1990 (9) TMI 145 - AT - Income Tax

Tribunal denies deduction for disputed additional expenditure, ruling contingent liabilities not deductible under mercantile accounting.

The Tribunal disallowed the deduction claimed by the assessee for additional expenditure demanded by APSEB, deeming the liability contingent as it was ... Carrying On Business, Deduction In Respect, State Electricity Board Issues Involved:1. Deduction of liability claimed by APSEB.2. Nature of the liability: contingent or ascertained.3. Applicability of precedents and legal principles.Issue 1: Deduction of liability claimed by APSEBThe assessee, a registered firm engaged in manufacturing and supplying electrical equipment to APSEB, failed to deliver the contracted materials on time. As a result, APSEB demanded Rs. 4,53,241.90 for additional expenditure incurred due to risk purchase. The assessee claimed this amount as a deduction from its profits, based on a letter from APSEB dated 21-9-1983.The Income-tax Officer (ITO) disallowed the deduction, deeming the liability as contingent since the amount was not paid, and the assessee had not agreed to the liability. The Commissioner of Income-tax (Appeals) allowed the deduction, referencing a previous ITAT decision in ITO v. Radiant Cables (P.) Ltd.Issue 2: Nature of the liability: contingent or ascertainedThe ITO argued that the liability was not definite or ascertained, as the assessee had denied the liability and APSEB had not initiated any legal action for recovery. The ITO distinguished the case from Kedarnath Jute Mfg. Co. v. CIT, stating that the present claim was not a statutory liability but a contractual one.The departmental representative contended that the liability was contingent, citing several precedents (CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd., Shree Sajjan Mills Ltd. v. CIT, CIT v. Phalton Sugar Works Ltd., Swadeshi Cotton Mill Co. Ltd. v. CIT, M.S.P. Senthikumara Nadar & Sons v. CIT). These cases established that contingent liabilities are not deductible, even under the mercantile system of accounting.The assessee's representative argued that the liability arose upon breach of contract and was ascertained by APSEB's letter dated 21-9-1983. The fact that the assessee denied the liability did not postpone its accrual. The representative cited the Tribunal's decision in Radiant Cables (P.) Ltd. and the Allahabad High Court's decision in CIT v. Sugar Dealers to support the claim.Issue 3: Applicability of precedents and legal principlesThe Tribunal examined the rival submissions and concluded that the CIT (Appeals) erred in accepting the assessee's claim. The Tribunal emphasized that contingent liabilities are not deductible. The Supreme Court in Shree Sajjan Mills Ltd. held that contingent liabilities do not constitute expenditure. The Madras High Court in M.S.P. Senthikumara Nadar & Sons v. CIT and the Supreme Court in CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd. supported this view.The Tribunal noted that the liability claimed by APSEB was disputed by the assessee and had not become final. The parties renegotiated the contract, and APSEB agreed to place a fresh order, stipulating that the original amount would be payable only if the new contract terms were not met. The liability was not ascertained and remained contingent until 1990 when APSEB recovered the amount from sums due to the assessee.The Tribunal distinguished the decisions relied upon by the assessee, noting that in those cases, there was no dispute about the liability. The Tribunal concluded that the assessee was not entitled to the deduction for the assessment year 1984-85.ConclusionThe Tribunal allowed the revenue's appeal, restoring the sum of Rs. 4,53,241 to the assessment. The liability claimed by APSEB was deemed contingent and not deductible for the assessment year 1984-85.