Dr. B.P Saraf, J.:— By this reference under section 256(2) of the Income-Tax Act, 1961 (“the Act”), the Income-Tax Appellate Tribunal has referred the following three questions of law to this court for opinion at the instance of the assessee:

“(1) Whether, on the facts and in the circumstances of the case, the Income-Tax Appellate Tribunal erred in law in holding that the sum of Rs. 19,81,625 being part of the compensation and fees payable to Dorr Oliver Inc. of U.S.A under the agreement on January 1, 1959, was not admissible as a deduction in the computation of the assessee's total income?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have held that the entire amount of Rs. 28,60,361 being compensation and fees payable to Dorr Oliver Inc. of U.S.A was deductible in arriving at the assessee's total income?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is not entitled to the surtax liability being allowed as a deduction in the computation of its income?”

2. Learned counsel for the parties are agreed that the controversy involved in question No. (3), stands concluded in favour of the Revenue by the decision of the Supreme Court in Smith Kline and French (India) Ltd. v. CIT, [1996] 219 ITR 581.

3. In view of the above, we answer question No. 3 in the affirmative and in favour of the Revenue.

4. We are now left with questions Nos. (1) and (2) only. The material facts relevant for deciding the controversy in these questions, briefly stated are as follows:

The assessee is a non-resident company originating and existing under the laws of the State of Delaware, U.S.A The company has also a branch office in Bombay. It is a subsidiary of another non-resident company, namely, Dorr-Oliver Inc. Stamford, U.S.A Its Indian business has since been taken over from April 1, 1977, by a company known as Hindustan Dorr-Oliver Ltd. By an agreement dated January 1, 1959, entered into between Dorr-Oliver Inc. and the assessee-company Dorr-Oliver (India) Ltd., Dorr-Oliver Inc. authorised the assessee-company to design, manufacture, use, sell and/or practise and to authorise others so to do certain equipment and processes. The said Dorr-Oliver Inc. further agreed to supply to the assessee-company copies of designs, drawings, specifications, etc., to the extent required by the assessee to use in its activities. For these rights and services described in the said agreement, the assessee was required to pay compensation and fees to Dorr-Oliver Inc. In pursuance of the relevant clauses of the said agreement, a sum of Rs. 28,60,361 became payable to Dorr Oliver Inc. as compensation and fees for the accounting year ending on September 30, 1974, relevant to the assessment year 1975-76. The assessee claimed the aforesaid amount as a deduction in the computation of the total income for the assessment year 1975-76. The Inspecting Assistant Commissioner of Income-Tax, Foreign Companies Range-I,. Bombay, disallowed the assessee's claim on the ground that no specific approval of the Government of India had been received for the same, as required by law. He, however, observed that the position would be reviewed as and when the necessary Government sanction was received. The assessee carried the matter in appeal before the Commissioner of Income-Tax (Appeals)-III, Bombay, who held that, as per the Government of India's letter dated May 9, 1972, informing the assessee that no further extension of collaboration agreement dated January 1, 1959, would be granted beyond June 30, 1972, the agreement between the assessee-company and the U.S.A company was a non-enforceable contract and no liability could arise out of it meriting a deduction in the case of the assessee. Reliance was placed by the Commissioner (Appeals) on the decision of the Supreme Court in Nonsuch Tea Estate Ltd. v. CIT, [1975] 98 ITR 189, in confirming the disallowance. The assessee challenged this decision of the Commissioner (Appeals), before the Income-Tax Appellate Tribunal (“the Tribunal”). By its order dated October 25, 1980, the Tribunal held that out of the total claim of Rs. 28,60,361 only a sum of Rs. 8,78,736 was allowable as a deduction in computing the assessee's profits for the assessment year 1975-76. As regards the balance amount, the Tribunal held that since the amount could not be said to have effectively accrued during the previous year relevant to the year under appeal, it could not be allowed as a deduction. To arrive at this conclusion, the Tribunal referred to a letter of the Government of India dated September 15, 1980, whereby the Government had granted approval for remittance of a sum of Rs. 47,48,850 subject to the conditions laid down therein and to the fact that the payment due under the agreement for the period ending September, 1974 (which is the previous year relevant to the assessment year 1975-76), worked out to Rs. 8,78,736.

