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Issues:
- Allowability of provision for sales tax liability as a deduction in computing business income for the assessee-company for the assessment year 1971-72. Analysis: The High Court of Calcutta addressed the issue of whether a provision for sales tax liability of Rs. 1,84,734 was allowable as a deduction in computing the business income of a private limited company for the assessment year 1971-72. The Income Tax Officer (ITO) initially disallowed the claim, stating that sales tax was not payable on the sale proceeds of certain matches under the West Bengal Sales Tax Act. However, the Appellate Assistant Commissioner (AAC) accepted the company's claim for deduction. The revenue appealed to the Appellate Tribunal, arguing that the liability to pay sales tax was disputed by the assessee and the quantification of taxation was challenged. The Tribunal observed that the provision for sales tax liability had been made by the assessee in good faith and could not be considered fictitious. The Tribunal concluded that the claim for deduction was admissible, and thus, dismissed the appeal. The Tribunal's decision was supported by legal precedents, including the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), which established that under the mercantile system of accounting, an assessee is entitled to deduct business liabilities, including sales tax provisions, even if the tax has not been paid or is disputed, as long as the provision was made genuinely. The Court also referred to the decision in Royal Boot House [1970] 75 ITR 507 (Cal) and CIT v. Hindusthan Housing and Land Development Trust Ltd. [1977] 108 ITR 380 (Cal) to support the allowance of the deduction. The Court emphasized that the principles governing provisions for liabilities in the mercantile system of accounting differ from those applicable to cases of enhanced compensation dependent on adjudication. Justice SABYASACHI MUKHERJEE concurred with the decision, highlighting that in the mercantile system of accounting, an assessee can claim a deduction for a provision for sales tax liability, even if the tax has not been paid or is disputed, as long as the provision was made in good faith. This principle was reinforced by the decisions in Royal Boot House [1970] 75 ITR 507 (Cal) and Kedarnath Jute Mfg. Co. Ltd. [1971] 82 ITR 363 (SC). Justice MUKHERJEE emphasized the distinction between cases where the right to enhanced compensation is subject to adjudication and cases involving provisions for liabilities in the mercantile accounting system. In conclusion, the High Court of Calcutta upheld the Tribunal's decision, allowing the provision for sales tax liability as a deduction for the assessee-company. The Court affirmed that under the mercantile system of accounting, a genuine provision for business liabilities, including sales tax, is admissible for deduction, even if the tax is disputed or not yet paid. The Court's ruling was in line with established legal principles and precedents, ensuring that the assessee's claim for deduction was justified.
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