Court allows deduction for accrued arrear rent and cess liability in relevant accounting year.

The court held that the liability to pay arrear rent and cess, disputed and crystallized through an agreement in the relevant accounting year, became enforceable in the assessment year 1976-77. The deduction was allowed as the liability accrued and became real and enforceable during the relevant period, supporting the assessee's claim. The court ruled in favor of the assessee, allowing the deduction without costs.

---

---

Issues Involved:
1. Whether the liability to pay arrear rent and cess of Rs. 4,13,666 arose in the accounting year relevant to the assessment year 1976-77.
2. Whether the deduction of the said amount is admissible in the assessment year 1976-77.

Detailed Analysis:

1. Liability Arising in the Accounting Year Relevant to Assessment Year 1976-77:
The assessee, a public limited company engaged in the manufacture and sale of tea, follows the mercantile system of accounting. The previous year relevant to the assessment year 1976-77 commenced on March 1, 1975, and ended on February 28, 1976. The assessee claimed a deduction for rent and cess amounting to Rs. 4,13,666, which was determined to be payable under section 42(2) of the West Bengal Estates Acquisition Act, 1953, for the period from April 15, 1955, to April 1, 1971. This liability was crystallized through an agreement executed on March 13, 1975, between the assessee and the State Government of West Bengal.

The Tribunal found that the liability for enhanced rent and cess was disputed and was settled only during the previous year under appeal in terms of the agreement executed on March 13, 1975. Therefore, the liability to pay the arrear rent and cess became enforceable in the previous year relevant to the assessment year 1976-77.

2. Admissibility of Deduction in Assessment Year 1976-77:
The Income-tax Officer initially did not allow the deduction, arguing that the liability arose in earlier years and, under the mercantile system of accounting, could not be claimed in the year under reference. However, the Commissioner of Income-tax (Appeals) allowed the claim, and the Tribunal upheld this decision, citing that the liability became enforceable only in the previous year relevant to the assessment year 1976-77.

Relevant Case Laws and Arguments:
- Revenue's Argument: The Revenue cited multiple cases, including Commr. of Agrl. I. T. v. Phalton Sugar Works Ltd. [1980], CIT v. Phalton Sugar Works Ltd. [1986], Belapur Sugar and Allied Industries Ltd. v. State of Maharashtra [1987], and Kalinga Tubes Ltd. v. CIT [1988], to argue that the liability should not be claimed in the year under reference.
- Assessee's Argument: The assessee countered that the cited cases actually supported their claim. They also referred to cases like CIT v. Orient Supply Syndicate [1982], Shalimar Chemical Works (P.) Ltd. v. CIT [1987], CIT v. Roberts McLean and Co. Ltd. [1978], National Newsprint and Paper Mills Ltd. v. CIT [1978], and CIT v. Jatia Manufacturing Investment Co. P. Ltd. [1983], which supported the deduction claim in the year when the liability became real and enforceable.

Conclusion:
The court concluded that the liability to pay rent and cess, although a statutory liability, was seriously disputed and only became enforceable when the agreement was executed in the previous year relevant to the assessment year 1976-77. The court held that the liability accrued, arose, and became real and enforceable in the previous year under reference, thus allowing the deduction. The question raised was answered in the affirmative and in favor of the assessee, with no order as to costs.

Separate Judgments:
- BHAGABATI PRASAD BANERJEE J.: Agreed with the judgment delivered.

---