2. The assessee is a private limited company and the appeal relates to the assessment year 1980-81. There was a lock-out in the factory due to labour trouble and unrest, from 34-7-1979 to 20-11-1979 and the assessee-company was provided police protection in order to ensure that there was no violence by the workers and the properties of the company were protected. The Superintendent of Police, Karwar, by bill dated 1-1-1980 to the Managing Director of the assessee-company demanded payment of Rs. 3,77,530 for providing police guards to the industrial property. The assessee-company, therefore, in the Profit & Loss account debited this amount of Rs. 3,77,530 for police deployment for the period 24-7-1979 to 24-9-1979 and a further provision of Rs. 3,77,000 for similar police deployment for the subsequent two months, i.e., 25-9-1979 to 20-11-1979. There was thus a debit in the Profit & Loss account of Rs. 7,54,530 on account of police charges which was included in the total security charges of Rs. 11,11,641 appearing in the manufacturing and other expenses. The Income-tax Officer however, found that the bill for Rs. 3,77,530 from the Superintendent of Police was dated 2-2-1980 and even this bill was challenged in the writ petition before the Hon'ble High Court and the Hon'ble High Court by order dated 1-4-1985 held that since the bill was disputed, unless the dispute was decided by the District Magistrate and it was determined what was the amount payable and who was the person who was liable to make the payment, the amount claimed in the bill cannot at all be recovered. The Hon'ble High Court, therefore, directed the District Magistrate to decide the dispute raised in the writ petition under Section 48 of the Karnataka Police Act, 1963, and till the dispute was decided nothing could be recovered from the assessee. The Income-tax Officer, therefore, came to the conclusion that both , the amounts of Rs. 3,77,530 demanded by the bill after the end of the previous year on 31-12-1979 which was stayed by the Hon'ble High Court and further amount of Rs. 3,77,000, the aggregate of which amounted to Rs. 7,54,530 and was claimed as a deduction in working out the business income, were not admissible. He, therefore, disallowed this claim of deduction while making the assessment.
3. The Commissioner of Income-tax (Appeals) agreed with the Income-tax Officer on this issue and refused to interfere. The assessee has, therefore, come up with the main point of dispute in the present appeal before us.
4. The learned counsel for the assessee-company, Shri Patel, submitted to us that the method of accounting of the assessee-company was Mercantile and, therefore, the liability for payment for the services rendered by the police personnel arose the moment the services were performed. Elaborating on his arguments, Shri Patel pointed out that the police personnel were deployed during the period of the lock-out, i.e., 24-7-1979 to 20-11-1979, i.e., during the previous year relevant to this assessment year. He, therefore, vehemently argued before us that the amount of Rs. 7,54,530 on account of payment for the services by the police deployed was an admissible deduction in working out the business income in this year in view of the ruling of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82ITR 363. Shri Patel submitted before us that even if the liability of this amount was the subject-matter of quantification or adjudication or was disputed, this made no difference to the allowability of the claim of deduction. According to Shri Patel the bill from the Superintendent of Police for deployment of police personnel for the period 24-7-1979 to 24-9-1979 was under the Karnataka Police Act, 1963. Shri Patel then referred to another ruling of the Hon'ble Supreme Court in the case of CIT v. Chunilal V. Mehta & Sons (P.) Ltd. [1971] 82 ITR 54 in support of the contention that the entries in the accounts was one thing and what was relevant was the method of accounting employed by the assessee and what was the amount received or paid was wholly an immaterial circumstance. Summing up, Shri Patel vehemently argued before us that the assessee-company was entitled to the claim of deduction of Rs. 7,54,530 on account of what the assessee-company had to pay or was expected to pay for deployment of police personnel during the period of the lock-out in working out the business income and this claim of deduction was wrongly not allowed by the authorities below.
5. On the other hand the learned Departmental Representative, Shri Subramanian, pointed out that in the first place, even under the Karnataka Police Act, 1963, normal deployment of police in order to ensure that there were no crimes in a particular area did not attract any liability to pay and it was only when there was deployment of additional police personnel on the application of a person that the deployment of the additional police personnel is at the cost of the person making the application for the same and there again, if the bill made in this connection by the Police authorities was disputed, the matter had to be referred to the District Magistrate who had to determine both whether any amount had to be paid and, if so, what was the payment for the additional deployment of police personnel and had also to determine by whom the payment was to be made. Reference in this connection was made by him to the writ petition filed by the assessee-company wherein it was stated that the assessee-company had not made any application seeking help of additional police force and the Superintendent of Police had also not obtained any undertaking from the assessee-company which was incumbent on him to do so that the assessee-company would pay for the cost of the additional police or guards which were deployed on the assessee's application. In these circumstances, according to Sri Subramanian, there was no liability on the assessee-company to pay any amount for the deployment of police personnel during the period of the lock-out until as directed by the Hon'ble High Court, the District Magistrate gave his decision and determined, firstly, whether any amount had to be paid at all, secondly, what was the amount which had to be paid and, thirdly, who had to make the payment. It was brought to our notice that the ruling of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co.
