Full Judgment Text
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PETITIONER:
KEDARNATH JUTE MFG. CO. LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, CENTRAL CALCUTTA
DATE OF JUDGMENT17/08/1971
BENCH:
GROVER, A.N.
BENCH:
GROVER, A.N.
HEGDE, K.S.
CITATION:
1971 AIR 2145 1972 SCR (1) 277
CITATOR INFO :
F 1991 SC 241 (1,9)
ACT:
Income-tax Act, 1922, ss. 10(1) and 10(2)(xv)-Disputed and
unpaid sales tax whether a permissible deduction-Liability
accrues in Year of sale and not when sales tax demand is
quantified or finally determined-Where mercantile system of
accounting is adopted amount is deductible when liability
accrues and the time when, liability is discharged is
irrelevant-Position is not changed even when entries in
books of account are made at a later date.
HEADNOTE:
The appellant was a public limited company doing the
business of jute and manufacturing of jute goods. It
followed the mercantile system of accounting.- Before the
Income-tax Officer in connection with the assessment year
1955-56 the appellant claimed a deduction on account of
assessed sales-tax. The demand of sales-tax waS contested
by the appellant before the higher sales-tax authorities but
before the matter was finalised the Income-tax Officer
completed the assessment. He disallowed appellant’s claim
for deduction of sales tax on the ground that the liability,
to pay sales tax had not been accented by the appellant and
no provision had been made in its books with regard to
payment of the assessed amount. The authorities Linder the
Act dismissed the appeals. The High Court in reference was
of the opinion that unpaid and disputed sales tax liability
could not form the basis of a claim for deduction In appeal
by special leave to this Court the appellant submitted that
sales tax paid or unpaid would be admissible deduction under
s.10(2)(xv) as well as s. 10(1) of the Income-tax Act, 1922,
and that where the mercantile system of accounting was
observed the deduction would be permissible in the year to
which the liability relates irrespective of the point of
time when the liability has been actually discharged.
HELD: Under all sales tax laws including the statute
applicable to the present case the moment a dealer makes
either purchase or sales which are subject to taxation, the
obligation to pay tax arises and taxability is attracted.
Although that liability cannot be enforced till the
quantification is effected by assessment proceedings, the
liability for payment of tax is independent of the
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assessment. In the present case the liability had even been
quantified. The liability could not cease to be one merely
because the assessee had taken proceedings before higher
authorities. An assessee that follows the mercantile system
of accounting is entitled to deduct from the profits and
gains of the business such liability which had accrued
during the period for which the profits and gains were being
computed even though it had to be discharged at a future
date. [281B-F]
Commissioner of Income-tax West Bengal II v. Royal Boot
House, 75 I.T.R. 507 and Pope The King Match Factory v.
Commissioner of Income-tax Madras, 50 I.T.R. 495, applied.
278
The contention that since the assessee had failed to debit
the liability in its books of accounts, it was debarred from
claiming the same as deduction either under s.10(1) or
s.10(2)(xv) of the Act could not be accepted. Whether the
assessee is entitled to a particular deduction or not will
depend on the provision of law relating thereto and not on
the view which the assessee might take of his rights nor can
existence or absence of entries in the books of accounts be
decisive or conclusive in the matter. [282 C-E]
The appeal must accordingly be allowed.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1899 of 1967.
Appeal by special leave from the judgment and order dated
August 24, 1966 of the Calcutta High Court in Income-tax
Reference No. 91 of 1962.
G. C. Sharma, F. Kuwnaria, B. R. Diwan and P. K.
Mukherjee, for the appellant.
Jagadish Swarup, Solicitor-General, P. L.
Juneja,
R. N. Sachthey and B. D. Sharma, for the respondent.
The Judgment of the Court was delivered by
Grover, J.-This is an appeal by special leave from the
judgment of the Calcutta High Court in an Income-tax
Reference.
