1997 (3) TMI 77 - HC - Income Tax

Summary

Issues:
1. Whether the Income-tax Appellate Tribunal was justified in allowing a deduction of Rs. 17,78,313 for the assessment year 1981-82.
2. Whether the Income-tax Appellate Tribunal was justified in allowing the assessee's claim on account of liability to sales tax/purchase tax amounting to Rs. 17,78,313 as a contingent liability.

Analysis:

The case involved an application under section 256(2) of the Income-tax Act, 1961, where the Revenue sought a mandamus to the Income-tax Appellate Tribunal to refer questions of law to the High Court for the assessment year 1981-82. The main issue was the allowance of a deduction of Rs. 17,78,313 claimed by the assessee on account of sales tax/purchase tax. The Assessing Officer had disallowed this claim, citing that a similar claim was rejected for the previous year. However, the Commissioner of Income-tax (Appeals) and the Tribunal both directed the deduction to be allowed based on earlier decisions and the Supreme Court's ruling in Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363.

The Revenue contended that the liability was unascertained and contingent, relying on decisions from the Madras High Court and the Allahabad High Court. They argued that a contingent liability cannot be considered as expenditure for deduction purposes under the mercantile system of accounting. However, the High Court held that the case fell within the purview of the Supreme Court's decision in Kedarnath Jute Manufacturing Co. Ltd. The Supreme Court had ruled that the obligation to pay sales tax arises when sales subject to tax are made, and the liability remains even if contested or not accounted for in the books.

During the proceedings, it was highlighted that the Andhra Pradesh High Court had previously held the assessee liable to pay sales tax/purchase tax for various years, including the assessment year in question. This supported the assessee's claim for deduction, even though the liability was contingent at the time of the claim. Consequently, the High Court answered the questions in favor of the assessee and against the Revenue, with no order as to costs.

This judgment underscores the principles governing the allowance of deductions for contingent liabilities under the Income-tax Act, emphasizing the Supreme Court's interpretation and application of tax liabilities in the context of the mercantile system of accounting. The decision also highlights the significance of judicial precedents and the relevance of prior court rulings in determining tax liabilities and deductions for taxpayers.