Gangadhar Narsingdas Agrawal (Huf) vs Commissioner of Income Tax

Dr. B.P. Saraf, J.—By this reference u/s 256(1) of the Income Tax Act, 1961, the Tribunal has referred the following questions at the instance of the assessee to this court for opinion:

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to claim deduction of interest paid to the relatives of G. N. Agarwal on the ground that the amount on which interest was paid came out of invalid gifts?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the jetty charges on barge loading expenses paid to Mahesh and Rajiv Mor were not allowable business expenditure?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to claim deduction on account of gratuity liability on the ground that the provisions of section 40A(7) have not been complied with?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to deduction of sales tax claim? "

Learned counsel for the parties are agreed that the questions Nos. 1, 2 and 3 are covered by decisions of the Supreme Court and this court and they may be answered in the light thereof. We, thereof, first answer these three questions as follows: Question No. 1 is covered by the decision of this court in the case of Gangadhar Narsingdas Agrawal (Huf) Vs. Commissioner of Income Tax, . Following the same, it is answered in the affirmative and in favour of the Revenue. The second question is also covered by the decision of this court in the assessee''s own case (income tax Reference No. 457 of 1978) dated August 24, 1993. Following the same question No. 2 is answered in the affirmative and in favour of the Revenue. Question No. 3 is covered by the decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. Vs. Commissioner of Income Tax, M.P., Bhopal and Another, . Following the same it is also answered in the affirmative and in favour of the Revenue. The only question that is left for determination is question No. 4. We shall, therefore, set out relevant facts pertaining to the said question only.

This reference pertains to the assessment year 1974-75, the relevant previous year being the year ended March 31, 1974. During the course of the assessment proceedings for this assessment year, the Income Tax Officer found that the assessee had debited to the profit and loss account a sum of Rs. 22,780 as arrears of sales tax paid during the year. The Income Tax Officer was of the opinion that the liability for sales tax had arisen long back and not during the accounting year under consideration. The liability related to the assessment years 1963-64 and 1964-65. The sales tax assessment order was dated November 12, 1968. The assessee paid a total sum of Rs. 22,780.70 during the period April 1, 1973, to March 30, 1974. There is no dispute about the fact that these payments related to sales tax liability for the assessment years 1963-64 and 1964-65 for which the sales tax assessment order has been made on November 12, 1968. The assessee''s plea before the Income Tax Officer was that since the payments were made during the year 1973-74 according to the installments granted by the sales tax authority, the claim for deduction of the same should be allowed on payment basis. This plea was rejected by the Income Tax Officer on the ground that the assessee was maintaining its books of account on mercantile basis. The appeal of the assessee against the order of the Income Tax Officer in so far as it related to the disallowance claimed for deduction of the above amount was rejected by the Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Tribunal. Hence, this reference at the instance of the assessee.

We have heard learned counsel for the assessee at length. We have perused the impugned order of the Tribunal. The Tribunal noted the fact that the claim related to the assessment years 1964-65 and 1965-66. The assessee denied the liability and preferred appeals against the assessments made by the Sales Tax Officer on November 12, 1968. The assessee lost at all stages. The plea of the assessee was dismissed by the High Court in June, 1974. This date was also after the close of the accounting period relevant to the assessment year under consideration. The Tribunal, therefore, held that neither did the liability relate to the assessment year under consideration nor had the liability become final during the accounting period. The Tribunal, therefore, approved rejection of the claim by the lower authorities on the ground that the assessee, who was maintaining its books of account on mercantile basis was not entitled to claim deduction in respect of the above amount in the assessment of the year under consideration.

The only submission of learned counsel for the assessee is that the payments were made by the assessee in the accounting year relevant to the assessment year under consideration. No claim had been made in the past in respect of the very same amount. It is not a case where the assessee is claiming deduction twice. According to learned counsel, the assessee did not claim deduction earlier in the assessment years 1963-64 and 1964-65 to which the liability related or in the year in which the demand was made by the Sales Tax Department inasmuch as it was disputing the liability. The assessee has claimed the deduction in the year in which the payment was made. In such a situation, according to learned counsel, the method of accounting is not determinative. The claim of the assessee, being genuine, is allowable u/s 37(1) of the Act. Reliance is placed in support of this contention on the decision of the Madras High Court in the case of Commissioner of Income Tax Vs. V. Krishnan, , the Gauhati High Court in the case of CIT v. Nathmal Tolaram [1973] 88 ITR 234 and the decision of the Orissa High Court in the case of Kalinga Tubes Ltd. Vs. Commissioner of Income Tax, . We have carefully considered this submission and perused the decisions relied upon by learned counsel for the assessee. We, however, find it difficult to agree with the submission of learned counsel in view of the decision of the Supreme Court in the case of The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, which is a complete answer to the submissions of learned counsel for the assessee. In the above case before the Supreme Court, the assessee-company, which followed the mercantile system of accounting incurred a liability of Rs. 1,49,776 on account of sales tax determined to be payable by the sales tax authorities on the sales made by it during the calendar year 1954, the previous year relevant to the assessment year 1955-56. The liability was quantified and demand was created by means of notice dated November 21, 1957. The assessee claimed deduction of that amount in its assessment for the assessment year 1955-56. The claim of the assessee was rejected by the Income Tax Officer on the ground that the assessee had contested the sales tax liability in appeals and that it had made no provision in its books with regard to the payment of that amount. The appeals to higher authorities or courts taken by the assessee contesting its liability to pay the sales tax ultimately failed. The Supreme Court held that the obligation to pay tax arises and taxability is attracted under all sales tax laws, the moment a dealer makes either purchases or sales which are subject to taxation. It was further observed that although that liability cannot be enforced till the quantification is effected by the assessment proceedings the liability for payment of tax is independent of the assessment. It was further observed (at page 366 of 82 ITR) :

