1961 (3) TMI 5 - SC - Income Tax

Whether there are materials for the Tribunal to hold that the aforesaid sales tax payments of ₹ 30,221 were unreasonable and unnecessary having due regard to the requirements of the business, and not consequently deductible under rule 12 of Schedule I of the Excess Profits Tax Act ? Held that - Reasonableness or the necessity of payments under rule 12, Schedule I of the Excess Profits Tax Act must be ascertained in the light of what may be regarded as commercially expedient and not on any legalistic considerations. It would not be expected of a businessman to start a litigation in respect of a tax which the Legislature of the State was competent to levy on the ground that the method devised for computing the tax liability was ultra vires. The tax was duly assessed and paid and the reasonableness and necessity must be adjudged in the light of the circumstances then prevailing and not in the light of subsequent developments. The High Court was right in answering the question in the negative. Appeal dismissed.

Summary

Issues:
1. Deductibility of sales tax payments under Excess Profits Tax Act.
2. Reasonableness and necessity of payments made under provisional assessment.
3. Interpretation of Schedule I, clause 12 of the Excess Profits Tax Act.
4. Validity of payments made under Madras General Sales Tax Act.
5. Impact of retrospective validation of levy by Madras Legislature on tax payments.

Analysis:

1. Deductibility of sales tax payments under Excess Profits Tax Act:
The case involved a firm engaged in manufacturing groundnut oil and cake, claiming a deduction of sales tax paid under provisional assessment while assessing income tax. The Excess Profits Tax Officer disallowed a portion of the claimed deduction, leading to an appeal. The Supreme Court held that if the payment was reasonable and necessary for the business, it should not be ignored in assessing excess profits tax liability. The Court emphasized that the system of paying tax under provisional assessments was not adopted to evade tax liability, and the payments were made in discharge of lawful obligations.

2. Reasonableness and necessity of payments made under provisional assessment:
The Court noted that the assessees consistently paid tax provisionally assessed by the Sales Tax Officer based on the turnover of the previous year, subject to adjustment at the end of the year. The payments were deemed obligatory and necessary for conducting the business. The Court highlighted that the reasonableness and necessity of the expenditure should be judged in the light of commercial expediency, and the payments made by the assessees were essential for the proper conduct of their business.

3. Interpretation of Schedule I, clause 12 of the Excess Profits Tax Act:
The Court analyzed clause 12 of Schedule I of the Excess Profits Tax Act, which disallows deductions in excess of what the Excess Profits Tax Officer deems reasonable and necessary for the business. It emphasized that the Excess Profits Tax Officer must consider the commercial expediency of the deductions claimed, and payments made in satisfaction of lawful obligations imposed by tax assessments cannot be deemed unreasonable.

4. Validity of payments made under Madras General Sales Tax Act:
The Court addressed the argument that the payments made under the Madras General Sales Tax Act were inconsistent with the Act's provisions. It noted that the legality of the tax levy was retrospectively validated by an amending Act, and the reasonableness and necessity of payments should be assessed based on the circumstances prevailing at the time of payment, not subsequent legal developments.

5. Impact of retrospective validation of levy by Madras Legislature on tax payments:
The Court considered the retrospective validation of the tax levy by the Madras Legislature and highlighted that the assessments made provisionally were to be regarded as valid despite any initial inconsistency between the Act and the rules. It noted that the assessees were not required to challenge the taxation scheme's legality and that the High Court's decision to answer the question against the assessees was upheld.

In conclusion, the Supreme Court dismissed the appeal, affirming the High Court's decision, and emphasized the importance of assessing the reasonableness and necessity of tax payments in the context of commercial expediency.