Appeal No 1899 of 1967
Appeal by special leave from the judgment and order dated August 24 1966 of the Calcutta High Court in Income tax Reference No 91 of 1962
G C Sharma F Kuwnaria B R Diwan and P K Mukherjee for the appellant
Jagadish Swarup Solicitor General P L Juneja R N Sachthey and B D Sharma for the respondent
The Judgment of the Court was delivered by Grover J
This is an appeal by special leave from the judgment of the Calcutta High Court in an Income tax Reference
The assessee who is the appellant is a public limited company doing the business of jute and manufacturing of jute goods
The method of accounting followed by the assessee is the mercantile system
During the assessment year 1955 56 the previous year ended on 31st December 1954 the assessee claimed a deduction of Rs 149776on account of sales tax determined to be payable by the sales tax authorities on the sales made by the assessee during the
aforesaid previous year
The sequence of dates may be mentioned
The income tax return was filed on 13th January 1956
The demand notice was served by the Sales Tax authorities on the 21st November 1957
On 9th November 1959 the assessee filed a revised return claiming the aforesaid deduction
The assessee had taken the order by which the demand for such tax had been created to the higher departmental authorities as it was contesting its liability to the extent that had been determined
The Income tax Officer however completed the assessment on 11th March 2 7 9 1960 before any final decision was given in the proceedings relating to the assessment of sales tax
According to the Income Tax Officer the assessee was not entitled to claim the deduction of the aforesaid amount of sales tax inasmuch as it had denied its liability to pay that amount and had made no provision in its books with regard to the payment of that amount
The Appellate Assistant Commissioner confirmed the order of the Income tax Officer
The Appellate Tribunal dismissed the appeal of the assessee
The following question of law was referred by the Tribunal for the opinion of the High Court Whether on the facts and in the circumstances of the case amount of Rs 149776 
which was claimed by the assessee as a deduction on account of sales tax was deductible as a business expense The High Court was of the opinion that unpaid and disputed sales tax liability could not form the basis of a claim for deduction for the purposes of income tax
The reasoning of the High Court mainly was that for the purpose of claiming a deduction under section 102 xv or the Income Tax Act 1922 hereinafter called the Act mere legal liability was not enough
There had to be an expenditure in the first place and it must be laid Out or expended wholly and exclusively for the purpose of such business
The High Court further held that unpaid and disputed sales tax could not be validly deducted in the computation of business income even under section 10 1 of the Act
It has been submitted on behalf of the assessee that sales tax paid or unpaid would be admissible deduction under section 10 2xv as well as under section 10 1
It is pointed out that if the method of accounting adopted by the assessee is cash system it would qualify for deduction only in the year in which it has been actually paid
If the method of accounting is mercantile system then the deduction will be permissible in the year to which the liability relates irrespective of the point of time wheel the liability has actual been discharged
Section 105 provides that in sub section 2 paid means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the section
The argument proceeds that in order 19 L1245 Su CI71 280 therefore that sales tax may qualify for deduction under section 10 2 xv it has to be in the nature of an expenditure  which has either been actually paid during the year of account or for the payment of which the liability has been incurred in the accounting year according as the method of accounting followed by the assessee is cash system or mercantile system
It is indisputable that the amount of sales tax paid or payable by the assessee is an expendi ture  within the meaning of section 10 2 xv
The amount in question was thus a kind of expenditure about which there can be no doubt that it had been laid out or expended wholly or exclusively for the purpose of business carried on by the assessee
The submission on behalf of the assessee in the alternative is that apart from valid deductibility of sales tax as an expenditure under section 10 2 xv of the Act it is a permissible deduction even under section 10 1
The profits of a business which are to be assessed to tax must be real profits and they have to be ascertained on ordinary principles of commercial trading and commercial accounting
Where an assessee is under a liability or is bound to make certain payment from the gross receipts the profits and gains can only be net amount after such an amount is deducted from the gross profits or receipts
In Commissioner of Income tax West Bengal II vs Royal Boot House1 it was held that where the assessee followed the mercantile system of accounting and without disputing the liability to pay the Sales Tax had made a provision for its payment in its account even though he had not actually paid the tax over to the authorities the assessee was entitled to deduction in respect of the provision for sales tax from his income under section 102 xv of the Act
It was pointed out that under the provisions of the Sales Tax statutes the liability to pay the tax was not dependent upon assessment or demand but was an obligation to pay the tax either annually quarterly or monthly as the case might be
This case was and has been sought to be distinguished by the Revenue on the ground that the liability to pay the Sales Tax had not been disputed and the assessee had made a provision for its payment in its account As will be presently 1 281 seen this distinction is without substance and does not affect the true legal position
