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1964 DIGILAW 236 (KER)

CALICUT TILE CO. , FEROKE v. CIT, KERALA

1964-08-31

T.C.RAGHAVAN, T.K.JOSEPH

body1964
Judgment :- 1. The question referred to the High Court is "whether the sum of Rs. 21,809/- or any part thereof paid by the assessee as compensation for wrongful cutting of trees is an admissible expense in the assessment year 1957-58 under S.10 (2) (xv) of the Indian Income-tax Act, 1922". 2. The assessee, a registered firm, entered into an agreement with a Nair tarwad for the purchase of trees for fuel to run its factory. Some members of the tarwad questioned the transaction in a partition suit; and the High Court of Madras directed the Subordinate Judge's Court, Calicut to hold an auction of the trees pending suit. In the auction that followed the assessee purchased the right to cut trees on 11th February 1942. Subsequently, the Nair tarwad filed a suit against the assessee for damages for unauthorised cutting of trees. The trial court (the Subordinate Judge's Court and not the court of the Munsiff as stated by the Tribunal) dismissed the suit; but on appeal the High Court of Madras awarded compensation of Rs.10,400;'- with interest thereon at 6 per cent from 20th March 1944. This decree was passed on 24th February 1955; and the assessee paid the amount in December 1956. The question for consideration is whether this payment is an admissible expense in the assessment year 1957-58 under S.10 (2) (xv) of the Income-tax Act of 1922. 3. The counsel of the Revenue argues that the expense is not admissible under S.10(2) (xv). We will have allowed the counsel to raise this contention but for the fact that one of the nine findings recorded by the Tribunal is "that the expenses were incidental to the trade carried on in the accounting years pertaining to 1943-44 and 1944-45 assessments and not to 1957-58". In view of this finding, we do not think that the question whether the expense is admissible under S.10(2)(xv) is open for discussion before us. The question therefore is confined to whether this is admissible in the assessment year 1957-58. 4. The counsel of the Revenue does not seriously urge that the expense is an admissible expense pertaining to assessment years 1943-44 & 1944-45. Still, he contends that the assessee, who follows the mercantile system of accounting, should have claimed this amount as an expense in the accounting year 1955. 4. The counsel of the Revenue does not seriously urge that the expense is an admissible expense pertaining to assessment years 1943-44 & 1944-45. Still, he contends that the assessee, who follows the mercantile system of accounting, should have claimed this amount as an expense in the accounting year 1955. It may be noted at this stage that the assessee's accounting year is the calendar year. 5. Of the cases cited before us, the decisions requiring consideration are the following. The first is Associated Printers (Madras) Private Ltd. v. Commissioner of Income-tax, Madras (43 ITR. 281). In that case the assessee took over a running business in February 1950, when a dispute between the predecessor and its workmen regarding Deepavali bonus for 1949 was pending adjudication by the industrial tribunal. The tribunal passed an award directing payment of bonus; and the award was published on 9th February 1951. The assessee also agreed on 30th June 1951 to pay bonus for 1950. The total amount for both the years was debited in the assessee's accounts in the accounting year ending 31st January 1952. The question was whether the expenditure was an admissible expense under S.10 (2) (xv) in the assessment year 1952-53; and the Madras High Court held that it was. The High Court held that though the bonus related to 1949 and 1950, the liability accrued only in the accounting year 1951-52, when the assessee provided for its payment. This decision is not very helpful to the assessee in the present case, because the amount was debited in the cited ruling in the accounting year in which it accrued. 6. The next case is commissioner of Income tax, West Bengal v. Shewbux Jahurilal (46 ITR. 688) The assessee-company entered into a contract with another company to supply jute on some future dates at specified rates. Under the contract the buyer had the option, in the event of non-delivery of the goods, to cancel the contract and to recover the difference in price. The assessee failed to supply goods in February 1947; and the buyer cancelled the contract and claimed the difference in price. The matter was referred to the Bengal Chamber of Commerce, which passed an award in 1948 and ' the award was filed in the High Court in 1949. The assessee failed to supply goods in February 1947; and the buyer cancelled the contract