1994 (11) TMI 86 - HC - Wealth-tax

Purchase Tax Liability Deductible as Business Expenditure & Partners' Shares as Debts

The court affirmed that the provision for purchase tax liability made by a firm was deductible as business expenditure under section 37(1) of the ... A Firm, Exemption From Payment, Purchase Tax, Question Of Law, Wealth Tax Issues:1. Deductibility of provision for purchase tax liability as business expenditure under section 37(1) of the Income-tax Act.2. Deductibility of partners' shares of the provision for purchase tax liability in computing their net wealth under the Wealth-tax Act.Analysis:1. The court addressed the issue of whether the provision made by a firm for purchase tax liability was deductible as business expenditure under section 37(1) of the Income-tax Act. The firm, engaged in the export of marine products, had made provisions in its accounts for potential purchase tax liability. The court, in a previous judgment, held that the provision was reasonable as the firm had legitimate reasons to anticipate the liability. Consequently, the court ruled that the amount covered by the provision was deductible in the computation of the firm's profits and gains.2. The second issue involved determining whether the partners' shares of the provision for purchase tax liability were deductible in computing their net wealth under the Wealth-tax Act. The Tribunal had upheld the partners' contention that their shares of the provision were deductible. The court relied on previous judgments and legal provisions to establish that the liability for purchase tax accrued at the time of purchases, making it an accrued liability. The court compared this liability to income-tax liability, emphasizing that both were present liabilities crystallized at specific dates. Therefore, the court concluded that the partners' shares of the provision were liable to be treated as a debt owed by them for the purpose of computing their net wealth.3. The Revenue contested the deductibility of the provision amount, arguing that it could not be considered a debt owed by the assessee. The Revenue relied on previous Supreme Court decisions related to wealth-tax assessments. However, the court differentiated between income-tax liabilities and liabilities for purchase tax. The court held that the liability for purchase tax accrued at the time of purchases, making it an existing liability that had to be deducted as a debt owed. The court rejected the Revenue's argument and declined to direct the Tribunal to refer any questions of law arising from the Revenue's contentions.4. The court also discussed decisions from the Madras High Court and the Bombay High Court related to liabilities under the Income-tax Act. These decisions highlighted that liabilities for super-tax arose only upon assessment by the Income-tax Officer. However, the court distinguished these cases from the present scenario involving purchase tax liability, where the liability accrued at the time of purchases. Based on its previous judgment and the nature of the liability for purchase tax, the court concluded that the provision made by the firm and the partners' shares of the provision were deductible as debts owed.5. Ultimately, the court dismissed the petitions, affirming its previous judgment that the provision for purchase tax liability was deductible and that the partners' shares of the provision were to be treated as debts owed. The court declined to direct the Tribunal to refer any questions of law, as it found no purpose in doing so based on its analysis and conclusions.