JUDGMENT Dipak Misra, J. 1. The present appeal preferred under Section 260A of the Income-tax Act, 1961 (for brevity "the Act"), was admitted on the following substantial question of law: Whether the Tribunal has erred in holding that the adjustments (disallowance) made by the Assessing Officer by treating the late delivery damages of Rs. 58,79,839 and penal interest of Rs. 14,69,905 as contingent liabilities were not within the scope of prima facie adjustments under Section 143(1)(a) of the Income-tax Act, 1961? 2. The facts leading to filing of this appeal are that the assessee-respondent filed its return of income for the assessment year 1997-98 on November 28, 1997, declaring its total income of Rs. 79,58,855. Audit reports as per Section 44AB of the Income-tax Act and as per the provisions of the Companies Act, 1956, were filed along with the return of income. The return was processed under Section 143(1)(a) of the Act as per the intimation dated November 17, 1998, which was served on the assessee on January 4, 1999. The Assessing Officer in the intimation had adjusted the total income at Rs. 1,53,08,599 and an additional tax of Rs. 6,32,077 was levied. 3. The assessee had claimed deduction on account of late delivery damages of Rs. 58,79,839 and penal interest of Rs. 14,69,905. In the audit accounts these two liabilities were categorised under the head "Contingent liabilities". It was stated that the liability on account of liquidated damages was due to delay or defect in supply amounting to Rs. 58,79,839 which was not provided in the accounts as in the opinion of the management the same was fully recoverable once the equipments are erected and commissioned. In respect of the penal interest of Rs. 14,69,905 it was commented that the said liability was also not accounted for as the management had made a representation and was hopeful that the same was liable to be waived by the bank. Against the intimation under Section 143(1)(a) of the Act the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), but the Commissioner of Income-tax (Appeals) upheld both the adjustments. Being dissatisfied with the order of the first appellate authority the assessee preferred an appeal before the Income-tax Appellate Tribunal, Indore (for short "the Tribunal"). Against the intimation under Section 143(1)(a) of the Act the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), but the Commissioner of Income-tax (Appeals) upheld both the adjustments. Being dissatisfied with the order of the first appellate authority the assessee preferred an appeal before the Income-tax Appellate Tribunal, Indore (for short "the Tribunal"). The Tribunal allowed the appeal holding that the adjustments made by the Assessing Officer were not the kind of adjustments as contemplated under Section 143(1)(a) of the Act inasmuch, as the basis of information available in the return and the accompanying documents, liability could not be treated as contingent liability and disallowed treating the same as prima facie inadmissible. The Tribunal further opined that it could not be said that the liability was not accrued during the year. Being of this view the Tribunal reversed the decisions of the forums below and allowed the appeal. 4. Questioning the correctness of the order passed by the Tribunal it is submitted by Mr. Rohit Arya, learned senior counsel along with Mr. Sanjay Lai for the appellant that the Tribunal has fallen into grave error by expressing the opinion that the adjustments made by the Assessing Officer are not the kind of adjustments contemplated under Section 143(1)(a) of the Act inasmuch as the perception of the assessee-company was totally erroneous and in view of the material available on record there could not be any shadow of doubt that they were contingent liabilities. 5. Mr. Sumit Nema, learned Counsel appearing for the assessee, supporting the order of the Tribunal submitted that the analysis made by the Tribunal in the backdrop of the provisions of the Act cannot be found fault with. It is urged by him that the Assessing Officer as well as the first appellate authority had misconstrued the provisions engrafted under Section 143(1)(a) of the Act as such power does not clothe the authorities to deal with the contentious issues. Learned Counsel further submitted that the authorities below have not appreciated the fact that the claim put forth by the assessee were based on mercantile system of accounting and as such accrued during the previous year. 6. To appreciate the submissions raised at the Bar we have carefully perused the order passed by the Tribunal. Learned Counsel further submitted that the authorities below have not appreciated the fact that the claim put forth by the assessee were based on mercantile system of accounting and as such accrued during the previous year. 6. To appreciate the submissions raised at the Bar we have carefully perused the order passed by the Tribunal. On a scrutiny of the order it is discernible that the Tribunal has taken note of the fact that the claim made by the assessee