Law:

Section:

Section 37(1) of the Income-tax Act, 1961 – Business expenditure – Year in which allowable – Assessment year 1963-64 – Assessee–firm was following mercantile system of accounting – Sales-tax liability of assessee for assessment years 1954-55 to 1957-58 was finally quantified in assessment year 1962-63 – Assessee-firm was granted permission to pay sales-tax in instalments – Assessee paid one of instalment in relevant assessment year and claimed deduction for same – Whether since quantification of liability of sales tax was made much earlier and not in relevant assessment year, instalment paid in relevant assessment year was not an allowable deduction – Held, yes FACTS The business carried on by the Hindu undivided family was taken over by the assessee-firm which consisted of three members of said HUF. The HUF as well as the assessee were following mercantile system of accounting. The assessment of the business of the partnership firm was completed in the status of a registered firm in the years 1961-62 onwards. The assessment orders under the Sales Tax Act in respect of the assessment years 1954-55 to 1957-58 were completed by the Sales Tax Officer by an order dated 31-3-1961 and sales tax liablity was computed at Rs. 1,23,518. On appeal, the appellate authority reduced the amount of tax by Rs. 39,110. Thereafter, the firm prayed for and was granted instalments to pay the amount of sales tax. An amount of Rs. 36,714 was paid by the firm in the financial year 1961-62, relevant to the assessment year 1962-63. Since there was already provision in the account books of the firm of Rs. 25,230 in respect of sales tax liability, the firm claimed a deduction of Rs. 11,484 in income-tax proceedings for the assessment year 1962-63. The claim was ultimately allowed by the Tribunal. On reference, the High Court held that inasmuch as the Hindu undivided family had been following the mercantile system of accounting and making provision for the tax only on estimate basis, it was in the year in which it was quantified finally that the actual liability for sales tax was finally determined and the quantification took place in the financial year relevant to the assessment year…

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