Law:

Section:

Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] - Business expenditure - Allowability of - Whether where liability to pay tax was still in dispute, and no correct estimate of said liability was made, same could not be allowed as deduction under section 10(2)(xv) of 1922 Act - Held, yes FACTS The assessee's business was of a commission agent in arecanut. The assessee was collecting till 1-10-1955, the tax on sales made by him in addition to his commission of 6.25 per cent, but thereafter, he raised the commission to 7.5 per cent. On 24-11-1955, the sales tax department made a provisional assessment on the assessee for the last purchases he had made on behalf of the non-resident arecanut dealers, which assessment was finally revised on 15-9-1955. The tax was then computed at Rs. 31,000. On 31-3-1956, the assessee entered Rs. 18,652 in his account books as expenditure for the sales tax payable on account of the purchases he had made, but the levy of tax was challenged as unconstitutional, the transaction on which it was levied being claimed to be sales of inter-State nature. The High Court dismissed the writ petition, but an appeal against it was pending before the Supreme Court. The liability to pay the tax therefore was still in dispute. Meanwhile the assessee claimed for the assessment year 1956-57 Rs. 18,652 as allowable deduction under section 10(2)(xv) of 1922 Act, and the claim had been held by the Income-tax Officer not to be justified. The Appellate Assistant Commissioner found that the method hitherto followed by the assessee ought to have been continued even for the purpose of the tax, and that the assessee's liability to pay the tax was still being contingent, because the challenge to the legality of the tax was still being continued. The Tribunal dismissed the appeal holding that the assessee having adopted the cash system of accounting could not convert into a mercantile system, and even under the mercantile system of keeping accounts, there was no ascertained liability in the case to justify any claim. On reference : HELD It is clear that under section 18 of the General Sales Tax Act,…

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