TMI Blog1966 (8) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... ercantile system of accounting. For the assessment year the assessee revised his return by claiming a reduction of Rs. 1,49,776 on account of sales tax determined to be payable on the sales account during the relevant accounting year. The assessee's total sales during the year amounted to Rs. 71,01,566. The assessee disclosed a total turn-over of Rs. 70,99,928 in its sales tax return for the period ending on the 31st December, 1954. The Sales Tax Act provided for exemptions in respect of sales made to registered dealers and on that principle the Sales Tax Officer excluded a sum of Rs. 39,04,492 from sales tax on the ground that such sales were to registered dealers. The remaining balance amount of Rs. 31,95,436 was held to be taxable turn-over liable to sales tax, and it is on this turn-over that the sales tax was determined at Rs. 1,49,776. It must also be noticed here on the facts that the demand notice for the sales tax was served on the 21st November, 1957. The original return for the income-tax was filed by the assessee on the 12th January, 1956. Against the assessment of sales tax the assessee moved this court by a writ. The assessee's writ petition was dismissed by the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10(2)(xv) of the Income-tax Act, which permits allowance for " any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation ". Assuming, without deciding, that expenditure in section 10(2)(xv) of the Act as above includes sales tax then it has to be examined in the facts of this particular case whether such tax answers the requirements of the statute that in this case the sales tax is an "expenditure" and " laid out or expended " as used in the above section. These words expenditure " laid out " and " expended " on appropriate construction in this context can only mean tax already paid or arranged to be paid. A tax such as sales tax not only not paid but disputed cannot come within the meaning of those words used in section 10(2)(xv) of the Act. Apart from this question of construction of the statute and the words used there it is also in accord with commonsense. What happens when a sales tax imposed but not paid and objected to under legal proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is must be paid or liability incurred or else there is no question of " remission " or "cessation." To claim deduction on the ground of sales tax without either paying it or arranging to pay it and on the contrary contesting the quantum and liability to pay it will be to go against all principles and canons of claims for deduction. It is necessary to emphasise that the primary object for the introduction of section 10(2A) of the Income-tax Act, which is done by way of an amendment in 1955, was obviously to make the provision self-reliant and self-contained by including within its operation amounts refunded and remitted and also to remove difficulties created by the two systems of keeping accounts, viz., cash and mercantile systems. Reference in this connection may be made to the decisions in Commissioner of Income-tax v. Lakshmamma and Commissioner of Income-tax v. Triunelveli Motor Bus Service Co. See also the observations of Shelat C. J. in the Gujarat High Court decision in Baroda Traders Ltd. v. Commissioner of Income-tax. Mr. Mitter for the assessee then developed a turn in his argument that the accrual of a liability to the sales tax by the order of assessment of the Sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aiming to deduct Rs. 1,49,776. In this case the Supreme Court makes it clear that the income-tax law makes a distinction between an actual liability in praesenti and a liability in futuro which, for the time being is only contingent. The ratio is that the former is deductible and not the latter. See the observations of Hidayatullah J. at pages 73-76 of that report. His Lordship observed at page 78 of that report as follows : " 'Expenditure' is equal to 'expense' and 'expense' is money laid out by calculation and intention though in many uses of the word this element may not be present, as when we speak of a joke at another's expense. But the idea of ' spending ' in the sense of ' paying out or away ' money is the primary meaning and it is with that meaning that we are concerned. 'Expenditure' is thus what is 'paid out or away' and is something which is gone irretrievably. To be an allowance within clause (xv), the money paid out or away must be, (a) paid out wholly and exclusively for the purpose of the business, and further (b) must not be : (i) capital expenditure, (ii) personal expense or (iii) an allowance of the character described in clauses (i) to (xiv). But whatever the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se nothing more was done in the account years. The money was placed in the hands of trustees and/or the insurance company to purchase annuities of different kinds, if required, but to be returned if the annuities were not bought and the setting apart of the money was not a paying out or away of these sums irretrievably. " Here the case before us is stronger on the facts. No transfer of any kind has been made, and not a farthing has been paid for sales tax. There was no setting apart. In fact, there was no entry made in the assessee's books of account for such sales tax. On this point, it is necessary to notice an argument of Mr. Mitra, for the assessee, that the effect of not providing for the sales tax in the accounts, was immaterial on the strength of the decision reported in Commissioner of Income-tax v. Gangadhar Banerjee Co. where at page 184 Subba Rao J. observed : " But nothing prevents the parties in a suitable case to establish by cogent evidence that certain items were, either by mistake or by design, inflated or deflated or that there were some omissions. " No doubt, that is so. But Mr. Pal argues for the Commissioner of Income-tax, that this was not a mistake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amdas v. Commissioner of Income-tax, where a sum of Rs. 75,000 paid to one by an assessee could not be called an expenditure, as the assessee did not pay the amount of any accrued liability but only paid it towards a contingent liability which might arise in the future or might not. It was laid down in that case very clearly that the income-tax law did not allow as expenses all the deductions that a prudent trader would make in computing his profits. The principle laid down in Peter Merchant's case was also followed by the Madras High Court in this decision. In a recent decision in Travancore Titanium Product Ltd. v. Commissioner of income-tax the question of interpretation of section 10(2)(xv) of the Income-tax Act was considered with reference to wealth-tax. In discussing this problem, the Supreme Court expounded the law on the subject that the nature of expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. In order to come within section 10(2)(xv) it is laid down by that authority of the Supreme Court decision that the expenditure must be incident to the business and must be necessitated or justified by commercial expedie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in his character as a trader. It cannot be stated that the payment of sales tax was made voluntarily and on grounds of commercial