Compulsory sales tax outgoings under accepted accounting method could not be disallowed merely because later refunds changed the final incidence.

Compulsory sales tax payments made under provisional assessments were treated as trading outgoings incurred under the statutory sales tax scheme, and the assessee's regular accounting method of debiting actual payments and crediting refunds had been accepted in prior assessments. The Excess Profits Tax framework, read with the income-tax rule on regularly employed accounting methods, required profits to be computed on that settled basis unless proper profits could not otherwise be deduced. Rule 12 did not permit the taxing authority to recast the accounts merely because later refunds reduced the final burden or because a different treatment would favour the Revenue. The disallowance was therefore unwarranted and the issue was answered in favour of the assessee.

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Issues: Whether the sales tax payments made under provisional assessments, to the extent disallowed by the Excess Profits Tax Officer, were unreasonable and unnecessary expenses and therefore not deductible under rule 12 of Schedule I of the Excess Profits Tax Act.

Analysis: The payments were compulsory sales tax outgoings incurred in the course of trading and were made under the statutory sales tax scheme. The assessee consistently followed a regular method of accounting by debiting actual payments when made and crediting refunds when received, and that method had been accepted in assessments. Section 21 of the Excess Profits Tax Act attracted section 13 of the Income-tax Act, under which profits must be computed in accordance with the method of accounting regularly employed unless proper profits cannot be deduced therefrom. Rule 12 did not authorise the taxing authority to recast that settled accounting basis merely because the provisional payments later resulted in refunds or because a different treatment would be more advantageous to the Revenue. The expenditure was not voluntary or excessive in the sense contemplated by rule 12.

Conclusion: The disallowance was unwarranted, and the question referred was answered in the negative in favour of the assessee.

Ratio Decidendi: A compulsory statutory trading payment, if recorded under a regular and accepted accounting method that properly reflects profits, cannot be disallowed under a reasonableness rule merely because later adjustment or refund changes its final incidence.

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