in the computation of income were not accounted in the accounts and the Assessing Officer has treated the liability as contingent liability and dislodged the claim, on the basis of the notes of the auditors in schedule 16 of the balance-sheet. The Tribunal took note of the submissions made by the assessee before the Commissioner of Income-tax (Appeals) that the auditor's treatment of the liability as contingent liability cannot be regarded as inadmissible. It was also pointed out that no waiver had taken place and the assessee had not received Rs. 58,79,839 deducted by different customers and the bank had also recovered interest on various dates during the year as they were backed by contracts and the assessee had no right to receive the amount till the contracts were amended. It was further urged that the book entries were not conclusive and the Assessing Officer could not treat the liability as contingent liabilities on the basis of information available in the return and accompanying documents and thereby dislodge the claim on the foundation of prima facie adjustment. The contentions were combated by the Revenue before the Tribunal that the assessee had not made the provision in the accounts for liquidated damages as in the opinion of the management the same was fully recoverable. The assessee had also not provided for the penal interest charged by the bank on the ground that the penal interest was to be waived by the bank. In this backdrop, propounded by the Revenue whether the Assessing Officer was justified in treating the same to be in the compartment of the contingent liability. 7. The Tribunal upon appreciating the aforesaid submissions in paragraph 9 has expressed the view as under: 9. We have carefully considered the rival submissions and the facts of the case. In this backdrop, propounded by the Revenue whether the Assessing Officer was justified in treating the same to be in the compartment of the contingent liability. 7. The Tribunal upon appreciating the aforesaid submissions in paragraph 9 has expressed the view as under: 9. We have carefully considered the rival submissions and the facts of the case. From the perusal of the notes on accounts, on the basis of which disallowance has been made it cannot be said that the liability had not accrued during the year. On the other hand, it can be said that it has already accrued, but the auditors have not accounted for in the books simply on the ground that the management is hopeful of some recovery/waiver from the customers and banks. Only on the basis of such expectation, the accrued liability cannot be treated as contingent liability specially in view of the fact that the assessee has claimed the deduction in the computation of income. It will not be proper only to take note of the note on accounts and to ignore the claim made in the computation of income. The real nature of liability and their crystalisation can be known only after scrutiny of the terms and conditions of supply, correspondence made by the assessee with the customers/bank representing for reduction/waiver and after examining as to whether the assessee had disputed the claim and as to whether he has a right to recover/waiver. Such scrutiny can be done only during the regular assessment after calling for necessary details and after hearing the assessee. From information available in the return and accompanying documents, the liability claimed cannot be treated as contingent liability and disallowed as prima facie inadmissible. Under the circumstances, we hold that the adjustments made by the Assessing Officer are not the kind of adjustments contemplated under Section 143(1)(a). Accordingly, the additions made under prima facie adjustment are to be deleted. 8. The question that falls for consideration is whether the Tribunal is justified in its approach. In this context, we may refer with profit to the decision rendered in Kamal Textiles v. [1991] 189 ITR 339(MP) wherein it has been held as under (headnote): The provisions of Section 143(1)(a) of the Income-tax Act, 1961, are not opposed to natural justice and are not ultra vires. The intimation under the provisions is issued on the basis of the assessee's own return. The intimation under the provisions is issued on the basis of the assessee's own return. What is permissible to be adjusted are (i) only apparent arithmetical errors in the return, accounts or documents accompanying the return, (ii) loss carried forward, deduction, allowance or relief, which is prima facie admissible on the basis of information available in the return but not claimed in the return, and, similarly, (iii) those claims which are on the basis of information available in the return, prima facie inadmissible, are to be disallowed. The assessing authority is not permitted under the guise of making adjustment to adjudicate upon any debatable issue. Section 143(1)(a)(i) is not opposed to natural justice. (emphasis Here printed in italics supplied) 9. In Amir Uddin v. [2001] 248 ITR 550(MP), it has been ruled as follows (page 554): If I