5. We have perused the facts of the case. Admittedly, the amount claimed as a deduction was payable to Dorr Oliver Inc. of U.S.A under an agreement dated January 1, 1959. The said agreement was a continuing agreement and the payments which fell due from time to time were duly approved by the Government of India and the Reserve Bank of India. On January 9, 1970, the Reserve Bank wrote to the assessee that the collaboration agreement had almost run for a period of 10 years. The assessee-company was advised by the Reserve Bank to arrange to terminate the said collaboration agreement and in case it wanted to continue the existing arrangement, to make a fresh application to the Government of India for approval. In the said letter, it was also indicated that in the absence of approval of the Government of India for the extended period, it would not be possible for the Reserve Bank to allow remittance facility in future. In reply, the assessee informed the Reserve Bank that the agreement was a perpetual one and contained a clause that the termination could only be made by either party by giving six months notice. Since there was no case for giving notice in accordance with the terms of the agreement, there was no question of applying afresh to the Government of India for continuation of the agreement. Thereafter, after protracted correspondence, the Government of India approved the agreement up to June 30, 1972. The Government of India also informed the assessee that the extension was granted as a special case and that no further extension would be permitted. The Inspecting Assistant Commissioner observed that in the absence of approval of the Government of India in regard to various payments which had become due, the deduction in respect thereof could not be allowed. The Inspecting Assistant Commissioner also observed that the decision would be reviewed if and when the Government sanction was obtained. The Commissioner (Appeals) rejected the appeal of the assessee and upheld the order of the Inspecting Assistant Commissioner. In its appellate order, the Commissioner (Appeals) observed that under the terms of the Foreign Exchange Regulation Act, 1973, no person in, or resident in, India could make any payment to or for the credit of any person residing outside India, or make any payment to or for the credit of any person by or on behalf of any person residing out of India or place any sum to the credit of any person outside India, etc., without specific sanction and permission of the Reserve Bank of India. The Commissioner (Appeals) also observed that in view of the refusal of the Government of India to extend its permission beyond June 30, 1972, the agreement between the assessee-company and the non-resident company was an unenforceable contract and no liability could arise out of such contract which could be claimed as a deduction in the computation of the income of the assessee. The Commissioner (Appeals) relied upon the decision of the Supreme Court in Nonsuch Tea Estate Ltd. v. CIT, [1975] 98 ITR 189. The Tribunal also upheld the order of the Inspecting Assistant Commissioner and the Commissioner (Appeals). Before the Tribunal, the assessee contended that out of the total claim for deduction of Rs. 28,60,361, there was an approval of the Government of India and the Reserve Bank for a sum of Rs. 8,78,736. The Tribunal was satisfied in regard to this contention. The Tribunal, therefore, allowed this part of the claim. The Tribunal, however, upheld the orders of the Commissioner (Appeals) in respect of the balance amount of Rs. 19,81,625.

6. We have heard Mr. Shetty for the assessee as also Mr. Desai for the respondent. There is no dispute in this case that the agreement in question was approved by the Central Government and the Reserve Bank only till June 30, 1972. No approval was granted to the agreement thereafter till the assessment year under consideration. We are informed that subsequently in 1980 some approvals were granted. If that is so, as observed by the Inspecting Assistant Commissioner in his order, the assessee can claim appropriate relief in accordance with law on the basis thereof. So far as the claim of the assessee for deduction of the amount in the assessment of the year under consideration is concerned, we find that the Income-Tax authorities, including the Tribunal, were correct in holding that the assessee was not entitled to get deduction of the amount of Rs. 19,81,625 for the year under consideration. Law is well-settled by the decision of the Supreme Court in Nonsuch Tea Estate Ltd. v. CIT, [1975] 98 ITR 189, that where accrual of liability is dependent upon some approval and/or sanction of the statutory authority, it will accrue or arise only on such approval. In the instant case, the uncontroverted factual position is that accrual of liability was dependent upon the approval and/or sanction of the Government of India and the Reserve Bank of India. There is also no dispute about the fact that in the year under consideration no such sanction was received. That being so, the ratio of the above decision of the Supreme Court squarely applies. The liability claimed by the assessee as deduction was not an accrued liability in the year under consideration and hence not deductible.

7. Our attention has also been drawn to the decision of this court in Commissioner Of Income-Tax v. Kirloskar Tractors Ltd., [1998] 231 ITR 849, where the above decision of the Supreme Court has been followed. We have perused the above decision. In that case, it has been observed (pages 861 and 863):

“So far as the controversy in respect of the year of accrual in view of the statutory requirement of approval of the Reserve Bank of India is concerned, the law is well-settled by the decision of the Supreme Court in Nonsuch Tea Estate Ltd. v. CIT, [1975] 98 ITR 189, that where accrual of liability is dependent upon some approval and/or sanction of the statutory authority, it will accrue and/or arise only on such approval……The ratio of the above decision squarely applies to the facts of the present case. Here also, under section 9 of the Foreign Exchange Regulation Act, 1973, there was a restriction on payments to any person resident outside India, save and except as may be provided in accordance with the general or special exemption……

In the instant case, the Reserve Bank of India granted approval to the assessee in the previous years relevant to the assessment year under consideration and the remittances were also m, ade in the same years. That being so, the liability to pay the amount pertaining to the earlier assessment years can be said to have accrued or arisen only in the years under consideration and the same was, therefore, allowable as a deduction in the computation of income of that year.”

(emphasis* supplied)

8. Following the ratio of the above decisions, it is clear that in the instant case, the liability of the assessee to pay the compensation to Dorr-Oliver Inc., Stamford, U.S.A, accrued only on the grant of approval by the Government of India in the year 1980. The liability cannot be said to have arisen from any date prior to the date of approval of the Government of India as the Foreign Exchange Regulation Act contains an absolute prohibition against such accrual.

9. Learned counsel for the assessee referred to the decision of the Supreme Court in Coca-Cola Export Corporation v. ITO, [1998] 231 ITR 200. We have perused the said decision. We are, however, of the opinion that the said decision has no relevance to the controversy before us in this case.

10. In view of the above, questions Nos. (1) and (2) are answered in the negative and in favour of the Revenue. This reference is disposed of accordingly with no order as to costs.