Deferred sales tax and crystallised liabilities were held deductible under tax law, with both additions deleted.

Deferred sales tax under a State scheme is deductible under section 43B where the statutory amendment deems the liability to have been paid, and the assessee satisfies the scheme conditions with supporting entitlement and deferment certificates; the disallowance was deleted. Prior period expenses are allowable in the year of crystallisation under the mercantile system when the liability is determined and accounted for during that year, even if the underlying bills relate to an earlier period; the addition was also deleted.

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Issues: (i) Whether sales tax liability deferred under the Karnataka sales tax scheme was allowable as a deduction under section 43B of the Income-tax Act, 1961; (ii) Whether prior period expenses were deductible in the assessment year in which the liability crystallised.

Issue (i): Whether sales tax liability deferred under the Karnataka sales tax scheme was allowable as a deduction under section 43B of the Income-tax Act, 1961.

Analysis: Circular No. 496 contemplates that where a State amends its sales tax law so that deferred sales tax is treated as actually paid, the statutory liability is regarded as discharged for the purposes of section 43B. Section 19C of the Karnataka Sales Tax Act, 1957 provided that where the eligible unit's deferred tax liability is created as loan by the designated department, such tax shall be deemed to have been paid. The assessee satisfied the conditions of the scheme and the entitlement and deferment certificates supported the claim.

Conclusion: The disallowance was not sustainable and the addition was rightly deleted in favour of the assessee.

Issue (ii): Whether prior period expenses were deductible in the assessment year in which the liability crystallised.

Analysis: Under the mercantile system, an expense is allowable in the year in which the liability is determined and crystallised, even if it relates to an earlier period. The record showed that the bills were received late and the liabilities were finalised and accounted for in the relevant year. On these facts, the expense had crystallised during the year under consideration.

Conclusion: The deletion of the addition for prior period expenses was justified and was in favour of the assessee.

Final Conclusion: The Revenue's appeal failed because both disputed additions were rightly deleted, and the assessment order was not restored.

Ratio Decidendi: Deferred sales tax is deductible under section 43B when the State scheme, by statutory amendment, deems the liability to have been paid, and an expense governed by the mercantile system is allowable in the year its liability crystallises.

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