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Allowability of provision for sales tax as deduction under mercantile method of accounting. Analysis: The case involves an appeal by an individual assessee for the assessment year 1974-75 regarding the provision made for sales tax in the accounts. The assessee, engaged in the manufacture of bone products, debited two items in the sales tax account: an amount actually paid during the year and a provision of Rs. 75,900. The Income Tax Officer (ITO) disallowed the provision as a contingent expenditure. The CIT (Appeals) upheld the disallowance, considering it a contingent liability. However, the assessee contended that the provision was for a statutory liability and provided relevant documents to support the claim. The Tribunal considered whether the provision for sales tax made by the assessee was allowable as a deduction under the mercantile method of accounting. It was established that the assessee followed the mercantile method of accounting, allowing for the deduction of liabilities that arose during the relevant accounting year. The Tribunal referred to the Supreme Court decision in Kedar Nath Jute Manufacturing Co. Ltd vs. CIT, which held that under the mercantile system, a dealer is entitled to deduct sales tax liability that arises on sales made during the year, even if not quantified or paid immediately. The Tribunal examined the provisions of the Madhya Pradesh General Sales Tax Act and Rules to determine the assessee's liability for sales tax. It was noted that the liability arose as soon as purchases and sales were made, even though the exact amount of refund for export sales was not quantified during the year. The Tribunal emphasized that the liability was not contingent but a definite statutory obligation. Referring to case law, the Tribunal reiterated that under the mercantile system, sales tax liability should be deducted in the year it accrues, regardless of the timing of quantification or payment. In conclusion, the Tribunal allowed the appeal and deleted the addition of Rs. 75,900 made by the ITO and upheld by the CIT (Appeals). The decision was based on the assessee's entitlement to claim deduction for sales tax liability under the mercantile method of accounting, as established by statutory provisions and legal precedents.
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