1987 (5) TMI 366 - HC - VAT and Sales Tax

Summary

Issues:
- Entitlement to deduction of sales tax liability for assessment year 1971-72.

Analysis:
The judgment pertains to a reference made under section 256(1) of the Income-tax Act, 1961 regarding the entitlement of the assessee to a deduction of Rs. 2,22,161 towards sales tax liability for the assessment year 1971-72. The assessee, a limited company engaged in the manufacture and sale of steel tubes, was required to pay sales tax under the Central Sales Tax Act, 1947 for the year 1962-63. The Sales Tax Officer initially demanded Rs. 11,02,698, which was contested by the assessee and subsequently reduced to Rs. 2,22,161 by the Sales Tax Tribunal. The assessee claimed this amount as a business expenditure for the assessment year 1971-72, which was initially disallowed by the Income-tax Officer but allowed on appeal. However, the Tribunal reversed the decision, leading to the reference before the High Court.

The crux of the issue revolves around the method of accounting employed by the assessee, which is the mercantile method. Under this method, liabilities are recognized when they accrue, irrespective of the actual payment date. The Appellate Tribunal held that the assessee was not entitled to the deduction in the assessment year 1971-72 as claimed. The assessee argued that the obligation to pay tax arose at the time of the sale transaction in 1962-63, and the liability continued until realization, even if quantified later. Citing relevant case law, the assessee contended that the liability for payment of tax is independent of the assessment and can be deducted from the profits and gains of the business under the mercantile system of accounting.

Additionally, the judgment discusses the issuance of a fresh demand notice when the liability is reduced, as per the decision in Income-tax Officer v. Seghu Buchiah Setty. The High Court opined that since the Sales Tax Tribunal reduced the demand, a fresh demand notice should be issued, thereby allowing the assessee to claim the deduction under section 37 during the assessment year 1971-72. The judgment also references conflicting decisions from other High Courts, which were deemed not necessary to discuss in detail.

In conclusion, the High Court held that the assessee, maintaining the mercantile system of accounts, could claim the deduction in the year when the sales tax liability was finally determined by the Sales Tax Tribunal in the second appeal. The question was answered in favor of the assessee, and no costs were awarded.