1984 (3) TMI 25 - HC - Income Tax

Summary

Issues:
1. Deduction of sales tax amount from total income.
2. Application of mercantile system of accounting in claiming deductions.
3. Interpretation of Supreme Court judgments regarding deduction of sales tax.

Detailed Analysis:
1. The primary issue in this case was whether a deduction of Rs. 36,916 towards possible sales tax was permissible from the total income for the assessment year 1967-68. The Income-tax Appellate Tribunal referred this question to the High Court for consideration. The sales tax amount in question was payable under the U.P. Sales Tax Act, and the assessee had provided for it in their accounts, although it had not been paid to the authorities during the relevant year. The Income Tax Officer (ITO) disallowed the deduction on the basis of non-payment, but the Appellate Authority Commission (AAC) allowed it citing a Supreme Court judgment. The Tribunal, however, required the amount to be paid to the government before deduction. The High Court analyzed the facts and relevant legal principles to determine the appropriateness of the deduction.

2. The High Court delved into the application of the mercantile system of accounting in claiming deductions for sales tax. It noted that under the mercantile system, amounts payable are treated as already paid, and amounts receivable are treated as already received, even if not physically transacted. The Court emphasized that the system allows for appropriating credits and debits to the correct accounting year. It rejected the argument that actual payment was necessary for claiming deductions, stating that forcing the assessee to maintain accounts on a cash basis would contradict their chosen accounting system. The Court highlighted previous judgments that supported deductions under the mercantile system before actual payment, emphasizing the importance of appropriating liabilities to the correct year.

3. The High Court extensively discussed Supreme Court judgments, including Kedarnath Jute Mfg. Co. Ltd. v. CIT and other relevant cases, to interpret the principles governing the deduction of sales tax. It noted that the normal practice is to claim the amount in the year the liability arises, even if the quantification and final demand occur in subsequent years. The Court emphasized that the primary liability should be appropriated to the year in which it arose, supporting the assessee's claim for deduction in the present case. The judgment highlighted the importance of considering the accounting system used by the assessee and the timing of the liability accrual in determining the appropriateness of deductions. Ultimately, the Court ruled in favor of the assessee, allowing the deduction of the sales tax amount from the total income for the assessment year 1967-68.