Now under all sales tax laws including the statute with which we are concerned the moment a dealer makes either purchases or sales which are subject to taxation the obligation to pay the tax arises and taxability is attracted
Although that liability cannot be enforced till the quantification is effected by assessment proceedings the liability for payment of tax is independent of the assessment
It is significant that in the present case the liability had even been quantified and a demand had been created in the sum of Rs 149776 by means of the notice dated 21st November 1957 during the pendency of the assessment proceedings before the Income Tax Officer and before the finalisation of the assessment
It is not possible  to comprehend how the liability would cease to be one because the assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail with regard to the quantum of liability etc
An assessee that follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed
It can again not be disputed that the liability to payment of sales tax had accrued during the year of assessment even though it had to be discharged at a future date
In Pope The King Match Factory vs Commissioner of Income tax Madras 1 a demand for excise duty was served on the assessee and though he was objecting to it and seeking to get the order of the Collector of Excise reversed he debited that amount in his accounts
on the last day of his accounting year and claimed that amount as a deductible allowance on the ground that he was keeping his accounts on the mercantile basis
The Madras High Court had no difficulty in holding that the assessee had incurred an enforceable legal liability on and from the date on which he received the Collector s demand for payment and that his endeavor to get out of that liability by preferring appeals could not in any way detract from or retard the efficacy of the liability which 1 28 2 had been imposed upon him by the competent excise authority
In our judgment the above decision lays down the law correctly
The main contention of the learned Solicitor General is that the assessee failed to debit the liability in its books of accounts and therefore it was debarred from claiming the same as deduction either under section 10 1 or under section 10 2 xv of the Act
We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although under the law a deduction must be allowed by the Income Tax Officer the assesses will lose the right of claiming or will be debarred from being allowed that deduction
Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter
The assessee who was maintaining accounts on the mercantile system was fully justified in claiming deduction of the sum of Rs 149776being the amount of sales tax which it was liable under the law to pay during the relevant accounting year
it may be added that the liability remained in tact even after the assessee had taken appeals to higher authorities or Courts which failed
The appeal is consequently allowed and the judgment of the High Court is set aside
The question which was referred is answered in favour of the assessee and against the Revenue
The assessee will be entitled to costs in this Court and in the High Court
Appeal allowed


Summary:
The appellant was a public limited company doing the business of jute and manufacturing of jute goods
It followed the mercantile system of accounting
Before the Income tax Officer in connection with the assessment year 1955 56 the appellant claimed a deduction on account of assessed sales tax
The demand of sales tax waS contested by the appellant before the higher sales tax authorities but before the matter was finalised the Income tax Officer completed the assessment
He disallowed appellant s claim for deduction of sales tax on the ground that the liability to pay sales tax had not been accented by the appellant and no provision had been made in its books with regard to payment of the assessed amount
The authorities Linder the Act dismissed the appeals
The High Court in reference was of the opinion that unpaid and disputed sales tax liability could not form the basis of a claim for deduction In appeal by special leave to this Court the appellant submitted that sales tax paid or unpaid would be admissible deduction under s102xv as well as section 101 of the Income tax Act 1922 and that where the mercantile system of accounting was observed the deduction would be permissible in the year to which the liability relates irrespective of the point of time when the liability has been actually discharged
HELD Under all sales tax laws including the statute applicable to the present case the moment a dealer makes either purchase or sales which are subject to taxation the obligation to pay tax arises and taxability is attracted
Although that liability cannot be enforced till the quantification is effected by assessment proceedings the liability for payment of tax is independent of the assessment
In the present case the liability had even been quantified
The liability could not cease to be one merely because the assessee had taken proceedings before higher authorities
An assessee that follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed even though it had to be discharged at a future date
281B F Commissioner of Income tax West Bengal II vs Royal Boot House and Pope The King Match Factory vs Commissioner of Income tax Madras  applied
278 The contention that since the assessee had failed to debit the liability in its books of accounts it was debarred from claiming the same as deduction either under s101 or s102xv of the Act could not be accepted
Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can existence or absence of entries in the books of accounts be decisive or conclusive in the matter
282 C E The appeal must accordingly be allowed