1995 (1) TMI 32 - HC - Income Tax

Summary

Issues:
1. Whether the demand raised on the assessee by the land and building tax authority for earlier years is allowable as a deduction in computing income for the assessment year 1979-80 when the assessee follows the mercantile system of accounting.

Analysis:
The case involves a question of law referred by the Income-tax Appellate Tribunal regarding the correctness of disallowing a demand of Rs. 2,64,113 on the assessee for earlier years by the assessing authority. The assessee claimed this amount as a deduction in the assessment year 1979-80, which included liability of house tax and land and building tax. The Income-tax Officer disallowed the additional liability for earlier years, stating it could not be claimed in the current year. The Commissioner of Income-tax (Appeals) allowed the claim, emphasizing that the liability was quantified during the current year, and the assessee could not have anticipated the higher liability. However, the Income-tax Appellate Tribunal reversed the decision, citing the assessee's obligation to determine market value and pay tax under the mercantile system of accounting.

In a previous case, CIT v. Shah Engineering Pvt. Ltd., it was established that additional tax liability created by the assessing authority after the assessee had paid the admitted tax amount could not have been anticipated by the assessee. The court ruled that the additional liability was not ascertained before the assessment order, and therefore, was allowable for computing the total income of the assessee. Following this precedent, the High Court concluded that the Income-tax Appellate Tribunal was not justified in disallowing the deduction of Rs. 2,64,113 for the earlier years demanded by the land and building tax authority. The court held in favor of the assessee, stating that the deduction should be allowed as the assessee followed the mercantile system of accounting.

In summary, the High Court ruled in favor of the assessee, allowing the deduction of Rs. 2,64,113 demanded by the land and building tax authority for earlier years in the assessment year 1979-80. The court emphasized that under the mercantile system of accounting, the additional tax liability created after the assessee had paid the admitted tax amount could not have been anticipated, and therefore, should be considered for computing the total income of the assessee for the relevant year.