High Court allows deduction for disputed contingent liability under mercantile accounting system.

The High Court of Allahabad allowed the deduction claimed by the assessee towards a contingent liability, emphasizing that under the mercantile system of accounting, an assessee can claim deduction for a business liability even if it is disputed, and not making a provision in the books of account does not negate this right. The court cited the decision in Kedarnath Jute Mfg. Co. Ltd. [1971] 82 ITR 363 and rejected the Revenue's application for reference, affirming the assessee's right to claim the deduction.

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Issues:
1. Whether the deduction claimed by the assessee towards a contingent liability is allowable as per the Income-tax Act, 1961.
2. Whether the judgment in the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363 is applicable in the present case.

Analysis:

The High Court of Allahabad heard arguments from both the Revenue and the assessee regarding the deduction claimed towards a contingent liability. The assessee, a public limited company engaged in various manufacturing activities, claimed a deduction of Rs.14,77,552 due to a contingent liability arising from a difference in cane price fixed by the Central Government. The Assessing Officer disallowed the claim, stating that the deduction would only be allowed when the matter is finally decided and the amount is paid. This decision was upheld by the Commissioner of Income-tax (Appeals) and later by the Tribunal. However, the Tribunal later amended its order, stating that the liability was allowable as it was based on a notification issued by the Ministry of Agriculture and Irrigation. The Tribunal relied on the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. [1971] 82 ITR 363.

The Revenue contended that the deduction should be subject to the pending decision of the Supreme Court. However, the court found similarities with a previous case and cited the decision in CIT v. J. K. Synthetics Ltd. [1983] 143 ITR 771 (All), which supported the assessee's right to claim deduction even if the liability is disputed. The court emphasized that under the mercantile system of accounting, an assessee can claim deduction for a business liability even if it is not quantified or paid. Referring to the Supreme Court decision in Kedarnath Jute Mfg. Co. Ltd. [1971] 82 ITR 363, the court reiterated that an assessee can claim deduction for a business liability even when it is being disputed, and not making a provision in the books of account does not negate this right.

In conclusion, the court rejected the Revenue's application for reference, stating that the decision in Kedarnath Jute Mfg. Co. Ltd. [1971] 82 ITR 363 already covered the points raised by the Revenue. Therefore, the deduction claimed by the assessee towards the contingent liability was deemed allowable, and the application was rejected with costs.

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