The assessee who is the appellant is a public limited
company doing the business of jute and manufacturing of jute
goods. The method of accounting followed by the assessee is
the mercantile system. During the assessment year 1955-56
(the previous year ended on 31st December, 1954), the
assessee claimed a deduction of Rs. 1,49,776/on account of
sales tax determined to be payable by the sales tax
authorities on the sales made by the assessee during the.
aforesaid previous year. The sequence of dates may be
mentioned. The income tax return was filed on 13th January,
1956. The demand notice was served by the Sales Tax
authorities on the 21st November 1957. On 9th November,
1959, the assessee filed a revised return claiming the
aforesaid deduction. The assessee had taken the order by
which the demand for such tax had been created to the higher
departmental authorities, as it was contesting its liability
to the extent that had been determined. The Income-tax
Officer, however, completed the- assessment on 11th March,
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1960 before any final decision was given in the proceedings
relating to the assessment of sales tax. According to the
Income Tax Officer, the assessee was not entitled to claim
the deduction of the aforesaid amount of sales tax inasmuch
as it had denied its liability to pay that amount and had
made no provision in its books with regard to the payment of
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that amount. The Appellate Assistant Commissioner confirmed
the order of the Income-tax Officer. The Appellate Tribunal
dismissed the,, appeal of the assessee. The following
question of law was referred by the Tribunal for the opinion
of the High Court: --
"Whether on the facts and in the circumstances
of the case, amount of Rs. 1,49,776/-. which
was claimed by the assessee as a deduction on
account of sales tax was deductible as a
business expense?"
The High Court was of the opinion -that unpaid and disputed
sales tax liability could not form the basis of a claim for
deduction for the purposes of income tax. The reasoning of
the High Court mainly was that for the purpose of claiming a
deduction under s. 10(2) (xv) or the Income Tax Act, 1922
(hereinafter called the "Act"), mere legal liability was not
enough. There had to be an expenditure in the first place
and it must be laid Out or expended wholly and exclusively
for the purpose of such business. The High Court further
held that unpaid and disputed sales tax could not be validly
deducted in the computation of business income even under s.
10 (1) of the Act.
It has been submitted on behalf of the assessee that sales
tax paid or unpaid would be admissible deduction under s. 10
(2)(xv) as well as under s. 10 (1). It is pointed out that
if the method of accounting adopted by the assessee is cash
system,, it would qualify for deduction only in the year in
which it has been actually paid. If the method of
accounting is mercantile system, then the deduction will be
permissible in the year to which the liability relates
irrespective of the point of time wheel the liability has
actual been discharged. Section (10)5 provides that in sub-
section (2) "paid" means actually paid or incurred according
to the method of accounting upon the basis of which the
profits or gains are computed, under the section. The
argument proceeds that in order
19- L1245 Su CI/71
280
therefore, that sales tax may qualify for deduction under S.
10 (2) (xv), it has to be in the nature of an ’expenditure’
which has either been actually paid during the year of
account or for the payment of which, the liability has been
incurred in the accounting year, according as the method of
accounting followed by the assessee is cash system or
mercantile system. It is indisputable that the amount of
sales tax paid or payable by the assessee is an ’expendi-
ture’ within the meaning of S. 10 (2) (xv). The amount in
question was thus a kind of expenditure about which there
can be no doubt that it had been laid out or expended wholly
or exclusively for the purpose of business carried on by the
assessee.
The submission on behalf of the assessee in the alternative
is that apart from valid deductibility of sales tax as an
expenditure under S. 10 (2) (xv) of the Act, it is a
permissible deduction even under S. 10 (1). The profits of
a business which are to be assessed to tax must be real
profits and they have to, be ascertained on ordinary
principles of commercial trading and commercial accounting.
Where an assessee is under a liability or is bound to make
certain payment from the gross receipts, the profits and
gains can only be net amount after ’such an amount is
deducted from the gross profits or receipts.
