TMI Blog1971 (8) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... 971 - Judge(s) : K. S. HEGDE. and A. N. GROVER. Jagadish Swarup, Solicitor-General of India (P.L. Juneja, R.N. Sachthey and B.D. Sharma, Advocates, with him), for the respondent. G.C. Sharma, V. Kumaria, B.R. Diwan and P.K. Mukherjee, Advocates, for the appellant. JUDGMENT The judgment of the court was delivered by GROVER J.-- This is an appeal by special leave from the judgment of the Calcutta High Court in an income-tax reference. The assessee, who is the appellant, is a public limited company doing the business of jute and manufacturing of jute goods. The method of accounting followed by the assessee is the mercantile system. During the assessment year 1955-56 (the previous year ended on 31st December, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction on account of sales tax, was deductible as a business expense ? The High Court was of the opinion that unpaid and disputed sales tax liability could not form the basis of a claim for deduction for the purposes of income-tax. The reasoning of the High Court mainly was that for the purpose of claiming a deduction under section 10(2)(xv) of the Income-tax Act, 1922 (hereinafter called the Act ), mere legal liability was not enough. There had to be an expenditure in the first place and it must be laid out or expended wholly and exclusively for the purpose of such business. The High Court further held, that unpaid and disputed sales tax could not be validly deducted in the computation of business income even under section 10(1) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on by the assessee. The submission on behalf of the assessee in the alternative is that apart from valid deductibility of sales tax as an expenditure under section 10(2)(xv) of the Act, it is a permissible deduction even under section 10(1). The profits of a business which are to be assessed to tax must be real profits and they have to be ascertained on ordinary principles of commercial trading and commercial accounting. Where an assessee is under a liability or is bound to make certain payment from the gross receipts, the profits and gains can only be the net amount after such an amount is deducted from the gross profits or receipts. In Commissioner of Income-tax v. Royal Boot House, it was held that where the assessee followed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vember, 1957, during the pendency of the assessment proceedings before the Income-tax Officer and before the finalisation of the assessment. It is not possible to comprehend how the liability would cease to be one because the assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail with regard to the quantum of liability, etc. An assessee who follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed. It can again not be disputed that the liability to payment of sales tax had accrued during the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. The assessee who was maintaining accounts on the mercantile system was fully justified in claiming deduction of the sum of ₹ 1,49,776 being the amount of sales tax which it was liable under the law to pay during the relevant accounting year. It may be added that the liability remained intact even after the assessee had taken appeals to higher authorities or courts which failed. The app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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