Law:

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Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1991-92 - Under terms of agreement, assessee-lessee was required to restore surface land so used by it to its original condition - Whether, very moment assessee dug pits, liability did arise and it was entitled for deduction of expenses which it was supposed to incur for filling those pits, as it was following mercantile system of accounting - Held, yes FACTS There was an agreement between the assessee and the State that as far as possible lessee (assessee) should restore the surface land so used to its original condition. During the year under consideration, the assessee had dug new pits. The ITO disallowed the expenses accrued on account of refilling of those pits on the ground that liability stipulated in the agreement to restore the land had not accrued in the assessment year under consideration and it would arise only when it had filled the pits. In appeal, the Commissioner (Appeals) allowed the claim of the assessee. However, the Tribunal restored the view taken by the Assessing Officer. On appeal under section 260A : HELD Considering the clause in the agreement, i.e., as far as possible the lessee shall restore the surface land so used to its original condition, the moment assessee dug pits, it was bound under the agreement to fill those pits and liability did accrue on the date when the pits were dug. Therefore, the Tribunal had committed error in disallowing the claim of the assessee in the year under consideration. The moment the assessee dug the pits, liability did arise and it was entitled for deduction of the expenses which it was supposed to incur for filling those pits, as the assessee was following the mercantile system of accounting. It could claim the expenses incurred as soon as it dug the pits.[Para 7] In the result, the appeal was to be allowed. [Para 8] T.C. Jain for the Appellant. Anuroop Singhi for the Respondent. ORDER 1. The appeal is directed against the order of Tribunal dated 16th January, 2001. 2. The only issue for our consideration in this appeal is whether Tribunal was justified in restoring the view taken by the ITO regarding…

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