A contingent liability, which might or might not arise, does not constitute expenditure for the purpose of Income Tax.

JUDGMENT - Dr. SARAF B.P., J.:---By this reference under section 256(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal has referred the following question of law to this Court for opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee is entitled to deduction of differential excise duty to the extent of Rs. 76,52,169/- for the assessment year 1981-1982?".

2. The material facts giving rise to this reference are as follows :

The assessee is a public limited company running a spinning and weaving mill. On the production of yarn, the assessee had been paying central excise duty on the basis of weight of the unsized yarn. However, in the accounting year ending on 30th June 1980, relevant to the assessment year 1981-1982, some dispute arose in regard to the calculation of the excise duty on the basis of the weight of the yarn before it was sized. The Excise Department was of the opinion that excise duty was payable on the basis of the weight after sizing. Though in its accounts for the assessment year 1981-1982, the assessee had claimed deduction on account of excise duty liability of a sum calculated on the basis of the weight of unsized yarn, in its return submitted to the Income Tax Officer for the said assessment year, in the computation of income, a sum of Rs. 88,41,112/- was claimed as deduction on account of excise duty liability. However, at the time of assessment, the authorised representative of the assessee submitted a copy of the writ petition filed by the assessee before this Court being Writ Petition No. 455 of 1980, and a copy of the judgment of this Court therein. According to the judgment and order of this Court dated 14th July, 1980, the excise duty liability of the assessee had been determined at Rs. 29,66,499/-. In view of the above statement and the decision of this Court, the Income Tax Officer modified the claim for deduction on account of excise duty liability made by the assessee in its return and allowed deduction of a sum of Rs. 29,66,499/- only. The assessee appealed to the Commissioner of Income Tax (Appeals). There was no dispute before the Commissioner of Income Tax (Appeals) that the disputed claim on account of excise duty had been quashed by the High Court and the amount of excise duty payable was only the amount allowed by the Income Tax Officer. The Commissioner (Appeals), however, following the decision of the Supreme Court in (Kedarnath Jute Manufacturing Co. Ltd.)1, 1971(82) I.T.R. 363, held that since the excise duty liability was a statutory liability, it had to be allowed in the year in which the demand was actually raised even if the assessee contested the liability and allowed the appeal of the assessee. The appeal of the revenue against the above order was dismissed by the Income Tax Appellate Tribunal ("Tribunal"). Hence this reference at the instance of the revenue.

3. Mr. R.V. Desai, learned Counsel for the revenue submitted before us that both the Tribunal and the Commissioner (Appeals) committed manifest error of law in following the decision of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. (supra) because it has no application to the facts of the present case. It was submitted that the decision of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. (supra), which is applicable only in case where there is a demand on account of tax or duty which is disputed, cannot be applied in the present case where there is no demand at all and the claim is based only on show cause notices issued by Superintendent of Central Excise. Our attention was drawn to the decision of this Court in Writ Petition No. 455 of 1980 filed by the assessee to challenge the validity and legality of the show cause notices to show that what the assessee had received during the year under consideration were merely show cause notices dated 22nd February, 1980 and 25th February, 1980 for different periods fro

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