Contractual sales tax liability payment qualifies as deductible business expenditure when tied to enforceable obligation.

A payment made under a contractual arrangement to discharge a purchaser-related sales tax liability was deductible as business expenditure because the assessee's right to the retained sale consideration was inseparably linked to its obligation to meet that liability when it arose. The liability was contractual in character and the later payment discharged an enforceable obligation, so the deduction was allowable and the revenue's disallowance was unjustified. The earlier section 41(1) ruling was distinguishable because it dealt with taxability of a credit note as a trading receipt on receipt, not the deductibility of a subsequently incurred and actually discharged liability.

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Issues: Whether the assessee was entitled to deduction of amounts paid under a contractual arrangement to discharge the purchaser's sales tax liability, and whether such payment could be treated as an allowable business expenditure.

Analysis: The agreement between the assessee and the purchaser showed that a part of the sale consideration had been retained as a deposit to meet any future sales tax liability arising from a change in law. The assessee's right to receive the retained sale price was inseparably linked with its obligation to discharge the corresponding tax liability when it arose. The liability was contractual in character, and the subsequent payment was made in discharge of that enforceable obligation. The earlier decision dealing with section 41(1) was distinguishable because that issue concerned taxability of a credit note as a trading receipt in the year of receipt, not the deductibility of the later liability actually discharged.

Conclusion: The deduction was allowable, and the disallowance made by the revenue authorities was not justified.

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