examine the impugned adjustment made by the Assessing Officer (the ITO), I find that they do not fall in any of the categories specified supra. The question, whether a particular income disclosed by the assessee is to be taxed under a particular head cannot be changed for being taxed under an altogether a new source of income under Section 143(1)(a). The impugned adjustment in the present case does not (sic) appear to me to be prima facie bad. In the return, the assessee disclosed that a particular income is being shown to be received under the head 'Long-term capital gains'. This was changed to an income to have been received from an 'adventure in the nature of trade' by the learned Assessing Officer (the ITO). This, in my opinion, needed a factual inquiry and could not be termed as a prima facie adjustment within the meaning of Section 143(1)(a), first proviso. This could be done only by issuing proper notice to the assessee or in the regular assessment under Section 143(3) of the Act, where the assessee would get an opportunity to satisfy the assessing authority that what he has disclosed in the return is the correct source of income and the same cannot be taxed under the head 'Adventure in the nature of trade'. 10. Recently, in Kvaverner John Brown Engg. (India) P. Ltd. v. Asst. 10. Recently, in Kvaverner John Brown Engg. (India) P. Ltd. v. Asst. CIT [2008] 305 ITR 103 (SC) : [2008] 170 Taxman 304 (SC), the apex court has expressed thus (page 104): The only point raised by the appellant is that it is not liable to pay additional tax as Section 143(1)(a), as it stood during the relevant year, was not applicable to the facts of this case because a moot point had arisen which could not have been a matter for adjustment under that section and which point needed consideration and determination only under regular assessment vide Section 143(3) of the 1961 Act. We find merit in this civil appeal. As stated above, we are concerned with the assessment years 1996-97 and 1997-98. One of the main conditions stipulated by way of the first proviso to Section 143(1)(a), as it stood during the relevant time, referred to prima facie adjustments. The first proviso permitted the Department to make adjustments in the income or loss declared in the return in cases of arithmetical errors or in cases where any loss carried forward or deduction or allowance which on the basis of information available in such return was prima facie admissible but which was not claimed in the return or in cases where any loss carried forward, or deduction or allowance claimed in the return which on the basis of information available in such return was prima facie inadmissible. In the present case, therefore, when there were conflicting judgments on interpretation of Section 80-O, in our view, prima facie adjustments contemplated under Section 143(1)(a) was not applicable and, therefore, consequently the appellant was not liable to pay additional tax under Section 143(1A) of the 1961 Act. 11. Keeping in view the aforesaid enunciation of law the present factual matrix is to be appreciated. As is evincible the Assessing Officer had issued the intimation by giving a note which reads as under: Liquidated damages accrued but not accounted as per notes on accounts amounting to Rs. 58,79,839 and bank interest accrued but not accounted as per notes on accounts submitted by the assessee along with the return of income amounting to Rs. 14,69,905. 12. From the aforesaid note it transpires that the Assessing Officer has done 12 prima facie adjustment because of the non-accounting of the two expenses in the books of account. 58,79,839 and bank interest accrued but not accounted as per notes on accounts submitted by the assessee along with the return of income amounting to Rs. 14,69,905. 12. From the aforesaid note it transpires that the Assessing Officer has done 12 prima facie adjustment because of the non-accounting of the two expenses in the books of account. In this context, we may fruitfully refer to the decision in Sutlej Cotton Mills Ltd. v. [1979] 116 ITR 1 (SC) wherein it has been held as under (page 5): ... it is now well settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may by making entries which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. 13. In this regard it is apt to refer to the decision in CTT v. [1956] 29 ITR 661 (SC), where their Lordships have opined as under (headnote): Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which he might take of his rights. 14. Thus, it is clear as crystal that the adjustment made by the Assessing Officer purely on account of non-accounting in the books of account is unjustified inasmuch the issue pertaining to deductibility or otherwise of liquidated damages and bank interest and has to be ascertained only after scrutiny of the terms and conditions of the contract between the assessee and the customers. Similarly, the facet of bank interest has to be verified by scrutiny of correspondences entered into between the assessee and the bank and also the waiver later on. 15. It is discernible that the assessee was of the opinion that the late delivery damages would be covered by getting the contract amended with the customer and accordingly no provision was made for accrued damages. However, that does not necessarily convey that the damages did not accrue and became the liability of the appellant. 