Sabyasachi Mukharji, J.:— In this reference under s. 256(1) of the I.T Act, 1961, arising out of the assessment for the assessment year 1964–65, the following question has been referred to us:

“Whether, on the facts and in the circumstances of the case and keeping in view the fact that the assessee followed the mercantile system of accounting, the Tribunal was correct in holding that, though the liability to pay the sum of Rs. 29,008 as provident fund contributions related to earlier years, it was allowable as a deduction in the computation of the assessee's income of the previous year relevant to the assessment year 1964–65, since the demand for the statutory contributions was raised by the statutory authority for the first time in the relevant previous year?”

2. It appears that the relevant previous year ended on May 31, 1963. The assessee is a firm dealing in wire ropes, chains and miscellaneous articles. In the computation of total income for the relevant previous year the assessee claimed deduction of Rs. 29,008 under the head “Provident Fund Contributions”. The ITO disallowed this claim on the ground that the provident fund contribution of Rs. 29,008 made by the assessee during the relevant previous year related to the liabilities of the earlier years and not of the relevant previous year. Being aggrieved, the assessee went up in appeal before the AAC, who agreed with the view of the ITO and dismissed the assessee's appeal.

3. The assessee went up in further appeal before the Tribunal which held. It appears that this sum of Rs. 29,008 represented the provident fund liability of earlier years. But it appears that though this was a statutory liability under the Employees' Provident Funds Act to make contributions, it was never enforced under the said Act in the earlier years and itwas only in the year under appeal that the Regional Provident Fund Commissioner called upon the assessee to make statutory contributions for the entire period from November, 1957, and that since the demand for the statutory contributions was made by the authorities for the first time during the year under appeal, the entire amount paid in that year was an allowable deduction though part of it related to an earlier period.

4. Now, it is true, that so far as the liability related for the year in question it is allowable in that year. It is also well settled that unlike the cash system of accounting, in a mercantile system of accounting the assessee is entitled to the deduction in that year, at the time the liability arises, and not in the year when the liability is enforced or discharged. These principles are well settled. On the relevant provisions of the Employees' Provident Funds Act, 1952, it appears that the liability for the previous year had arisen in the earlier years. But we have noted that the assessee is a firm dealing in wire ropes, chains and miscellaneous articles. It is common knowledge that under the scheme of the Employees' Provident Funds Act, 1952, disputes and doubts very often arise as to whether a particular employer is a factory and whether such an employer is contemplated by the Provident Funds Act and also whether such an employer employs the number of employees required to come under the mischief of the Act.

5. In this connection, reference may be made to the letter of the Regional Provident Fund Commissioner which is dated 19th June, 1962. It was addressed to the partners of the assessee-firm on the subject of “Extension of the Employees' Provident Funds (Amendment) Act, 1960”. The subject is important. The letter stated, inter alia, as follows:

“It transpires on investigation that your factory started manufacture in the year 1953, and that it is engaged in the manufacture of pulley blocks, hooks, sockets, chain-links, etc., and that its employment strength was over fifty during August, September and October, 1957. Your factory is, therefore, covered under the Employees' Provident Funds Act, 1952, and the Scheme framed thereunder. I am, therefore, to request you to comply with the provisions of the Act and the Scheme with effect from the 1st January, 1961, for the present in the manner indicated in the note annexed to this office letter No. R-2799.WB/989 dated the 7th January, 1961, immediately pending a decision for compliance for the period from the 1st November, 1957, to the 31st December, 1960.”

6. Now, it is apparent from the letter that the decision about compliance for the period of the earlier years was pending. It is also apparent from the letter that it was found on investigation that the assessee was engaged in the manufacture of pulley blocks, hooks, sockets, chain-links, etc., which came under the mischief of the Act, and that during the relevant period it had employees over the strength of fifty, which was a necessary condition to come under the mischief of the Act. Therefore, viewing from that point of view it could be said that though in a mercantile system of accounting the liability arose in the year in question, in reality it arose in the year when it was clarified to be applicable to the assessee and the assessee was asked to discharge that liability. It would be apparent from the tenor of the letter that a certain decision was pending. Now, this position seems to be quite apparent from the facts of the letter.

