Judgment:
Devi Prasad Singh, J.
1. Controversy relates to assessment year 1989-90. The assesse company entered into an agreement with Madhya Pradesh Government to print and supply lottery tickets. It was found by the Director of lotteries M.P. Government that the assessee company had breached the terms of the agreement by printing and supplying defective lottery tickets without obtaining any release order to the Sole Selling Agents. In consequences thereof, a show cause notice dated 24.1.1987 was issued to the assesse for the breach of agreement and consequently forfeiture of Rs. 11,73,350/-. In response to notice, the assessee company submitted its reply dated 12.3.1987. The reply submitted by the assessee was considered and rejected by the Director Lotteries vide order dated 6.10.1988. Originally by order dated 9.9.1987 the bank guarantee was forfeited and exparte decision was taken to recover the amount. In consequences thereof, the decision was communicated vide letter dated 24.1.1987. It shall be appropriate to reproduce the operative portion of letter/notice dated 24.1.1987 as under:.You may therefore, show cause as to why this loss of Rs. 11,73,350/- be recovered from you by way of forfeiting your pending bills of Rs. 2,80,875-00/-, bank Guarantee of Rs. 1 lacs and security of Rs. 5 0,000/-. Further as to why the balance amount of Rs. 8,02,475/- be not recovered as arrears of land revenue. If your reply is not received in this office by 15th Feb. 1987 exparte decision will be taken.
2. Though the notice dated 24.1.1987 relates to assessment year 1987 but keeping in view the order dated 1.10.1988 passed by the Madhya Pradesh Government rejecting the petitioner's contention the assesse claimed deduction in the assessment year 1989-90. The assessing authority held that liability crystallized on 24.1.1987. Therefore, claim was tenable only in the assessment year 1988-89. The claim of the assesse with regard to trading loss for the assessment year 1989-90 was not allowed. The order of assessing officer was confirmed by CIT (Appeal).
3. On appeal, the appellate tribunal deleted the addition and held that the liability is allowable in the year 1989-90. On the basis of material on record the tribunal observed that the assessing officer himself taken the accounting period from 15.4.1987 to 31.3.1989. The accounting period for the assessment year 1988-89 ended on 15.4.1987. Since, the Director of Small Savings and State Lotteries Bhopal had passed the decisive order against the assesse on 9.8.1987 i.e. after 15.4.1987, the liability did not crystallized before 24.1.1987. Accordingly, the Tribunal directed deletion of 11,73,350/-, hence the present appeal.
4. On 22.2.2008 following substantial question of law was framed by this Court:
1. Whether the Hon'ble Appellate Tribunal erred in law in holding that the liability was allowable in Assessment Yer 1988-90 when the order of the Director, Lotteres, Madhya Pradesh Government had been passed on 24.1.1987 and the claim was only maintainable in relation to Assessment year 1988-99.
2. Whether the Appellate Tribunal was justified in law holding that the loss was relatable to A. Y. 1989-90 even when the loss occurred in A. Y. 1988- 89, and in doing so, ignoring the well settled principle that the claim of loss is relatable only in the year (in this case A. Y. 1988-89) where stock is lost or its value diminished.
5. While assailing the Tribunal's order, the appellant had relied upon the judgment reported in 1991 ITR 337, CIT v. Mahabir Jute Mills Pvt. Ltd. and : 1971 ITR (82) 784, CIT, U.P. v. Burhwal Sugar Mills Co. Ltd.
6. On the other hand, learned Counsel for the respondents had relied upon the judgements of this Court reported in : 1980 (125) ITR 33, Swadeshi Cotton Mill Co. Ltd. v. Commissioner of Income Tax, Kanpur and 2006 (283) ITR 489, Commissioner of Income Tax v. Raj Motors.
