Accrued liability deductible on mercantile basis, but investment allowance fails where machinery was not ready for use by the cut-off date.

Under mercantile accounting, cess and cess surcharge that were statutorily payable at year-end constituted an accrued and ascertained liability, so the deduction was allowable for the relevant assessment year even though the levy was later invalidated and the claim appeared only in the computation of income; bookkeeping treatment was irrelevant. Investment allowance under Section 32A(1) depended on the machinery being installed and ready for use before the prescribed cut-off date, and the factual material showed the coal mill and auxiliaries were commissioned only later, with essential components and supporting acceptance material absent; the allowance was therefore not admissible.

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Issues: (i) Whether the assessee was entitled to deduction of cess and cess surcharge as an accrued liability for the assessment year 1988-89 notwithstanding the subsequent invalidation of the levy and the fact that the claim had been made only in the computation of income; (ii) Whether the assessee was entitled to investment allowance under Section 32A(1) of the Income-tax Act, 1961 in respect of the coal mill and auxiliaries claimed to have been installed before 31 March 1987.

Issue (i): Whether the assessee was entitled to deduction of cess and cess surcharge as an accrued liability for the assessment year 1988-89 notwithstanding the subsequent invalidation of the levy and the fact that the claim had been made only in the computation of income.

Analysis: Under mercantile accounting, income and expenditure are recognised on accrual. The cess and cess surcharge were statutorily payable as on 31 March 1988 and therefore constituted an ascertained liability during the relevant previous year. Their later invalidation by the Supreme Court did not alter the character of the liability for that year, but only gave rise to the consequence of cessation in the later year in which the levy was struck down. The absence of an entry in the books of account and the possibility of filing a revised return were irrelevant to the admissibility of the deduction, because allowability depends on the existence of the liability in law and not on bookkeeping treatment.

Conclusion: The deduction was allowable. The issue is decided in favour of the assessee and against the Revenue.

Issue (ii): Whether the assessee was entitled to investment allowance under Section 32A(1) of the Income-tax Act, 1961 in respect of the coal mill and auxiliaries claimed to have been installed before 31 March 1987.

Analysis: For the purpose of investment allowance, the plant and machinery had to be installed and ready for use before the relevant cut-off date. The concurrent findings recorded that the machinery was commissioned only on 14 August 1987, that essential components including the coal dustbin and coal mill ESP had not been installed by 31 March 1987, that the precalcinator was also acquired later, and that no test report, acceptance report, or comparable material showed the plant to have been operational or accepted as installed. The absence of depreciation claim did not decide the issue, but the factual material supported the conclusion that the machinery was not ready for use by the stipulated date.

Conclusion: The claim for investment allowance was not admissible. The issue is decided in favour of the Revenue and against the assessee.

Final Conclusion: The appeal succeeded only on the first question and failed on the second, resulting in relief to the assessee on the deduction of cess and cess surcharge while denying investment allowance.

Ratio Decidendi: A statutory liability accrued under mercantile accounting is deductible in the year of accrual notwithstanding its later invalidation or the assessee's bookkeeping treatment, and investment allowance is available only when the machinery is actually installed and ready for use within the prescribed time.

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