1985 (1) TMI 51 - HC - Income Tax

Summary

Issues:
1. Correct assessment year for sales tax deduction.
2. Allowability of sales tax deduction for a specific assessment year.
3. Accounting basis for sales tax liability.

Analysis:
The judgment pertains to a reference made by the Income-tax Appellate Tribunal to the High Court to determine the correctness of allowing a sum of Rs. 3,258 as sales tax deduction for the assessment year 1974-75. The Revenue contended that the liability for sales tax should be included in the relevant assessment year based on the mercantile system of accounting, even if quantified in subsequent years. The IAC had added back the sales tax amount to the income of the assessee, following the principle established in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363, which emphasized charging the liability for the year in which it arose.

The CIT (Appeals) allowed a portion of the sales tax amount, considering it directly resulted from the sales tax order. However, the Tribunal held that the entire sum of Rs. 3,258 was quantified in the previous year related to the assessment year 1977-78, making it allowable for deduction in the current assessment year. The Revenue argued that the sales tax liability should be accounted for in the year it arose, regardless of quantification in subsequent years, citing various precedents supporting this view.

The High Court, in line with the Revenue's argument and legal precedents, concluded that the Tribunal erred in allowing the sales tax deduction for the assessment year 1974-75. The judgment highlighted the importance of adhering to the mercantile system of accounting and recognizing the tax liability in the year it originated, even if disputed or quantified in later years. The decision favored the Revenue, directing that the sales tax amount should not be deductible for the specified assessment year.

In summary, the judgment clarified the correct assessment year for sales tax deduction, addressed the allowability of sales tax deduction based on accounting principles, and emphasized the significance of recognizing tax liabilities in the year they arise, as per established legal precedents.