KEDARNATH JUTE MFG. CO. LTD. vs. COMMISSIONER OF INCOME TAX, CENTRAL CALCUTTA

CIVIL APPEAL No. 1899/1967Supreme Court[1972] 1 S.C.R. 27717 August 1971Bench: 2 JudgesAuthor: K.S. HEGDE, A.N. GROVER B6 pages
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What were the facts?

The appellant, Kedarnath Jute Mfg. Co. Ltd., a public limited company following the mercantile system of accounting, claimed a deduction of Rs. 1,49,776/- for assessment year 1955-56 on account of sales tax determined to be payable on sales made during the previous year. The sales tax demand notice was served on November 21, 1957. The assessee contested the liability before higher sales tax authorities. The Income-tax Officer completed the assessment on March 11, 1960, disallowing the deduction, stating the assessee had not accepted the liability and made no provision in its books. The Appellate Assistant Commissioner, Appellate Tribunal, and High Court upheld this disallowance, opining that unpaid and disputed sales tax was not deductible.

What did the Supreme Court hold?

The Supreme Court held that under all sales tax laws, the obligation to pay tax arises the moment a dealer makes taxable purchases or sales. Although the liability cannot be enforced until quantified by assessment, it is independent of the assessment. In this case, the liability had been quantified. The Court found that the liability did not cease to exist merely because the assessee pursued proceedings before higher authorities. An assessee following the mercantile system is entitled to deduct liabilities that accrued during the accounting period, even if discharged later. The Court rejected the revenue's contention that failure to debit the liability in books of account debars the assessee from claiming the deduction, stating that entitlement to deduction depends on the law, not on the assessee's accounting entries. The appeal was allowed, setting aside the High Court's judgment and answering the question in favour of the assessee.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,49,776/-, claimed by the assessee as a deduction on account of sales tax, was deductible as a business expense under Section 10(2)(xv) of the Income-tax Act, 1922? Assessee's arguments: Sales tax, whether paid or unpaid, is an admissible deduction under Section 10(2)(xv) and Section 10(1) of the Income-tax Act, 1922. For assessees following the mercantile system of accounting, deduction is permissible in the year the liability relates, irrespective of when it is discharged. Section 10(5) defines 'paid' as actually paid or incurred according to the method of accounting. Revenue's arguments: The High Court held that unpaid and disputed sales tax liability could not form the basis of a claim for deduction. The revenue contended that the assessee failed to debit the liability in its books of accounts, thus being debarred from claiming it as a deduction under Section 10(1) or Section 10(2)(xv).

Which sections of the Income-tax Act were involved?

Section 10(1),Section 10(2)(xv),Section 10(5)

AI-generated summary — verify with the full judgment below

A B c D E F G H KEDARNATH JUTE MFG. CO. LTD. v. 277 COMMISSIONER OF INCOME TAX, CENTRAL CALCUTTA August 17, 1971 [K. S. HEGDE AND A. N. GROVER, JJ.] Income-tax Act, 1922, ss. 10(1) and 10(2)(xv)-Disputed and unpaid sales tax whether a permissible deduction-Liability accrues in year of" sale and not when sales tax demand is quantified or finally determined-"- Where mercantile system ~f accouming is adopted amount is deductible when liability accrues and the time when liability is discharged is irrelevant-Position is not changed even when entries in books of account are made at a later date.

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 appel- lant 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

The order continues below.

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