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Deduction of purchase tax under mercantile system of accounting. Summary: The High Court of Punjab and Haryana considered the case of an assessee, a registered firm deriving income from the manufacture and sale of woollen cloth, sale and purchase of wool tops and yarn, who claimed a deduction of Rs. 19,964 for payment of purchase tax during the accounting year. The assessing authority rejected the claim as the liability to pay purchase tax had arisen in previous years and the method of accounting was mercantile. The AAC upheld the decision, but the Income-tax Tribunal allowed a deduction of Rs. 16,132, stating that the enforceable legal liability arose upon receiving the demand notice for payment. The revenue challenged this decision, leading to the question of whether the deduction was justified in the assessment year 1971-72. The Tribunal relied on previous decisions, including Pope The King Match Factory v. CIT, Kedarnath Jute Mfg. Co. Ltd. v. CIT, and CIT v. Nathmal Tolaram. However, the court found that the first two decisions did not support the Tribunal's view, and the reliance was misconceived. While Nathmal Tolaram's case supported the assessee's contention, the court could not subscribe to that view. The court analyzed the decisions cited, emphasizing that under the mercantile system of accounting, deductions can only be claimed for liabilities that have accrued, not for those discharged in the accounting year. Referring to the Income Tax Act and relevant provisions, the court concluded that the liability to pay the purchase tax arose in a previous year, and the deduction could only be claimed in the year when the liability accrued. Therefore, the court answered the question in the negative, in favor of the revenue and against the assessee.
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