Court allows deduction for past expenditure if consistently treated as incurred in relevant year.

Gappumal Kanhiyalal Versus Commissioner of Income-tax

Gappumal Kanhiyalal Versus Commissioner of Income-tax - [1961] 42 ITR 446 (Allahabad) Issues Involved:
1. Justification of disallowing the expenditure of Rs. 9,076 spent by the assessee in a period preceding the accounting year but written off in the accounting year relevant for the assessment year.
2. Applicability of the assessee's method of accounting under section 13 of the Indian Income-tax Act.
3. Determination of the relevant accounting year for claiming expenditure.

Issue-Wise Detailed Analysis:

1. Justification of Disallowing the Expenditure of Rs. 9,076:
The primary question referred under section 66(1) of the Indian Income-tax Act was whether the Tribunal was justified in disallowing the expenditure of Rs. 9,076 spent by the assessee in a period preceding the accounting year but written off in the accounting year relevant for the assessment year. The Tribunal held that the assessee could claim an allowance in respect of expenditure only in the accounting year in which it was incurred. It was found by the taxing authorities that the assessee spent only Rs. 21-6-0 on May 17, 1945, during the accounting year under assessment, and the rest of the expenses were spent in preceding years, leading to the disallowance of the claim.

2. Applicability of the Assessee's Method of Accounting under Section 13:
The assessee contended that by virtue of section 13 of the Income-tax Act, the system of accounting as adopted by him entitled him to such deduction in the year in question. The assessee maintained a mixed method of accounting, where litigation expenses were debited to the debtor's account and written off only when the litigation came to a finality. The Tribunal, however, did not accept this method for claiming deductions for expenses incurred in previous years.

3. Determination of the Relevant Accounting Year for Claiming Expenditure:
The Tribunal's decision was based on the principle that expenses must be claimed in the accounting year in which they were incurred. Several cases were cited to support this proposition, including Commissioner of Income-tax v. Basant Rai Takhat Singh, Mackenzie v. Arnold, and Commissioner of Income-tax v. Mathuradas Mannalal, which collectively emphasized that deductions can be permitted in respect of only those expenses incurred in the relevant accounting year. However, the assessee argued that his hybrid system of accounting, which had been previously accepted, should allow him to claim the expenditure in the year when the litigation concluded and the expenses were written off.

Conclusion:
The court analyzed the provisions under section 13 of the Income-tax Act, which requires income, profits, and gains to be computed in accordance with the method of accounting regularly employed by the assessee. The court observed that if the method of accounting regularly employed by the assessee treats the expenditure as incurred in the accounting year, then it should be allowed, even if the expenditure was actually incurred in earlier years. The court referred to the decision in Commissioner of Income-tax v. Maharajadhiraja of Darbhanga, where a hybrid system of book-keeping was accepted. The court concluded that the assessee should be entitled to deduct the expenses in question, even though they were expenses of previous years, based on the regularly employed method of accounting. Therefore, the answer to the question raised was in the negative, indicating that the Tribunal was not justified in disallowing the expenditure.

The judgment highlights the importance of the method of accounting regularly employed by the assessee and its acceptance by the revenue authorities in determining the relevant accounting year for claiming deductions.