Judgment :- VENKATADRI J. This is a reference made under section 66(1) of the Indian Income-tax Act by the Income-tax Appellate Tribunal. The facts, as given in the statement of the case, are as follows The assessee, a registered partnership firm, was carrying on, inter alia, banianship business under Shaw Wallace and Company, and their business was conducted under the general banianship agreement. The crux of the agreement between the parties was that the assessee should be responsible for Shaw Wallace and Co. for any loss which the firm may sustain and it should guarantee the due fulfilment of all the contracts entered into with them through the assessee, and it should indemnify Shaw Wallace and Co. against any loss in respect thereof. Due to quarrels among its partners the assessee-firm decided to wind up its business, and when Shaw Wallace and Co. came to know of the assessee's decision, they informed the assessee that they would help it in the winding up of the mutual banianship matters and for an early settlement of its dealings with the assessee to the benefit of all concerned. While sending their letter, they attached a statement showing the outstandings position as on December 13, 1957, at Rs. 5, 54, 105 which the assessee had guaranteed. They expected to realise a major portion of the outstandings from the merchants directly, and they considered that a sum of Rs. 75, 000 being the expected balance amount due from the outstandings would be bad debt. Shaw Wallace and Co. suggested in that letter that they would receive Rs. 75, 000 from the assessee and relieve it of all its obligations of guarantee and indemnity. They also suggested that, in case they recovered even that debt, they would refund the sum of Rs. 75, 000 or such sum as may be found due after giving credit to the amounts realised. They further informed the assessee that the said arrangement would enure up to January 1, 1961. By that time, they would try to recover and after the expiry of the said date whatever amount they recovered would be on their account. The assessee accepted the said arrangement, paid a sum of Rs. They further informed the assessee that the said arrangement would enure up to January 1, 1961. By that time, they would try to recover and after the expiry of the said date whatever amount they recovered would be on their account. The assessee accepted the said arrangement, paid a sum of Rs. 75, 000 to Shaw Wallace and Co., debited the same to the profit and loss account, and claimed a deduction of the aforesaid amount as liability due to Shaw Wallace and Co., in the course of the assessment proceedings for the year 1958-59The Income-tax Officer refused the deduction of the sum of Rs. 75, 000 on the ground that it was not a trading liability, but was a payment made to absolve and indemnify the partners from any future liability, consequent on the dissolution of the firm and the cancellation of the banianship business. On appeal, the Appellate Assistant Commissioner of Income-tax held that the sum was paid by the assessee in pursuance of the agreement he entered into with them and that it was not paid wholly and exclusively for the purpose of the business. On further appeal to the Income-tax Appellate Tribunal, the Tribunal held that the assessee was allowed to compute his liabilities with the firm by payment of a consolidated sum of Rs. 75, 000 in the course of termination of the business and that it was not expended for the purpose of earning profits, and accordingly the assessee was not entitled to a deduction either under section 10(1) or section 10(2)(xv) After having failed with the Tribunal, the assessee requested the Tribunal to refer the matter to this court and the Tribunal, inasmuch as in their opinion a question of law arose out of its order, has drawn up an agreed statement of the case and referred to this court the following question of law "Whether the assessee was entitled to claim a sum of Rs. 75, 000 paid to Shaw Wallace & Co. as a deduction under section 10(1) or section 10(2)(xv) of the Act ?" * The assessee was carrying on what is called banianship business with Shaw Wallace and Company. In the course of this business, the assessee had to secure purchasers for goods sold by Shaw Wallace & Co. and stood guarantee for the money due and payable by the merchants to whom goods were delivered. In the course of this business, the assessee had to secure purchasers for goods sold by Shaw Wallace & Co. and stood guarantee for the money due and payable by the merchants to whom goods were delivered. As and when amounts were realised from the constituents, credits would be given and the assessee was to be freed from the guarantee in respect of those transactionsThe general banianship agreement between the assessee and Shaw Wallace and Company runs to about fifty clauses. The important clauses which have a bearing for our purpose are these "15(f) To be responsible in all cases of delivery on credit authorised by the banians for payment to the firm of the price of the goods so delivered such authority to be deemed to have been duly given by the counter-signature of the delivery order by the banians or their duly authorised representative as in paragraph 6 hereof mentioned (g) To be responsible to the firm for any loss or damage which the firm may sustain by reason of any variation of or addition to the terms of any indents, offers, orders or contracts made without the consent of the firm thereto (h) In the event of the failure of any buyer to pay for or take delivery of any merchandise, commodities or goods and/or documents relative to any merchandise, commodities or goods on the due date, to pay forthwith to the firm in cash the contract price of such merchandise, commodities or goods and/or documents