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Issues: Allowable deduction for payments related to previous years under the Income-tax Act, 1922 for assessment years 1953-54 and 1954-55.
Analysis: The case involved a public limited company facing disputes over dearness allowance payments to workers, leading to an Industrial Court award in favor of the workers. The company appealed the decision, resulting in a revised allowance. The dispute centered on whether the additional allowance amounts of Rs. 1,08,884 for 1953-54 and Rs. 3,43,278 for 1954-55 were allowable deductions in the respective assessment years, even though they were debited in the books for the following year. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the deductions, stating that payments were deductible only in the year they were actually made. However, the Tribunal allowed the deductions, relying on a previous case. The matter was referred to the High Court for opinion. The High Court referred to a recent Supreme Court decision that clarified the timing of liability under the mercantile system of accounting. The Supreme Court held that deductions are admissible only in the year when the liability under the award is finally determined, emphasizing that the system of reopening accounts does not align with the Income-tax Act. The Court noted that the previous case cited by the Tribunal was overruled by necessary implication, as it allowed deductions based on the year of final adjudication rather than the year of determination of liability. Consequently, the High Court answered both questions against the assessee, concluding that the deductions for the additional dearness allowance payments were not allowable for the assessment years in question. The parties were directed to bear their own costs, with the counsel's fee assessed at Rs. 100. The judgment reiterated the principle that deductions are only permissible in the year when the liability under the award is conclusively determined, in line with the mercantile system of accounting and the Income-tax Act. In summary, the judgment clarified the timing of allowable deductions for payments related to previous years under the Income-tax Act, emphasizing that deductions are admissible only when the liability under the award is finally determined, as per the mercantile system of accounting. The decision highlighted the importance of aligning accounting practices with the provisions of the Income-tax Act to determine the eligibility of deductions for specific payments.
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