2007 (3) TMI 727 - HC - Income Tax

Summary

Issues involved: Interpretation of section 15A(1)(a) of the U.P. Sales-tax Act for deduction of revenue expenditure and deduction of additional sales tax liability as revenue deduction for assessment year 1978-79.

Interpretation of section 15A(1)(a) of the U.P. Sales-tax Act:
The High Court held that the assessee was not entitled to the deduction of Rs. 77,757 as allowable revenue expenditure for the accounting period relevant to the assessment year 1978-79. The decision was based on precedents including Haji Aziz & Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350, Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429, and National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383. The court emphasized that the deduction was not permissible in this case.

Additional sales tax liability as revenue deduction:
Regarding the deduction of Rs. 3,44,007 on account of the additional sales tax liability, the Court ruled in favor of the assessee. Citing the decision in Addl. CIT v. Rattan Chand Kapoor [1984] 149 ITR 1 1, the Court held that the assessee was entitled to this deduction as allowable revenue deduction for the accounting period relevant to the assessment year 1978-79. The Court highlighted that the deduction was permissible in this scenario.

Explanation under section 37(1) of the Act:
The Court noted the insertion of an Explanation to section 37(1) of the Act, which clarified that any expenditure incurred for an illegal purpose shall not be considered as expenditure for the purpose of business. The Explanation, inserted by Finance (No. 2) Act, 1998 with retrospective effect from 1-4-1962, emphasized that no deduction or allowance shall be granted for such expenditure. This provision was considered while determining the deductibility of expenses in the case.

Conclusion:
In conclusion, the High Court answered the reference questions accordingly, ruling against the assessee for the deduction under section 15A(1)(a) of the U.P. Sales-tax Act, and in favor of the assessee for the deduction of additional sales tax liability as allowable revenue deduction.