1996 (8) TMI 13 - HC - Income Tax

Summary

Issues:
- Whether the Tribunal was right in law to hold that allowance of Rs. 40,935 towards payment of entry tax by the Commissioner of Income-tax (Appeals) was justified when the liability pertained to earlier years and the assessee was maintaining his accounts on mercantile system?
- Whether the Tribunal was right in law to hold that statutory liability could be claimed by the assessee either when the event took place or when the assessments were completed under the relevant statutory law?

Analysis:

Issue 1: The first issue revolves around the deduction claimed by the assessee for payment of entry tax, which pertained to earlier years. The Assessing Officer disallowed the claim, stating that since the assessee maintained accounts on the mercantile system, the liability should be allowed in the year it accrued. However, the Commissioner of Income-tax (Appeals) allowed the appeal, relying on precedents from various High Courts. The Tribunal held that since the liability accrued to the assessee during the relevant accounting period, the deduction could be allowed. The Tribunal's decision was based on the principle that the liability arose when the goods entered the state territory, as per the decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363. The Tribunal rejected the Assessing Officer's disallowance and made the reference to the High Court.

Issue 2: The second issue addresses the timing of when the statutory liability could be claimed by the assessee. The High Court considered the clarification by the Commissioner of Sales Tax that gudaku was subject to entry tax, which led the assessee to immediately deposit the entry tax amount and claim it in the assessment year 1983-84. The Court referred to the decision in Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1, which discussed the hybrid system of accounting and when liabilities are considered to have arisen. The Court also cited Pope the King Match Factory v. CIT [1963] 50 ITR 495, emphasizing that even under the mercantile system, the liability is considered accrued when it arises. Ultimately, the Court held in favor of the assessee, stating that the liability accrued when the amount was deposited, and therefore, the deduction was rightly allowed, taking a pragmatic approach.

In conclusion, the High Court answered the second question in favor of the assessee, stating that once the second question is answered in favor of the assessee, it is unnecessary to address the first question. The judgment highlights the importance of when liabilities accrue under different accounting systems and statutory laws, emphasizing a pragmatic approach in determining the allowance of deductions.