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Issues involved: Assessment of purchase tax deduction u/s mercantile system of accounting for assessment years 1975-76 and 1976-77 in relation to assessment year 1977-78.
Summary: The High Court considered the case where the assessee's main business involved purchasing paddy, husking it, and selling rice, with a requirement to sell a percentage of rice to the Government at specified rates. The dispute arose regarding the deduction of purchase tax paid for the assessment years 1975-76 and 1976-77 in the assessment year 1977-78, based on the mercantile system of accounting. The Income-tax Officer initially disallowed the deduction of purchase tax for the earlier years, citing the accrual of liability principle under the mercantile system. However, the Commissioner of Income-tax (Appeals) granted relief to the assessee. Subsequently, the Income-tax Appellate Tribunal dismissed both the Revenue's appeal and the assessee's cross-objections, leading to a reference question to the High Court. The High Court referred to precedents emphasizing that under the mercantile system, deductions should be claimed based on the accrual of liability, regardless of when the liability is quantified. The court highlighted that the liability for purchase tax had accrued in the relevant periods of the earlier assessment years, even though the tax was quantified later. The court also noted that the dismissal of the writ petition and quantification of tax by sales tax authorities did not warrant claiming the deduction in a subsequent assessment year under the mercantile system of accounting. Additionally, the court distinguished cited cases where the crucial date for claiming deduction varied based on the circumstances of each case, ultimately concluding that the Tribunal erred in allowing the deduction for the earlier years in the assessment year 1977-78. Consequently, the court ruled in favor of the Revenue, denying the deduction and leaving the parties to bear their own costs.
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