Law: Income Tax Act, 1961

Section: 10

Income-tax---Business expenditure---Deduction---Mercantile system of accounting--¬Assessee manufacturing welding rods---Obtaining on loan welding rods from its sister concern to be returned on demand---Provision made for additional liability on account of rise in price of wire rods---Provision made is allowable deduction though amount not actually spent. The assessee-firm manufactured welding rods. It maintained its accounts on the mercantile system. The assessee obtained on loan welding rods from its sister concern with an agreement to return the same on demand. In the assessment years 1973-74, 1974-75 and 1975-76, the assessee had taken on loan 347.402,292.017 and 104.803 tonnes of wire rods respectively from its sister concern. None of the goods were returned by the assessee in the accounting year relevant to the assessment year 1976-77. The assessee had provided for an additional liability in respect of 639.419 tonnes at the rate of Rs.810.56 being Rs.5,18,237.31, on account of the rise in price of wire rods from Rs.2,525.56 to 3,336.04 in the year 1974-75 (assessment year 1975-76). The said claim of Rs.5,18,237.31 was not allowed by the Income-tax Officer. On appeal the Commissioner (Appeals) and, on further appeal, the Tribunal affirmed the order of the Income-tax Officer. On a reference at the instance of the assessee: Held, (i) that in the assessment years 1973-74, 1974-75 and 1975-76, the assessee had taken on loan 347.402, 292.017 and 104.803 tonnes of wire rods respectively from its sister concern and, under the contract between the assessee and the sister concern, the assessee was liable to return the same on demand. Consequently, the assessee must make provision in its accounts of the prices of the said loan in view of material taken on loan, so as to enable it to purchase the same in the open market. The rate of the goods shown by the entry in the assessees account was not challenged nor was it alleged to be an inflated one. The amount of Rs.24,82,756.36 was an estimated amount which would have to be expended by the assessee in the course of its business in order to return the raw materials taken as loan. From the said amount of Rs.24,82,754.36,…

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