1. Dispute over deductibility of sales tax paid under provisional assessment for Excess Profits Tax purposes under Rule 12, Schedule 1 of the Excess Profits Tax Act. (Para 1 , 2 )
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1961 Supreme(SC) 95
SUPREME COURT OF INDIA
J.C.Shah : J.L.Kapur
Commissioner Of Excess Profits Tax Hyderabad
Versus
S.R.V.G.Press Company, Kurnool
Case No. : 270 of 1960
Date of Decision : 3/10/61
Advocates Appeared: Gopalakrishnan G. : Gutpa D. : Sastri K.N.Rajagopal : Thiyagarajan : Umrigar H.J.
Important Points
Expenditure incurred to satisfy lawful statutory tax obligations, even under a provisional assessment system, is considered "reasonable and necessary" for the business when judged by the standard of commercial expediency.
Subject
Tax Law - Excess Profits Tax
Act Referred
Headnote
(A) Excess Profits Tax Act - Rule 12, Schedule 1 - Madras General Sales Tax Act - Sections 10 and 15 - Deduction of sales tax paid under provisional assessment - Whether payments made under a statutory system of provisional assessment, subject to final adjustment, are "reasonable and necessary" for the business - Reasonableness and necessity of expenditure must be adjudged in the light of commercial expediency (Para 5) - Payments made in discharge of obligations imposed lawfully and necessary for the proper conduct of business satisfy the requirements of Rule 12, Schedule 1 of the Excess Profits Tax Act (Para 5).
(B) Commercial Expediency - A businessman is not expected to initiate litigation against a tax levied by the State on the ground that the method of computation is ultra vires to avoid payment - Reasonableness and necessity must be adjudged in light of circumstances prevailing at the time of payment and not subsequent developments (Para 7).
Facts of the case:
A firm manufacturing oil and cake followed a system of paying sales tax based on provisional assessments of the previous year's turnover, as permitted by the applicable state sales tax law, with final adjustments made at the end of the year. For a specific accounting period, the firm claimed a deduction for the provisional sales tax paid. While the income-tax authorities allowed the deduction, the excess profits tax officer disallowed a portion of it, contending that the amount paid in excess of the actual tax liability was unreasonable and unnecessary under the relevant rules.
Findings of Court:
The court found that the payments were made to satisfy lawful obligations and were necessary for the conduct of the business, as failure to pay would result in penalties or recovery as arrears of land revenue. The system of provisional assessment was a permitted method and not adopted to evade tax.
Issues: Whether the payments made under provisional sales tax assessment were unreasonable and unnecessary having regard to the requirements of the business and thus non-deductible under Rule 12, Schedule 1 of the Excess Profits Tax Act.
Ratio Decidendi: The reasonableness and necessity of expenditure for the purpose of calculating excess profits tax must be determined based on commercial expediency. Since the tax payments were obligatory under the law and necessary to avoid penalties and ensure the proper conduct of business, they are deemed reasonable and necessary.
Result: Appeal dismissed with costs.
(B) Commercial Expediency - A businessman is not expected to initiate litigation against a tax levied by the State on the ground that the method of computation is ultra vires to avoid payment - Reasonableness and necessity must be adjudged in light of circumstances prevailing at the time of payment and not subsequent developments (Para 7).
Facts of the case:
A firm manufacturing oil and cake followed a system of paying sales tax based on provisional assessments of the previous year's turnover, as permitted by the applicable state sales tax law, with final adjustments made at the end of the year. For a specific accounting period, the firm claimed a deduction for the provisional sales tax paid. While the income-tax authorities allowed the deduction, the excess profits tax officer disallowed a portion of it, contending that the amount paid in excess of the actual tax liability was unreasonable and unnecessary under the relevant rules.
Findings of Court:
The court found that the payments were made to satisfy lawful obligations and were necessary for the conduct of the business, as failure to pay would result in penalties or recovery as arrears of land revenue. The system of provisional assessment was a permitted method and not adopted to evade tax.
Issues: Whether the payments made under provisional sales tax assessment were unreasonable and unnecessary having regard to the requirements of the business and thus non-deductible under Rule 12, Schedule 1 of the Excess Profits Tax Act.
Ratio Decidendi: The reasonableness and necessity of expenditure for the purpose of calculating excess profits tax must be determined based on commercial expediency. Since the tax payments were obligatory under the law and necessary to avoid penalties and ensure the proper conduct of business, they are deemed reasonable and necessary.
Result: Appeal dismissed with costs.
