Commissioner of Income-tax Vs. Bharat Fire Bricks and Pottery Works (Pvt.) Ltd. - Court Judgment

Excerpt:
- ajit k. sengupta, j. 1. in this reference under section 256(1) of the income-tax act, 1961, at the instance of the revenue, the following question has been referred by the tribunal to this court for its opinion for the assessment year 1972-73 :'whether, on the facts and in the circumstances of the case, the appellate tribunal was justified in holding that the claim of the assessee-company for deduction of rs. 3,16,061 on account of demand made by the director-general of supplies and disposals for failure of the assessee to carry out the terms of, the contract for supply of refractories in working out the business income should be allowed ?'2. the facts leading to the reference are as under :the assessee, a limited company, was awarded a contract by the director-general of supplies and disposals for supply of refractories to chittaranjan locomotive works but, due to increase in the prices of raw materials and the higher price sought by the assessee-company not being given, the assessee-company did not supply the refractories according to the terms of the contract. the director-general of supplies and disposals, therefore, cancelled the contract at the risk and cost of the assessee and placed the contract with messrs. bharat mining corporation ltd. at an enhanced rate. the extra expenditure involved as a result of what was described by the director-general of supplies and disposals as repurchase amounted to rs. 3,16,061 which was demanded from the assessee-company by a letter of the director-general of supplies and disposals dated january 13, 1971. this was not accepted by the assessee-company and the matter was, therefore, referred to arbitration and the arbitration proceedings were still pending. the assessee-company claimed this amount of rs. 3,16,061 as a deduction in working out the business income describing it as penalty for non-fulfilment of the contract. this was, however, not allowed by the income-tax officer.3. the assessee-company filed an appeal to the appellate assistant commissioner against the said disallowance made by the income-tax officer who held that the assessee's liability in regard to the sum of rs. 3,16,061 had not been determined during the previous year under appeal inasmuch as the matter was still pending in arbitration proceedings.4. on further appeal by the assessee before the tribunal, it was contended on behalf of the revenue that this was not a case of statutory liability. a disputed contractual liability could be allowed only when the same is settled. according to the revenue, since arbitration proceedings were still pending, the claim of the assessee-company for deduction of rs. 3,16,061 as business loss was clearly premature.5. the tribunal, however, held and observed that the demand of rs. 3,16,061 made against the assessee-company by the director-general of supplies and disposals for non-fulfilment of the contract by the assessee-company could not be said to be flimsy or frivolous. it was not in dispute that the demand arose in consequence of the assessee's business and was integrally connected with the carrying on of business.6. we have heard counsel appearing for the assessee as well as the revenue. it appears to us that the tribunal has not approached the issuein dispute from a proper angle. it is an admitted position that the assessee had disputed and had repudiated its liability to pay any part of the claim made by the director-general of supplies and disposals and the entire dispute had been referred to arbitration. the tribunal has found as a matter of fact that the arbitration proceedings were pending during the previous year under reference. the prima facie merits of the claim of the director-general of supplies and disposals have no bearing on the issue whether the liability pending adjudication could be an accrued liability. while describing the claim as not flimsy and frivolous, the tribunal only refers to a chance of the claim turning out as a liability in the final outcome of the arbitration.7. in cit v. roberts mclean and co. ltd. : [1978]111itr489(cal) , this court held that the expression 'profits and gains' must be understood in its commercial sense and, if a legal liability has been definitely incurred in the accounting year, it must be allowed in that year; but, if the liability is contingent and does not raise any definite obligation in the accounting year, it cannot be the subject-matter of deduction even under the mercantile system of accounting. the tribunal has not referred to the terms of the contract between the director-general of supplies and disposals and the assessee-company. it is not known whether the liability could be lawfully fastened upon the assessee-company in terms of the contract. since the dispute in regard to the claim of rs. 3,16,061 made by the director-general of supplies and disposals had been referred to arbitration in accordance with the terms of the contract, it appears to us that, until the award is delivered by the arbitrator, the liability of the assessee-company was nothing but contingent.8. in that view of the matter and following the decision of this court in cit v. roberts mclean and co. ltd. : [1978]111itr489(cal) , we answer the question referred in this case in the negative and in favour of the revenue.9. there will be no order as to costs. k.m. yusuf, j. 10. i agree.