Contingent liability deductions in profit computation require fair valuation; face-value provisions are insufficient for tax purposes.

Contingent retirement-benefit liabilities may be relevant in annual income-tax profit computation, but only where the obligation can be fairly and reliably valued as part of the year's true profit. A provision cannot be allowed merely because the liability arises from services already rendered or because it is treated as deferred remuneration; the deduction must reflect the real burden of the year. A face-value appropriation, without proper discounting or satisfactory valuation evidence, was too rough to support the claimed deduction, so the provision was disallowed.

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Issues: (i) Whether annual deductions could be made in computing taxable profits for contingent retirement-benefit liabilities arising under the Peruvian social legislation; (ii) whether the claimed deductions could be allowed at face value without discounting and on the basis of the evidence before the court.

Issue (i): Whether annual deductions could be made in computing taxable profits for contingent retirement-benefit liabilities arising under the Peruvian social legislation.

Analysis: The payments were treated as deferred remuneration for services rendered over the period of employment, but no payment was exigible until termination of service. The court rejected the contention that the legal contingency of each individual claim prevented any current provision from being taken into account merely because the liability had not yet matured. At the same time, the deductions claimed had to reflect the real burden of the year and could not be justified simply by treating the whole liability as if it were a payment of the last year of service.

Conclusion: The appeal failed on the contention that the full annual appropriations were deductible as such in principle.

Issue (ii): Whether the claimed deductions could be allowed at face value without discounting and on the basis of the evidence before the court.

Analysis: Even if current provision for future liabilities was permissible in principle, the figure inserted in the accounts had to be a fair estimate of the present value of the obligation. A mere face-value appropriation was too rough and was not shown, on the material before the court, to be a sufficiently reliable measure of the liability. The finding that the method accorded with correct accountancy practice was not decisive for income-tax purposes, and the case was not fit for remission to explore a new method of valuation.

Conclusion: The deductions as claimed were not allowable, and no remand was ordered.

Final Conclusion: The decision confirms that contingent trading liabilities may be relevant to annual profit computation only where they can be fairly and reliably valued; otherwise, the taxable profits are to be computed without allowing the claimed provision.

Ratio Decidendi: For income-tax purposes, annual trading profits are not governed by an absolute rule excluding contingent liabilities, but a deduction for a future liability is allowable only if the liability can be fairly and satisfactorily estimated as part of the true profit of the year.

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