1996 (1) TMI 3 - SC - Income Tax

Sales T.O. completed the assessment in respect of the a/y 1962-63 on Mar. 31, 1966, and demanded an additional - Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of Rs. 2,22,161 towards the sales tax liability for the a/y 1971-72 - When the assessee is following the mercantile sys. of accounting, in case of sales tax payable by the assessee, the liability to pay sales tax would accrue the moment the dealer made sales, which are sub. to sales tax

Summary

Issues:
Interpretation of liability to pay sales tax under the mercantile system of accounting for deduction in income tax assessment.

Analysis:
The case involved a dispute regarding the deduction of sales tax liability by a limited company manufacturing steel tubes in Orissa for the assessment year 1971-72. The company had a sales tax liability for the assessment year 1962-63, which was reduced to Rs. 2,22,161 by the Sales Tax Tribunal. The Income-tax Officer disallowed the deduction, but the Appellate Commissioner allowed it. The Income-tax Tribunal reversed the decision, leading to the High Court ruling in favor of the assessee. The key issue was whether the liability to pay sales tax accrued during the relevant assessment year or when the demand notice was served by the Sales Tax Officer.

The High Court held that the liability accrued when the fresh demand notice was served, allowing the deduction for the assessment year 1971-72. However, the Supreme Court disagreed with this interpretation. It referenced the Kedarnath Jute Manufacturing Co. Ltd. case, emphasizing that under the mercantile system of accounting, the liability to pay sales tax arises when sales subject to tax are made, regardless of ongoing disputes or appeals. The Court clarified that even if the liability amount is reduced later, the original accrual remains valid.

The Court rejected the High Court's reasoning that the liability accrued upon the issuance of the demand notice, emphasizing that the mercantile system dictates when liabilities accrue. The Court also dismissed the reliance on other cases cited by the respondent's counsel, stating that the Kedarnath case directly addressed the issue at hand. Ultimately, the Court allowed the appeal, setting aside the High Court's decision and ruling in favor of the Revenue, denying the deduction for the sales tax liability in the assessment year 1971-72.