1991 (2) TMI 70 - HC - Income Tax

Summary

Issues:
1. Allowance of liability for purchase tax as a deduction in the assessment for the year 1978-79.
2. Method of accounting followed by the assessee.
3. Entitlement to debit provision for purchase tax liability in the account.

Analysis:
1. The case involved the question of whether the Tribunal was justified in allowing the liability for purchase tax as a deduction in the assessment for the year 1978-79. The assessee, a firm engaged in exporting fish prawns, had debited a sum towards purchase tax liability in the trading account. The Revenue disallowed the deduction, adding the amount to the total income of the assessee. However, the Commissioner of Income-tax (Appeals) and the Tribunal held that the assessee was entitled to debit the amount as a provision for the liability that arose during the accounting period. The Tribunal referred the question to the High Court, which declined to answer, directing the Tribunal to consider the method of accounting adopted by the assessee and decide the matter afresh.

2. The crucial issue in this case was the method of accounting followed by the assessee. Both the Commissioner of Income-tax (Appeals) and the Tribunal assumed that the assessee maintained its accounts on a mercantile basis, allowing the provision for purchase tax liability. However, the High Court noted that there was no evidence or finding regarding the method of accounting adopted by the assessee. The absence of clarity on the method of accounting made it impossible to determine whether the provision for purchase tax liability was valid. The High Court emphasized the importance of establishing the method of accounting before adjudicating the controversy raised in the case.

3. Another significant aspect was the entitlement of the assessee to debit the provision for purchase tax liability in the account. The Revenue contended that since the liability ceased to exist due to a government notification waiving the purchase tax, the deduction should not be allowed. However, the Tribunal relied on precedent and held that the liability accrued during the relevant accounting period, entitling the assessee to the deduction. The High Court highlighted the need for a thorough consideration of all aspects, including how the provision was made in the accounts and whether the assessee accepted the liability in sales tax proceedings, before reaching a decision on the deduction.

In conclusion, the High Court declined to answer the question referred to it, directing the Income-tax Appellate Tribunal to reconsider the matter, taking into account the method of accounting adopted by the assessee and all relevant factors before making a decision on the allowance of the provision for purchase tax liability as a deduction.