1970 (12) TMI 11 - HC - Income Tax

In its books of account for the current year which were maintained on the mercantile system of accounting the assessee made the provisions for its liability under the Sales Tax Act - demand notice for the sales tax of earlier years were received by the assessee in the accounting year - demand was not disputed by assessee - held that amounts demanded have to be allowed as deduction

Summary

Issues:
1. Deductibility of estimated and disputed sales tax liabilities as business expenses.

Analysis:
The case involved a reference under section 66(1) of the Income-tax Act, 1922, concerning the assessment year 1956-57. The assessee, an unregistered firm, had sold its business as a going concern to a private limited company and was dissolved. The dispute arose regarding the deduction of sales tax liabilities in the assessment. The assessee had made provisions for sales tax liabilities for the current year and two earlier years in its accounts. The Income-tax Officer disallowed a significant portion of the claimed deduction, which was further reduced by the Appellate Assistant Commissioner. The main contention was whether unascertained and disputed sales tax liabilities could be allowed as deductions. The Tribunal held that as the demand notices for the sales tax liabilities of the earlier years were received during the accounting year, the entire amount should be allowed as legitimate business expenses against the profits of the relevant year.

The Commissioner contended that the disputed liabilities for the earlier years should not be allowed as deductions merely based on the receipt of demand notices in the relevant accounting year. It was argued that unless the assessee accepted the liability and made provisions in the books of account, the liabilities should not be considered as ascertained and undisputed. Reference was made to a previous court decision where the disallowance of a claim for deduction of sales tax was upheld due to the assessee's denial of liability and lack of provision in the books of account. However, it was noted that there was no finding by any authority that the assessee was still disputing the liability even after receiving the demand notices for the sales tax of the earlier years. Consequently, the Tribunal's decision to allow the deduction for the sales tax liabilities of the earlier years was deemed justified.

The Tribunal referred a question to the High Court regarding the deductibility of the entire sum of sales tax liabilities. The court, concurring with the Tribunal's decision, held that the deduction of the sales tax liabilities for the earlier years was permissible as the assessee did not contest the liabilities after receiving the demand notices. Therefore, the question was answered in the affirmative in favor of the assessee, leading to the allowance of the claimed deduction.