1974 (11) TMI 31 - HC - Income Tax

Court denies deduction of sales tax in computing income for 1963-64, emphasizing liability link to transaction year.

The High Court ruled in favor of the revenue, denying the assessee's claim for deduction of sales tax amount in computing total income for the assessment ... In Part Issues:1. Deduction of sales tax amount in computing total income for the assessment year 1963-64.2. Relevance of sales tax liability to the previous year ending March 31, 1963.3. Applicability of mercantile system of accounting in claiming deductions.4. Interpretation of provisions of Income-tax Act, 1961 for claiming deductions.5. Consideration of liability arising and expenses relating to income for the assessment year 1963-64.Analysis:The judgment revolves around the deduction of a sales tax amount in computing the total income for the assessment year 1963-64. The assessee, a wholesale trader in rice and pulses, had disputed sales tax added to the turnover by the sales tax authorities. The High Court later modified the assessment orders, reducing the tax amount. The assessee claimed a deduction of Rs. 23,389 in the income for the previous year ending March 31, 1963, based on the adjustment made in the profit and loss account. However, the Income-tax Officer, Appellate Assistant Commissioner, and Tribunal rejected this claim, stating that the liability did not relate to the previous year and was not paid during that year.The Tribunal referred the question of entitlement to deduction to the High Court. The High Court analyzed the situation, emphasizing that under the mercantile system of accounting, the liability would be linked to the year in which the transaction occurred, i.e., the assessment years 1955-56 and 1956-57. The Court highlighted that the deduction could only be claimed if the expenditure was incurred for earning the income returned in the relevant assessment year, which was not the case here. The Court also noted that the entire disputed amount was paid before April 1, 1961, and therefore, no deduction could be claimed for the assessment year 1963-64 based on payment.The Court referred to a Supreme Court case to support its reasoning, emphasizing that the liability to pay sales tax arises when the transactions subject to tax occur, regardless of quantification under assessment. The Court rejected the argument that the adjustment made in the accounting year relevant to the assessment year 1963-64 was decisive for claiming the deduction. Additionally, the Court declined to consider certain documents requested by the assessee, as they were deemed irrelevant to the issues at hand.Ultimately, the High Court answered the reference in the affirmative and in favor of the revenue, denying the assessee's claim for deduction and awarding costs to the revenue.