Accrued sales tax is deductible, but penalty for late return filing is not an allowable business deduction.

A accrued statutory sales tax liability was treated as deductible in computing business income where the assessee followed the mercantile system, so the additional sales tax was allowable as a business deduction. By contrast, a penalty imposed for late filing of a return under the Madhya Pradesh General Sales Tax Act was held to be a penal levy arising from breach of a statutory obligation and not a commercial loss incurred wholly and exclusively for business purposes, so it was not deductible. The reference was therefore treated as partly in favour of the assessee and partly in favour of the Revenue.

---

---

Issues: (i) Whether additional sales tax of Rs. 2,863 was deductible in computing business income. (ii) Whether penalty of Rs. 41,000 levied for late filing of return under section 17(3) of the Madhya Pradesh General Sales Tax Act, 1958, was an allowable business deduction.

Issue (i): Whether additional sales tax of Rs. 2,863 was deductible in computing business income.

Analysis: The statutory sales tax liability had accrued during the relevant period. A liability which has arisen under the taxing law is deductible when the assessee follows the mercantile system and the liability is otherwise admissible.

Conclusion: The deduction of additional sales tax of Rs. 2,863 was allowable and this issue was answered in favour of the assessee.

Issue (ii): Whether penalty of Rs. 41,000 levied for late filing of return under section 17(3) of the Madhya Pradesh General Sales Tax Act, 1958, was an allowable business deduction.

Analysis: A penalty imposed for breach of a statutory obligation is not a normal incident of business and is not a commercial loss incurred wholly and exclusively for business purposes. The nature of the levy was penal and not an accretion to tax or interest.

Conclusion: The penalty of Rs. 41,000 was not deductible as business expenditure and this issue was answered against the assessee.

Final Conclusion: The reference was answered partly in favour of the assessee and partly in favour of the Revenue, with the statutory sales tax deduction allowed and the penalty disallowed as a business deduction.

Ratio Decidendi: A statutory liability for sales tax that has accrued is deductible, but a penalty imposed for infraction of law is not an allowable deduction as business expenditure.

---