1965 (8) TMI 8 - HC - Income Tax

On Aug. 21 1957 assessee debited a sum of Rs. 29, 482 in its accounts as additional sales tax payable under the U.P. Sales Tax (Amendment) Act 1956 which replaced - held that On Aug. 21 1957 when the debit entry was raised admittedly there was no valid Sales Tax (Amendment) Act under which the tax of Rs. 10, 962 could have been claimed by the sales tax authority from the assessee - therefore there was no such enforceable liability against the assessee

Summary

Issues:
Admissibility of deduction under the mercantile system of accounting for a disputed liability.

Analysis:
The judgment delivered by the High Court of Allahabad pertains to a case stated under section 66(1) of the Act, questioning the admissibility of a deduction of Rs. 10,692. The assessee, a cloth dealer, debited this sum in its accounts as additional sales tax payable under the U.P. Sales Tax (Amendment) Act, 1956. However, this Act had been declared ultra vires by the court before the debit was raised. Subsequently, the U.P. Sales Tax (Amendment) Act, 1957, was also declared ultra vires. The Income-tax Appellate Tribunal held that no legal liability existed for the additional sales tax, disallowing the deduction of Rs. 10,692.

Under the mercantile system of accounting, a deduction can only be made for an ascertained and enforceable liability. Anticipated losses and contingent liabilities are not permissible deductions. The court cited various precedents to support this principle. In this case, as of the date the debit entry was raised, there was no valid law in place to impose the additional tax liability, rendering the debit invalid even under the mercantile system of accounting.

The petitioner relied on Supreme Court decisions, but the court found them inapplicable to the present case. The court emphasized that no question regarding the retrospectivity of the Sales Tax (Amendment) Act was raised before the Tribunal, precluding the assessee from introducing such arguments at this stage. Consequently, the court answered the question against the assessee, directing them to pay the costs of the reference.

In conclusion, the judgment underscores the importance of a valid and enforceable liability for claiming deductions under the mercantile system of accounting. It highlights the need for adherence to established legal principles and the limitations on deductions for contingent or unenforceable liabilities.