TMI Blog1984 (2) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year 1964-65 ? " The question has arisen in somewhat unusual circumstances. The assessee is an individual dealing in knitting wool : formerly he was partner in a firm known as Gokal Chand Rattan Chand, but even as an individual he was carrying on business under the some name. The firm was dissolved on March 31, 1956, and then the assessee took over all assets and liabilities as shown by a dissolution deed dated June 8, 1956. The firm during its existence incurred sales tax liability amounting to Rs. 10,670 for the period April 1,1953, to March 31, 1956. There was subsequently sales tax liability also on the individual business amounting to. Rs. 27,469. Although the point is not explained in the statement of case, it seems there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the demand was raised but to those years in which the liability arose. The matter was referred to a third member, who agreed with the Accountant Member. Now, the reference is before us in which it is contended that the view of the judicial Member was correct. Before proceeding with the case further, it may be mentioned that the third member analysed the judgment of the Supreme Court in Kedarnath Jute Mfg. Co.'s case [1971] 82 ITR 363 and also based his decision on different point altogether. It was observed that the assessee could keep his accounts on the mercantile system or on cash basis or adopt a hybrid system of accounting. In this case, it was held that the sales tax liability had been recorded by the assessee on the basis o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in the account books and also no claim, but after the amount had been determined the assessee filed a revised return. The Calcutta High Court had held that unpaid and disputed sales tax liability could not form a basis of a claim for deduction for the purpose of income-tax. The Supreme Court held as follows (p. 367) : " We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although, under the law, a deduction must be allowed by the Income-tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f when the income has either accrued or is receivable and similarly an expense has to be entered when the obligation arises or the liability to pay arises. The entries are made in anticipation of actual payments. In this case, on the facts, as the assessee was denying the liability to be taxed at Bombay, no entries could be made. If the demand had been raised in the period shortly after the year ended and before the assessment was completed, then on the basis of Kedarnath lute Mfg. Co.'s case [1971] 82 ITR 363 (SC), a revised return could have been filed and the deduction could have been allowed. But, if there is neither an entry nor a demand, it is difficult to visualise how the deduction could be claimed earlier than the actual demand. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, this is a matter for the assessee to deal with in his own way. It seems to us that it was open to the assessee to make the entry either on the basis of an accrual of liability or on the basis of the demand raised by the Department. Inasmuch as the third member of the Tribunal has noted that the entry made by the assessee was on the basis of the demand and no different system had been previously followed by the assessee, we think this is a case which can be easily decided on coming to the view that the assessee had adopted a hybrid system of accounting which was open to him and hence, on the principles of accountancy adopted by the assessee, the amount was a deductible expense for the assessment year 1964-65. For the reasons stated abo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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