7. The question cropped up as to when inference should be drawn as to on what date liability has been crystallized. It was vehemently argued that the assessee has adopted mercantile system of accounting hence liability crystallized on 24.1.1987 after receipt of notice send by M.P. Government with regard to amount in question. Submission of appellant counsel does not seem to carry weight. The notice dated 24.1.1987 does not finally settled the controversy with regard to trade loss of Rs. 11,73,350/-. It is evident from the operative portion of the notice (supra) that explanation was called from the assesse with rider that in case reply is not received by 15.2.1987 exparte decision shall be taken. The assesse submitted reply and thereafter final decision was taken only on 1.10.1988 which falls in the assessment year 1989- 90 and not in the assessment year 1988-89 as held by assessing authority.
8. The finality of a transaction or trade loss is to be seen on the basis of material on record pin pointing the date when inference may be drawn with regard to crystallization of liability. It shall depend upon the facts and circumstances of each case. No hard and fast rule or guidelines can be laid down with regard to crystallization of liability. In the present context, in any case keeping in view the letter and spirit of notice dated 24.1.1987 it cannot be assumed that liability crystallize on the said date. After submission of reply by the appellant the decision could have been taken by the M.P. Government in either way i.e. the contention of petitioner could have been accepted or rejected asserting its exparte decision to forfeit the account of Rs. 11,73,350/-.
9. In view of above, since the final decision was taken on 1.10.1988 the trade loss obviously shall fall in the assessment year 1989-90.
10. The case of Burhwal Sugar Mills (supra) though relates to mercantile system of accounting but it does not extend any help to appellant rather it helps the respondent assesse. It has been held by a Division Bench of this Court that mercantile system of account the date on which liability accrues is the date to be considered for the purpose of entertaining that liability in the accounts. This includes estimated liability. The facts and circumstances of the present case is different than the case in hand. In the present case explanation was sought from the assessee and decision could have been both way and ultimately only on 1.10.1988 final decision was taken and liability deemed to accrue on said date.
11. In the case of Mahabir Jute Mills (supra) a Division Bench held that the sale would deem to have been taken place on the date the requisition order was served upon the assesse. The assesse shall be entitled to the deduction of loss suffered on account of the order of requisition. The facts and circumstances of the case of Mahabir Jute Mills is entirely different than the present one and not applicable.
12. In the case of Swadeshi Cotton Mill (supra) a Division Bench of Allahabad High court held that if liability is based on some contractual obligation, it arises only when it is ascertained. Unless the liability has become an ascertained sum of money, it no doubt exists but proceedings have yet to be taken to determine the exact amount. A vague liability to make a payment cannot be entered into the accounts book.
13. Undoubtedly, liability in the present context was ascertained only on 1.10.1988 when decision was communicated by the Director to the assesse through the letter of the date.
14. In the case of Raj Motors (supra) again Division Bench of Allahabad High Court after considering the judgments of this Court and Hon'ble Supreme Court reiterated the aforesaid proposition of law and held that liability of a contractual nature accrues when it is finally settled.
In the present case, obviously the liability was ascertained and settled on 1.10.1988, hence, trade loss falls within the assessment year 1989-90.
15. In view of above, whenever a question arises to ascertain the trade loss under the mercantile system based on breach of contract then liability shall be crystallized only on the date when it is ascertained and settled between the parties. In the absence of any ascertainment with regard to trade loss because of violation of contractual obligation the assessment year may not be based merely on presumption or ministerial communication between the parties.
16. In view of above, the question framed are answered as under:
(I) The finding recorded by the Tribunal holding that liability was allowable in assessment year 1988-89 ignoring the letter dated 24.1.1987 based on date of ascertainment of liability is correct.
(II) The finding recorded by Tribunal on the basis of ascertainment of liability with regard to trade loss of Rs. 11,73,350/- keeping in view the final verdict of Director lotteries M.P. is correct and lawful. The letter dated 24.1.1987 is merely a notice calling explanation as to why the amount may not be forfeited hence it cannot be treated as declaration causing loss in the assessment year 1988-89.
17. Thus, the questions framed are answered against the revenue. Tribunal's judgment affirmed.