15. It is discernible that the assessee was of the opinion that the late delivery damages would be covered by getting the contract amended with the customer and accordingly no provision was made for accrued damages. However, that does not necessarily convey that the damages did not accrue and became the liability of the appellant. As is perceptible, the auditors did not accept the no provision made for late delivery damages and qualified their report under Section 44AB of the Income-tax Act. As has been held in the case of Sutlej Cotton Mills Limited [1979] 116 ITR 1 (SC) that for the purpose of computing income under the Income-tax Act the book entries are not conclusive. If under the Act a liability has accrued merely because no entry is made in the books of account it would not mean that the liability cannot be claimed or the income cannot be assessed. It is also noticeable, the penal interest was debited by the bank to the appellant's account and recovered on various dates during the financial year 1996-97. The assessee-appellant had made representations to the bank to exempt it from the said levy and in anticipation of exoneration it did not charge the same in the accounts. The request was finally rejected by the bank and, therefore, liability has been charged in the return. In the statement of computation of income for the year 1997-98, following the mercantile system the payment of interest was claimed as deduction which has been disallowed Under Section 143(1)(a). On a perusal of the factual aspects there can be no shadow or trace of doubt that the nature of deduction claimed by the assessee can be allowed or disallowed only on examination of various documents related thereto; and it cannot be added on the foundation of prima facie adjustment as envisaged under Section 143(1) of the Act because of the debatable nature of the claim. It is because the assessee as is manifest, has claimed the liability as contingent. 16. In this regard we may fruitfully refer to the decision in Bharat Earth Movers v. [2000] 245 ITR 428 (SC) wherein it has been held as under (page 431): ... if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. In this regard we may fruitfully refer to the decision in Bharat Earth Movers v. [2000] 245 ITR 428 (SC) wherein it has been held as under (page 431): ... if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. 17. In Kalekhan Mohammed Hanif v. [1987] 163 ITR 769 (MP) this Court has ruled thus (page 772): In Metal Box Company of India Ltd. v. (1969) ILLJ 785 SC, the Supreme Court considered the various income-tax and wealth-tax decisions and laid down that it would be legitimate to deduct estimated liability in the profit and loss account while working out its net profit. It was observed as under (page 62): In the case of an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. Just as receipts' though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business. 18. In this context, we may refer with profit to the decision in CIT v. [1980] 122 ITR 240(Bom), wherein it has been held as under (page 245): In order to decide whether a particular amount is laid out or expended wholly or exclusively for the purposes of the assessee's business, the test to be applied is : Has the expense been incurred with the sole object of furthering the trade or business interest of the assessee unalloyed or unmixed with any other consideration? If the expense is found to bear an element other than the trade or business interest of the assessee, the expenditure is not an allowable one. To arrive at the conclusion that the expenditure was dictated solely by business consideration one has to consider the nature of the business, the way it is conducted and any likelihood of the business being adversely affected or its interest being promoted by the refusal or the incurring of the expenditure, as the case may be. When the assessee places all the facts and circumstances before the revenue authorities, the latter must examine the same and must make up their minds as to whether the expenditure was necessitated or justified by commercial expediency. The ultimate finding that the expense is allowable under Section 10(2)(xv) is an inference of law to be deduced from the facts of the case. The question is a mixed one of law and fact. 19. In view of the aforesaid there can be no trace of doubt that the issues which were raised are debatable in nature and do not come under the purview of prima facie adjustment as contemplated under Section 143(1)(a) of the Act. Therefore, we are of the considered opinion, the view expressed by the Tribunal cannot be found fault with and accordingly, the appeal, being devoid of merit, stands dismissed/There shall be no order as to costs.