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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, 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

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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. 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

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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. 28 3