1966 (8) TMI 1 - HC - Income Tax

Amount debited by the assessee to the profit and loss account and credited to the sales tax account is an admissible deduction - assessee is entitled to a deduction during the year in which the liability became ascertained for him irrespective of the time at which the actual payment of the sales tax was made by the assessee

Summary

Issues Involved:
1. Whether the sum of Rs. 27,167 debited by the assessee to the profit and loss account and credited to the sales tax account is an admissible deduction.

Issue-wise Detailed Analysis:

1. Admissibility of Sales Tax Deduction:
The primary issue in this case is whether the sum of Rs. 27,167, debited by the assessee to the profit and loss account and credited to the sales tax account, is an admissible deduction under section 66(1) of the Indian Income-tax Act, 1922. The relevant assessment year is 1956-57. The assessee, a dealer in cloth, had debited the amount as the estimated sales tax liability for the year ending on 28th August, 1957, based on the U.P. Sales Tax (Amendment) Act, 1956, and subsequent legislative changes.

2. Legal Background and Legislative Amendments:
The Government of Uttar Pradesh initially raised the sales tax rate on 31st March, 1956, through an ordinance, which was later replaced by the U.P. Sales Tax (Amendment) Act, 1956. This Act was further amended by the U.P. Sales Tax (Amendment) Act, 1957. The validity of these enactments was challenged, and the court declared the ordinance and subsequent amendments ultra vires. However, the U.P. Sales Tax (Validation) Act (XV of 1958) was later upheld by the Supreme Court in J.K. Jute Mills v. State of U.P., affirming the validity of the sales tax levy from 31st March, 1956.

3. Mercantile System of Accounting:
The assessee followed the mercantile system of accounting, which brings into credit what is due immediately it becomes legally due and debits expenditure for which a legal liability has been incurred before it is actually disbursed. The Income-tax Officer, Appellate Assistant Commissioner, and Tribunal initially disallowed the deduction on the grounds that the liability was not ascertained due to ongoing legal challenges.

4. Statutory Liability Under the Sales Tax Act:
The court emphasized that the liability to sales tax arises under the charging section 3 of the Act, which fixes the liability of the dealer to pay sales tax irrespective of whether it has been realized from the customer. The quantification is made under section 7, and the dealer is obligated to submit returns and deposit the tax under Rule 41 of the U.P. Sales Tax Rules. The Judicial Committee in Wallace Brothers v. Commissioner of Income-tax held that the liability to tax arises by virtue of the charging section alone, even if quantification is postponed.

5. Treatment of Liability by the Assessee:
The assessee had treated the sales tax liability as an automatic and ascertained liability, debiting the estimated amount in the profit and loss account. The court noted that merely because the liability was estimated and not a precise figure does not make it unascertained. The Supreme Court in Calcutta Co. Ltd. v. Commissioner of Income-tax held that an estimated liability under a contract could be deducted as an accrued liability, and the same principle applies to statutory liabilities.

6. Judicial Precedents:
The court referred to various precedents, including S.R.V.G. Press Co. v. Commissioner of Excess Profits Tax and Pope the King Match Factory v. Commissioner of Income-tax, which supported the view that statutory liabilities like sales tax are deductible as business expenses before arriving at taxable profits, even if disputed.

7. Distinction Between Ascertained and Contingent Liabilities:
The court distinguished between ascertained and contingent liabilities, noting that a statutory liability under the U.P. Sales Tax Act attaches automatically to income from sales. The assessee's conduct in treating the liability as ascertainable and debiting it in the accounts was crucial.

8. Binding Nature of Judicial Declarations:
The court emphasized that declarations of law by the High Court are binding on all authorities within the State. The distinction between the validity of the law and the ascertainment of liability was highlighted, with the court noting that the Supreme Court's final pronouncement in J.K. Jute Mills v. State of U.P. validated the sales tax liability.

Conclusion:
The court concluded that the sum of Rs. 27,167 debited by the assessee was an admissible deduction, as the liability to pay sales tax was a statutory, ascertained liability under the mercantile system of accounting. The question was answered in the affirmative and in favor of the assessee, with the department directed to pay the costs of the reference.