Sales tax liability must be actual and expended to qualify for deductions under tax law; unpaid and disputed tax does not meet this criterion.

1. In this Income tax Reference under S. 66(1) of the Indian Income - tax Act, the Tribunal referred the following question for determination by this Court :
"Whether, on the facts and circumstances of the case, the amount of Rs. 1,49,776 which was claimed by the assessee as a deduction on account of sales - tax was deductible as a business expense ?"

2. The facts giving rise to this question may be set out briefly. The assessee is the Kedarnath Jute Manufacturing Co Ltd. of 13 Syed Sally Lane, Calcutta. It is a public limited company doing business in jute and jute goods manufacturing. The relevant previous year ended on the 31st December 1954. It followed the mercantile system of accounting. For the assessment year the assessee revised his return by claiming a reduction of Rs. 1,49,776 on account of sales tax determined to be payable on the sales account during the relevant accounting year.
2. The assessee's total sales during the year amounted to Rs. 71,01,566. The assessee disclosed a total turn over of Rs. 70,99,928 in its sales tax return for the period ending on the 31st December, 1954. The Sales - tax Act provided for exemptions in respect of sales made to registered dealers and on that principle the Sales Tax Officer excluded a sum of Rs. 39,04,492 from sales tax on the ground that such sales were to registered dealers. The remaining balance amount of Rs. 31,95,436 was held to be taxable turn over liable to sales - tax, and it is on this turn - over that the sales - tax was determined at Rupees 1,49,776.

3. It must also be noticed here on the facts that the demand notice for the sales - tax was served on the 21st November, 1957. The original return for the income - tax was filed by the assessee on the 12th January, 1956. Against the assessment of sales - tax the assessee moved this Court by a writ. The assessee's writ petition was dismissed by the High Court on the 17th August, 1961. Then followed the certificate proceedings initiated by the Sales - tax Department for realisation of the amount of sales - tax due and the necessary certificate was forwarded to the Certificate Officer and Additional District Magistrate, 24 Parganas for necessary action. While the Certificate Proceeding was pending before the Certificate authorities, income - tax assessment was taken up and completed on the 11th March, 1960. Income - tax Officer rejected the assessee's claim for deduction of the sales - tax on the ground that the assessee had denied its liability to pay the sales - tax and was contesting its liability to pay not only by the writ petition which was dismissed but also by objections to the Certificate Proceedings which are pending. It must also be noted as a fact that the assessee was found to have made no provision with regard to the liability for sales - tax in its books.

4. The assessee appealed from the order of the Income - tax Officer to the Appellate Assistant Commissioner who rejected the assessee's appeal on the same ground as the Income - tax Officer on the 5th September, 1960. Thereafter the assessee appealed to the Tribunal. Before the Tribunal the assessee's contention was that the legal liability for sales - tax accrued when the sales were made and therefore although the quantification of the tax came later yet because the liability to the sales - tax related to business profits of the previous year, deduction for the sales - tax should have been allowed during the relevant assessment year.

5. The Tribunal rejected the assessee's appeal Reasons of the Tribunal for such rejection were that although the assessee followed the mercantile system of accounting yet even under that system of accountancy only that expenditure was permissible deduction which was in the nature of accrued liability. But in this case the liability to sales - tax under the West Bengal Sales Act was an unascertained liability which the Tribunal described as "amorphous liability depending on the application of the provisions of the Sales - tax to