1991 (5) TMI 29 - HC - Income Tax

Summary

Issues:
Interpretation of sales tax liability for the assessment year 1975-76 based on demand notice received in 1974, applicability of Supreme Court judgments on sales tax liability, determination of when sales tax liability accrued, and the deductibility of sales tax liability in accounting for total income.

Analysis:
The case involved a reference under section 256(2) of the Income-tax Act, 1961, regarding the deduction of sales tax liability amounting to Rs. 2,21,386 for the accounting years ending December 31, 1970, and December 31, 1971. The dispute arose as the assessee claimed that the liability to pay sales tax only arose when demand notices were received in 1974 and 1975, while the Income-tax Officer contended that the liability accrued within the years of sale. The Appellate Assistant Commissioner allowed a deduction of Rs. 1,05,310, which was demanded during the relevant previous year, and disallowed the remaining amount. Both the assessee and the Department appealed this decision before the Tribunal.

The Tribunal considered the unsettled nature of the law regarding sales tax payment on the products in question and held that the liability to pay sales tax arose when the demand notices were received by the assessee. The Tribunal supported the Appellate Assistant Commissioner's decision to allow the deduction of the sum demanded in the relevant previous year. The judgment referenced Supreme Court cases such as K. G. Khosla and Co. (P.) Ltd. [1966] 17 STC 473 and Binani Bros. (P.) Ltd. [1974] 33 STC 254 to establish the timeline of liability accrual based on sales and import transactions.

The High Court affirmed the Tribunal's decision, emphasizing that the liability became real and enforceable when the demand notice was served by the Commercial Tax Officer during the relevant previous year. Citing the case of CIT v. Teesta Valley Co. Ltd. [1991] 187 ITR 657, the court concluded that the liability accrued when it became real and enforceable, aligning with the principles laid down in relevant judgments. The court answered the reference question in favor of the assessee, supporting the deduction of the sales tax liability demanded during the relevant previous year.

In conclusion, the judgment clarified the timing of sales tax liability accrual, the impact of demand notices on liability enforceability, and the deductibility of sales tax in accounting for total income based on established legal principles and Supreme Court precedents.