Method of accounting: litigation costs carried in suspense and written off are deductible in the year they are brought into account.

Whether prior-year litigation expenses written off in the accounting year are deductible depends on the assessee's regularly employed method of accounting: where such costs have been carried in suspense and thereafter debited to the profit and loss account in accordance with that regular system, they may be regarded as incurred for tax computation in the year they are written off. The court applied the principle that computation follows the regularly employed accounting method and held the Tribunal erred in disallowing the deduction, answering the reference in favour of the assessee.

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Issues: Whether the Tribunal was justified in disallowing deduction of litigation and related expenses (Rs. 9,076 / Rs. 9,098) which had been incurred in prior years but were written off in the accounting year and claimed as a business deduction in that accounting year under the assessee's regularly employed system of accounts.

Analysis: The question requires applying the requirement that income, profits and gains be computed according to the method of accounting regularly employed by the assessee (section 13 of the Income-tax Act) alongside the general principle that expenses are deductible in the year in which they are incurred. If an assessee regularly employs a system of accounting whereby litigation expenses are debited to a debtor's account and held in suspense until finality (with consequent write-off in a later accounting year), then for computation under section 13 those amounts treated as expenditure in the relevant accounting year may be regarded as incurred in that year for tax purposes. The court examined authorities recognising that where receipts or expenses are carried in suspense and thereafter brought into the income or loss account according to a regularly employed accounting method, those entries can form part of the computation for the year in which they are so brought into account. The court distinguished cases that generally state the rule that expenses are deductible only in the year actually incurred, holding that those decisions did not address the effect of a regularly employed hybrid accounting system governed by section 13.

Conclusion: The Tribunal was not justified in disallowing the deduction; on the facts the expenditure in question is deductible in the accounting year when it was written off under the assessee's regularly employed method of accounting, and the reference question is answered in the negative (decision in favour of the assessee).

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