.Issue-wise Detailed Analysis:1. Determination of the Correct Assessment Year for the Loss of Rs. 1,20,000 Claimed by the Assessee:The primary issue was whether the loss of Rs. 1,20,000 claimed by the assessee was admissible in the assessment year 1950-51 or 1947-48. The assessee entered into forward contracts in April 1946 to supply loose jute, with deliveries due in late 1946. The contracts were extended to February 28, 1947, but the assessee failed to deliver, leading to cancellation notices on March 1, 1947. The buyers claimed the difference between the contract price and the market price, amounting to Rs. 3,58,997. Arbitration resulted in awards against the assessee, leading to a settlement in April 1949 for Rs. 1,35,000, with Rs. 1,20,000 paid by February 1950. The assessee, using the mercantile system, recorded the Rs. 1,20,000 loss in the assessment year 1950-51. The department argued the loss should have been recorded in 1947-48 when the claim was made. The Tribunal held the loss was ascertainable only upon settlement, making it admissible in 1950-51.2. Application of the Mercantile System of Accounting for Anticipated Losses:The court examined whether the assessee was required to record anticipated losses in its books when claims were made but disputed. Under the mercantile system, income, profits, and gains must be computed according to the method of accounting regularly employed by the assessee. The court referred to the Supreme Court's explanation in Keshav Mills Ltd. v. Commissioner of Income-tax, emphasizing that under the mercantile system, liabilities must be recorded when they are legally due, not merely anticipated. The court concluded that an assessee is not bound to record disputed claims as losses in the books until the liability is admitted or adjudicated.3. Legal Obligation of the Assessee to Record Disputed Claims in the Books of Account:The court rejected the department's argument that the assessee must record all anticipated losses as soon as claims are made, regardless of whether the claims are admitted. The court emphasized that the assessee's books should reflect the actual state of affairs according to the assessee's judgment. The court cited the case of Calcutta Co. Ltd. v. Commissioner of Income-tax, where the Supreme Court allowed the deduction of estimated expenditure for future liabilities under the mercantile system, provided the liability had accrued. The court also referenced English cases, such as H. Ford & Co Ltd. v. Commissioners of Inland Revenue, to illustrate that contingent liabilities are not deductible until they become actual liabilities. The court concluded that the assessee could contest the claims and only record the loss when it was ascertained or admitted.Conclusion:The court held that the loss of Rs. 1,20,000 was admissible in the assessment year 1950-51 as claimed by the assessee. The court emphasized that under the mercantile system, the assessee is not obliged to record disputed claims as losses until the liability is admitted or adjudicated. The reference was answered accordingly, with costs awarded to the assessee.