1996 (7) TMI 83 - HC - Income Tax

High Court allows deduction for purchase tax provision under mercantile accounting system

Commissioner Of Income-Tax Versus AM Moosa

The High Court allowed the assessee's claim for a deduction of Rs. 10,69,034 for purchase tax provision, emphasizing the liability crystallized upon ... Bona Fide, Income Tax, Mercantile System, Net Wealth, Purchase Tax, Sales Tax, Tax Liability Issues:- Disallowance of deduction from purchase tax liability- Entitlement of the assessee to claim deduction for purchase tax provisionAnalysis:The judgment pertains to a reference under section 256(2) of the Income-tax Act initiated by the Revenue concerning the assessment year 1978-79. The assessee, engaged in processing and exporting sea foods, had its original assessment set aside by the Income-tax Appellate Tribunal, leading to a revised assessment order disallowing a claimed deduction from purchase tax liability. The Commissioner of Income-tax later allowed the deduction, a decision upheld by the Income-tax Appellate Tribunal citing precedent. The Revenue's subsequent appeal was dismissed, prompting them to seek a reference which was initially rejected but later directed by the High Court. The primary issue revolved around whether the assessee could claim a deduction of Rs. 10,69,034 for purchase tax provision.The High Court observed that the formulated question of law contained factual elements, necessitating a breakdown of the circumstances involved. The first point addressed was the liability to pay purchase tax on prawns purchased for export, which was contingent on statutory obligations and the timing of filing returns. The Court emphasized that the liability crystallized upon filing returns, as evidenced by the quantification in the original assessment order. The exemption from purchase tax for the relevant period was also scrutinized, with the Commissioner's order indicating a pre-existing liability despite the exemption notification post-dating the period. The demand for Rs. 85 and the assessee's legal challenge against the tax levy were deemed irrelevant to determining the provision for tax liability during the accounting period.The Court relied on legal precedents, including the decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT, to support the assessee's claim for the provision of purchase tax liability. The application of the mercantile system of accounting and the bona fide apprehension of liability were pivotal in allowing the deduction. Notably, previous judgments and the treatment of similar provisions in related cases were cited to reinforce the justification for permitting the deduction in the present case. The Court concluded by affirming the allowance of the provision for purchase tax liability, emphasizing the availability of remedies for the Revenue in case the tax was found to be non-payable in subsequent assessments.In light of the detailed analysis, the High Court answered the referred question of law in the affirmative, favoring the assessee over the Revenue. The judgment directed the forwarding of a copy to the Income-tax Appellate Tribunal, Cochin Bench, for necessary action.