JUGDISH SAHAI J. - This is a reference made by the Income-tax Appellate Tribunal (Delhi Bench) - hereinafter referred to as 'the Tribunal' - to this court under the provisions of section 66(2) of the Income-tax Act (hereinafter referred to as 'the Act').
The reference has been made at the instance of the assessee, Bharat Stores Ltd. Agra (hereinafter referred to as 'the assessee'). This case relates to the assessment made in the year 1947-48, the relevant previous year being the one ending on June 30, 1946.
The statement of the case shows that the assessee, which is a registered company incorporated under the Indian Companies Act, carries on the business of purchase and sale of buildings and machinery and keeps its accounts in the mercantile system.
The assessee had purchased a vast area of land for a sum of Rs. 1,30,000. It sub-divided the land into a large number of small plots for the purpose of construction of residential houses. The assessee published advertisement in local newspapers for the sale of the plots. In the advertisements it was mentioned that the assessee had undertaken to lay out metalled roads in the area. The statement of the case is clear on the point that the assessee had not incurred any expenditure on the construction of the road during the relevant year. All that the assessee had done was that it debited a sum of Rs. 50,000 in the trading account of land and building department under the head 'Reserve for roads'. The assessee sold plots to the tune of Rs. 3,04,827 during the previous year. In the subsequent year it sold four more plots, the total of the sale price received being Rs. 8,28,027(?). Deducting the sum of Rs. 50,000 reserved for roads the assessee showed a profit of Rs. 1,55,845 in the lands and building department.
The Income-tax Officer added back the amount of Rs. 50,000 to the profit of the assessee. The assessee appealed to the Appellate Assistant C commissioner who dismissed the appealed to the Appellate Assistant second appeal before the Tribunal. The tribunal dismissed the appeal after observing as follows :
'The expenditure was never incurred by the assessee in the year of account nor even in the subsequent year. What the assessee did was merely to make an estimate of the expenditure that he might incur on the construction of roads and the lay out of the plots. The assessee has shown this as a reserve in his account. This item of Rs. 50,000 is really an unascertained contingent liability which has not been fulfilled in the year of account or even in the subsequent year. The income-tax authorities were justified in rejecting the claim of the assessee in this year.'
The assessee then moved the Tribunal for making a reference to his court. That application was rejected and the assessee made an application under section 66(2) of the Act to this court. This reference was made by the Tribunal under the orders of this court made under the aforesaid provision. The question referred are :
'1. Whether, in respect of the sum of Rs. 50,000 the assessee had incurred any enforceable liability ?
2. If the answer to question No. 1 is in the affirmative, whether the sum of Rs. 50,000 was an allowable expenditure of the year in question ?'
The statement of the case does not show that in the sale deeds which the assessee had executed in favour of the various purchasers who purchased plots from the assessee any undertaking had been given that roads would be constructed. All that was done in the present case was that a sum of Rs. 50,000 was shown to have been reserved for the purpose of construction of the roads. It is not a case where a definite liability had been incurred. It was a case where the amount had been provisionally kept in reserve for the purpose of construction of roads. The assessee was free not to spend that amount or at any rate to postpone the expenditure over construction of reads to a long period. We are, therefore, unable to agree with Mr. Sapru that the assessee had a definite liability to spend the sum of Rs. 50,000 over the construction of the roads in the previous year.
Mr. Sapru placed reliance upon Calcutta Co. Ltd. v. Commissioner of Income-tax. That case is clearly distinguishable. In that case the procedure followed was that when a plot was sold the purchaser paid 25% of the purchase price in cash and undertook to pay the balance with interest at a certain rate in ten annual instalments which he secured by creating a charge on the land purchased. The seller in that case undertook to carry out developments within six months of the date of sale. The undertaking to carry out developments was clearly incorporated in the deeds of sale themselves and the purchaser gave a security by means of a separate documents. The Supreme Court noticed this important fact at page 5 of the report by observation as follows :
'This undertaking having been incorporated in the deeds of sale themselves there was certainly a liability undertaken by the appellant to carry out these developments within six months from the dates of those deeds. Time was of course not the essence of the contract and the appellant, therefore, was at liberty to carry out that undertaking within a reasonable time. That, however, did not absolve it in any manner whatever from carrying out the undertaking and the purchaser were in a position to enforce the undertaking by taking appropriate proceedings in that behalf.'
In the absence of there being anything in the statement of the case to show that in the various sale deeds executed by the assessee in favour of the purchasers an undertaking had been incorporated, the liability to construct roads was not enforceable in a court of law in the present case. Consequently, it is not a case of an ascertained liability at all and the Calcutta Co. Ltd. v. Commissioner of Income-tax is clearly distinguishable.
It is true that in the mercantile system of accounts it is not necessary that the expenditure should really have been incurred in the year of assessment but it is equally true that the liability must have been ascertained and must be one which can be enforced in a court of law. It is well settled that the expenditure which is deductible for income-tax purposes is one which is towards a liability actually existing at the time and merely putting aside of money which may become expenditure in future is not expenditure see Indian Molasses Co. (Private) Ltd. v. Commissioner of Income-tax.
We, therefore, answer question No. 1 in the negative against the assessee and in favour of the department. In view of our answer on question No. 1 the necessity of answering question No. 2 does not arise and we record no answer to that question. The assessee shall pay to the Commissioner of Income-tax a sum of Rs. 200 by way of costs. We assess the fee of the counsel at the same figure.