1998 (4) TMI 69 - HC - Income Tax

Summary

Issues:
Assessment of income for the year 1976-77 - Deduction of sales tax liability.

Analysis:
The case involved a dispute regarding the assessment of income for the year 1976-77 concerning the deduction of sales tax liability. The assessee was following the mercantile system of accounting, but the Income-tax Officer contended that the assessee did not adopt the mercantile system for sales tax payments. The Income-tax Officer treated sales tax receipts as part of trading receipts but disallowed the deduction of the entire sales tax liability that accrued during the year. The Commissioner of Income-tax (Appeals) ruled in favor of the assessee, allowing the deduction of the sales tax liability. The Revenue appealed to the Income-tax Appellate Tribunal, which found that the sales tax liability accrued at the time of sales and was deductible on an accrual basis, even if the payment was delayed. The Tribunal relied on the Supreme Court decision in Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1977] 82 ITR 363 to support its decision.

The Appellate Tribunal issued a corrigendum to its order, clarifying certain statements related to the method of accounting followed by the assessee. The Revenue challenged the Tribunal's decision, arguing that the sales tax liability was not provided in the trading account. The Tribunal, however, maintained its stance that the assessee was following the mercantile system of accounting and was entitled to deduct the sales tax liability that had accrued during the accounting year. The court distinguished a prior decision where the assessee followed a cash system of accounting, unlike the present case where the sales tax collections were considered part of total receipts. The court upheld the Tribunal's decision, stating that the sales tax liability was deductible on an accrual basis as it had accrued at the time of sales, regardless of the actual payment timing.

In conclusion, the court ruled in favor of the assessee, affirming that the sales tax liability accrued during the accounting year was deductible on an accrual basis. The decision was supported by the Supreme Court ruling and the distinction made regarding the method of accounting followed by the assessee. The court answered the legal question in the affirmative, against the Revenue, and decided that the assessee was entitled to the deduction of the sales tax liability that had accrued during the relevant accounting year. No costs were awarded in this case.