1991 (2) TMI 24 - HC - Income Tax

Summary

Issues:
1. Whether disputed central excise duty and sales tax liabilities are deductible while computing the capital base under the Companies (Profits) Surtax Act, 1964?

Analysis:
The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the deductibility of disputed central excise duty and sales tax liabilities while computing the capital base for surtax assessment. Initially, the questions framed were considered unsatisfactory, leading to a reframing of the main issue. The Assessing Officer had deducted liabilities from demands by the Central Excise and Sales Tax Departments, considering them as ascertained liabilities. However, the assessee contended that these were contingent liabilities and should not be deducted. The Commissioner and the Tribunal upheld the deduction, leading to the matter being brought before the High Court.

The High Court analyzed the provisions of Rule 1A of the Companies (Profits) Surtax Act, 1964, which requires liabilities not provided for in the accounts to be deducted in computing the capital base. The balance-sheets of the assessee showed these disputed liabilities under contingent liabilities not acknowledged as debts. The Court emphasized that provision for taxation is made based on ascertained liabilities at the end of the year, and since the disputed demands were not claimed as deductions in the profit and loss account or income-tax assessment, they could not be considered as liabilities.

The Court highlighted that the disputed liabilities were not ascertained and were actively contested by the assessee, indicating they were not treated as liabilities. The Court clarified that Rule 1A applies when liabilities are claimed as deductions but not provided for in the accounts, which was not the situation in this case. Therefore, the Court ruled in favor of the assessee, stating that the disputed central excise duty and sales tax liabilities should not be deducted while computing the capital base for surtax assessment.

In conclusion, the High Court answered the reframed question in the affirmative and in favor of the assessee, emphasizing that the disputed liabilities, being contingent and actively contested, were not liable to be deducted in the capital base calculation. No costs were awarded, and the balance-sheets and assessment orders were to be kept as part of the record.