JUDGMENT C.S.P. Singh, J.
1. The Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, has referred the following question of law for our opinion :
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in allowing the sum of Rs. 32,660 on account of infringement commission in the accounting period relevant to the assessment year 1972-73?"
2. The assessee is a private limited company. It is a dealer of Standard Cars, Tractors, Rajdoot Motor Cycles, Scooters and spare parts, etc. In the previous year relevant to the assessment year 1972-73, the assessee had supplied 42 tractors to the Public Works Department. The Public Works Department, in turn, distributed these tractors to various districts. Its principal, M/s. Escorts Ltd., required the assessee to pay infringement commission on the sale of these tractors to its various dealers outside Lucknow as, according to M/s. Escorts Ltd., whose agent the assessee was, the dealers in other districts were entitled to commission on the sale of these tractors. A demand at the rate of Rs. 930 per tractor was made by M/s. Escorts Ltd., but the dealer did not agree to this. Subsequently by letter dated May 11, 1972, the matter was settled and the assessee was asked to pay infringement commission to other dealers outside Lucknow at Rs. 650 per tractor. The assessee accepted the claim and paid the amount which worked out to Rs. 32,650. The assessee claimed deduction of this amount, but it was rejected by the ITO on the ground that this claim had not been accepted by the assessee in the relevant previous year, as in that year the assessee had taken up the stand that he was not liable to pay this amount. The assessee went up in appeal. The AAC took the view that although the assessee had contested the claim made by M/s. Escorts Ltd., it could not ilisregard the direction of its principals as the assessee's business consisted mostly of sale of tractors of M/s. Escorts Ltd., and the assessee in the interest of its own business had to agree to the claim, for fear of termination of its agency. He accordingly held that although the commission was paid after the end of the previous year the liability to pay it had already arisen, and accrued in the relevant previous year, except for five tractors which have been sold in the assessee's own area. As a result he allowed an amount of Rs. 22,650 as deduction in the relevant assessment year. Both the revenue and the assessee appealed. The Tribunal took the view that as the assessee was maintaining its accounts on mercantile basis, and as M/s. Escorts Ltd., the assessee's principals, had demanded the amount in question, the assessee rightly made provision for this liability as infringement commission and as such the assessee was entitled to deduction of the entire amount especially in view of the fact that the infringement commission in respect of five tractors sold by the assessee in its own area have been offered for taxation in the subsequent years. On these findings, it dismissed the appeal filed by the revenue and allowed that filed by the assessee.
3. It is settled that the mere fact that an assessee keeps his account on the mercantile system does not give him a handle to debit liability of every kind whatsoever. The liability that can be debited is only that which is certain, and which arises in present. In the present case, although M/s. Escorts Ltd. had made a claim for infringement commission, the assessee was contesting that rate, and not admitting his liability. He agreed to pay an amount of Rs. 650 per tractor on the 19th May, 1972, i.e., after the relevant previous year had closed. The liability was of a contractual nature and crystallized only when the assessee agreed to the payment of Rs. 650 per tractor, and not at any point of time earlier. Counsel relied on the decision of the Supreme Court in the case of Kedar-nath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363 and the decision of this court ia the case of CIT v. Sugar Dealers [1975] 100 ITR 424. The case of Kedarnath Jute Manufacturing Co. Ltd. [1971] 82 ITR 363 is clearly distinguishable, for, in that case, the liability for sales tax arose by virtue of the statute as soon as the sale was effected. Such is not the case here. The assessee's case is not that the liability arose as soon as it supplied the tractors to the public works department at Lucknow. His contention is that the liability arose when a claim to that effect was lodged with it by M/s. Escorts Ltd. The assessee did not admit this contractual liability earlier than the 19th May, 1972. Nothing was brought on the record to show that the agency contract fixed a liability as soon as the infringement took place. It also appears to us that the amount of Rs. 950 per tractor claimed by M/s. Escorts Ltd. was negotiable, for, ultimately, the matter was settled at Rs. 650 per tractor. In such circumstances, it cannot be said that an ascertainable liability arose to the extent of Rs. 950 per tractor as soon as M/s. Escorts Ltd. had made the claim. In our view, the liability for the amount arose when the assessee admitted the liability at the rate of Rs. 650 per tractor which is evidenced by the letter of the 19th May, 1972. The decision of this court in the case of Sugar Dealers [1975] 100 ITR 424 is also not in point, for, in that case, the security which the assessee had deposited had been forfeited in the previous year on account of the breach of contract by the assessee. Thus, although the assessee in that case had contested the liability and took proceedings for recovery of security amount, that was inconsequential, for, the loss has already been suffered by the assessee by forfeiture of the security in the relevant previous year. Such is not the case here, for, the demand made by M/s. Escorts Ltd. during the relevant previous year did not fructify as it was resisted by the assessee, and it was only when the previous year had run out that the claim was admitted for the reduced amount. The deduction, as such, could not have been allowed as the liability did not arise in the relevant previous year.
4. We, accordingly, answer the question in the negative, in favour of the department and against the assessee. The department is entitled to its costs, which is assessed at Rs. 200. Counsel's fee is assessed at the same figure.