1956 (2) TMI 74 - HC - Income Tax

Court rules sales tax payments necessary for business, not voluntary. Excess Profits Tax Officer can't reduce payments arbitrarily.

The judgment ruled in favor of the assessee, stating that sales tax payments were necessary for the business and not voluntary expenditures. It emphasized ... - Issues:1. Interpretation of rule 12 of Schedule I of the Excess Profits Tax Act regarding the deductibility of sales tax payments.2. Consistency in accounting methods and treatment of sales tax payments for income-tax and excess profits tax assessments.3. Application of section 13 of the Income-tax Act to assessments under the Excess Profits Tax Act.Analysis:1. The judgment dealt with the interpretation of rule 12 of Schedule I of the Excess Profits Tax Act concerning the deductibility of sales tax payments. The Excess Profits Tax Officer disallowed a portion of sales tax paid by the assessee, claiming it was unreasonable and unnecessary for the business. The Tribunal upheld this decision, citing the need to correct an anomaly where the entire sales tax payments were allowed as deductions for income-tax but not for excess profits tax purposes. The Tribunal concluded that the Excess Profits Tax Officer was justified in disallowing the amount under rule 12, considering it as an advance payment not properly ascertained until the final assessment.2. The judgment highlighted the consistency in the assessee's accounting methods regarding sales tax payments for income-tax and excess profits tax assessments. The assessee maintained books according to the Dewali year, recording sales tax payments annually based on actual cash payments made, without considering outstanding liabilities or pending refunds. Despite delays in final assessments and refunds, the assessee's method was consistently accepted by the Department for income-tax assessments. The judgment emphasized that the Revenue Authority must respect the method of accounting regularly employed by the assessee unless there are valid reasons to deviate from it.3. The judgment addressed the application of section 13 of the Income-tax Act to assessments under the Excess Profits Tax Act. Section 21 of the Excess Profits Tax Act incorporates section 13 of the Income-tax Act, allowing the assessee to choose a proper method of accounting for profit computation. The judgment emphasized that the Revenue Authority must adhere to the assessee's chosen method of accounting unless it does not accurately reflect the profits. The judgment cited various precedents to support the importance of regular and consistent accounting methods in profit computation, irrespective of the specific terminology used.In conclusion, the judgment ruled in favor of the assessee, stating that the sales tax payments were necessary for carrying on the business and were not voluntary expenditures. The judgment emphasized that the sales tax was a compulsory levy, and the assessee had no discretion in determining the amount payable. Therefore, the Excess Profits Tax Officer could not arbitrarily reduce the sales tax payments under provisional assessments. The judgment directed the Commissioner of Income-tax to pay the assessee's costs, including the advocate's fee.