Provision for purchase tax liability remains deductible where pending sales tax proceedings leave a real and reasonable apprehension of tax exposure.

A provision for purchase tax liability is deductible where the assessee has a real and reasonable apprehension of liability and the relevant sales tax proceedings have not finally negatived that liability. The rejection of the exemption claim in provisional proceedings, together with the fact that assessments for the relevant years remained unfinished, supported the existence of a continuing liability. A later exemption order did not undermine the position for the earlier accounting period in which the provision was created. The provision was therefore not to be denied merely because the liability had not yet crystallised by final assessment.

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Issues: Whether the assessee was entitled to deduction for provision made towards purchase tax liability for the relevant assessment years when sales tax proceedings were still pending and no final exemption or assessment had conclusively negated the liability.

Analysis: The documents placed on record showed that the claim for exemption under section 5(3) of the Central Sales Tax Act, 1956 had been rejected in the provisional proceedings and that the sales tax assessments for the relevant years were not finalised. The material also indicated that the assessee had a continuing apprehension of purchase tax liability. The later exemption order relied upon by the Assessing Officer did not displace the assessee's position for the accounting period relevant to the assessment year in question, because the provision had been made earlier and the liability had not been shown to be imaginary or non-existent. On these facts, the provision could not be denied merely on the footing that the liability had not yet crystallised by final assessment.

Conclusion: The assessee was entitled to deduction of the provision made towards purchase tax liability, and the disallowance was not sustainable.

Ratio Decidendi: A provision for tax liability is allowable where the surrounding material shows a real and reasonable apprehension of liability and the relevant proceedings have not finally negatived that liability.

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