1962 (3) TMI 81 - HC - Income Tax

Court allows deduction of Rs. 21,373 as accrued liability for 1955-56 assessment year

The court ruled in favor of the assessee, allowing the deduction of Rs. 21,373 as an accrued liability for the assessment year 1955-56. The court held ... - Issues Involved:1. Whether the Tribunal was justified in disallowing the claim of the assessee that Rs. 21,373 constituted an allowable sum of deduction in the year of account.Detailed Analysis:1. Nature of the Assessee's Business and Excise Duty Classification:The assessee is a manufacturer and dealer in safety matches owning a factory called 'Pope The King Match Factory' at Kalugumalai, Tirunelveli District. Initially classified as 'category No. 2' for excise duty purposes, the factory's increased production in 1954 necessitated reclassification to 'category No. 1,' which carried a higher excise duty.2. Petition for Reclassification and Conditions Imposed:The assessee petitioned the Assistant Collector of Central Excise for permission to exceed the production ceiling for category No. 2. Permission was granted with two conditions: immediate remittance of differential duty for the quarter ended September 30, 1954, and an undertaking to pay differential duty for the half-year ended June 30, 1954, if so decided by the Collector.3. Demand for Differential Duty:On December 9, 1954, the assessee received a demand for Rs. 21,373-7-0 as differential duty for the period January 1, 1954, to June 30, 1954. Despite appeals to higher authorities, the demand was not canceled.4. Claim for Deduction in Income Tax:The assessee, maintaining accounts on a mercantile basis, debited the amount on April 12, 1955, and claimed it as a deductible allowance for the assessment year 1955-56. The claim was disallowed by the Additional Income-tax Officer, Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal on the grounds that the liability was disputed and not finalized in the relevant year.5. Tribunal's Reasoning:The Tribunal held that the assessee had not incurred a legal obligation to pay the amount during the relevant year, describing the demand as potentially 'theoretical.'6. Court's Analysis of Accounting Method:The court confirmed that the assessee followed the mercantile method of accounting, rejecting the Appellate Assistant Commissioner's view that the assessee did not follow this method for excise duty payments.7. Legal Liability and Accrual:The court emphasized that the statutory demand by the excise authorities was clear and enforceable, creating an accrued liability for the assessee. The liability was not contingent but a definite obligation from the date of the demand.8. Relevant Case Law:The court referenced Rajarathina Nadar v. Commissioner of Income-tax, where it was held that an ascertained liability is deductible even if disputed. The court also discussed James Spencer & Co. v. Commissioner of Inland Revenue, distinguishing it from the present case as the latter involved a definite, non-contingent liability.9. Conclusion:The court concluded that the assessee's liability to pay the excise duty arose from the statutory demand and was enforceable in the year of account. Therefore, the assessee was entitled to deduct the amount as an accrued liability under the mercantile system of accounting.10. Judgment:The question was answered in favor of the assessee, allowing the deduction of Rs. 21,373 as an accrued liability for the assessment year 1955-56. The department was ordered to pay the assessee's costs, with counsel's fee set at Rs. 250.