A contingent liability cannot be the subject-matter of a deduction even under the mercantile system of accounting.

( 1 ) IN this reference under Section 66 (1) of the Indian Income-tax Act, 1922, the assessment year involved is 1961-62. The previous year ended on July 31, 1960. The assessee is a company. The facts stated and found by the Tribunal are briefly as follows: The company maintains its books in the mercantile system of accounting. It deals in various types of machinery! By an agreement dated September 1, 1946, the company appointed one Khazan Singh Anand as its sole selling agent for Delhi, U. P. and Bihar. The company disputed its liability to pay commission and remuneration as claimed by the selling agent and the said dispute was referred to the arbitration of the Bengal Chamber of Commerce in terms of the arbitration clause contained in the agreement. Thereafter, the agreement was terminated by the company on July 31, 1951. An award was made against the company on March 14, 1960, for Rs. 1,05,285. 43 with interest thereon at 5 1/2% from January 19, 1959, up to the date of the award. The company then transferred a part of the said interest to the interest account of the earlier year, and Rs. 1,08,370. 55 as the principal sum and the balance interest to the profit and loss account of the year ending on July 31, 1960.

( 2 ) RS. 1,08,370 claimed by the company as an allowable deduction in the accounting year was rejected by the Income-tax Officer for the reasons recorded in the assessment order. The appeal filed by the company was allowed by the Appellate Assistant Commissioner. The Tribunal has dismissed the appeal filed by the department by rejecting its contentions recorded in its appellate order. Hence, the following question is now before us at the instance of the Commissioner :"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee rightly debited in the accounts the amount of Rs. 1,08,370 at the stage when the dispute was settled in arbitration ? 2. Whether, on the facts and in the circumstances, the amount of Rs. 1,08,370 was allowable as a deduction in computing the profits from the assessee's business for the assessment year 1961-62 ?"

( 3 ) THE submissions made before us by Mr. Ajit Sengupta, the learned counsel for the revenue, were as follows: The liability of the company under the agreement was not a contingent or an inchoate liability but was an accrued liability in the earlier year and the award had merely quantified the said liability in the accounting year for the reason that the agreement was not subsisting in the accounting year and the interest was awarded by the arbitrators from 19th January, 1959; by debiting a portion of the said interest in the earlier year the company had accepted the position that its liability had arisen in the earlier year in view of its mercantile system of accounting; in any event, the liability for interest under the award had arisen from year to year and, therefore, it should be held that at least a part of the said liability for interest had arisen in the earlier year ; and since the agreement was not subsisting in the accounting year, it should be held that the entire liability of the company under the award was referable to the earlier year in which the contract was subsisting.

( 4 ) MR. Sengupta has cited those cases which were discussed by Mr. Justice A. N. Sen in his judgment dated January 9, 1973, in Income-tax Reference No. 5 of 1967, intituted Commissioner of Income-tax v. Hindusthan Housing and Land Development, Trust Ltd. Apart from those cases, Mr. Sengupta has also cited the cases of T. N. K. Govindarajulu Chetty v. Commissioner of Income-tax [1913] 87 ITR 22 (Mad) and Joyanarayan Panigrahi v. Commissioner of Income-tax [1974] 93 ITR 102 (Orissa) but, it is unnecessary for us to discuss these two cases in the view we have taken in this matter.

( 5 ) MR. R. Murarka, the learned counsel for the company, has disputed the above contentions of Mr. Sengupta and has argued that the entire liability of the