Law:

Section:

Section 145(1) of the Income-tax Act, 1961-Method of accounting-Year in which liability/expenditure deductible-Whether purchase tax liability of assessee, maintaining accounts on mercantile basis, relating to years 1965-66 to 1967-68, for which demand notice was served on 24-4-1970, was an allowable deduction in assessment year 1971- 72-Held, no Facts On 27-4-1970, the assessee-firm, maintaining accounts on mercantile basis, received a demand notice for purchase tax relating to the years 1965-66 to 1967-68 and it claimed deduction of Rs. 19,964 on that account in the assessment year 1971-72. The ITO and the AAC rejected its claim. On second appeal, the Tribunal upheld its claim (though at a reduced figure) on the ground that the assessee had incurred an enforceable legal liability only from the date on which it received the demand notice for payment of the said sum from the concerned assessing authority. On reference: Held According to section 145( 1), income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee. In the instant case, the chargeable income of the assessee for the assessment year 1971-72, therefore, had to be computed according to the mercantile system of accounting, according to which the assessee would be entitled to those deductions the liability for which accrued and not for those which have been discharged in the accounting year. In the instant case, it was not disputed that the liability to pay the impugned amount arose in the year 1967-68 and not in the assessment year 1971-72. The deduction qua this amount, therefore, could be claimed by the assessee in the accounting year in which the liability to pay it actually accrued and the fact that the authorities entitled to enforce the liability issued notice for its payment in a later accounting year would be of no consequence. Case Review Pope the King Match Factory v. CIT [1963] 50 ITR 495 (Mad.) and Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 263 (SC) distinguished. CIT v. Nathmal Tola Ram [1973] 88 ITR 234 (Gauhati) dissented from. Cases…

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