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The general rule for allowance for business expenditure is that any such expenditure should be claimed in the year in which it is incurred. There are exceptions to this rule especially in cases of deduction of liability of contractual nature. In the case of CIT v. Tamilnadu Dairy Development Corpn. Ltd. (120TAX233) the assessee under an agreement with Indian Dairy Corporation (IDC) incurred certain costs on account of certain joint projects in the preceding two years in the absence of any clear understanding as to whether such costs were to be borne by the assessee or IDC. The Madras High Court held that where there was a doubt about expenditure on project costs having been incurred for the benefit of an assessee or on account of IDC, till that doubt was cleared, it was not possible for the assessee to make any such claim and such claim is admissible in the year in which the issue is clarified.

In yet another case of CIT v. Mahindra Ugine & Steel Co. Ltd. (120TAX250) the Bombay High Court upheld the decision of the Tribunal that a lump sum provision of anticipated liability to pay workers higher wages with retrospect date under protracted negotiations would be admissible as deduction in the year in which such negotiations had reached a final stage.

In the case of Commissioner of Income-tax Vs. Purshotham Gokuldas (237ITR115) the Kerala High Court held that if the assessee follows the mercantile system of accounting and the liability, which being accrued, is disputed then the same could be claimed only when the dispute is settled. However, this does not hold good in case of a statutory liability, which can be claimed only in the year of accrual, notwithstanding the fact that the same is disputed.

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