Income-tax---

----Business expenditure---Year in which expenditure is deductible-- Controversy regarding liability to entry tax in respect of commodity in which assessee was dealing---Clarification by Commissioner of Sales Tax on 2-11-1981, that entry tax was payable---Consequent payment of entry tax for assessment years 1977-78 and 1978-79 in December, 1981, and June, 1982---Amounts paid were deductible in assessment year 1983-84---Indian Income Tax Act, 1961,'S.37.

For the assessment year 1983-84, the assessee had claimed deduction of Rs.40,935 towards payment of entry tax. There was no dispute that the expenditure pertained to earlier years. However, the assessee claimed deduction during the year on two grounds. The first was that the clarification as to the liability of the assessee for payment of entry tax of gudaku was issued by the Commissioner of Sales Tax on November 2, 1981, which was the date falling during the accounting period relevant to the present assessment year. It was claimed that the entry tax pertained to Diwali years 1977-78 and 1978-79 and the assessments to entry tax in respect of these two years were made on December 30, 1981, and June 28, 1982. These two dates also fell during the accounting period relevant to the assessment year 1983-84. The Assessing Officer disallowed the claim because the assessee was maintaining accounts following the mercantile system and so, the liability was allowable in the year in which the liability accrued. The Commissioner of Income-tax, (Appeals) and the Tribunal allowed the assessee's claim. On a reference:

Held, that it was an admitted fact that the situation was whether gudaku which had been imported by the assessee was subject to entry tax or not, because what was subject to entry tax was tobacco and whether gudaku is tobacco or not, was a debatable question and it only came to be clarified by the Commissioner of Sales Tax by the communication, dated November 2, 1981, that gudaku is a manufactured product out of tobacco and, therefore, it is also subject to entry tax. The peculiar situation had arisen that the assessments for the years 1977-78 and 1978-79 had already been completed and this liability accrued to the assessee on account of the letter written by the Commissioner of Sales Tax on November 2, 1981, falling in the relevant year, i.e., ending Diwali 1982 and, therefore, it was taken to be the assessment year 1983-84. Therefore, the pragmatic approach would be that in fact the assessee was held liable on account of the letter written by the Commissioner of Sales Tax and he deposited that amount during that year. That showed that the actual liability accrued to the assessee when he had deposited the amount in that year and accordingly he claimed deduction during 1983-84. Deduction was thus rightly allowed to the assessee taking a pragmatic approach in the matter.

CIT (Addl.) v. Rattan Chand Kapoor (1984) 149 ITR 1 (Delhi); CIT v. Central Provinces Manganese Ore Co. Ltd. (1978) 112 ITR 734 (Bom.) Kedarnath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363; 24LSTC 672 (SC) and Pope, the King Match Factory v. CIT (1963) 50 ITR 495 (Mad.) ref.

Abhay Sapre for the Commissioner.

B.L. Nema for the Assessee.

JUDGMENT

A. K: MATHUR, C. J.---This is an income-tax reference under section 256(1) of the Income Tax Act, 1961, and the following two questions have been referred at the instance of the Revenue for answer by this Court:

"(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law to hold that allowance of Rs.40,935 towards payment of entry tax by the Commissioner of Income-tax (Appeals) was justified when the liability pertained to earlier years and the assessee was maintaining his accounts on mercantile system?

(ii) Whether the Tribunal was right in law to hold that statutory liability could be claimed by the assessee either when the event took place or when the assessment were completed under the relevant statutory law?"

The brief facts giving rise to this reference are these: For the assessment year 1983-84, the assessee had claimed deduction of Rs.40,935 towards payment of entry tax. There was no dispute that the expenditure pertained to earlier years. However, the assessee claimed deduction during the year on two grounds. The first was that the clarification as to the liability of the assessee for: payment of entry tax on gudaku was issued by the Commissioner of Sales Tax on November 2, 1981, which was the date falling during the accounting period relevant to. the present assessment year. It was claimed that the entry tax pertained to Diwali years 1977-78 and 1978-79 and the assessments for entry tax in respect of these two years were made on December 30, 1981, and June 28, 1982. These two dates also fell during the accounting period relevant to the assessment year 1983-84. The Assessing Officer disallowed the claim holding that the liability and the clarification by the Commissioner of Sales Tax were irrelevant considerations. It was further held by him that since the assessee was maintaining accounts following the mercantile system, the liability was allowable in the year in which the liability accrued. The completion of the assessment was simply quantification of the liability.

