1997 (2) TMI 9 - SC - Income Tax

Held that when the assessee is following the mercantile system of accounting, in the case of sales tax payable by the assessee, the liability to pay sales tax would accrue the moment the dealer made sales which are subject to sales tax and, at that stage, the obligation to pay the sales tax arises and the raising of the dispute in this connection before the higher authorities would be irrelevant

Summary

Issues:
- Allowability of sales tax composition fee as an expenditure for the assessment year 1968-69.

Analysis:
The case involved an appeal by the assessee regarding the allowability of a sales tax composition fee of Rs. 1,91,887 as an expenditure for the assessment year 1968-69. The assessee, engaged in the manufacture and sale of biris, claimed exemption from sales tax based on certain notifications. However, the Sales Tax Department levied sales tax for a specific period. The assessee applied for stay of tax recovery, which was granted but later vacated. Subsequently, the assessee paid a portion of the tax liability and sought deduction of the amount paid in the assessment year 1968-69. The claim for deduction was disallowed by the Income-tax Officer, the Appellate Assistant Commissioner, and the Tribunal.

The Tribunal referred the matter to the High Court, which relied on the decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363. The High Court held that since the assessee followed the mercantile system of accounting, the deduction of tax liability accrued in a previous year was not permissible in the assessment year 1968-69. The assessee contended that as the tax was actually paid in the relevant previous year, deduction should be allowed. Reference was made to the decision in Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542, emphasizing the treatment of sales tax as a trading receipt and the entitlement to claim deduction upon payment to the State Government.

The Supreme Court, considering the precedents, including CIT v. Kalinga Tubes Ltd. [1996] 218 ITR 164, affirmed that under the mercantile system of accounting, the liability to pay sales tax accrues when sales subject to tax are made. The court reiterated that the obligation to pay sales tax arises at the time of sale, regardless of any disputes raised subsequently. Therefore, the court found no merit in the appeal and dismissed it, with no order as to costs.