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Allahbad High Court
S.C.MANCHANDA,M.H.BEG
Devi Das Madho Prasad, Agra - Appellant
Versus
Commissioner of Income-Tax, Lucknow - Respondent
Decided On : 08/23/1966
INCOME TAX - Deduction - Sales tax liability - Whether an admissible deduction - Liability under the U. P. Sales Tax Act, 1948 - Whether an ascertained liability - Whether becomes contingent merely because the existence of the law imposing the liability is doubtful - Whether declarations of law by the High Court are binding upon all the authorities and citizens within the State of Uttar Pradesh.
Fact of the Case:
The assessee, a dealer in cloth, debited the profit and loss account with Rs. 27,167/-, being the estimated sales tax liability as imposed by the U. P. Sales Tax (Amendment) Act, 1956, which was subsequently declared ultra vires by the High Court. The Income Tax Officer disallowed the deduction on the ground that the amount did not represent an ascertained liability as the validity of the Act was being challenged in Court. The assessee appealed to the Appellate Assistant Commissioner and the Tribunal, but the decision was upheld.
Finding of the Court:
The Court held that the liability to sales tax arose under the charging Sec. 3 of the Act and was fixed by Sec. 3 of the Act. The liability was finally and irrevocably fixed by Sec. 3 of the Act. The Court further held that the liability to sales tax existed and was known and ascertainable throughout the accounting year. The Court also held that the liability was an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of the business, and the amount to be expended could be debited in the accounts maintained on the mercantile system of accounting before it was actually disbursed.
Issues: 1. Whether the sum of Rs. 27,167 debited by the assessee to the profit and loss account and credited to the sales tax account is an admissible deduction? 2. Whether the liability to sales tax under the U. P. Sales Tax Act, 1948, is an ascertained liability? 3. Whether the liability to sales tax becomes contingent merely because the existence of the law imposing the liability is doubtful? 4. Whether declarations of law by the High Court are binding upon all the authorities and citizens within the State of Uttar Pradesh?
Ratio Decidendi: 1. The liability to sales tax arises under the charging Sec. 3 of the Act and is fixed by Sec. 3 of the Act. The liability is finally and irrevocably fixed by Sec. 3 of the Act. 2. The liability to sales tax existed and was known and ascertainable throughout the accounting year. 3. The liability to sales tax is an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of the business, and the amount to be expended could be debited in the accounts maintained on the mercantile system of accounting before it was actually disbursed. 4. Declarations of law by the High Court are binding upon all the authorities and citizens within the State of Uttar Pradesh.
Final Decision: The Court answered the question in the affirmative and in favor of the assessee. The Department was directed to pay the costs of the reference, which were assessed at Rs. 200. Counsel's fee was also assessed at the same figure.
MANCHANDA, J. :- This is a case stated under Sec. 66 (1) of the Indian Income Tax Act. 1922, (hereinafter referred to as the Act). The Question referred is :
"Whether the sum of Rs. 27,167 debited by the assessee to the profit and loss account and credited to the sales tax account is an admissible deduction?"
1-a The material facts are these: The relevant assessment year is 1956-57, the year ending on 28th August, 1957. The assessee is a dealer in cloth both purchased locally and imported from outside. Uptill the 31st March, 1956, sales tax was charged by the Government of Uttar Pradesh on sales of cloth imported from outside Uttar, Pradesh at the rate of 3 pies to 6 pies per rupee On the 31st of March, 1956, the Govt. of Uttar Pradesh issued an Ordinance raising sales tax to one anna per rupee. This Ordinance was subsequently replaced by the U. P. Sales Tax (Amendment) Act, 1956, which purported to regularise the provisions of the said Ordinance. Subsequent to this the U. P. Sales Tax (Amendment) Act, 1957, was passed on 30th September 1957, the main purpose of which was to hold that the amendment brought by the U. P. Ordinance of 31st March, 1956, was valid on and from 31st March, 1956. The validity of these enactments was challenged by certain assessees and also ultimately by the assessee by a writ petition in 1957. This Court by its order dated the 5th May, 1957, declared Ordinance No. IX of 1956, issued on 31st March, 1956, to be ultra vires on a writ petition filed by another assessee. This decision of a Full Bench of Court is reported in Messrs Adarsh Cloth Bhandar of Aligarh v. Sales Tax Officer, Aligarh, (1957) 8 STC 666 : (AIR 1957 All 475). The further amendment made in the Act by the U. P. Sales Tax (Amendment) Act, purporting to rectify the defects was also declared to be ultra vires by a Full Bench of this Court on 14th February, 1958, in Firm Bengali Mal Satish Chandra Jain Cloth Merchants of Agra v. Sales Tax Officer, Agra, (1958) 1 STC 492: (AIR 1958 All 478) (FB). After the decision in Firm Bengali Satish Chandra's case 1958-9 STC 492 : (AIR 1958 All 478) (FB) (supra) was given, the Act was further amended by the U. P. Government by the U. P. Sales Tax (Validation) Act (XV of 1958). This Act was published on the 6th of May, 1958. Against this also writ petitions were filed but the High Court in Ram Chandra Textiles v. Sales Tax Officer, Hathras, 1964 All LJ 396 : (AIR 1965 All 24) (FB) relying on J. K. Jute Mills Co., Ltd. v. State of U. P., AIR 1961 SC 1534 overruled by the earlier Full Bench decision of this Court firm Bengali Mal Satish Chandra's case. 1958-9 STC 492 : (AIR 1958 All 478) (FB) (supra). In J. K. Jute Mills v. State of U. P. AIR 1961 SC 1534 (supra) the controversy had already been set at rest, and it was held that the U. P. Sales Tax (Validation) Act (XV of 1958) is valid and intra vires. This meant that the levy of Sales Tax at one anna per rupee as from 31st March, 1956, was valid, and sales tax was payable for the relevant assessment year by the assessee at that rate.
2. While the writ petitions were pending in the High Court as to the validity or otherwise of the Sales Tax (Amendment) Act, the assessee on the last date of the previous year which ended on 28th August, 1957, debited the profit and loss account with Rs. 27,167/-, being the estimated sales tax liability as imposed by the legislation which was being impugned by other cloth dealers of Uttar Pradesh at that time. It was admitted that the assessee's system of accounting was merecantile and it had accordingly put forward a claim to deduct the said sum of Rs. 27,167/- on the ground that the said sales tax was payable under the aforesaid Ordinance and Notifications and the Validation Act.
3. The Income Tax Officer found that the assessee had shown the correct turnover of sales at Rs. 5,33,046 as well as the gross profit thereon at Rs. 48,663. He further found: "Most of the purchases are vouched. Sales are also fully vouched...
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