7. Therefore, if having regard to the reality of the situation, the Tribunal took a view that in reality the liability matured in the relevant year, it cannot be said that such a finding was improper or incorrect. We must, however, point out that the Tribunal seems to have been influenced by a decision of the Assam High Court in the case of Commissioner Of Income-Tax, Assam v. Nathmal Tolaram, [1973] 88 ITR 234. There, the Assam High Court was dealing with a case where though the assessee was liable to pay sales tax in respect of the business transacted by it for the period from 31st March, 1949, till 31st March, 1950, the assessee who was maintaining its accounts under the mercantile system had not made any provision for payment of sales tax in its accounts relevant for the period. The Assam High Court was of the view that the demand for sales tax relating to the transaction effected during the period was made only in the accounting year corresponding to the assessment year 1958–59, and, on these facts, the Assam High Court held that the mere fact that in the mercantile system of accounting the assessee had not earlier debited his account with the expenditure which had accrued as liability in an earlier year, would not disentitle the assessee to debit his account later when an enforceable demand was made by the appropriate authority and that the demand for Rs. 43,377 representing the final demand for sales tax which the assessee was called upon to pay during the previous year relevant to the assessment year 1958–59, could properly be allowed as a deduction in the assessment of that year, though the assessee had been following the mercantile system of accounting. With great respect we are, however, unable to accept this view of the Assam High Court. This view seems to be contrary to the ratio of the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT, [1971] 82 ITR 363, and this decision of the Assam High Court was dissented from in a decision of the Division Bench of the Kerala High Court in the case of L.J Patel & Company v. Commissioner Of Income-Tax, Kerala., [1974] 97 ITR 152, as well as decision of the Madras High Court inthe case of Commissioner Of Income-Tax, Madras-Ii. v. V. Krishnan., [1980] 121 ITR 859. We are in respectful agreement with the views of the Madras High Court and the Kerala High Court as noted above. But with great respect, we are unable to agree with the view expressed by the Assam High Court.

8. But, here, as we have mentioned, the position is not a theoretical position as to whether a statutory liability arose in the year when it became due or when it was discharged. Here the facts are that the assessee is a firm—whether it is a factory employing certain amount of employees and whether it came under the mischief—required a clarification from the Regional Provident Fund Commissioner. As a matter of fact, the letter of the Commissioner, which we have set out hereinabove, is indicative of the fact that the subject was the extension of the Employees' Provident Funds (Amendment) Act, 1960. Furthermore, the Commissioner, in the penultimate paragraph of the said letter, made it clear, pending a decision for the past period, that the demand was made for a certain year in question. Therefore, from a commercial point of view, for a commercial man, in the reality of the situation, to claim deduction in the year under question was not unjustified. If, on that basis, the facts of which are on the records of the Tribunal, the Tribunal has allowed the deduction, we cannot say that the said decision of the Tribunal is perverse or incorrect.

9. Our attention was drawn to a Bench decision of the Madras High Court in the case of Regional Provident Fund Commissioner v. K.R. Subbaier Tape Factory, Tiruchirapalli, [1965] 29 FJR 309; AIR 1967 Mad 129. There, however, the Division Bench of the Madras High Court was concerned with certain clauses entitling the Provident Fund Commissioner to recover from the employer the arrears of contribution even for pre-discovery period, i.e, the date from which the scheme became applicable to the employer to the date on which the employer was called upon to pay the contribution by a notice. Observations of the Division Bench of the Madras High Court must, therefore, be understood in the background of that controversy. We are not faced with that controversy.

10. In that view of the matter, we are of the opinion that the Tribunal was correct in allowing this deduction. We would, however, say that it is not in all cases correct to say that a statutory liability discharged in a particular year become eligible for deduction in the year in question in the mercantile system of accounting. It depends on the facts and circumstances of the case and on the statutory provisions. Here in part the statutory liability admittedly accrued in the year in question and in part became real and enforceable in view of the facts in the year in question though referable to earlier years. But the reality of the situation was that, in substance, the liability accrued in the year in question. In that view of the matter, the decision of the Tribunal is sustained. The question is answered in the manner indicated above and in favour of the assessee.

11. There will be no order as to costs.

Sudhindra Mohan Guha, J.:— I agree.