Legal Category Hierarchy
Advocates:
D.GUTPA, G.GOPALAKRISHNAN, H.J.Umrigar, K.N.RAJAGOPAL SASTRI, Thiyagarajan
D.GUTPA, G.GOPALAKRISHNAN, H.J.Umrigar, K.N.RAJAGOPAL SASTRI, Thiyagarajan
Table of Contents
2. Whether sales tax payments under a provisional assessment scheme were unreasonable and unnecessary for business requirements, thus non-deductible under the Excess Profits Tax Act. (Para 2 , 7 )
3. Reasonableness and necessity of expenditure for Excess Profits Tax must be judged by commercial expediency; obligatory statutory payments for business conduct are deemed reasonable and necessary. (Para 4 , 5 , 6 , 7 )
4. Statutory tax payments made in discharge of lawful obligations are reasonable and necessary for business conduct, regardless of whether the assessment method was later challenged. (Para 5 , 7 )
5. Appeal dismissed; the High Court's finding that the sales tax payments were not unreasonable or unnecessary was upheld. (Para 8 )
6. How is the reasonableness and necessity of expenditure determined for Excess Profits Tax deductions?
The reasonableness and necessity of expenditure must be adjudged in the light of commercial expediency. Payments made to discharge lawful obligations necessary for the proper conduct of business are deemed to satisfy these requirements. (Para 5 )
7. Are statutory tax payments made under a provisional assessment scheme deductible if the scheme is later questioned?
Yes. Reasonableness and necessity are determined by commercial expediency and circumstances prevailing at the time of payment, not by legalistic considerations or subsequent developments regarding the validity of the tax method. (Para 7 )
8. Does the failure of a taxpayer to litigate the validity of a tax assessment method render the payment unreasonable for tax deduction purposes?
No. A businessman is not expected to initiate litigation against a tax the legislature is competent to levy simply because the computation method might be ultra vires. (Para 7 )
J.C.SHAH, J.
(1) THE assessees are a firm carrying on business at Kurnool, of manufacturing ground-nut oil and cake. Under the Madras General Sales Tax Act IX of 1939, the assessees were entitled to a rebate of sales tax paid on goods purchased by them and used in the manufacturing process. The assessees maintained their books of account according to the Samvat Year ending with Diwali. The system of accounting was a mixture of mercantile and cash. Purchases and sales of goods on credit were duly entered in the books of account. The sales tax actually recovered by the tax authorities was debited when paid and amounts if any refunded were credited when received. The assessees had adopted the system which was permitted by the Act of paying tax calculated on the turnover of the previous year of account. Under this system, tax was provisionally assessed by the Sales Tax Officer on the basis of the turnover of the previous year, and thereafter the liability was adjusted at the end of the year of account in the light of the actual turnover of that year, and of rebate allowed in respect of groundnuts pressed into oil. As a result of the final adjustment made by the sales tax authorities, in some years the assessees were assessed to pay tax in excess of the amount provisionally assessed and in others they obtained refund of the excess tax paid under the provisional assessment. The following tabular statement shows the official years for sales tax, provisional demands made by the sales tax authorities, the final demands and the adjustments made in that behalf. Official Year Provisional Final Adjustment. Refund/Additional-levy.
ended. demand. demand.
Rs. Rs. Rs. Rs.
31-3-1942 2,679/- 1,872/- 807/-
31-3-1943 3,046l/- 2,863/- 183/-
31-3-1944 14,509/. 18,402/- 3,893/-
31-3-1945 47,276/- 20,037/- 27,239/-
31-3-1946 45,315/- 13,379/- 31,936/-
_
(2) FOR the assessment year 1946-47 (corresponding to the year of account 18/10/194 4/11/1945), the assessees claimed in their assessment to income-tax to deduct Rs. 49,633.00 being the amount of salestax paid under a provisional assessment. In the year ending 31/3/1945, the assessees had paid Rs. 47,276.00 as sales-tax provisionally assessed. They also had paid in that year Rs. 3,894.00 in adjustment of the liability for the previous year towards sales-tax due. After giving credit for Rs. 1,537.00 received as rebate, the total sales-tax liability under the provisional assessment was Rs. 49,633.00. The Income-tax Officer accepted this claim, and debited it from the income in the assessment year 1946-47 in assessing the taxable income of the assessees. Deduction of salestax actually paid under provisional assessment less rebates was permitted by the Income-tax Officer not only in the assessment year 1946-47 but also in the earlier years. The Excess Profits Tax Officer had also adopted for the chargeable accounting period prior to 18/10/1944 the same method of computation, but for the chargeable accounting period 18/10/194 4/11/1945, the Excess Profits Tax Officer allowed out of the amount of Rs. 47,276.00 debited to sales tax only Rs. 17,055.00 as properly attributable to that period in computing the Excess Profits Tax liability. According to the Excess Profits Tax Officer, the excess amount paid under he provisional assessment i.e., Rs. 30,221.00 could not be taken into account, because under r. 12 of Sch. 1 of the Excess Profits Tax Act, expenditure in excess of the amount reasonable and necessary for the business was not a permissible deduction. In appeal against the order of the Excess Profits Tax Officer, the tribunal affirmed the order. Against the order passed by the tribunal confirming the order of the Excess Profits Tax Officer, the assessees applied for and obtained an order referring the following question to the High court of Judicature of Andhra Pradesh,
`WHETHER there are materials for the tribunal to hold that the aforesaid sales-tax payments of Rs. 30,2
