1972 (5) TMI 1 - HC - Income Tax

Whether the sum of Rs. 43,377, representing the demand of sales tax which the assessee was called upon to pay during the previous year to the assessmerit year 1958-59 could properly be allowed as deduction in the assessment of that year - In the absence of any legal bar in the way of the assessee claiming this expenditure in the year of demand for which provision has already been made in his accounting year, deduction under section 10(2)(xv) is permissible in law and has been rightly allowed by the Tribunal - the sum of Rs. 43,377 representing the final demand of sales tax which the assessee was called upon to pay during the previous year to the assessment year 1958-59 could properly be allowed as deduction in the assessment of that year

Summary

Issues:
1. Deductibility of sales tax demand as an expenditure in the assessment year 1958-59.

Detailed Analysis:

The judgment pertains to a reference under section 66(1) of the Indian Income-tax Act, 1922, regarding the deductibility of a sales tax demand of Rs. 43,377 in the assessment year 1958-59. The assessee, an unregistered firm, incurred this liability due to sales tax assessments for the periods ending in 1949-50. The firm disputed the demand through various appeals but eventually deposited the amount in 1959. The main issue is whether this sales tax liability can be claimed as a deduction under section 10(2)(xv) of the Income-tax Act.

The High Court considered the nature of the expenditure and the accounting system maintained by the assessee. The court noted that the sales tax demand, being wholly and exclusively for the business, was debited in the accounts when the department made an enforceable demand. The court emphasized that under the mercantile system of accounting, once a liability is determined and debited, it becomes an expenditure that can be claimed as a deduction.

The court discussed the legal principles related to the accrual of liabilities and the timing of deductions under the mercantile system. It referred to a Supreme Court decision emphasizing that an assessee following the mercantile system can claim deductions for liabilities that accrued during the relevant accounting period, even if the payment occurs later. The court rejected the argument that the expenditure must relate to the specific accounting year, highlighting that there is no legal bar to claiming a deduction for a liability incurred in a previous year but debited in the current year.

Further, the court distinguished a case involving the relating back of income to an earlier year, clarifying that such provisions do not apply to deductions under section 10(2)(xv). It emphasized that the genuineness and compulsiveness of the sales tax demand, along with the absence of any legal impediment, justified allowing the deduction claimed by the assessee. The court concluded that the sales tax demand of Rs. 43,377 could properly be allowed as a deduction in the assessment year 1958-59, ruling in favor of the assessee.

In a concurring opinion, the second judge agreed with the affirmative answer to the question regarding the deductibility of the sales tax demand. The judgment provides a detailed analysis of the legal principles governing the deductibility of expenditures under the Income-tax Act, particularly in cases involving liabilities accrued in previous years but debited in the current accounting period.