1. M. B. SHAH, J.---The Commissioner of Income-tax,' Delhi, sought reference of the following two questions by filing an application before the Delhi High Court (see (1991) 192 ITR 221) under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") (page 222): "(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in confirming that a contingent liability which is not acknowledged even as a debt by the assessee qualifies for deduction under the Income-tax Act?
(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the principles laid down by the Supreme Court in the case of Indian Molasses Co. (P.) Ltd. (1959) 37 ITR 66, are not applicable to this case and the case is covered by the principles laid down in Kedarnath Jute Mfg. Co. Ltd. (1971) 82 ITR 363 by ignoring the material fact that excise duty in this case is neither determined nor owed as a debt by the assessee but is merely a contingent liability not provided for in, the books of account?"
2. The High Court dismissed the said application by holding that the questions of law raised are academic and the answer to the same is self---evident in view of the decision of this Court in the case of Kedernath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363. Against that order, the Revenue has filed this appeal. It was the case of the assessee-respondent company that the company was manufacturing carbon paper which was not labile to excise duty till February 28, 1975. By the Finance Act of 1975, duty at 10 per cent. Ad valorem was levied on items not otherwise specified therein which included carbon paper. On October 29, 1979, the Collector of Central Excise issued a general trade notice stating that "carbon paper" would be liable to be classified as coated paper under Item No.17(2) of the Central, Excise Tariff. Prior to that, carbon paper was subjected to excise duty under residuary Item No.68. Hence, the respondent-assessee was required to clear those goods under the said item No.17(2). However, the assessee did not accept this classification and contended that carbon paper was not coated paper at all. On March 11, 1980, a notice was issued requiring the assessee to show cause as to why the approval of the classification of carbon paper under Item No.68 should not be withdrawn with effect from March 16, 1976. Thereafter, the assessee received a demand letter, dated April 21, 1980, which is in the form of a demand notice for payment of basic excise duty and special excise duty for the years 1976-77 1978-79 and 1979-80, in all demanding a sum of Rs.92,98,805. The assessee challenged the levy of excise duty under Item No.17(2) by filing Civil Writ Petition No.634 of 1980. Pending the writ petition, the assessee filed a revised return claiming the amount of Rs.92,98,805 as deduction. The Income-tax 'Officer disallowed the claim of the assessee for the assessment year 1980-81 on the ground that only a show-cause notice was issued in the said assessment year. In respect of the subsequent assessm ent year 1981-82, the claim of the assessee was rejected by the Income-tax Officer on the ground that as the assessee maintains the mercantile system of accounting, the claim for earlier years was inadmissible. He further observed that the liability had arisen in that year, but the same would have been allowed if the 71.:bility was in present and not in future as the dispute was pending in a writ petition and hence, it was a contingent liability. In appeal, the Commissioner of Income-tax allowed the claim of the assessee on the basis of the decision of this Court in the case of Kedamth (1971) 82 ITR 363. The Tribunal dismissed the appeal as well as the application under section 256(1) for referring the questions to the High Court.
3. At the time of hearing of this appeal, learned counsel for the applicant submitted that the High Court ought to have raised the questions and directed them to be referred because questions of law were required to be decided. He submitted that the liability of the assessee was contingent and the decision rendered by this Court in Kedarnath's case-(1971) 82 ITR 363 does not deal with a situation where the liability had arisen in a subsequent assessment year It is his further submission that the so-called contingent liability to pay the excise duty related to previous assessment years 1976-77 to 1979-80 and, therefore, deductions were rightly not granted in the assessment year 1981- 82: "It is not possible to comprehend how the liability would cease to be one because the assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail with regard to the quantum of liability, etc."
4. Further, in that case, the Court has approved the decision of the Madras High Court in the case of Pope The King Match' Factory v. CIT (1963) 50 ITR 495 where it was held that the assessee had incurred an enforceable legal liability on and from the date on which he received the Collector's demand for payment and that his endeavour to get out of that liability by preferring appeals could not in any way detract from or retard the efficacy of the liability which had been imposed by the competent excise authority.
5. Learned, counsel for the appellant further submitted that in the books of account the respondent had not debited the said amount and no entries are made acknowledging the said liability. In our view, this contention also does not require much consideration as similar contention was negatived by this Court in Kedarnath's case (1971) 82 ITR 363, by holding thus (page 367): "Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter: The assessee who was maintaining accounts on the mercantile system was fully justified in claiming deduction of the sum of Rs.1,49,776 being the amount of sales tax which it was liable under the law to pay during the relevant accounting year."
6. Learned counsel for the appellant, however, relied upon the decision of this Court in the case of Indian Molasses Co. (P.) Ltd. v. CIT (1959) 37 ITR 66 for contending that the expenditure would be deductible for Income---tax purpose which is towards a liability existing at the time, but putting aside the money which may become expenditure on the happening of an event is not expenditure.
7. He submitted that the liability of the assessee in the present case was only contingent and not actual liability in praesenti. It is not necessary to discuss in detail the said decision because in that case itself the Court has observed (page 76;)
8. "Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any .Sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits."
9. The Court after discussing various contentions finally held (page 80): "Expenditure which is deductible for income-tax purposes is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure. "