Kedarnath Jute Mfg. Co. Ltd. Vs.
Commissioner of Income Tax, Central Calcutta [1971] INSC 202 (17 August 1971)
GROVER, A.N.
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 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.
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, 2 7 9 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 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 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.
28 2 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 (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 intact 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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