Law: Income Tax Act, 1961

Section: 37(1)

Income-tax----Business expenditure---Mercantile system of accounting ---Assessee o engaged in processing and export of sea foods---Purchase tax---Notification exempting purchase tax on prawns purchased for export---Income-tax Officer disallowing claim for deduction of purchase tax liability---Liability to pay purchase tax arose only when return for sales tax was filed---That assessee not liable to pay purchase tax not a concluded fact at that time---Provision made for purchase tax liability on bona fide reasonable apprehension that amount will become payable---Provision made for purchase tax liability allowed while computing net wealth of assessee---Department could assess such amounts to tax in subsequent year if liability ceased to exist---Provision made for purchase tax liability is an allowable deduction ---Kerala General Sales Tax Act, 1963, S.5(3)---Indian Central Sales Tax Act, 1956, S.5(3)--¬Indian Income Tax Act, 1961, S.37(1). A provision in the accounts made by an assessee following the mercantile system of accounting, for liability to sales tax (though disputed) is yet liable to be allowed as business expenditure, if there is a bona fide reasonable apprehension on the part of the assessee that the amount will become payable. The Department is not without its remedies in case it is ultimately found that the purchase tax was not payable. Section 41(1) of the Income Tax Act, 1961, enables assessment of such amounts to tax in any subsequent year in which the liability ceased to exist. Under section 5(3) of the Central Sales Tax Act, 1956, in order to get exemption from payment of tax, certain conditions have to be satisfied. At the time of filing the return under the Central Sales Tax Act, 1956, or the Sales Tax Act of the State, the assessee is legally bound to show all the turnover either exempted or non-exempted. The filing of the return is an obligation or a duty arising under the provisions of the relevant Acts. When such an obligation or duty is found in a statute, the liability to pay the tax arises only on performing it. When there is such liability, the return to be filed by the assessee should contain all the exempted turnover due to…

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