1973 (11) TMI 23 - HC - Income Tax

Allahabad High Court allows deduction of purchase tax liability under mercantile system

Commissioner Of Income-Tax, Lucknow Versus Poonam Chand Trilok Chand

The High Court of Allahabad ruled in favor of the assessee, allowing the deduction of Rs. 31,630 as a liability for purchase tax. The court emphasized ... Appeal Against Assessment, Mercantile System, Purchase Tax Issues:1. Whether the assessee was entitled to claim a sum as an allowable deduction for the purpose of income computation.Analysis:The High Court of Allahabad was presented with a question under section 256(1) of the Income-tax Act, 1961, regarding the entitlement of the assessee to claim a sum of Rs. 31,630 as a deduction for income computation. The assessee, a commission agency dealer registered under the U.P. Sales-tax Act, collected an amount from customers on account of purchase tax on the sale of Rab. The assessee disputed the liability to pay the purchase tax, retaining a balance of Rs. 31,630 after paying a portion to the sales-tax department. The Income-tax Officer treated this amount as income from business, while the assessee contended it should be allowed as a deduction, as it represented its liability to purchase tax. The Income-tax Appellate Tribunal accepted the assessee's claim, leading to the Commissioner's grievance and subsequent reference to the High Court.The court considered the assessee's accounting basis (mercantile) and the nature of the liability incurred. The Tribunal found that the amount collected by the assessee as purchase tax represented an estimated sum of tax payable on transactions for the relevant year. The court emphasized that under the mercantile system, an assessee could claim a deduction for expenditure when the liability accrued, even if not yet paid. The department argued against the deduction, citing the absence of debiting in the profit and loss account and the disputed liability. However, the court rejected these contentions, emphasizing the allowance of deductions for incurred liabilities under the mercantile system, regardless of actual payment or accounting entries.Referring to the Supreme Court's decision in a similar case, the court reiterated that the liability to pay tax arises when a sale or purchase transaction occurs, entitling the assessee to deduct the liability from business profits. The court highlighted that the failure to debit the liability or contest it did not preclude claiming it as a deduction. Even though the appeal outcome on the liability was pending, the court affirmed the entitlement to a deduction once the liability accrued, with provisions for adjustments if the liability changed subsequently. The court, therefore, ruled in favor of the assessee, allowing the deduction of the purchase tax amount and ensuring no loss of revenue to the Government.In conclusion, the court answered the question in the affirmative, in favor of the assessee, granting costs of Rs. 200.