expediency without any actual necessity for such payment. Sales tax is a compulsory levy under the sanction of the legislature and there is no discretion left to the assessee as regards the extent of the payment. The direct purpose for which the money is laid out is not the benefit of the business and the payment goes for the benefit of the State..... The expenditure is unremunerative but is not the less a proper deduction, for without such expenditure the business of purchasing and selling could not be carried on. This decision was affirmed by the Supreme Court and reported as Commissioner of Excess Profits Tax v. S. R. V. G. Press Co. The affirmation, however, of the Supreme Court was not on this point which we are discussing here, namely, whether the payment of the sales tax is at all obligatory and necessary for the purpose of carrying on business, but on the point whether such payment must be deemed to satisfy the requirement of rule 12 of Schedule I of the Excess Profit Tax Act and it was held by the Supreme Court that the Excess Profits Tax Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax is not such a tax which could be called as a pre-requisite or a condition precedent for carrying on business such as the trading licence fees or the professional licence fees. Mr. Pal relies on the Supreme Court decision already noticed in Travancore Titanium Product Ltd. v. Commissioner of Income-tax and especially the decision in Harrods (Buenos Aires) Ltd. In the latter case in a proceeding for assessment of income-tax of the business the claim of the assessee-company to deduct the "substitute tax" paid to the Argentine Government was accepted by the taxing authorities on the ground that it was an expenditure without paying which the assessee-company could not carry on its business at all. Mr. Pal contends that this test should be strictly applied. When such a tax is a condition precedent or a pre-requisite to the carrying on of the business no doubt such tax should be deductible. But where, as in the present case before this court, it was not such a necessary pre-requisite or a condition precedent to the carrying on of the business itself but a tax above certain " taxable turnover ", the legal position becomes entirely different. The substitute tax in Harrd's case was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich we are doing, the problem would have arisen in connection with the Central Sales Tax Act. Then taxes under that statute would no longer mean additional revenue to the Union because the income-tax will be reduced accordingly. It leads to the situation where what the right hand gets, the left hand has to give away. Important and fundamental as this question is, we do not wish to express any opinion on this point because we are satisfied that the question on the present reference before us can be answered on the interpretation of section 10 of the Income-tax Act. It would be necessary to consider another branch of the argument advanced by Mr. Mitter for the assessee. That argument is based on the distinction between payability and legal liability. Mr. Mitter's contention is that the payability or payment of the sales tax is not the test by which its deductibility from the income-tax is to be judged. He relied on the Special Bench decision of this High Court in In re Recols (India) Ltd. and specially the observations made at pages 281 and 282 of that report where it is said : " To my mind, it is clear that the tax becomes really payable as such only at that point of time when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Commissioner of Income-tax. He relied on the quotation from Simon on Income Tax, second edition, volume II, at page 204 on accrued liability which the Supreme Court mentioned in these terms at page 6 of that report : " In cases, however, where an actual liability exists, as is the case with accrued expenses, a deduction is allowable ; and this is not affected by the fact that the amount of the liability and the deduction will subsequently have to be varied. A liability, the amount of which is deductible for income-tax purposes, is one which is actually existing at the time of making the deduction, and is distinct from the type of liability accruing in Peter Merchant Ltd. v. Stedeford which although allowable on accountancy principles, is not deductible for the purposes of income-tax. " At page 10 of that report the Supreme Court further made certain observations on which Mr. Mitter relied and which perhaps inspired Mr. Mitter's argument on these grounds : " Even under section 10(2) of the Income-tax Act, it might possibly be urged that the word ' expended ' was capable of being interpreted as ' expendable ' or ' to be expended ' at least in a case where a liability to incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt, however, finds it difficult to accept the correctness of this contention. Section 10 is one whole section. The section along with its sub-sections and various clauses thereof are to be read together, and not in separate water-tight compartments. It will be a wrong construction to separate section 10(1) completely from section 10(2) of the Income-tax Act. Section 10 comes under Chapter III dealing with taxable income under the Income-tax Act. It is the special section on the head of business as a " head " of income chargeable to income-tax. Its sub-section (1), therefore, says that the tax shall be payable by the assessee under the head " profits and gains of business, profession or vocation ". Sub-section (2) that follows is not a different subject but continues the subject raised in sub-section (1) of section 10 and lays down that such profits or gains shall be computed after making the "following allowances". The "following allowances" are set out serially in sub-clauses (i) to (xv), in great meticulous details and not in vague generalities. Prima facie, therefore, to introduce other implied allowances not mentioned in the long list of sub-clauses from (i) to (xv) would be cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " in section 10(1) of the Act. That would include such taxes as a professional tax or a trade tax the payment of which is a condition precedent before a person is allowed to carry on such trade or profession as already discussed in Harrod's case dealing with what is known as the substitute tax. A good deal of learning has been used in the argument in this case on the subject of the method of accounting for the assessee. No stone was left unturned to impress upon this court that the assessee's system of accounting was the mercantile system of account. It almost ran as a magic word throughout the arguments for the assessee. Equally insistent was the argument on the other side for the revenue authorities that it made no difference on the facts and principles involved in this case. Having regard to the view that we have taken of the interpretation of section 10 of the Income-tax Act, we do not venture in this case to discuss the system of accounting in great detail. Normally, under section 13 of the Income-tax Act the assessee's regular method of accounting determines the mode of computing his taxable income. But it must be emphasised that the method of accounting cannot invent fact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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