Purchase tax deduction follows accounting method and timing of accrual or payment, not later litigation outcomes.

Purchase tax deduction depends on the accounting method regularly followed and the year in which the liability accrues or is actually paid. Where the assessee followed a mixed system for tax liabilities, the purchase tax relating to the earlier assessment year was deductible in the year the liability properly related to, even though payment was made later in instalments. By contrast, the purchase tax amount actually paid in the earlier accounting year had to be claimed in that year, and pending litigation did not permit shifting the deduction to assessment year 1971-72. The reference was thus answered partly for the assessee and partly for the Revenue.

---

---

Issues: (i) Whether purchase tax liability of Rs. 84,765.44 relating to assessment year 1969-70 was deductible in assessment year 1971-72. (ii) Whether purchase tax amount of Rs. 1,11,453.42, paid on 30 January 1970, could be deducted in assessment year 1971-72.

Issue (i): Whether purchase tax liability of Rs. 84,765.44 relating to assessment year 1969-70 was deductible in assessment year 1971-72.

Analysis: The assessee's tax liability had been in dispute and the matter was finally settled only when the appellate proceedings ended on 28 October 1970. The Court held that, on the finding that the assessee followed a mixed system of accounting for tax liabilities, the deduction could be claimed in the year to which the liability properly related and not merely because payment was made later in instalments. The amount of Rs. 10,000 had been deposited in the relevant accounting year and the balance also related to the same liability.

Conclusion: The deduction of the purchase tax liability relating to assessment year 1969-70 was allowable in favour of the assessee and against the Revenue.

Issue (ii): Whether purchase tax amount of Rs. 1,11,453.42, paid on 30 January 1970, could be deducted in assessment year 1971-72.

Analysis: The amount had actually been paid in the accounting year relevant to assessment year 1970-71. The Court held that, whichever accounting system applied, the assessee was bound to claim the deduction in the year of actual payment. The pendency of litigation challenging the liability did not justify shifting the deduction to a later year, and the later non-debit in the balance-sheet did not create a fresh entitlement.

Conclusion: The deduction of Rs. 1,11,453.42 in assessment year 1971-72 was not allowable and was decided in favour of the Revenue and against the assessee.

Final Conclusion: The reference was answered partly in favour of the assessee and partly in favour of the Revenue by distinguishing between the two purchase tax liabilities on the basis of the year in which the deduction was legally claimable.

Ratio Decidendi: A deduction for tax liability must be claimed in the year determined by the assessee's regularly employed accounting method and the year of actual accrual or payment, and a liability under litigation does not permit postponement of the deduction to a subsequent assessment year.

---