relative to any merchandise, commodities or goods and all other sums (if any) payable by the buyer so failing in respect thereof and all charges and expenses incurred by the firm in respect thereof under the provisions of paragraph 14 hereof (i) To guarantee payment of all promissory notes and bazar chits signed by dealers and merchants (j) Generally to guarantee to the firm the due fulfilment by all merchants, dealers and constituents of the firm of their several indents, orders, offers, contracts and engagements and of liabilities and obligations thereunder or thereto attaching and to indemnify the firm against any loss in respect thereof." * This was the type of business the assessee was carrying on with Shaw Wallace and Company. On the date of the settlement by the assessee with Shaw Wallace and Company, the total outstandings from the customers was Rs. 5, 54, 105. On the date of the settlement by the assessee with Shaw Wallace and Company, the total outstandings from the customers was Rs. 5, 54, 105. According to the terms of the agreement, the assessee stood guarantee for the said amount and he had to indemnify them by payment of the said sum in case Shaw Wallace failed to recover the moneys from the buyers. When the assessee finally decided to dissolve the firm, Shaw Wallace and Co. agreed to receive a lump sum of Rs. 75, 000 towards their guaranteed amount of Rs. 5, 54, 104.68. Shaw Wallace and Co. fixed the above-said sum of Rs. 75, 000 based on the past experience gained in the course of their business and as they were likely to recover a major portion of the outstandings except the doubtful recovery of Rs. 75, 000. They further agreed to refund the entire sum of 75, 000 or such other sum as may be found due, after giving credit to sums realised out of the sum of Rs. 75, 000. The learned counsel for the assessee contended that if it had to pay Rs. 5, 54, 104.68 the tax authorities could not refuse deduction of the sum from the profit and loss account as allowable expenditure in the course of the business. It paid Rs. 75, 000 to relieve itself of all obligations to Shaw Wallace and Co. This sum was paid in the course of the business and accordingly debited in the profit and loss account as on December 30, 1957. It was a revenue expenditure, as it was expenses incurred in the course of the business with Shaw Wallace and Co. Learned counsel urges that it was expenditure in the course of the business, incurred as current expenditure during the assessment year. To support his proposition of law, he cited Commissioner of Income-tax v. Mysore Sugar Co. Ltd., where the assessee-company made heavy advances to the sugarcane growers who entered into a written agreement with the company that they would sell sugarcane to the company at current market rates and adjust the advances towards the price of sugarcane they supplied to the company. Ltd., where the assessee-company made heavy advances to the sugarcane growers who entered into a written agreement with the company that they would sell sugarcane to the company at current market rates and adjust the advances towards the price of sugarcane they supplied to the company. Due to drought, the sugarcane growers did not deliver sugarcane to the company and it did not work on account of the non-supply of sugarcane, with the result the company incurred heavy loss in respect of the advances made to the sugarcane growers. The Government of Mysore appointed a committee and they commented that the assessee-company should waive its rights in respect of the amounts advanced which came to Rs. 2, 87, 422. The company claimed this amount as a deduction under sections 10(1) and 10(2)(xv) of the Income-tax Act. The question was whether that amount represented a loss of capital or was a revenue expenditure. Their Lordships of the Supreme Court decided in favour of the assessee-company on the ground that the amount, so far as the company was concerned, represented the current expenditure towards the purchase of sugarcane, and it made no difference that the sugarcane thus purchased was grown by the growers with the seedlings, fertiliser and money taken on account from the assessee-company, that in so far as the assessee-company was concerned, it was doing no more than making a forward arrangement for the next year's crop and paying an amount in advance towards the price, so that the growing of the crop might not suffer due to want of funds in the hands of the growers. Their Lordships held that, as there was no element of capital investment in making the advance, the loss incurred by the assessee was a loss on the revenue side and was therefore deductibleLearned counsel for the assessee cited also Calcutta Co. Ltd. v. Commissioner of Income-tax, where the assessee in the course of his land development business, that is buying land, developing it so as to make it fit for building purpose and selling it at a profit, sold several plots of land. Several purchasers purchased the plots but did not pay the full price for the land but paid only a part of the purchase-money and the balance was to be paid in instalments, which he secured by creating a charge on the land purchased. Several purchasers purchased the plots but did not pay the full price for the land but paid only a part of the purchase-money and the balance was to be paid in instalments, which he secured by creating a charge on the land purchased. The assessee maintained its accounts in the mercantile method of accounting. He entered in his accounts the full sale price of the lands sold during the accounting year, though less than that sum was actually received in cash. Similarly, he debited a sum of Rs. 24, 809 as expenditure for the developments to be carried out, even though no part of that amount represented any