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 for sales tax arises when sales are effected, not upon assessment or demand by tax authorities. The court emphasized that sales tax is a necessary business expense and is directly related to business operations. The decision favored the assessee, allowing the deduction of the sales tax provision, with costs to be paid by the Commissioner of Income-tax.

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Issues Involved
1. 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 Analysis

Issue 1: Deductibility of Sales Tax Provision

Facts 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.

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