Court allows deduction of customs duty under mercantile accounting system for assessment year 1983-84

The High Court ruled in favor of the assessee, allowing the deduction of customs duty for the assessment year 1983-84. The Court held that under the mercantile system of accounting, the liability to pay tax arises when transactions occur, even if quantification and enforcement happen later. It emphasized that a provision for fiscal liability, even if disputed, should be allowed as a deduction if there is a genuine apprehension of the liability. The Court rejected the Revenue's argument and affirmed the Tribunal's decision to accept the claim, ultimately disposing of the reference in favor of the assessee.

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Issues:
Whether the assessee is entitled to claim deduction of customs duty in the assessment year 1983-84Rs.

Analysis:
The case involved a dispute over the deduction of customs duty by the assessee for the assessment year 1983-84. The assessee, a company following the mercantile system of accounting, had initially claimed a deduction of Rs. 47,00,000 for customs duty payable in 1982, which was later revised to Rs. 70.56 lakhs covering the years 1975-76 to 1983-84. The Assessing Officer rejected the claim, stating that the liability to customs duty had not arisen at the relevant time. The Commissioner of Income-tax (Appeals) also disallowed the claim, citing the assessee's dispute with the customs duty levy. However, the Tribunal held that the liability accrued when a demand was raised by the authorities, and as the demand was still subsisting, the liability also subsisted during the relevant year. The Tribunal directed the Assessing Officer to allow the claim, leading to a reference to the High Court.

The Revenue argued that the demand was raised before the assessment year in question and that the subsequent demand was merely additional, questioning the Tribunal's decision. The assessee contended that the Revenue's current plea contradicted its previous stance, which focused on the dispute over the demand. The High Court noted the sequence of events, emphasizing that under the mercantile system of accounting, the liability to pay tax arises when the transactions occur, even if the quantification and enforcement happen later. Citing previous court decisions, the High Court affirmed that a provision for a fiscal liability, even if disputed, should be allowed as a deduction if there is a genuine apprehension of the liability being claimed. The Court also highlighted that under the mercantile system, duties collected from customers are deductible when the liability arises.

The High Court further discussed the applicability of section 43B of the Income-tax Act, noting that prior to its enactment, demands could be claimed as deductions in the year of demand. Rejecting the Revenue's argument based on the order dates, the Court emphasized that the original order for customs duty was passed within the relevant assessment year, making it valid for deduction. The Court concluded that the Tribunal was justified in accepting the claim, ruling in favor of the assessee against the Revenue.

In conclusion, the High Court answered the referred question in the affirmative, favoring the assessee and disposing of the reference accordingly.

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