A liability arising from a contractual obligation accrues only when it is ascertained.

R.R. Rastogi, J.

1. THIS is a reference under Section 256(2) of the I.T. Act, 1961 (hereinafter referred to as "the Act"). The following two questions have been referred by the Income-tax Appellate Tribunal, Allahabad Bench, for the opinion of this court:

"1. Whether, on the facts and in the circumstances of the case, the liability in respect of the sum of Rs. 18,533 paid to Ahmedabad Textile Industry Research Association accrued in the previous year relevant to the assessment year 1960-61 ?

2. Whether the finding of the Appellate Tribunal in respect of the addition of Rs. 6,81,643 to the book results of the Pondicherry Unit stands vitiated because it does -not take into account some relevant material and takes into account some irrelevant material and considerations ? "

2. THE brief facts are that the assessee, a public limited company, is carrying on the business of manufacture of cotton yarn and cloth. It has got several units including one at Kanpur and another at Pondicherry. Its head office is at Kanpur. It follows the calendar year as its year of account. In its assessment for the assessment year 1960-61, the assessee in its head office account claimed a deduction of Rs. 18,533, being the sum paid to Ahmedabad Textile Industry Research Association towards its annual contribution for the year ended March 31, 1958. THE bill for that amount was of 18th May, 1957, and it was to the following effect :

Rs.

Annual contribution from 1-4-1957 to 31-3-58

Pursuant to the General Board's resolution dated 18-12-1957

11,14,602 spindles @ 86 pies 10,743 94

2,077 looms @ 312 annas 7,788.75

________________________

18,532.69

________________________

It appears that there was some dispute between the assessee on the one hand and the aforesaid association on the other with regard to that bill and the payment was ultimately made in the previous year relevant to the assessment year under consideration in terms of the assessee's letter dated September 21, 1959, and oh that account the assessee claimed deduction of that amount in this year. The ITO did not accept the assessee's contention because, firstly, the correct nature, object and purpose of expenditure was not known and so it could not be said that it was of revenue nature and, secondly, that it related to the period April 1, 1957, to March 31, 1958, and could not be allowed in the calendar year 1959. In appeal, the AAC did not agree with the first objection of the ITO as the payment was in the nature of an annual contribution and was hence of a revenue nature. He, however, agreed with the second objection of the ITO and confirmed the disallowance.

3. IN its further appeal before the Appellate Tribunal, the assessee again disputed the disallowance of its claim. The Tribunal, agreeing with the view taken by the revenue authorities, that this liability did not relate to the year under consideration, disallowed the claim,

4. ACCORDING to Sri Raja Ram Agarwal, learned counsel for the assessee, in the mercantile system of accounting, until a liability has accrued its debit cannot be made in the accounts and accrual depends on the facts and circumstances of each case. It was claimed that this payment was made to an association and was in the nature of an annual contribution, that there was some dispute between the parties about the sum demanded and when after the settlement of the dispute the liability was ascertained then alone it accrued. In our opinion, there is much substance in the submission made before us on behalf of the assessee and we agree that in the case of a statutory liability the quantification or ascertainment cannot postpone its accrual, but if the liability is based on some contractual obligation, it arises only when it is ascertained. The case of Kedar Nath Jute Mfg. Co. Ltd. |1971] 82 ITR 363 (SC) is an instance where the liability arose as a result of a statutory provision. In that case, the assessee-company which followed the mercantile system of