1978 (9) TMI 86 - AT - Income Tax

Summary

Issues:
1. Disallowance of sales tax as a deduction for the assessment year 1973-74.
2. Interpretation of the mercantile system of accounting.
3. Finality of liability for sales tax deduction.

Analysis:
The appellant, a partnership firm engaged in the purchase and sale of second-hand oil engines, appealed against the disallowance of a deduction of Rs. 8,184 representing sales tax paid in the assessment year 1967-68. The Income Tax Officer (ITO) disallowed the claim, stating it pertained to an earlier year and the matter was finalized in a previous year. The Appellate Authority Commissioner (AAC) upheld the disallowance, emphasizing the mercantile system of accounting and the timing of recognizing the liability. The appellant argued that the liability became final only during the year under appeal and relied on legal provisions supporting the deduction in the current year despite the transactions relating to earlier years.

The appellant's counsel contended that the liability for sales tax was disputed on various grounds, and the final resolution occurred within the relevant previous year. The Financial Commissioner's order on 12th Sept. 1972 confirmed the finality of the liability, contrary to the ITO's assertion of finality on 28th Feb. 1972. The Tribunal noted that the appellant correctly claimed the deduction when the liability was conclusively settled, in line with the principles of the mercantile system of accounting. Referring to the Supreme Court's decision in Kedernath Jute Manufacturing Co. Ltd. vs. CIT, the Tribunal emphasized the appellant's right to claim the deduction when the liability was firmly established, rejecting the AAC and ITO's views on the timing of the claim.

The Tribunal, after reviewing the facts and legal arguments presented, accepted the appellant's contentions and allowed the deduction of Rs. 8,184 for the assessment year 1973-74. The decision highlighted the importance of recognizing liabilities under the mercantile system of accounting and the relevance of finality in determining the timing of deductions. The appeal was allowed in favor of the appellant, emphasizing the correct application of accounting principles and legal provisions in determining the admissibility of deductions related to sales tax liabilities.