1988 (11) TMI 92 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sales tax liability for the assessment year 1971-72 should be allowed as a deduction.
2. Impact of mercantile system of accounting on the deduction of sales tax liability.
3. Applicability of Supreme Court's decision in Kedarnath Jute Manufacturing Co. Ltd. v. CIT.

Detailed Analysis:

1. Whether the sales tax liability for the assessment year 1971-72 should be allowed as a deduction:
The primary issue was whether the sales tax liability, quantified on December 16, 1970, could be deducted in the assessment year 1971-72. The Income-tax Officer rejected the deduction, stating that the liability pertained to the period 1968-69. The Appellate Assistant Commissioner upheld this decision, noting that under the mercantile system of accounting, the liability should be claimed in the year it accrued. The Tribunal, however, allowed the deduction, following the decision in Kedarnath Jute Mfg. Co. Ltd. and the Assam High Court in CIT v. Nathmal Tolaram.

2. Impact of mercantile system of accounting on the deduction of sales tax liability:
The Appellate Assistant Commissioner emphasized that under the mercantile system, liabilities should be claimed in the year they accrue. The Tribunal, however, accepted the assessee's contention that the extra demand raised during the relevant accounting year should be allowed as a deduction. The Tribunal's decision was influenced by its earlier ruling in the assessee's case for the year 1970-71 and the Assam High Court's decision in Nathmal Tolaram.

3. Applicability of Supreme Court's decision in Kedarnath Jute Manufacturing Co. Ltd. v. CIT:
The Supreme Court in Kedarnath Jute Mfg. Co. Ltd. held that the liability to pay sales tax arises immediately upon entering into transactions subject to sales tax, irrespective of when it is quantified. The Tribunal followed this decision, allowing the deduction despite the liability being disputed in appeal. However, the Revenue argued that the liability arose in an earlier year, and the Tribunal erred in following the Assam High Court's decision, which had been expressly differed from by other High Courts.

Judgment:
The High Court concluded that the assessee, following the mercantile system of accounting, should have claimed the sales tax liability in the year it accrued (1968-69), not when it was quantified (1971-72). The court disagreed with the Assam High Court's decision in Nathmal Tolaram and aligned with the views of the Kerala, Madras, and Calcutta High Courts, which held that the liability accrues when the transaction occurs, not when it is assessed or quantified. Consequently, the Tribunal erred in allowing the deduction for the assessment year 1971-72.

The question referred was answered in the negative and in favor of the Revenue, with no order as to costs.