expenditure made during that year. The department disallowed the expenditure. But their Lordships of the Supreme Court held that the sum of Rs. 24, 809 represented the estimated amount which would have to be expended by the assessee in discharging a liability which it had already undertaken under the terms of the deeds of sale of the lands in question and was an accrued liability, which according to the mercantile system of accounting, the assessee was entitled to debit in its books of account. Thus, in the case of the Mysoye Sugar Co., it was a case of advance of the purchase price to the sugarcane growers for the supply of sugarcane to the company's factory, which was necessary for the purpose of running their business, and in the case of the Calcutta Company, the assessee was under a legal obligation to expend the moneys on the properties he sold to the purchasers. But, on the facts of the instant case, it is neither a case of advance to Shaw Wallace and Company, in the course of their business nor is it a case of any legal obligation to pay a sum of Rs. 75, 000 on the date when they entered into the agreement. According to the terms of the agreement, the assessee had to guarantee Shaw Wallace and Company the due fulfilment by all merchants of several indents and other liabilities and obligations and to indemnify Shaw Wallace and Company against any loss in respect thereof. 75, 000 on the date when they entered into the agreement. According to the terms of the agreement, the assessee had to guarantee Shaw Wallace and Company the due fulfilment by all merchants of several indents and other liabilities and obligations and to indemnify Shaw Wallace and Company against any loss in respect thereof. In the case of guarantee, there is an existing debt or duty the performance of which is guaranteed by a surety, while in the case of indemnity, the possibility of risk of any loss happening is only contingent against the indemnifier who undertakes to indemnify. The surety's liability is often said to be secondary, accessory or contingent liability. The assessee in the instant case used to settle the account with Shaw Wallace and Co. at the end of every year, the actual amount being paid by him on the default of the principal debtors. In the course of the assessment proceedings for the year in question, the Income-tax Officer allowed a sum of Rs. 32, 811 and a sum of Rs. 20, 103 which the assessee had to pay to Shaw Wallace and Co., on account of the default committed by the principal debtors. Therefore, the assessee had to pay to Shaw Wallace and Co., as and when principal debtors committed default in payment of their dues in respect of the dealings with Shaw Wallace and Co. When the assessee agreed to pay Rs. 75, 000, there was no liability as such to pay to Shaw Wallace and Co. In other words, though there may be outstandings to the extent of Rs. 5, 54, 000 and the assessee had stood guarantee for this amount, there was no default committed as such by the merchants. It is only when the merchants commit default, the assessee becomes liable for that amount as guarantor. Shaw Wallace and Co. may take steps to recover the sum of Rs. 5, 54, 000. They only expected that they may not recover Rs. 75, 000 out of that amount. In fact, they hoped to recover the amount in full ; and if they should recover that amount, they undertook to give credit and refund the amount to the assessee ; and in case they recovered only a part of the sum of Rs. 75, 000, they would take only the balance of amount due and refund the rest to the assessee. 75, 000, they would take only the balance of amount due and refund the rest to the assessee. It was also clear that the amount of Rs. 75, 000 was to be paid at the time of terminating the business dealings with Shaw Wallace and Co. The amount of Rs. 75, 000 was an anticipated loss for the assessee in the course of his dealings with Shaw Wallace and Co. Reserves for anticipated losses, contingent liabilities and expenses not actually incurred will be disallowed. It is settled law that a claim for deduction in respect of anticipated, uncertain or contingent liability is not permissible. In the law of income-tax, a distinction is made between actual liability in praesenti and liability de futuro, which for the time being is only contingent ; the former is deductible but not the latter. The principle involved was thus stated in Edward Collins and Sons Ltd. v. Commissioner of Inland Revenue in the following terms "It is a general principle, in the computation of the annual profits of a trade or business under the Income Tax Acts, that those elements of profit or gain, and those only, enter into the computation which are earned or ascertained in the year to which the enquiry refers ; and in like manner, only those elements of loss or expense enter into the computation which are suffered or incurred during that year There is no precedent that I know of for a claim such as that made by the appellants in the present case, although all commercial enterprise is subject to vicissitudes which may be, and now and then are, serious enough to cause grievous loss and even disaster. I confess to thinking that it would be a dangerous innovation to allow apprehended losses in futuro to constitute proper matter for deduction from the present profits of commercial undertakings." * Numerous cases had come for decision both in the Court of Appeal and the House of Lords, on the question what is contingent liability and when and how it is permissible to deduct it from the income of the assessee. In Alexander Howard and Co. Ltd. v. Bentley (H. M. Inspector of Taxes), the company was formed in 1933 to take over the business of one Howard, who became the governing director. In Alexander Howard and Co. Ltd. v. Bentley (H. M. Inspector of Taxes), the company was formed in 1933 to take over the business of one Howard, who became the governing director. He agreed to accept pound 2, 000 per annum provided that an annuity was secured to his widow. The directors later considered that the obligation to pay the annuity would be detrimental to the company. Howard surrendered all right to the annuity, in consideration of the payment of pound 4, 500 by the company. The company contended that the sum of pound 4, 500 was allowable as a deduction in computing its profits for income-tax purpose. It was held that the deduction claimed was not allowable, as the sum of pound 4, 500 was not money in any sense expended for the purposes of trade. In Peter Merchant Ltd. v. Stedeford (H. M. Inspector of Taxes) the assessee-company was carrying on the business of managing factory canteens and supplying of meals and light refreshments in such canteens. Under the customary form of contract, the light equipment and utensils, although provided by the factory owner, were to be maintained in their original quantity and quality by the assessee-company. Losses of light equipment through breakages and pilfering had been found to be large. It proved impossible, owing to the scarcity and high price of the equipment concerned, to effect all the replacements for which the company was liable. In its accounts each year, the company had charged as expenses not only the amounts of the disbursements : actually made in effecting the replacements, but also amounts representing, at current prices, the company's liability to effect replacements as soon as the required equipment became available. The former amounts were allowed as deductions in computing the company's profits for the purpose of assessment to income-tax. The company contended that the latter amounts also were admissible deductions. It was held "The real liability under the contract, so far as the replacement of the utensils goes, was a contingent liability ; it was a liability which would not arise until the termination of the contract, and it was contingent upon the inability of the caterers in the meanwhile to replace the utensils. It was held "The real liability under the contract, so far as the replacement of the utensils goes, was a contingent liability ; it was a liability which would not arise until the termination of the contract, and it was contingent upon the inability of the caterers in the meanwhile to replace the utensils. In that sense it is, I think, correct to say that the real liability under the contract was a contingent one." * Similarly in Southern Railway of Peru Ltd. v. Owen, the assessee-company operated its railway under the obligation of a statutory scheme, by virtue of which its employees were entitled to receive from it a lump sum payment on the termination of their service. The company claimed that an allowance should be made in respect of its liability to pay to its employees then in service in the computation of profits for each of the years of assessment. The Crown contended that the company was not in any year under a definite obligation to pay its employees a lump sum on the termination of their employment. In each case, the right to lump sum was contingent on certain conditions being fulfilled. The employee could forfeit his right to payment by wrongful conduct, such as dishonesty or insubordination. The liability therefore remained contingent until service was actually ended. So the lump sum could not be regarded as an earning in any particular year of service. The House of Lords observed at page 759 "...... I should have thought that the charges for retirement benefits which the appellant has claimed to make in the four relevant years were well on the wrong side of what was permissible. When account is taken of all the circumstances, I should have thought that the sums charged were a very long way from affording a scientific appraisement of the additional burden arising in respect of the year's services ; and were, therefore, in the nature of a rough reserve against the future rather than a measured provision." * In the instant case, a similar situation has arisen. By a rough and ready method, the assessee and Show Wallace and Company had fixed a sum of Rs. 75, 000 as the probable amount that would have to be indemnified by the assessee as a guarantor, when the occasion for it arose. By a rough and ready method, the assessee and Show Wallace and Company had fixed a sum of Rs. 75, 000 as the probable amount that would have to be indemnified by the assessee as a guarantor, when the occasion for it arose. The above cases have been frequently referred to, whenever courts had to consider whether a particular deduction was a contingent liability or an accrued liability. In Indian Molasses Co. (Private) Ltd. v. Commissioner of Income-tax, the Supreme Court referred to these cases. The Indian Molasses Company created a trust deed for the purpose of providing pension to one of its employees. Accordingly a trust deed was executed in favour of three trustees providing for funds in order to enable them to take necessary annuity policies in the name of the employee and his wife. In case the employee died before he attained the age of 55 years, the annuity was payable to his wife for her lifetime. Should both die before the employee attained the age of 55 years, the particular clause in the trust deed provided for surrendering the contract at any time before that date for a cash surrender value. The assessee-company claimed deduction of the initial sum and the yearly premia from its profits under section 10(2)(xv) of the Act. The company contended that the payment of pension as also payment of lump sum to get rid of a recurring liability was an expenditure of a