Category Archives: Unnecessary Battle

Year of allowance of contractual liability – Pointless Scuffle

A statutory liability arises as soon as the specified event occurs or the condition stipulated by the statute gets fulfilled. In the case of a contractual liability, the liability arises or accrues only when the dispute is finally adjudicated upon or is settled amicably. Again in the matter of allowance of either of such liability there would occur dispute since several events may count on the final outcome of such liability. Both the revenue and the assessee would choose year of allowance of their interest. But seldom does this litigation pay off to either party. As far as statutory liability goes there is little to doubt after the passing of the Supreme Court decision in Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax (1971) 82ITR363. However the contractual liability accrues when it is finally settled and this often force one to log into sequence of events spreading over more than one year and the dispute results as to the year in which the expenditure can be said to have been incurred.

The following passing observations by the Special bench of Delhi ITAT in Indian Communication Network P. Ltd. vs. Inspecting Assistant Commissioner of Income-tax (1994) 206ITR96 need greater following in adjudicating matters for allowance of contractual liabilities ( at Page 114):

“ Before we part with this ground, we cannot help feeling that the litigation between the parties could have been avoided since it was quite immaterial, whether full deduction was allowed in one year or partly in one year and partly in the next, since the assessee is a company and rate of tax is uniform. The gain to one and