Delhi High Court on section 37(1) of the Income-tax Act, 196

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Year in which deductible - Assessment year 1983-84 - Assessee-company floated an incentive scheme in terms of which assessee was liable to pay to its dealers cash incentive for sales made - Scheme was valid up to 30-4-1981 but subsequently it was extended up to 30-6-1981, - Assessee claimed that liability incurred on extended incentive scheme was liable to be adjusted in relevant assessment year as liability had accrued and crystillised only on 30-6-1981 when it came to know actual sales made by its dealers - Claim was disallowed on ground that since assessee was maintaining its accounts on mercantile basis, liability had accrued earlier and only quantification of it was postponed - Whether liability to pay additional incentive crystallized only on 30-6-1981 when assessee was informed of actual sales made by dealers and, therefore, assessee was entitled to deduct liability in relevant assessment year - Held, yes FACTS The assessee-company had floated a scheme in terms of which it was liable to pay to its dealers certain cash incentive for sales made. The said scheme was valid up to 30-4-1981, but was extended up to 30-4-1981, as a result of which, not only were the dealers extended the incentives that were available under the earlier scheme, but they were also entitled to higher grade of incentive if the sales from 1-5-1981 to 30-6-1981 were added to the sales already made up to 30-4-1981. In terms of the scheme, as extended, the assessee incurred a liability of certain amount and according to it said amount was liable to be adjusted in the assessment year 1983-84 as liability had accrued and crystilised only on 30-6-1981 when it came to know the actual sales made by its dealers. The view taken by the revenue was that since the assessee was maintaining its accounts on a mercantile basis, the liability had accrued earlier and only the quantification of the incentive was postponed. Accordingly, the claim of the assessee to allow deduction of the said liability in the assessment year 1983-84 was disallowed. On appeal, the order of the Assessing Officer was upheld. On reference: HELD The liability to pay incentive to the dealers upto 30-4-1981 could not be disputed. However, the payment of additional incentive on a graded scale and relating back to the pre 30-4-1981 period would depend upon the sales made by the dealers from 1-5-1981 to 30-6-1981. That additional incentive would actually crystallize only on 30-6-1981 when the assessee was informed of the actual sales made by the dealers. [Para 10] Insofar as the dealers of the assessee were concerned, they would not have acquired a right to get additional incentive in the sense that the assessee would not have known till 30-6-1981 how much incentive the dealers had earned. On the other hand, insofar as the dealers were concerned, their entitlement would be known only when the sales were actually ascertained and determined and that was possible only 30-6-1981 and not on a date prior to that. [Para 14] There was no doubt that the assessee had incurred an expenditure. The only dispute was regarding the date on which the liability had crystallized. It appeared that there was no change in the rate of tax for the assessment year 1983-84. The question, therefore, was only with regard to the year of deduction and it was a pity that all the authorities had to expend so much time and energy only to determine the year of taxability of the amount. [Para 18] Therefore, the Tribunal was not correct in law in disallowing sales incentive claimed by the assessee. EDITOR’S NOTE Following the decision in the case of CIT v. Shriram Pistons & Rings Ltd. [IT Reference Nos. 70-71 of 1988] the Tribunal was right in law in allowing the payment of royalty to foreign collaborators as revenue expenditure. CASE REVIEW Bharat Earth Movers v. CIT [2000] 245 ITR 428 / 112 Taxman 61 (SC) - distinguished on facts. [Para 12] E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 7 (SC) - followed [Para 14]