1999 (9) TMI 79 - HC - Income Tax

Summary

Issues:
1. Allowability of provision made towards purchase tax as expenditure.
2. Consideration of purchase tax provision as statutory liability.
3. Application of mercantile system of accounting for tax provision deduction.

Analysis:
1. The case involved a tax reference arising from an order by the Income-tax Appellate Tribunal regarding the allowability of a provision made towards purchase tax as expenditure for the assessment year 1982-83. The assessee, a registered firm engaged in seafood export, had debited Rs. 3,86,000 towards purchase tax liability in its profit and loss account. The Income-tax Officer disallowed the provision, deeming it a contingent liability. Both the first appellate authority and the Tribunal upheld this decision.

2. The assessee contended that the issue was similar to previous decisions where provisions for disputed liabilities were considered allowable if there was a reasonable apprehension of liability. Citing cases like Abad Fisheries v. CIT and Baby Marine Exports v. CIT, the court emphasized the importance of assessing whether the provision was made in anticipation of a genuine liability. The court held that if there was a reasonable apprehension of the liability, the provision could be considered a deductible business expenditure.

3. The Revenue argued that without a specific finding on the mercantile system of accounting, the assessee could not benefit from the earlier decisions. Referring to CIT v. Bell Foods, the Revenue highlighted the importance of maintaining accounts on a mercantile basis for such deductions. However, the court distinguished the present case, noting that the assessing authority did not provide any reason to conclude that the mercantile system was not followed by the assessee. Consequently, the court held that the assessee was indeed following the mercantile system, allowing for the deduction of the purchase tax provision.

4. In conclusion, the court answered all three questions against the Revenue and in favor of the assessee, emphasizing the importance of the mercantile system of accounting in determining the deductibility of provisions for liabilities. The judgment highlighted the need for a genuine apprehension of liability and adherence to accounting principles for such deductions to be allowed, ultimately ruling in favor of the assessee in this tax reference case.