A liability incurred by a company for earning profits from its business is allowable as a deduction under the same head under which a part of it had been allowed as a deduction in earlier years.

Dipak Kumar Sen, Ajit K. Sengupta

( 1 ) IN this reference under Section 256 (1) of the Income-tax Act, 1961, the following question of law has been referred to this court : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the liability of Rs. 57,103 was allowable as a deduction for the assessment year 1967-68 ?"

( 2 ) THE assessment year involved is 1967-68 for which the relevant accounting year is the year ending September 30, 1966. The assessee is a company which is engaged in the business of hiring out navigation receivers and equipment to its various customers in India. Such navigation receivers and equipment are in turn taken on hire by the assessee from Dacca Navigation Concessions Ltd. , London (hereinafter referred to as the "london company"), vide an agreement dated December 19, 1961.

( 3 ) THE dispute before the Tribunal was in regard to an additional liability arising from the devaluation of Indian currency on June 6, 1966. The Income-tax Officer disallowed the said additional liability due to devaluation of Indian currency on June 6, 1966, amounting to Rs. 57,103 because, in his opinion, the said sum represented a provision in the accounts towards the difference in exchange in respect of liabilities to the principals and accordingly as no remittance had been made during the year under consideration by the assessee the said provision could not be allowed as a deduction.

( 4 ) THE agreement required that the said sum of Rs. 57,103 represented liability in respect of hire charges in the years 1963 and 1964. The Appellate Assistant Commissioner, therefore, concluded that as no remittance was actually made by the assessee in respect of the said liability during the year under consideration and as the assessee had only made a provision in its accounts, the Income-tax Officer was correct in not allowing the deduction claimed by the assessee.

( 5 ) THE Tribunal considered the contentions of the assessee as well as the Department at length. The Tribunal found that the assessee was a trading company which carried on business of taking on hire navigation receivers and equipment from the London company and letting out the same on hire to its customers in India. The account of the London company in the books of the assessee was a trading account of a supplier. The said account showed certain liability to be discharged in pound sterling on the date of devaluation. The said liability was for payment of hire charges to the London company. On June 6, 1966, the Indian rupee was devalued which increased the said liability of the assessee by Rs. 57,103. The original liability and the increased liability were, therefore, part and parcel of the same transaction, namely, the receipt of navigation receivers and equipment on hire from the London company. The Tribunal was of the opinion that the liability of Rs. 57,103 was not a separate and distinct liability apart from the original transaction of payment of hire charges by the assessee. It was also of the view that there was no distinction between hire charges credited to the account of the London company in the earlier years and the hire charges now credited in the year 1966. The Tribunal, therefore, held that as the original credit was allowed as a deduction to the assessee, the credit now given to the account of the London company should also be allowed as a deduction. The Tribunal further held that a liability would be allowed as a deduction under the same head under which a part of it had been allowed as a deduction in earlier years. The assessee maintained its books of account on mercantile basis and the additional liability accrued due during the year under consideration and, therefore, had to be allowed as a deduction. The said liability was incurred by the assessee for earning profits from the assessee's business in existence and, therefore, the said liability was wholly and exclusively laid out for the assessee's business. T

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