1969 (10) TMI 18 - HC - Income Tax

Deductibility of Estimated Sales Tax Liability under Indian Income-tax Act

The sum of Rs. 15,000 debited by the assessee in its profit and loss account is considered an ascertained liability under the mercantile system of ... Assessee estimated its liability to extra sales tax at the rate payable under notification No. S.T.905/X - this is debitable in the profit and loss account as an ascertained liability under the mercantile system which the assessee follows - amount is, therefore, allowable as a deduction in the computation of its profits and gains u/s 10 of the IT Act, 1922 Issues Involved:1. Whether the sum of Rs. 15,000 debited by the assessee in the profit and loss account represents an ascertained liability on the mercantile system of accounting deductible under section 10 of the Indian Income-tax Act, 1922, for the assessment year 1958-59.Issue-wise Detailed Analysis:1. Nature of the Liability and the Mercantile System of Accounting:The primary question is whether the Rs. 15,000 debited by the assessee in its profit and loss account on the last day of the accounting year is an ascertained liability under the mercantile system of accounting and thus deductible under section 10 of the Indian Income-tax Act, 1922. The assessee firm, which deals in cloth on a wholesale basis and maintains its accounts on a mercantile basis, estimated its sales tax liability based on a notification dated 31st March 1956, which increased the sales tax on imported cloth.2. Legal Validity of the Notification and Subsequent Developments:Initially, the notification increasing the sales tax was struck down by the High Court in Adarsh Bhandar v. Sales Tax Officer. However, the U.P. Sales Tax (Validation) Act, 1958, later validated the increased rate, which was upheld by the Supreme Court in J. K. Jute Mills v. State of U.P. This validation meant that the sales tax at the enhanced rate was legally due for the relevant assessment year.3. Precedent Cases and Tribunal's Decision:In a similar case, Devi Das Madho Prasad v. Commissioner of Income-tax, the High Court allowed the deduction of an estimated sales tax liability, emphasizing that under the mercantile system of accounting, a statutory liability could be debited as an ascertained liability. The Tribunal's rejection of the claim in that case was overturned by the High Court, which held that the liability to sales tax was statutory and could be estimated and debited in the accounts.4. Principles of Accrual of Statutory Liability:The judgment refers to the Supreme Court's decision in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax, which established that a liability to tax is a present liability, even if it becomes payable after quantification. The Supreme Court held that a liability created by a charging section in a taxing statute is an ascertained liability if the rate of tax is prescribed or ascertainable.5. Differing Judicial Opinions and Final Conclusion:Sahai J. opined that the liability could not be considered ascertained until an assessment was made, while Pathak J. held that the liability arose by virtue of the charging section and did not depend on assessment. The judgment concurs with Pathak J., stating that the liability to sales tax arises at the end of the relevant assessment year and can be debited as an ascertained liability under the mercantile system of accounting.6. Application to the Present Case:The assessee's estimation of its liability to extra sales tax at Rs. 15,000, based on the validated notification, is considered an ascertained liability. This amount is allowable as a deduction in the computation of the assessee's profits and gains under section 10 of the Indian Income-tax Act, 1922, for the assessment year 1958-59.Conclusion:The sum of Rs. 15,000 debited by the assessee in its profit and loss account is an ascertained liability under the mercantile system of accounting and is deductible under section 10 of the Indian Income-tax Act, 1922, for the assessment year 1958-59. The question referred is answered in the affirmative.