revenue character. Their Lordships of the Supreme Court held that the sums paid should be treated as set apart to meet a contingency and that the payment of those sums was not a paying out or away of those sums irretrievably and did not amount to "expenditure", and a deduction could not be made in respect thereof under section 10(2)(xv). Their Lordships observed "In our opinion, the payment was not merely contingent but the liability itself was also contingent. Expenditure which is deductible for income-tax purposes is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure." * In Commissioner of Income-tax v. Indian Metal and Metallurgical Corporation, the above cases have been referred to. The assessee, a registered firm, was carrying on business as manufacturers of stainless steelware, brass-sheets and circles. The assessee, a registered firm, was carrying on business as manufacturers of stainless steelware, brass-sheets and circles. It maintained its books of accounts on the mercantile system. In the previous year for the assessment year 1956-57, the assessee credited to a separate account called the gratuity reserve account a sum of Rs. 5, 600, being approximately fifteen days' wages of all employees and workmen who were in its service during the year of account, with the object of maintaining a fund to meet its eventual liability under the provisions of the Industrial Disputes Act and claimed this amount as business expenditure under section 10(2)(xv) of the Act. The claim was disallowed, on the ground that it was only a prospective liability of a contingent nature. When the matter came up to this court, the Bench, to which one of us was a party, held ".... we are of opinion that the liability of the assessee in respect of retrenchment compensation under section 25F of the Industrial Disputes Act is not a liability in praesenti, but is only a contingent liability, which cannot be taken into account as an accrued liability. .... We are further of opinion that even if it is permissible to charge the year's profits to build up the sinews to withstand the result of an uncertain event of retrenchment, the actual provision made is so over-generous, and is so improper an appraisement of the present value of a future liability that it has to be struck down as an over-reserve." * But, in Associated Printers (Madras) Private Ltd. v. Commissioner of Income-tax, a Bench of this court, to which one of us was a party, had to consider more or less a similar question. There the assessee took over a running business, at a time when a dispute between the predecessor of the assessee and its workmen regarding their claim for Deepavali bonus for 1949 was pending adjudication by the Industrial Tribunal. After the transfer of the business, the assessee was also made a party to the dispute. There was an award directing the payment of 11/2 months' basic wages as bonus. The total amount of bonus was debited in the assessee's accounts for the assessment year in question. The question was whether the amourt so debited was an allowable expenditure. After the transfer of the business, the assessee was also made a party to the dispute. There was an award directing the payment of 11/2 months' basic wages as bonus. The total amount of bonus was debited in the assessee's accounts for the assessment year in question. The question was whether the amourt so debited was an allowable expenditure. This court allowed the deduction, on the ground that the liability to pay bonus under the award and the agreement was a liability legally enforceable against the assessee, that the liability itself accrued only after the date of the transfer of the business, and that when the assessee provided for the bonus payments, it discharged its own liability accruing in that year of account. This court also held that the expenditure was properly debitable in the accounting year, and it was only in that year the liability accrued and in the earlier years it was at best a contingent liability On a review of the case-law on the subject, we are of opinion that the sum of Rs. 75, 000 paid by the assessee to Shaw Wallace and Company cannot be called an expenditure, as he did not pay the amount on account of any accrued liability but only paid it towards a contingent liability, which contingency might arise in the future ; indeed the contingency might never at all arise. On the date he paid the sum of Rs. 75, 000 he had not become liable either as a guarantor or as an indemnifier. Equally, Shaw Wallace and Company cannot enforce the liability on the assessee, without taking any steps to recover the moneys due and payable by their constituents who entered into contract with them through the assessee and failing in their attempts thereby incurring a loss. The assessee may have acted as a prudent businessman, but the income-tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The whole law has been summed up thus in Konstam's Law of Income Tax (twelfth edition) in paragraph 105 ".... expenses in order to be deductible in ascertaining profits must have been incurred for the purposes of earning the gross receipts ; they must be wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation. expenses in order to be deductible in ascertaining profits must have been incurred for the purposes of earning the gross receipts ; they must be wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade, or is made out of the profits of the trade." * Such is not the case here. Therefore, we are of opinion that the Tribunal reached the right conclusion in disallowing this deduction It follows that the question has to be answered in the negative and against the assessee. The assessee will pay the costs of the department. Counsel's fee Rs. 250 Question answered in the negative.