Regular accounting method governs deduction of litigation expenditure written off when litigation ends.

Under the Indian Income-tax Act, business income is computed according to the method of accounting regularly employed by the assessee. Where a bona fide hybrid system keeps litigation expenditure in suspense and writes it off only when the litigation ends, deduction is allowed in the year of write-off even if the payments were made in earlier years. The accounting treatment, not the timing of payment alone, governed the tax result, and the disallowance was not justified.

---

---

Issues: Whether litigation expenditure incurred in earlier years but written off in the accounting year was deductible in that year under the assessee's regularly employed hybrid system of accounting.

Analysis: The assessee maintained a mixed method of accounting in money-lending transactions, under which litigation expenses were debited to the debtor's account and written off only when the litigation finally ended. The general rule is that expenditure is ordinarily deductible in the year in which it is incurred, but section 13 of the Indian Income-tax Act requires business income, profits, and gains to be computed in accordance with the method of accounting regularly employed by the assessee. Where a regular accounting system treats litigation expenditure as held in suspense and claims it only when the fate of the litigation becomes clear, the fact that the payments were made in earlier years does not prevent deduction in the accounting year if that is how the accounts are regularly kept. The position was treated as analogous to cases where income carried in suspense and brought into account later was accepted for tax computation.

Conclusion: The expenditure was deductible in the accounting year on the basis of the assessee's regularly employed method of accounting, and the disallowance was not justified.

Final Conclusion: The reference was answered in favour of the assessee by holding that the disputed litigation could be claimed in the year of write-off under the accounting method regularly followed.

Ratio Decidendi: Under section 13 of the Indian Income-tax Act, a regularly employed and bona fide method of accounting governs the computation of business income, and expenditure kept in suspense under that system may be deducted in the year in which the method brings it into account even if the payments were actually made in earlier years.

---