Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Year in which deductible - Assessee followed mercantile system of accounting - It entered into sales transactions subject to sales tax in assessment year 1668-69, but quantum of sales tax was finally determined in assessment year 1971-72 when assessee claimed deduction on that account - Whether deduction in respect of sales tax would be allowable in 1968-69 when liability arose and not in 1971-72 when quantum was determined - Held, yes Facts The assessee, a registered partnership firm, was carrying on business in grains and milling cereals. It followed the mercantile system of accounting. It was assessed to sales tax under the Bihar Sales Tax Act, 1959, for the period 1963-69. Under the income-tax assessment for the assessment year 1971-72, the assessee claimed deduction on account of sales tax which related to the sales transactions of the year 1968-69 but was quantified on 16-12-1970. The ITO rejected its claim on the ground that the sales tax pertained to the period 1968-69 and was allowable in that year only. On second appeal, the Tribunal, following the decision of the Assam High Court in CIT v. Nathmal Tolaram [1973] 88 ITR 234 (Gauhati) accepted the claim of the assessee and allowed deduction on account of sales tax in the assessment year 1971-72. On reference: Held It has been held by the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 that an assessee who follows the mercantile system of accounting is entitled to claim deduction from its profits and gains of its liability for sales tax during the relevant period irrespective of the fact whether the assessee has challenged the sales tax assessment in further proceedings or has failed to debit such liability in its books of account during the relevant period, or to make any provision therefor. The Supreme Court held further that the liability for payment of sales tax is independent of the assessment and the enforcement thereof and the absence of quantification will not stand in the way of accrual of the liability. In the instant case, the assessee became liable to pay sales tax during the period 1968-69. It was also…

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