1978 (12) TMI 38 - HC - Income Tax

Summary

Issues involved:
1. Allowance of interest paid on credit balance in individual account of a partner.
2. Allowability of deduction for liability to Central Sales Tax quantified in a subsequent year.

Issue 1: Interest Payment on Credit Balance
The High Court considered whether the Tribunal was correct in allowing the assessee's claim for interest paid on the credit balance in the individual account of a partner. The firm maintained two accounts for the partner, one for capital and the other for deposit. The Tribunal found that the interest was paid to the partner in his individual capacity, not as a partner, and thus, it could not be disallowed under section 40(b) of the Income Tax Act. However, a previous decision by the High Court indicated that interest paid to a partner was disallowable under section 40(b) regardless of the capacity in which the payment was made. Therefore, the first question was answered against the assessee.

Issue 2: Deduction for Central Sales Tax Liability
Regarding the second issue, the Court analyzed the deduction claimed by the assessee for a liability to Central Sales Tax quantified in a subsequent year. The assessee had not made any provision for sales tax in the relevant year when the transactions occurred, but the tax was assessed and demanded in a later year. The Income Tax Officer (ITO) held that the liability accrued when the transactions were made and could not be allowed as a deduction in the subsequent year. However, the Tribunal disagreed, stating that the assessee was not aware of the liability in the earlier year and thus allowed the claim. The Court referred to a Supreme Court decision emphasizing that under the mercantile system of accounting, a liability accrues when transactions subject to tax are made, regardless of when the assessment is done. The Court held that the assessee should have deducted the liability in the year the transactions occurred and disallowed the claim for the subsequent year. Therefore, the second question was also answered against the assessee.

In conclusion, the High Court ruled against the assessee on both issues, disallowing the interest payment on the credit balance and the deduction for Central Sales Tax liability. The Commissioner was awarded costs amounting to Rs. 200.