2004 (8) TMI 11 - HC - Income Tax

Section 37 - sales tax liability and penal interest - Whether Tribunal was justified in law in holding that the assessee s claim for Rs. 15, 498 representing sales tax liability and penal interest on it for earlier years was an allowable deduction under the Income-tax Act 1961 specially when the said amount was offered for taxation in the assessment year 1979-80 on refund? - We therefore answer the question of law referred to us in the affirmative i.e. in favour of the assessee and against the Revenue

Summary

Issues:
1. Allowability of deduction for sales tax liability and penal interest under the Income-tax Act, 1961.

Analysis:
The High Court of Allahabad was tasked with determining the allowability of a deduction under the Income-tax Act, 1961, related to a sales tax liability and penal interest amounting to Rs. 15,498 for earlier years. The Income-tax Officer disallowed this amount, considering it as penalty and interest imposed by sales tax authorities for previous years. The Commissioner of Income-tax (Appeals) concurred with this disallowance, stating that the amount should neither be allowed as a deduction nor be taxed on refund. However, the Tribunal held in favor of the assessee, stating that the additional demand created by the sales tax authorities in the relevant assessment year should be allowed as a deduction. The Tribunal emphasized that the liability to pay the amount arose in the assessment year in question, and thus, it should be deductible.

The Revenue contended that the deduction should only be allowed in the year when the liability to pay sales tax accrued, not when it was actually paid, as the assessee followed the mercantile system of accounting. However, the High Court dismissed this argument, highlighting that the sales tax amount had been realized from customers and paid to the authorities, and the additional demand was separate from the admitted tax liability. The Court emphasized that the liability for the amount arose and accrued for the first time on a specific date, justifying the Tribunal's decision to allow the deduction during the assessment year under consideration.

In conclusion, the High Court ruled in favor of the assessee, affirming the Tribunal's decision to allow the deduction for the sales tax liability and penal interest amount. As nobody appeared on behalf of the assessee, no costs were awarded in the case.