The Commissioner of Income-tax (Appeals), on the assessee's appeal, allowed the appeal relying on the decision of the Delhi High Court in the case of Addl. CIT v. Rattan Chand Kapoor (1984) 149 ITR 1, of the Bombay High Court in the case of CIT v. Central Provinces Manganese Ore Co. Ltd. (1978) 112 ITR 734 and of the Madras High Court, in the case of Pope the King Match Factory v. CIT (1963) 50 ITR 495. However, the issue was as to when the liability came to be accrued. The Income-tax Officer took the view that the liability arose the moment the goods entered into the territory of the State of Madhya Pradesh, and, therefore, the assessee knew that he was under the -statutory obligation to pay entry tax, whether the appeal was pending or decided. The representative placed reliance on the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363, in which it was held that the moment a dealer makes either purchases or sales which are subject to sales tax, the obligation to pay the tax arises, though the liability may not be enforced till the quantification. The Tribunal did not accept this point of view canvased by the representative of the Department and held that since the liability had accrued to the assessee during the accounting period relevant to the subsequent year 1983-84, deductions could be allowed to the assessee and he rejected the order passed by the Assessing Officer disallowing the above deduction. Hence, the Tribunal has made the reference on the aforesaid questions at the instance of the Department.

We have heard learned counsel for the parties. We need not examine the first question at present, because this question can be conveniently answered with reference to the second question. It is an admitted fact that the situation was whether gudaku which has been imported by the assessee is subject to entry tax or not. because what was subject to entry tax was tobacco and whether gudaku is tobacco or not, was a debatable question and it only came to be clarified by the Commissioner of Sales Tax by the communication dated November 2, 1981, that gudaku is a manufactured product out of tobacco, and, therefore, it is also subject to entry tax. On that basis, the assessee immediately deposited the entry tax amounting to Rs.40,935 and claimed the same in the assessment year 1983-84.

In Kedarnath's case (1971) 82 ITR 363 (SC), their Lordships of the Supreme Court have taken the view that whenever account is maintained, the assessee is entitled for deduction in the year in which the liability accrued. Before the Delhi High Court in Addl. CIT v. Rattan Chand Kapoor (1984) 149 ITR 1 a similar question came up for consideration and their Lordships observed that the assessee had adopted a hybrid system of accounting. In that context, their Lordships said that the liability will be treated to have been arisen in the year in which the, demand was raised. It was observed (head note):

"Held also, on the facts, that since the entry made by the assessee was on the basis of a demand and no different system had been previously followed by him, the 'assessee had adopted a hybrid system of accounting which was open to him and, hence on the principle of accountancy- followed by the assessee, the amount was deductible expense for the assessment year 1964-65."

The Delhi High Court also distinguished Kedamath's case (1971) 82 ITR 363 (SC) and it was observed that Kedamath's case (1971) 82 ITR 363 (SC), was limited to those cases in which the demand for sales tax is raised by the Sales Tax Department before the income-tax assessment for the relevant year has actually been completed as no revised return can be filed after the assessment is over.

In Pope the King Match Factory v. CIT (1963) 50 ITR 495 (Mad), it has been held that even in the case of mercantile system of accounting, the liability is to be considered from the date it is accrued. In fact, in the present case, the peculiar situation has arisen that the assessments for the years 1977-78 and 1978-79 had already been completed and this liability accrued to the assessee on account of the letter written by the Commissioner of Sales Tax on November 2, 1981, falling in the relevant year, i.e., ending Diwali 1982 and; therefore, it was taken to be the assessment year 1983-84. Therefore, the pragmatic approach would be that in fact the assessee was held liable on account-of the letter written by the Commissioner of Sales Tax and he deposited that amount during that year. That shows that the actual liability accrued to the assessee when he had deposited the, amount in that year and accordingly he claimed deduction during 1983-84. Deduction was thus rightly allowed to the assessee taking a pragmatic approach in the matter.

Therefore, we answer the second question in favour of the assessee. So far as the first question is concerned. We need not answer it, because once we answer the second question in favour of the assessee, it is not proper to answer the first question, as it is secondary. Hence, in this view of the matter, we answer the second question in favour of the assessee and need not answer the first question.

M.B.A./3255/FCReference answered.