1981 (6) TMI 115 - HC - VAT and Sales Tax

Tax liability accrues at transaction time, not exemption cancellation. Importance of recognizing liabilities in accounting periods.

The High Court ruled against the assessees, stating that the liability to pay tax arose when the transactions took place, not upon the cancellation of the ... - Issues:1. Interpretation of liability towards purchase tax for specific accounting periods.2. Application of exemption notifications and subsequent cancellation on tax liabilities.3. Determination of the point in time when the liability to pay sales tax is incurred by an assessee.4. Impact of accounting methods (mercantile system) on recognizing tax liabilities.Analysis:Issue 1:The cases involved a dispute regarding the deduction of liability towards purchase tax for specific accounting periods. The liability arose from purchases made during the relevant years, and the question was whether the liability could be debited in the accounting period ending on March 31, 1974, or in subsequent years.Issue 2:The focus was on the effect of exemption notifications issued by the Government, particularly one dated October 12, 1973, exempting purchase tax on cashewnuts imported through the Cashew Corporation. Subsequently, a cancellation order was issued on November 9, 1973. The contention was whether the liability arose only upon the cancellation of the exemption notification.Issue 3:The core issue revolved around the timing of incurring the liability to pay sales tax. The assessees argued that the liability did not arise until the cancellation of the exemption notification. However, the Tribunal disagreed, emphasizing that the liability arose when the transactions took place, irrespective of enforcement or exemption notifications.Issue 4:The impact of the mercantile system of accounting on recognizing tax liabilities was discussed. The Supreme Court's precedent highlighted that the liability for payment of tax accrues during the assessment year, even if quantification occurs later. The High Court emphasized that liabilities must be recognized in the respective years when transactions occur, regardless of subsequent exemption or cancellation notifications.In conclusion, the High Court ruled against the assessees, stating that the liability to pay tax arose when the transactions took place, not upon the cancellation of the exemption notification. The judgment emphasized the importance of recognizing liabilities in the appropriate accounting periods, as per the mercantile system of accounting. The decision reaffirmed the principle that liabilities accrue when transactions occur, irrespective of subsequent regulatory actions.