1969 (6) TMI 37 - HC - Income Tax

Assessee entitled to deduct sales tax provision under Indian Income-tax Act

The court held that the assessee is entitled to deduct the sales tax provision under section 10(2)(xv) of the Indian Income-tax Act, 1922. The liability ... - Issues Involved1. Whether the sales tax provision of Rs. 22,642 is deductible in the computation of the total income of the assessee for the assessment year 1961-62.Detailed AnalysisIssue 1: Deductibility of Sales Tax ProvisionFacts and Background:- The assessee followed the mercantile system of accounting.- For the assessment year 1961-62, the assessee made a provision of Rs. 22,642 for sales tax payable.- The Income-tax Officer disallowed the deduction, considering it a mere provision for taxes that were neither paid nor ascertained by the sales tax authorities.- The Appellate Assistant Commissioner upheld this disallowance.- The Income-tax Appellate Tribunal allowed the deduction, stating that the sales tax liability accrued as soon as the sales were effected.Arguments by Revenue:- Sales tax is not deductible for income-tax purposes.- The liability for sales tax arises only upon assessment or demand by sales tax authorities.- Reliance was placed on various cases, including *Recols (India) Ltd.*, *Kedarnath Jute Manufacturing Co.*, and others, arguing that mere legal liability is insufficient for claiming deduction.Arguments by Assessee:- Sales tax is deductible under sections 10(1) and 10(2)(xv) of the Indian Income-tax Act, 1922.- Payment of sales tax is necessary for carrying on the business.- The liability for sales tax arises on sales effected, not on assessment or demand.- Cited cases including *Kesoram Industries and Cotton Mills Ltd.* and *Textile Machinery Corporation Ltd.* to support the claim.Court's Analysis:- Reviewed the relevant provisions of the Bengal Finance (Sales Tax) Act, 1941.- Noted that the liability to pay sales tax arises on sales effected, not dependent on assessment or demand.- The obligation to pay sales tax is directly related to the business and is necessary for its operation.- Sales tax is a compulsory levy and its payment is necessary for carrying on the business.- In the context of the mercantile system of accounting, expenditures are entered when a legal liability arises, not when the actual payment is made.Precedents Considered:- *Keshav Mills Ltd.* and *Calcutta Company Ltd.*: Mercantile system of accounting recognizes liabilities when they arise.- *Kesoram Industries and Cotton Mills Ltd.*: Liability to pay tax is a present liability.- *Textile Machinery Corporation Ltd.*: Provision for sales tax stands on the same footing as provision for income-tax liability.Conclusion:- The assessee is entitled to deduction of the sales tax provision under section 10(2)(xv) of the Indian Income-tax Act, 1922.- The liability for sales tax is incurred in the capacity of a trader and is directly connected with the business.- The facts of the case differ from *Kedarnath Jute Manufacturing Co.*, where the liability was disputed and no provision was made.- The court answered the reference in the affirmative, in favor of the assessee, allowing the deduction of the sales tax provision.Judgment:- The reference was answered in the affirmative, and the Commissioner of Income-tax was directed to pay the costs of the reference.Separate Judgment:- SANKAR PRASAD MITRA, J. concurred with the judgment.Final Reference:- Reference answered in the affirmative.