and claimed the difference in price. The matter was referred to the Bengal Chamber of Commerce, which passed an award in 1948 and ' the award was filed in the High Court in 1949. Subsequently, a settlement was arrived at, by which the sum payable was reduced and was also made payable in February 1950. The amount was accordingly paid in February 1950; and the assessee claimed this as a loss in the year 1950-51. The Calcutta High Court held that even though the assessee maintained his accounts on the mercantile system of accounting, he was not bound to show all anticipated debts and pay tax on that basis. The High Court held further that the loss could be claimed only when it was ascertained; and therefore, the assessee was entitled to have the loss allowed in the assessment year 1950-51. In this case also, though the amount related to an earlier year, it was actually settled by the award in a later year; and it was claimed as a loss in that subsequent year itself. Therefore, this decision also is not of much help to the assessee in the case before us. 7. The next decision requiring consideration is the decision of the Supreme Court in Badridas Daga v. Commissioner of Income-tax (AIR. 1958 SC. 783). In that case some amounts were embezzled by an employee of the assessee; and the Supreme Court held that that amount would be a deduction under S.10 (1) of the Income-tax Act. The learned counsel of the assessee draws our attention to the observation of the Supreme Court in this case that the question should be looked at as a businessman would. Even applying that test, we do not think that the deduction of this amount in 1956 is justified. Though the trial court dismissed the suit, the High Court passed a decree against the assessee in February 1955. On the passing of that decree, it is obvious that the liability accrued or was settled or ascertained; and the assessee should have claimed the amount in 1955, as he was following the mercantile system of accounting. He pleads that he filed a petition for leave to appeal to the Supreme Court and that was dismissed only late in 1956. On the passing of that decree, it is obvious that the liability accrued or was settled or ascertained; and the assessee should have claimed the amount in 1955, as he was following the mercantile system of accounting. He pleads that he filed a petition for leave to appeal to the Supreme Court and that was dismissed only late in 1956. We do not think that that circumstance could have altered the position. Therefore, it is only proper to think that the amount accrued in February 1955 when the High Court passed the decree. 8. The last of the cases is probably more in point; and that is Commissioner of Income-tax, Madhya Pradesh, Nagpur and Bhandara v. Swadeshi Cotton and Flour Mills. The full report of this Supreme Court decision is not available; but a summary of it appears in 52 ITR. (Short Notes) at page 6. The assessee paid a sum of over a lakh of rupees by way of profit bonus to its employees for the calendar year 1947; and it debited the amount in its profit and loss account for the year 1948. But in fact, the award for payment of bonus was made only in January 1949; and the amount was disbursed also in the same calendar year. The Supreme Court held that it was only in 1949 that the claim for profit bonus was settled by the award of the industrial tribunal; and the only year to which the liability under the award could be properly attributed was 1949, relevant to the assessment year 1950-51. The Supreme Court observed further that an employer who followed the mercantile system of accounting incurred a liability towards profit bonus only when the claim for bonus was settled amicably or by industrial adjudication. The Supreme Court again observed that as far as receipts were concerned, there could be no re-opening of accounts; and the position was the same in respect of expenses. In our judgment this observation of the Supreme Court applies to the present case; and the expenditure claimed in this case was ascertained or settled in February 1955 when the High Court passed the decree. 9. In this view, we answer the reference in the negative, against the assessee. In our judgment this observation of the Supreme Court applies to the present case; and the expenditure claimed in this case was ascertained or settled in February 1955 when the High Court passed the decree. 9. In this view, we answer the reference in the negative, against the assessee. Since the contention of the Revenue has all along been that the expense could be claimed only in 1943-44 and since that has been given up only in this Court, we do not mulct the assessee with costs. The parties will suffer their respective costs. 10. The answer may be sent to the Tribunal.