1985 (3) TMI 6 - HC - Income Tax

Summary

Issues:
- Whether the assessee was entitled to deduction in respect of sales tax amounting to Rs. 49,110?

Analysis:
The case involved a dispute regarding the deduction of sales tax amounting to Rs. 49,110 claimed by the assessee for the assessment year 1974-75. The Income-tax Officer initially disallowed the deduction, stating that the assessee, a contractor, was not registered under the Sales Tax Act, and thus, had no liability to pay sales tax. However, the Commissioner of Income-tax (Appeals) allowed the deduction, emphasizing that the liability to pay sales tax arises when the dealer sells goods exceeding the specified limit under the Sales Tax Act, irrespective of registration status. The Commissioner relied on the Supreme Court decision in Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363, which supported the deduction of sales tax liability for mercantile accounting-based assessee. The Income-tax Appellate Tribunal, in contrast, held that since the assessee was not a registered dealer and no sales tax proceedings were initiated within the limitation period, the deduction was not permissible. The Tribunal also distinguished the Kedarnath case, emphasizing the absence of assessment and payment of sales tax by the assessee.

The main contention revolved around whether the liability to pay sales tax, even without actual assessment or payment, could be deducted by the assessee following the mercantile system of accounting. The Department argued that without assessment or payment, the deduction was premature, citing decisions like Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542 and Sinclair Murray and Co. P. Ltd. v. CIT [1974] 97 ITR 615, which required actual payment to claim deduction. Additionally, the Department relied on Deepchand Shyam Sunder v. CIT [1980] 125 ITR 724, highlighting the necessity of a legal liability for deduction. The Tribunal's decision was based on the absence of registration, assessment, and payment of sales tax by the assessee, leading to the conclusion that the deduction was not allowable.

In further support of the assessee's position, references were made to the Supreme Court case of Kedarnath Jute Manufacturing Co. Ltd. and other cases like CIT v. K. A. Karim and Sons [1982] 133 ITR 515 and Haji Lal Mohd. Biri Works v. CIT [1982] 134 ITR 718 (All), emphasizing the accrual of liability under the mercantile system of accounting. However, the court ultimately sided with the Department, ruling that the deduction for sales tax was not permissible in the absence of registration, assessment, or payment by the assessee. The court highlighted the necessity of a legal liability for deduction, which was not met in this case, leading to the denial of the deduction amounting to Rs. 49,110.

Therefore, the court answered the reference in the negative, favoring the Department's stance on the disallowance of the deduction claimed by the assessee for sales tax liability.