Case Law Details
Echjay Forgings P. Ltd. Vs. ITO (ITAT Mumbai)- The assessee has merely reversed a unilateral write back of dues payable to vendor. As a matter of fact, as later developments showed, the very decision of writing off amount payable to Is pat Profiles Limited was premature and based on too optimistic an appraisal of vendor’s willingness of forego the claim.
All that the assessee has done in the present year to reverse the action of write off. There is no dispute, as evident from the legal proceedings initiated by the vendor and as evident from the fact that ultimately assessee had to pay off this liability- though at a lesser amount, that the liability to pay to Ispat Profiles Limited did exist in the relevant previous year, even as it did not reflect in the assessee’s account. Under these circumstances, disallowing the liability debited to profit and loss account, on the ground that it is a contingent liability, was clearly erroneous. The profits of the assessee are to be computed on the basis of normal accountancy practices, and it is only elementary that all known liabilities are to be provided for while computing business profits. There was thus no infirmity in assessee’s claim for deduction of liability of ~ 1,07,83,402 payable to Ispat Profiles Limited. The stand of the authorities below that liability accrued as a result of memorandum of understanding dated 1st September, 2004 is wholly incorrect, inasmuch as liability came into existence as a result of purchase of raw materials from Ispat Profiles Limited, and the MOU only resulted in part remission of the same to the extent claim was forgone by the vendor. The same has been offered to tax in the relevant assessment year and Assessing Officer has accepted the same. As observed by Hon’ble Supreme Court, in the case of Chainrup Sampatram vs CIT, 24 ITR 481, “while anticipated loss is thus taken into account, anticipated profits…is not brought into account, as no prudent trader would care to show increased profit before it’s actual realisation”. The underlying principle is the theory of conservation in accounting which has the sanction of Honourable Courts above. In view of these discussions, as also bearing in mind the entirety of the case, we deem it fit and proper to direct the Assessing Officer to delete the impugned dis-allowance of t. 1,07,83,402 The assessee gets relief accordingly.
Echjay Forgings P. Ltd. Vs. Income Tax officer
ITAT Mumbai
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