1985 (9) TMI 135 - AT - Income Tax

Summary

Issues Involved:
1. Timing of Sales Tax Liability
2. Deductibility of Ceased Liability
3. Cessor of Liability and Applicability of Section 41(1) of the Income-tax Act, 1961

Issue-wise Detailed Analysis:

1. Timing of Sales Tax Liability:
The primary issue is whether the additional sales tax liability arises in the year of sale or in the year the demand is raised by the Sales Tax Department. The department contended, based on the Supreme Court decision in Kedarnath Jute Mfg. Co. Ltd., that the liability to pay sales tax arises at the point of sale itself. However, the Tribunal recognized that sales tax liability, like any other liability, involves complexities and disputes, making it an oversimplification to assert that it arises solely in the year of sale.

The Tribunal examined various judicial precedents. The Kerala High Court in L.J. Patel & Co. v. CIT and the Madras High Court in CIT v. V. Krishnan supported the department's view. Conversely, the Allahabad High Court in Banwari Lal Madan Mohan and the Delhi High Court in Rattan Chand Kapoor indicated that the liability could be claimed in the year when the demand was raised, especially if the demand arose after the initial assessment years were completed.

The Tribunal also referenced the Calcutta High Court's decision in CIT v. Orient Supply Syndicate, which emphasized the commercial reality and the timing of when the liability became enforceable. The Tribunal concluded that the additional liability for sales tax should be claimed in the year the demand was raised, thus allowing the assessee to claim the deductions in the assessment year 1979-80.

2. Deductibility of Ceased Liability:
The second issue addressed whether the assessee could claim a deduction for a liability that ceased to exist by the time the appeal was heard. The Tribunal decided that the matter should be based on the materials available in the accounting year and not on subsequent events. This approach prevents the decision from depending on the timing of the appeal hearing, ensuring consistency in applying income-tax law.

3. Cessor of Liability and Applicability of Section 41(1):
The third issue involved whether there was a cessation of liability in light of the Sales Tax Tribunal's decision quashing the reassessments. The Tribunal noted that the Sales Tax Department had filed a revision petition against the Tribunal's order, which was pending before the Andhra Pradesh High Court. The Tribunal held that as long as the revision petition was pending, there was no cessation of liability, and section 41(1) would not apply for the assessment year 1985-86.

However, if the High Court admitted the revision petition, the order of the Sales Tax Tribunal would not be operative. The Tribunal referenced the Punjab and Haryana High Court's decision in Salig Ram Kanhaya Lal v. CIT and the Allahabad High Court's decision in Rameshwar Prasad Kishan Gopal v. V.K. Arora, ITO, which supported the view that liability does not cease while appeals are pending.

To ensure the matter is not overlooked, the Tribunal directed the assessee to make an entry in the books of account regarding the sales tax liability if the High Court admitted the revision petition. This would ensure that the matter is tracked and assessed correctly depending on the final outcome of the revision petition.

Conclusion:
The appeal was treated as allowed, with the Tribunal concluding that the additional sales tax liability could be claimed in the year the demand was raised, and directing the assessee to make necessary entries in the books of account to account for the pending revision petition.