JIWANRAM SHEODUTTRAI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) "Whether, on a true and proper construction of the contract with the Indian Railways and their letters dt. 3rd May, 1986, and 15th April, 1988, the appellant is entitled to deduction in respect of the demand of Rs. 46,82,142 made by the Indian Railways during the previous year relevant to the asst. yr. 1987-88 and the purported findings of the Tribunal that the liability had not crystallized and rejecting the said claim are based on any material and or even arrived at by ignoring the relevant materials and or by taking into consideration irrelevant and or extraneous materials and or are otherwise arbitrary, unreasonable and perverse."

(2.) In order to appreciate the situation, we may briefly refer to the facts. The assessee had entered into a contract with the Railways for supplying certain materials. The contract contained a condition that in case of rejection of the material supplied, the replacement would be at the cost of the assessee-contractor. In this case, there was rejection not once but twice, namely, after the first rejection, the goods were returned to the supplier at a foreign country from whom the goods were imported and the goods were replaced. The replacement was also rejected and the goods were returned to the foreign supplier. These facts are not in dispute. Subsequently, the Railway authorities on 3rd May, 1986 (p. 131 of the paper book) demanded a sum of Rs. 46,82,142 on account of the expenditure incurred in the transaction pursuant to the terms and conditions of the purchase order dt. 29th July, 1982, being a warranty obligation on the part of the assessee. The Railway had also on 15th April, 1988 (p. 134 of the paper book), asked the assessee to refund the commission received by the assessee from the Railways in respect of the supplies so made. Admittedly, the assessee, till today, neither has paid the demand made by the Railways nor has refunded the commission received by it from the Railways. The period of limitation as available to the Railways is 30 years under Article 112 of the Schedule to the Limitation Act, 1963.

(3.) Mr. J.P. Khaitan, learned senior counsel, ably assisted by Mr. Sanjay Bhowmick, submitted that in terms of Section 41 of the IT Act, in case the liability ceases, it would be offered to tax in the year when the liability would cease. Therefore, the liability reflected in the accounts cannot be ignored. If the liability cannot be ignored, then there is no alternative for the IT authorities but to allow deduction of the loss reflected in the accounts. According to him, the assessee is entitled to reflect the loss in the accounts maintained under the mercantile system as soon he admits the liability.