Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Year in which deductible - Assessment year 1975-76 - Assessee, under a wrong impression, did not pay sales tax although liability to pay arose as soon as sale was effected - On 14-12-1947 a demand notice was served on him for payment of sales tax pertaining to accounting year ending 31-12-1970 - Whether liability of sales tax pertaining to earlier year accrued and arose and because real and enforceable in previous year relevant to assessment year in question when demand notice was served and therefore, it was an allowable expenditure in year in question - Held, yes FACTS The assessee-company claimed deduction being liability for sales tax pertaining to the accounting years ending on 31-12-1970 and 31-12-1971. The assessee's case before the ITO was that it came to know about its sales tax liability for the first time on 14-12-1974. The ITO found from the Sales Tax Officer's order that the assessee, under a wrong impression that its case was covered by a decision of the Supreme Court did not pay sales tax within the years in which sales were effected. He further found that the assessee was to pay the sales tax within the respective accounting periods in view of the later decision of the Supreme Court in the case of Binani Bros. (P.) Ltd. v. Union of India [1974] 33 STC 254. He, therefore, held that the assessee's liability to pay sales tax accrued within the respective years of sale and as such, its claim for deduction was not allowable during the assessment year under appeal, the accounting period for which began much later than the years in which sales were effected. On appeal, the AAC held that the assessee's liability to pay sales tax arose at the point of time when tax was demanded by the Sales Tax Officer by issue of notices and accordingly allowed the assessee's claim for deduction to the extent which was demanded during the previous year relevant to the assessment year under consideration. On further appeal, the Tribunal up held the order of the AAC. On reference : HELD The Director-General of Supplies and Disposals accepted the condition on which the sale was effected that the price would…

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