Ltd. (supra) was applicable to statutory liabilities, for example, the liability to pay sales tax arose the moment the sales took place or the liability to pay excise duty arose the moment the goods were manufactured and taken out of the warehouse or the liability to pay customs duty arose the moment the goods were imported. Thus, according to Shri Subra-manian, the ruling will not apply in the present case where the first point for determination was whether it was a case of normal deployment of police personnel for maintaining law and order and not a case of additional deployment of police personnel on the application of the assessee-company which, according to the assessee-company, as mentioned by it in the writ petition, was never made. He, therefore, submitted that this was, in the first place, not a liability at all and even if it was a liability, it was a contractual liability which could be claimed as a deduction only in the year in which the liability was accepted by the assessee. Shri Subr-amanian submitted to us that even after the order of the Hon'ble High Court dated 1-4-1985 when a decision was taken by the Deputy Commissioner and District Magistrate by order dated 22-7-1985, the assessee-company, again, did not accept this order and filed a second writ petition before the Hon'ble High Court which was still pending. In these circumstances, according to Shri Subramanian, there was no liability on account of deployment of police personnel during the lock-out period 24-7-1979 to 20-11-1979 which could be claimed as a deduction in working out the business income even under the mercantile system of accounting for the assessment year 1980-81 under consideration in the present appeal.
6. We have carefully considered the rival submissions. At the outset it will be necessary to point out that according to the copy of the bill of the Superintendent of Police, Karwar, which was filed before us, the bill is dated 1-1-1980 and not 2-2-1980 as mentioned by the Income-tax Officer in the assessment order. Nothing howevey turns on this since the previous year of the assessee-company was the calendar year 1979 which ended on 31-12-1979 and, therefore, whether the date of the bill was 2-2-1980 as mentioned by the Income-tax Officer in the assessment order or 1-1-1980 as mentioned in the copy of the bill given to us at the time of the hearing, the bill was submitted after the end of the previous year. It is to be seen whether there was deployment of additional police personnel in order to keep peace or to protect the properties, such additional personnel was deployed on the application of a person and the cost of deployment of additional police personnel has to be borne by the applicant and not otherwise. It is not under dispute that according to the assessee-company, as mentioned by it in its writ petition before the Hon'ble High Court, no application for deployment of additional police personnel was made and the Superintendent of Police had also not taken any undertaking from the assessee- company that the additional police or guards deployed will be at the cost of the assessee-company for which the assessee-company had to pay. In these circumstances, the liability of the assessee-company, if any, on account of the deployment of the police personnel during the lock-out period which, according to the assessee-company was normal deployment for maintenance of peace and for which no application was made by the assessee-company and according to the police department was additional deployment for which the assessee-company had to bear the cost, will only arise when the liability on this account was determined as provided under the Karnataka Police Act, 1963, or, in the alternative, was demanded by the police department and was accepted by the assessee-company. Viewed in this context, it is not under dispute that the liability even in respect of Rs. 3,77,530 for which the bill was submitted by the Superintendent of Police, Karwar, to the assessee-company was not accepted till today by the assessee-company and for the second amount of Rs. 3,77,000, it was a mere provision in the assessee's account books for the subsequent period of two months, i.e., 25-9-1979 to 20-11-1979 for which even the bill from the police department was not received. Even in respect of the first amount of Rs. 3,77,530, the District Magistrate gave his decision on 22-7-1985 in consequence of the direction of the Hon'ble High Court of Karnataka dated 1-4-1985 and that was not accepted by the assessee-company and is subject-matter of writ petition before the Hon'ble High Court. In these circumstances, the amount of Rs. 3,77,530 cannot be said to a statutory liability and the ruling of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. ltd. (supra) will not be applicable to this liability. Even the other ruling of the Hon'ble Supreme Court in the case of Chunilal V. Mehta & Sons (P.) Ltd. (supra) cited by the assessee's learned counsel, Shri Patel, will be of no help to the assessee on the facts of the present case. It is necessary to point out that the amount of Rs. 3,77,530 for which the bill was drawn up by the Superintendent of Police after the end of the previous year has not been accepted by the assessee-company till today and, therefore, it is, in the first place, not a liability and even if it is a liability, it cannot be the liability of the previous year relevant to the assessment year 1980-81 even under the mercantile system of accounting. In respect of the second amount of Rs. 3,77,000, for which there was a mere provision in the account books and even a bill was not submitted by the Superintendent of Police to the assessee-company, the assessee-company's case for deduction of the amount in working out the business income is much weaker. We have, therefore, no hesitation in coming to the conclusion that the claim of deduction of Its. 7,54,530 on account of so-called liability for deployment of police personnel under the mercantile system of accounting was not admissible in working out the business income and was rightly not allowed by the authorities below.
7. to 13. [These paras are not reproduced here as they involve minor issues'].