1986 (2) TMI 27 - HC - Income Tax

High Court denies deduction for prior tax payment, emphasizing accrual basis principle under Income-tax Act.

The High Court ruled against the assessee, holding that the payment made during the accounting period for earlier tax liability is not a permissible ... Deduction Issues involved: The issue involves whether the amount paid by the assessee as arrears of tax under the Kerala Motor Vehicles (Taxation of Passengers & Goods) Act, 1963, relating to earlier years is to be allowed as a deduction in computing the assessee's income for the assessment year 1975-76.Summary:The firm, engaged in passenger transport, filed a return for the assessment year 1975-76 claiming a deduction for tax paid under the Kerala Motor Vehicles Act. The Income-tax Officer disallowed part of the deduction related to tax accrued in earlier years. The Appellate Assistant Commissioner allowed the entire deduction, which was upheld by the Income-tax Appellate Tribunal. The Tribunal noted that the liability for tax had accrued in earlier years but was not enforceable during legal challenges. The High Court held that under the mercantile system of accounting, the deduction should have been claimed in relevant assessment years, not when the payment was made. Referring to legal precedents, the court emphasized that the liability for tax accrues when due, regardless of payment timing. The court ruled against the assessee, stating that the payment made during the accounting period for earlier tax liability is not a permissible deduction under the Income-tax Act for the assessment year in question.The judgment highlights the distinction between cash and mercantile systems of accounting, emphasizing that under the mercantile system, liabilities are recognized when they arise, not when paid. It also references previous court decisions, including a Full Bench ruling, to support the principle that past liabilities cannot be considered for computing income in subsequent years. The court rejected the argument that an agreement allowing installment payments affected the accrual of tax liability, affirming that the liability arises as per the statute regardless of payment terms. Ultimately, the court ruled in favor of the Revenue, denying the deduction claimed by the assessee for tax paid on earlier years' liability.