In Commissioner of Income-tax, West Bengal II v. Royal Boot
House,(1) it was held that where the assessee followed the
mercantile system of accounting and, without disputing the
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liability to pay the Sales Tax had made a provision for its
payment in its account even though he had not actually paid
the tax over to the authorities, the assessee was entitled
to deduction in respect of the provision for sales tax from
his income under S. 10(2) (xv) of the Act. It was, pointed
out that under the provisions of the Sales Tax statutes, the
liability to pay the tax was not dependent upon assessment
or demand but was an obligation to pay the tax either
annually, quarterly or monthly, as the case might be. This
case was and has been sought to be distinguished by the
Revenue on the- ground that the liability to pay the Sales
Tax had not been disputed and the assessee had made a
provision for its payment in its account As, will be
presently
(1) 75 I.T.R. 507.
281
seen this distinction is without substance and does not
affect the true legal position.
Now under all sales tax laws including the statute with
which we are concerned, the moment a dealer makes either
purchases or sales which are subject to taxation, the
obligation to pay the tax arises and taxability is
attracted. Although that liability cannot be enforced till
the quantification is effected by assessment proceedings,
the liability for payment of tax is independent of the
assessment. It is significant that in the present case, the
liability had even been quantified and a demand had been
created in the sum of Rs. 1,49,776/- by means of the notice
dated 21st November, 1957 during the pendency of the
assessment proceedings before the Income Tax Officer and
before the finalisation of the assessment. It is not
possible’ to comprehend how the liability would cease to be
one because the assessee had taken proceedings before higher
authorities for getting it reduced or wiped out so long as
the contention of the assessee did not prevail with regard
to the quantum of liability etc. An assessee that follows
the mercantile system of accounting is entitled to deduct
from the profits and gains of the business such liability
which had accrued during the period for which the profits
and gains were being computed. It can again not be disputed
that the liability to payment of sales tax had accrued
during the year of assessment even though it had to be
discharged at a future date. In Pope The King Match Factory
v. Commissioner of Income-tax, Madras (1) a demand for
excise duty was served-on the assessee and though he was
objecting to it and seeking to get the order of the
Collector of Excise reversed, he debited that amount in his
accounts. on the last day of his accounting year and claimed
that amount as a deductible allowance on the ground that he
was keeping his accounts on the mercantile basis. The
Madras High Court had no difficulty in holding that the,
assessee had incurred an enforceable legal liability on and
from the date on which he received the Collector’s demand
for payment and that his endeavor to get out of that
liability by preferring appeals could not in any way detract
from or retard the efficacy of the liability which
(1) 50 I.T.R. 495.
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had been imposed upon him by the competent excise authority.
In our judgment, the above decision lays down the law
correctly.
The main contention of the learned Solicitor General is that
the assessee failed to debit the liability in its books of
accounts and, therefore, it was debarred from claiming the
same as deduction either under section 10 (1) or under s. 10
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(2) (xv) of the Act. We are wholly unable to appreciate the
suggestion that if an assessee under some misapprehension or
mistake fails to make an entry in the- books of account and
although under the law, a deduction must be allowed by the
Income Tax Officer, the assesses will lose the right of
claiming or will be debarred from being allowed that
deduction. Whether the assessee is entitled to a particular
deduction or not will depend on the provision of law
relating thereto and not on the view which the assessee
might take of his rights nor can the existence or absence of
entries in the books of account be decisive or conclusive in
the matter. The assessee who was maintaining accounts on the
mercantile system was fully justified in claiming deduction
of the sum of Rs. 1,49,776/being the amount of sales tax
which it was liable under the law to pay during the relevant
accounting year. it may be added that the liability remained
in tact even after the assessee had taken appeals to higher
authorities or Courts which failed. The appeal is
consequently allowed and the judgment of the High Court is
set aside. The question which was referred is answered in
favour of the assessee and against the Revenue. The
assessee will be entitled to costs in this Court and in the
High Court.
Appeal allowed.
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