Law: Income Tax Act, 1961

Section: 37,145

(a) Income-tax----Business expenditure---Payment to foreign collaborator---Mercantile system of accounting---Liability accrues arid is deductible in year in which slim payable---Not year in which assessee actually pays---Procedure for obtaining permission of Reserve Bank to make payment---Will not postpone accrual of liability or make it contingent---Indian Income Tax Act, 1961, S.37. Admittedly, the liability of the assessee to pay the amount to its non-resident technical collaborator under the contract became due-in the previous year relevant to the assessment year 1975-76 and not in the previous year relevant to the assessment year in question. The assessee was not entitled to urge that it maintained its accounts on the cash system only for the transaction in question for the year in question. The parties had entered into agreement on transfer of technical know-how with the permission of the Government of India. Under it the liability of the assessee to pay the fee for technical know-how accrued. The fact that actual payment could be made only with the permission of the Reserve Bank of India, only put the assessee under obligation to apply to the Reserve Bank of India for grant of necessary permission for releasing payment of the-amount to the non-resident: But its enforceability was not a contingent one. The Tribunal was wrong in allowing the sum in question as deduction for the assessment year in question by holding that the liability in the preceding year was contingent and became due and payable in the year in question only. Chandnee Widya Vati Madden (Mrs.) v. Dr. C.L. Katial AIR 1964 SC 978 ref. (b) Income-tax- ----Method of accounting---Cash or mercantile ---Assessee following mercantile system--Cash system adopted for one transaction in one year--­Not permissible--Indian Income Tax Act. 1961; S.145. Under section 145 of the Income Tax Act. 1961, income under the head "Profits and gains" of business or profession, where the assessee maintains books of account, has to be in accordance with the method of accounting regularly, employed by the assessee. which could be either cash, mercantile or hybrid system. The assessee for .any particular source of…

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