"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. "

It was held that the assessee who 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.

The Supreme Court approved the decision of the Madras High Court in the case of Pope The King Match Factory Vs. Commissioner of Income Tax, Madras, , where it was held 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 endeavour to get our of that liability by preferring appeal could not in any way detract or retard the efficacy of the liability which had been imposed upon him by the excise authorities. As in the case before the Supreme Court, in the case before us the liability relates to the assessment years 1963-64 and 1964-65. The demand for payment of the amount was also received by the assessee from the Sales Tax Officer on November 12, 1968. The assessee was maintaining its accounts on the mercantile system. He was fully justified in claiming deduction of the above amount being the amount of sales tax which it was liable under the law to pay during the accounting years relevant to the assessment year 1963-64 and 1964-65 in the assessments for those assessment years. Even if the submission of the assessee is accepted that according to him he was not liable to pay any sales tax for the assessment years 1963-64 and 1964-65 and hence no liability accrued during the account years relevant to those assessment years, he did incur enforceable legal liability on and from the date on which he received the Sales Tax Officer''s notice of demand for payment of the amount which was on November 12, 1968. The said liability remained intact even after the assessee had taken appeals, to higher authorities or courts which failed. The ultimate rejection of the appeal of the assessee in the High Court was also not in the accounting year relevant to the assessment year under consideration. It was also in June, 1974, i. e., in the accounting year relevant to the next assessment year, viz., the assessment year 1975-76. That being so, the assessee who is maintaining the mercantile system of accounting is not entitled to claim deduction in respect of the above amount on any reasoning in the computation of income for the assessment year under consideration.

This view of ours is also fully supported by the decision of the Kerala High Court in L.J. Patel and Company Vs. Commissioner of Income Tax, , wherein following the decision of the Supreme Court in The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, , it was held that the assessee could not claim deduction in the assessment year 1963-64 where the liability of the assessee who was maintaining mercantile system of accounting to pay excise duty arose in 1952. The deduction of such amount could be claimed only in the year 1952 in accordance with section 145(1) of the Income Tax Act, 1961. It cannot be claimed in the assessment year 1963-64 on the ground that as the assessee was contesting the liability, the amount was paid in the year 1962. We have perused the decision of the Gauhati High Court in the case of CIT v. Nathmal Tolaram [1973] 88 ITR 234 . With great respect, we are unable to agree with the view of the Gauhati High Court in that case. Even otherwise, the decision of the Gauhati High Court does not assist the assessee because in the case, the assessee was called upon to pay the amount of sales tax during the previous year relevant to the assessment year in which the deduction was claimed. In the instant case, the claim has been made even much later. It has been made in the year when the actual payment was made. We also find it extremely difficult, in the face of the decision of the Supreme Court in The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, , to agree with the decision of the Orissa High Court in Kalinga Tubes Ltd. Vs. Commissioner of Income Tax, , where it was held that the assessee who maintains its accounts on the mercantile system can claim deduction in the year when the liability of sales tax was finally determined by the Sales Tax Tribunal. In our opinion, this decision goes counter to the decision of the Supreme Court where it was clearly held that the liability did not cease to be liability because the assessee had taken proceedings before the higher authorities for getting it reduced. The Supreme Court clearly stated that the liability remained intact even after the assessee had taken appeals to higher authorities or courts which failed. The decision of the Madras High Court in Commissioner of Income Tax Vs. V. Krishnan, , in our opinion, does not help the assessee because in this case, it was held that in the absence of any provision to show that the existence of demand is a condition precedent to the liability arising, the liability to sales tax would ordinarily relate to the year in which the transaction took place. It was categorically held that the assessee cannot be allowed deduction in the year in which the tax is paid. The observation of the Madras High Court to the effect that the deduction would be available either in the year of accrual of liability or in the year of payment and not in the year of receipt of the disputed demand notice had to be read in the light of section 145 of the Act. So read, it would be clear that in a case where the mercantile system of accounting is followed deduction would be available only in the year of accrual of liability whereas in a case where the assessee follows the cash system of accounting, the deduction would be available in the year of payment.

In the premises, we are of the opinion that the Tribunal was right in holding that the assessee was not entitled to deduction of the sales tax claim. Accordingly, we answer question No. 4 in the affirmative, i. e., in favour of the Revenue and against the assessee.

In the facts and circumstances of the case, there shall be no order as to costs.