1987 (8) TMI 150 - AT - Income Tax

Summary

Issues:
1. Whether the assessee is entitled to a deduction of Rs. 7,56,590.
2. Nature of liability - contractual or statutory.
3. Allowability of additional sales-tax as a deduction.
4. Treatment of contingent liability in mercantile accounting system.

Analysis:

Issue 1:
The main contention in the appeal was regarding the entitlement of the assessee to a deduction of Rs. 7,56,590. The dispute arose from an agreement between the assessee and M/s. Vishindas Parasram regarding the purchase of stock and the liability for sales tax.

Issue 2:
The Tribunal deliberated on the nature of the liability, whether it was a contractual or statutory obligation. It was established that while the additional sales-tax might be a statutory liability for M/s. Vishindas Parasram, for the assessee, it was considered part of the cost of goods purchased. The Tribunal emphasized that the liability was contractual in nature based on the agreements between the parties.

Issue 3:
The question of allowing the additional sales-tax as a deduction was crucial. The Commissioner (Appeals) found that the additional sales-tax was an accrued liability, disputing the Income-tax Officer's stance. The Tribunal analyzed the contractual terms and concluded that the liability only arose when demanded by the sales-tax department, which had not occurred during the relevant accounting year.

Issue 4:
Regarding the treatment of contingent liabilities in the mercantile accounting system, the Tribunal rejected the argument that a provision for contingent payment should be made. It emphasized that under the mercantile system, only liabilities that had arisen could be allowed as deductions, and in this case, the liability was uncertain and in dispute.

The Tribunal ultimately allowed the departmental appeal, highlighting that the additional sales-tax liability was contingent and had not been demanded during the relevant accounting year, thus not qualifying for deduction. The judgment clarified the distinction between contractual and statutory liabilities, emphasizing the importance of actual demand for recognizing a liability in the mercantile accounting system.