Accrual under mercantile accounting turns on crystallised liability; commission and liquidated damages succeeded, but wages and insurance did not.
Under the mercantile system, a deduction is allowed only when the liability has crystallised under the governing contract or statute. A provision for increased wages was not deductible in the earlier previous year because the award creating the liability was made later, and retrospective wording did not itself create accrual; the claim failed. Commission payable to Sri Lankan agents and to Annapurna Agencies accrued when orders were procured, since the contracts made commission earned on securing orders and only deferred payment; these claims succeeded. Insurance premium for the Sri Lanka project had not accrued because cover was conditional on payment of premium; this claim failed. Liquidated damages accrued on delivery under the agreement, so that issue also succeeded.
Issues: (i) Whether the provision for increased wages under the wage award was deductible in the previous year ended 30.06.1983; (ii) Whether commission payable to Sri Lankan agents accrued when the orders were secured; (iii) Whether commission paid to the Sri Lankan agents qualified for weighted deduction as expenditure on maintenance of an agency outside India; (iv) Whether insurance premium for the Sri Lanka project accrued as liability in the previous year ended 30.06.1983; (v) Whether commission payable to Annapurna Agencies accrued on procurement of purchase orders; (vi) Whether liquidated damages liability accrued on delivery under the agreement.
Issue (i): Whether the provision for increased wages under the wage award was deductible in the previous year ended 30.06.1983.
Analysis: The assessee followed the mercantile system, but deduction was available only when the liability had actually accrued. The wage liability arose under the arbitration award made on 11.07.1983 and published on 20.07.1983. The retrospective date mentioned in the memo did not by itself create an accrued liability in the earlier previous year. Accounting standards could not override the Income-tax Act for that assessment year.
Conclusion: The issue was decided against the assessee and in favour of the Revenue.
Issue (ii): Whether commission payable to Sri Lankan agents accrued when the orders were secured.
Analysis: The agreements had to be read as a whole. They showed that the agents earned commission on securing orders, while the actual payment was linked to later supplies or receipts. The contractual obligation to pay commission arose when the orders were procured, and the mercantile system allowed deduction of the accrued liability even if payment was deferred.
Conclusion: The issue was decided in favour of the assessee and against the Revenue.
Issue (iii): Whether commission paid to the Sri Lankan agents qualified for weighted deduction as expenditure on maintenance of an agency outside India.
Analysis: Weighted deduction under Section 35B(1)(b)(iv) required expenditure incurred wholly and exclusively on maintaining an agency outside India for promotion of sales outside India. Payment of commission for procuring orders did not amount to maintenance of an agency, and the assessee failed to show expenditure of the kind contemplated by the provision.
Conclusion: The issue was decided against the assessee and in favour of the Revenue.
Issue (iv): Whether insurance premium for the Sri Lanka project accrued as liability in the previous year ended 30.06.1983.
Analysis: The policy terms made cover dependent on payment of premium, and the premium had not been paid by the end of the previous year. Mere retrospective coverage from an earlier date did not create accrual of liability before the premium condition was satisfied.
Conclusion: The issue was decided against the assessee and in favour of the Revenue.
Issue (v): Whether commission payable to Annapurna Agencies accrued on procurement of purchase orders.
Analysis: Clause (1) created entitlement to commission on the total value of the order once the order was procured, while clause (5) only governed the timing of actual payment. The liability therefore accrued when the purchase orders were secured, even though payment was to be made pro rata against receipts.
Conclusion: The issue was decided in favour of the assessee and against the Revenue.
Issue (vi): Whether liquidated damages liability accrued on delivery under the agreement.
Analysis: Following the earlier decision in the assessee's own case, the right to receive the extra price or liquidated amount arose on delivery of the goods. The Tribunal had rightly treated the liability as having accrued on delivery.
Conclusion: The issue was decided in favour of the assessee and against the Revenue.
Final Conclusion: The reference was answered partly in favour of the Revenue and partly in favour of the assessee. The wage provision, insurance premium, and weighted-deduction claim failed, while the commission claims and the liquidated-damages issue succeeded.
Ratio Decidendi: Under the mercantile system, a liability is deductible only when it has crystallised under the governing contract or statute, and retrospective effect, later quantification, or accounting treatment cannot create an accrued liability where the enforceable obligation arose only later.