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Issues Involved
1. Whether the sales tax provision of Rs. 22,642 is deductible in the computation of the total income of the assessee for the assessment year 1961-62. Detailed Analysis Issue 1: Deductibility of Sales Tax Provision Facts and Background: - The assessee followed the mercantile system of accounting. - For the assessment year 1961-62, the assessee made a provision of Rs. 22,642 for sales tax payable. - The Income-tax Officer disallowed the deduction, considering it a mere provision for taxes that were neither paid nor ascertained by the sales tax authorities. - The Appellate Assistant Commissioner upheld this disallowance. - The Income-tax Appellate Tribunal allowed the deduction, stating that the sales tax liability accrued as soon as the sales were effected. Arguments by Revenue: - Sales tax is not deductible for income-tax purposes. - The liability for sales tax arises only upon assessment or demand by sales tax authorities. - Reliance was placed on various cases, including *Recols (India) Ltd.*, *Kedarnath Jute Manufacturing Co.*, and others, arguing that mere legal liability is insufficient for claiming deduction. Arguments by Assessee: - Sales tax is deductible under sections 10(1) and 10(2)(xv) of the Indian Income-tax Act, 1922. - Payment of sales tax is necessary for carrying on the business. - The liability for sales tax arises on sales effected, not on assessment or demand. - Cited cases including *Kesoram Industries and Cotton Mills Ltd.* and *Textile Machinery Corporation Ltd.* to support the claim. Court's Analysis: - Reviewed the relevant provisions of the Bengal Finance (Sales Tax) Act, 1941. - Noted that the liability to pay sales tax arises on sales effected, not dependent on assessment or demand. - The obligation to pay sales tax is directly related to the business and is necessary for its operation. - Sales tax is a compulsory levy and its payment is necessary for carrying on the business. - In the context of the mercantile system of accounting, expenditures are entered when a legal liability arises, not when the actual payment is made. Precedents Considered: - *Keshav Mills Ltd.* and *Calcutta Company Ltd.*: Mercantile system of accounting recognizes liabilities when they arise. - *Kesoram Industries and Cotton Mills Ltd.*: Liability to pay tax is a present liability. - *Textile Machinery Corporation Ltd.*: Provision for sales tax stands on the same footing as provision for income-tax liability. Conclusion: - The assessee is entitled to deduction of the sales tax provision under section 10(2)(xv) of the Indian Income-tax Act, 1922. - The liability for sales tax is incurred in the capacity of a trader and is directly connected with the business. - The facts of the case differ from *Kedarnath Jute Manufacturing Co.*, where the liability was disputed and no provision was made. - The court answered the reference in the affirmative, in favor of the assessee, allowing the deduction of the sales tax provision. Judgment: - The reference was answered in the affirmative, and the Commissioner of Income-tax was directed to pay the costs of the reference. Separate Judgment: - SANKAR PRASAD MITRA, J. concurred with the judgment. Final Reference: - Reference answered in the affirmative.
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