HIGH COURT OF DELHI

R.C. Gupta

v.

Commissioner of Income-tax, Delhi

MADAN B. LOKUR AND DR. S.MURALIDHAR, JJ.

IT REFERENCE NO. 153 OF 1986

September 3, 2007

Section 37(1) of the Income-tax Act, 1961 – Business expenditure – Year in which deductible – Assessment year 1979-80 - Certain amount was payable by assessee to company ‘H’ for certain purchases made from it in 1975 –Said liability, however, was disputed by assessee - Since ‘H’ filed a recovery suit against assessee on 18-8-1978, assessee claimed that as he was following mercantile system of accounting, said liability accrued in assessment year in question and, thus, deductible in that year – Revenue, however, contended that said liability was a contingent liability and not an ascertained one – Whether liability in question was capable of being estimated with reasonable certainty when recovery suit was filed by ‘H’ against assessee on 18-8-1978 and merely because that liability was not a statutory one, it could not be said that it was not an ascertained one but a contingent one – Held, yes – Whether, therefore, claim of assessee for deduction towards disputed liability should be allowed in assessment year in question – Held, yes

FACTS

During the assessment year 1979-80 the assessee had debited to certain amount the raw material account. The assessee explained that the said amount was payable to company ‘H’ for certain purchases made from it in 1975 but in respect of same the assessee had disputed his liability. He also contended that since said company filed a recovery suit against the assessee on 18-8-1978, the said amount accrued in the assessment year 1979-80 and, thus, deductible in that year as the assessee was following mercantile system of accounting. The Assessing Officer, however, disallowed the claim on the ground that said amount did not relate to any purchases made during the previous year relevant to the assessment year in question. On appeal, the Commissioner (Appeals) allowed the assessee’s claim. On revenue’s appeal, the Tribunal allowed the appeal holding that as long as the dispute continued and the assessee kept resisting liability, he would not be entitled to claim the deduction even if he followed the mercantile system of accounting.

On reference, the assessee submitted that merely because he had disputed the liability, it did not mean that liability ceased to be a liability; that once a suit was filed for recovery of the said sum by ‘H’, the liability became an ascertained one; and since he followed the mercantile system of accounting he was bound to account for the said liability by making a provision therefor. The revenue, however, contended that the liability was contingent and not an ascertained one.

HELD

The liability, in the instant case, was capable of being estimated with reasonable certainly when a recover suit was filed by ‘H’ against the assessee on 18-8-1978. Merely because the liability was not a statutory one it could not be said that it was not an ascertained one but a contingent one. [Para 9]

In view of the settled law and in the facts of the instant case, the claim of the assessee for deduction towards disputed liability should be allowed in the assessment year 1979-80. [Para 10]

Accordingly, it was held that on the facts and in the circumstances of the case, the Tribunal was not justified in law in holding that the disputed liability was not allowable as deduction in the assessment year 1979-80. [Para 11]