2004 (9) TMI 62 - HC - Income Tax

Sales tax liability - amount paid towards E.S.I. (Employees State Insurance) - Income-tax Officer declined the assessee s claim of additional sales tax liability on the ground that it was following the mercantile system of accounting and the amount related to the earlier assessment years and not for the assessment year in which the deduction is being claimed - 1. Whether Tribunal was in law justified in holding that the assessee s claim representing sales tax liability relating to earlier years were an allowable deduction in the years under consideration viz. assessment years 1976-77 1977-78 1978-79 and 1979-80? - We answer this question of law in the affirmative i.e. in favour of the assessee and against the Revenue - 2. Whether the Tribunal was correct in allowing the assessee s claim for a sum of Rs. 82, 077 as liability raised against him by an order of the Regional Director E.S.I.? - We are of the opinion that the Tribunal was not justified in allowing the deduction of Rs. 82, 077 during the assessment year 1976-77 as it related to the liability which had accrued in the previous years relating to the earlier assessment years and not in the assessment year in question This question is answered in the negative i.e. in favour of the Revenue and against the assessee

Summary

Issues:
1. Deductibility of sales tax liability for earlier years in the assessment years 1977-78 to 1979-80.
2. Allowance of the claim for liability raised by the Regional Director, E.S.I., in the assessment year 1976-77.

Analysis:

Issue 1: Deductibility of Sales Tax Liability:
The court was tasked with determining whether the Income-tax Appellate Tribunal was justified in allowing the deduction of the assessee's claim representing sales tax liability relating to earlier years in the assessment years 1977-78 to 1979-80. The respondent-assessee, a private limited company involved in manufacturing glass articles, claimed additional sales tax liability for the mentioned years. The Income-tax Officer initially disallowed the deduction, citing that the amount related to earlier assessment years and not the years under consideration. The Tribunal, however, allowed the deduction. The court referred to the principle laid down by the Supreme Court in various cases, emphasizing that under the mercantile system of accounting, the liability to pay sales tax accrues when the sales subject to taxation are made. The court noted that the additional tax liability had been created during the relevant previous years for the assessment years in question. Therefore, the court held that the Tribunal was justified in allowing the deduction of the sales tax liability for the earlier years in the assessment years 1977-78 to 1979-80.

Issue 2: Claim for Liability Raised by Regional Director, E.S.I.:
The second question revolved around the allowance of the claim for a sum of Rs. 82,077 as liability raised against the assessee by the Regional Director, E.S.I., in the assessment year 1976-77. The court examined the circumstances surrounding the liability, including the closure of the factory, labor issues, and the subsequent reopening of operations. The liability towards E.S.I. contribution was disputed by the assessee, but it was settled during the accounting period relevant to the assessment year 1976-77. The court referred to the provisions of the Employees' State Insurance Act, 1948, and reiterated that the contribution payable fell due on the last day of the wage period. Despite the assessee disputing the liability, the court held that the liability had accrued in the earlier assessment years and not during the assessment year 1976-77 when the final order was passed. Therefore, the court concluded that the Tribunal was not justified in allowing the deduction of Rs. 82,077 for the liability raised by the Regional Director, E.S.I., in the assessment year 1976-77.

In conclusion, the court ruled in favor of the assessee regarding the deductibility of sales tax liability for earlier years in the assessment years 1977-78 to 1979-80 but in favor of the Revenue regarding the claim for the liability raised by the Regional Director, E.S.I., in the assessment year 1976-77.