1986 (2) TMI 53 - HC - Income Tax

Supreme Court allows deduction claim for Central sales tax liability, ruling in favor of assessee

The Supreme Court ruled in favor of the assessee, allowing the deduction claim of Rs. 1,40,316 for Central sales tax liability for the assessment year ... Deduction Issues Involved:1. Deduction claim for Central Sales Tax liability.2. Timing of liability accrual.3. Applicability of retrospective amendments.4. Principles of accountancy and mercantile system.5. Judicial precedents and their interpretations.Issue-Wise Detailed Analysis:1. Deduction Claim for Central Sales Tax Liability:The assessee company claimed a deduction of Rs. 1,40,316 for Central sales tax liability for the assessment year 1973-74. This liability pertained to sales made during the accounting year 1957-58. The initial assessment did not deduct the Central sales tax collections, leading to a dispute that eventually reached the Supreme Court.2. Timing of Liability Accrual:The crux of the issue was determining when the liability for the Central sales tax actually arose. The Income-tax Officer disallowed the deduction, arguing that the liability arose in 1964 when the original assessment was made. However, the Appellate Assistant Commissioner and the Tribunal concluded that the liability crystallized only on August 31, 1972, when the Joint Commercial Tax Officer issued a demand notice following the Supreme Court's decision.3. Applicability of Retrospective Amendments:The Central Sales Tax (Amendment) Act, 1969, had a retrospective effect, making tax on inter-state sales payable from July 1, 1957. This amendment was crucial as it overturned the earlier legal position established by the Supreme Court in Yaddalam's case, which had held that such transactions were not taxable under the Central Sales Tax Act.4. Principles of Accountancy and Mercantile System:The Tribunal's decision was influenced by principles of accountancy, specifically the mercantile system. The Accountant Member emphasized that the liability was determined only when the demand notice was issued in 1972, making it prudent for the assessee to claim the deduction in the assessment year 1973-74. The Judicial Member concurred, noting that the sales were not taxable when made, and the liability only arose later.5. Judicial Precedents and Their Interpretations:The judgment referenced several key decisions:- Kedarnath Jute Manufacturing Co. v. CIT: The Supreme Court held that a liability to pay sales tax arises in the year of sales, even if the tax is quantified later.- Pope the King Match Factory v. CIT: This case established that a disputed liability could still be claimed as a deduction.- CIT v. T.S. Srinivasa Iyer: The Madras High Court allowed a deduction for urban land tax even when no provision was made in the accounts immediately after the Supreme Court upheld the tax's validity.- CIT v. V. Krishnan: The court held that a sales tax liability should be claimed in the year the transactions took place or when the tax was paid.The judgment concluded that the liability for the Central sales tax did not exist until the Supreme Court's decision was given effect to by the Commercial Tax Officer on August 31, 1972. Therefore, the assessee was entitled to claim the deduction for the assessment year 1973-74.Conclusion:The Tribunal's view was upheld, affirming that the assessee was entitled to the deduction of Rs. 1,40,316 for the assessment year 1973-74. The question referred was answered in the affirmative, in favor of the assessee, with costs awarded to the Revenue.