A contingent liability is not deductible for income-tax purposes.

1. - This is an income-tax reference application dated February 17, 1981, under Section 256(2) of the Act 1961 (hereinafter referred to as "the Act") arising out of the order of the Income-tax Appellate Tribunal, Jaipur, in Income-tax Appeal No. 1788 (JP) of 1980 and C.O. No. 52/ JP/80.

2. Briefly stated, the facts of the case are that the non-petitioner company initially filed original return declaring an income of Rs. 31,49,270 on August 18, 1976. This was subsequently revised on February 24, 1978, and as per the revised return, the total income was shown at Rs. 3,45,842. In this revised return the assessee claimed Rs. 19,92,263 for contingency provisions and also revised the depreciation chart in relation to which another reference made under Section 256(1) is pending in this court. The assessee claimed to deduct Rs. 19,92,263 being contingency provision, which was disallowed in the earlier years 1974-75 and 1975-76. The Inspecting Assistant Commissioner (Assessment) after examining the claim of the assessee, allowed deduction to the extent of Rs. 5,97,867, vide its assessment order dated March 22, 1979, but disallowed the balance amount claimed of Rs. 13,94,396 on the ground that the liability in question does not pertain to the assessment year under review. The non-petitioner went in appeal against the above order and the Commissioner of Income-tax (Appeals), Rajasthan, Jaipur, vide his order dated October 16, 1979, observed that the excess sum of Rs. 41,84,285, which represented provision for contingency allowed in the trading account up to the assessment year 1975-76 was taxable in the assessment year 1975-76 (1976-77?). He further stated that since there is a double addition of Rs. 13,94,396 in the contract account, deduction of Rs. 13,94,396 has to be given from the excess contingency of Rs. 41,84,285 and thus only a sum of Rs. 27,89,889 was available to be brought to tax in the assessment year 1976-77. The non-petitioner preferred an appeal before the Income-tax Appellate Tribunal, Calcutta (Bench). "A", Camp at Jaipur, against the order of Commissioner of Income-tax (Appeals) and the Revenue also filed cross-objections. The Income-tax Appellate Tribunal, vide its order dated October 21, 1981, knocked off the enhancement made by the Commissioner of Income-tax (Appeals) and restored the matter to the Inspecting Assistant Commissioner for computation of income exactly in the same manner as has been done in the assessment years 1974-75 and 1975-76. The Income-tax Appellate Tribunal observed that the method of accounting adopted by the assessee in the assessment years 1974-75 and 1975-76 continued in the assessment year 1976-77 and since there has been no departure made by the assessee, there was no reason to make a total departure by holding that some of the provisions of the contingency made by the assessee did not qualify for deduction at all. The case of the Revenue was that the assessee company itself has been changing its mode of computation in the matter of allow-ability of contingency from year to year. The Revenue further contended that up to the assessment year 1976-77, the total provision for contingency allowed was Rs. 1,19,564 in both accounts (i.e., Rs. 41,84,285 in the trading account and Rs. 78,10,279 in the contract account) against the allowable sum of Rs. 78,10,279 only for in the trading account the supplies made by the assessee shown as sales tax and even sales tax is paid thereon (sic). There can, therefore, be absolutely no question of making any provision for contingency in regard to the sales in the trading account. The Revenue thus contends that the excess amount of Rs. 41,84,285 had to be brought to tax in the assessment year 1976-77. Out of this amount, an amount of Rs. 13,94,396 had to be deducted according to the Commissioner of Income-tax (Appeals). Thus the total excess income to be brought to tax was to be assessed at Rs. 27,89,889.

3. It has been contended by learned counsel for t