Mercantile system deduction of disputed tax liability allowed when bona fide liability was reasonably apprehended; subsidy not deducted from machinery cost.

Under the mercantile system, a disputed statutory liability is deductible when, at the time the provision is made, a prudent businessman has a bona fide and reasonable apprehension that the amount may become payable; on that basis, the provision for purchase tax on prawns was allowed. The deduction for sales tax actually paid during the year was not allowed on the facts and timing relevant to the accounting year. For depreciation, the subsidy received was not required to be deducted from the actual cost of machinery, as the existing judicial rule treated such subsidy as not reducing cost. The assessee therefore succeeded on the purchase-tax and subsidy issues, while the sales-tax claim failed.

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Issues: (i) Whether the assessee was entitled to deduction of the provision made in the books towards purchase tax liability under the Kerala General Sales Tax Act; (ii) whether the assessee was entitled to deduction of sales tax actually paid during the year; (iii) whether the subsidy received by the assessee had to be deducted from the cost of machinery for computing depreciation.

Issue (i): Whether the assessee was entitled to deduction of the provision made in the books towards purchase tax liability under the Kerala General Sales Tax Act.

Analysis: The assessee maintained its accounts on the mercantile system. The question was whether a provision for purchase tax on prawns, made before any assessment or demand, could be allowed as a business deduction when the liability was disputed. The governing principle applied was that a liability need not have been quantified or enforced if, on the date of making the provision, there existed a bona fide and reasonable apprehension that the amount might become payable. The controversy on whether processed prawns retained the same commercial identity under section 5(3) of the Central Sales Tax Act was then unsettled, and even judicial opinion was divided. In that setting, the assessee's provision was not fanciful or unreasonable, and later decisions could not retrospectively defeat a claim that was justified on the facts then prevailing.

Conclusion: The assessee was entitled to the deduction, and the answer was in favour of the assessee.

Issue (ii): Whether the assessee was entitled to deduction of sales tax actually paid during the year.

Analysis: This issue was not substantively pressed before the Court. No independent reasoning was required beyond the conclusion that the claim did not succeed on the facts and timing relevant to the accounting year.

Conclusion: The deduction was not allowable, and the answer was against the assessee.

Issue (iii): Whether the subsidy received by the assessee had to be deducted from the cost of machinery for computing depreciation.

Analysis: The issue stood covered by the existing decision of the Court, later approved by the Supreme Court, that such subsidy did not go to reduce the actual cost for depreciation purposes. The Tribunal's contrary view could not be sustained.

Conclusion: The subsidy was not to be deducted from the cost of machinery, and the answer was against the Revenue.

Final Conclusion: The reference was disposed of by allowing the assessee's claim on the purchase-tax provision, rejecting the claim for sales tax paid during the year, and upholding the assessee's position on the subsidy issue.

Ratio Decidendi: Under the mercantile system, a disputed statutory liability is deductible when, at the time of making the provision, the assessee has a bona fide and reasonable apprehension that the liability may be fastened, judged from the position of a prudent businessman and the legal controversy then prevailing.

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