Case Note & Summary
The appeal arose from a reference made by the Income Tax Appellate Tribunal to the Allahabad High Court concerning two questions, of which only question no. 2 was before the Supreme Court: whether payment of sales tax composition fee of Rs. 1,91,887 was an allowable expenditure for assessment year 1968-69. The assessee, a manufacturer and seller of biris, claimed deduction of sales tax paid in the previous year relevant to assessment year 1968-69, though the tax liability related to earlier periods. The assessee relied on notifications exempting biris from sales tax, but the Sales Tax Department took the contrary view for the period December 14, 1957 to June 30, 1958. The assessee applied for stay of recovery, which was granted and later vacated on October 16, 1967. Thereafter the assessee paid Rs. 1,96,887 towards a tax liability of Rs. 1,96,351. The Income Tax Officer, Appellate Assistant Commissioner and Tribunal disallowed the deduction, holding that the liability accrued earlier under the mercantile system of accounting. The Allahabad High Court affirmed, relying on Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income Tax and distinguishing Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income Tax. In the Supreme Court, the appellant contended that actual payment in the previous year entitled the assessee to deduction, relying on Chowringhee. The Revenue relied on Commissioner of Income Tax v. Kalinga Tubes Ltd., where this Court held that under the mercantile system, sales tax liability accrues at the time of sale and raising of a dispute before higher authorities is irrelevant. The Supreme Court found the present case fully covered by Kalinga Tubes and dismissed the appeal with no order as to costs.
Headnote
A) Income Tax - Deductibility of Sales Tax Liability - Allowable Expenditure - Income Tax Act, 1961 - The assessee, following the mercantile system of accounting, claimed deduction of sales tax composition fee actually paid in the previous year relevant to assessment year 1968-69, though the tax liability had accrued in earlier years. The High Court disallowed the deduction relying on Kedarnath Jute Mfg. Co. Ltd. v. CIT, which held that under the mercantile system, deduction must be claimed in the year the liability accrues. The Supreme Court affirmed, following CIT v. Kalinga Tubes Ltd., holding that sales tax liability accrues at the time of sale and actual payment in a later year is irrelevant. Held that the payment of sales tax composition fee was not allowable expenditure for assessment year 1968-69 (Paras 1-2). B) Precedent - Applicability of Chowringhee Sales Bureau - Distinction on Mercantile System - Income Tax Act, 1961 - The assessee relied on Chowringhee Sales Bureau P. Ltd. v. CIT, (1973) 87 ITR 542, where deduction was allowed in the year of payment of sales tax collected as a trading receipt. The High Court distinguished that decision on the ground that it did not relate to an assessee following the mercantile system of accounting. The Supreme Court did not find it necessary to rely on Chowringhee because the case was fully covered by Kalinga Tubes. Held that Chowringhee Sales Bureau did not assist the assessee (Para 2).
Issue of Consideration
Whether payment of sales tax composition fee of Rs. 1,91,887 was an allowable expenditure for assessment year 1968-69 for an assessee following mercantile system of accounting
Final Decision
Appeal dismissed. The payment of sales tax composition fee was not allowable expenditure for assessment year 1968-69. No order as to costs.
Law Points
- Sales tax liability accrues at time of sale under mercantile system of accounting
- actual payment in later year does not shift deduction
- Chowringhee Sales Bureau distinguishable for non-mercantile assessee
- Kalinga Tubes followed
