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Commissioner Of Income-Tax v. R. Shantilal & Co.
Summary of Legal Opinion
Factual and Procedural Background
This is a reference under section 66(1) of the Income-tax Act, 1922, made by the Commissioner of Income-tax II, Calcutta, concerning the assessment year 1956–57 (the relevant previous year being 2011 Guzrati Dewali Sambat year from 26 October 1954 to 17 June 1955). The assessee, Messrs. R. Shantilal and Company (an unregistered firm), sold and transferred its business as a going concern to R. Shantilal & Company Private Ltd. shortly before the accounting year closed and the firm was dissolved on 17 June 1955.
In the firm's mercantile books for the accounting year it made provisions for sales-tax liabilities totalling Rs. 47,505, comprising:
- Estimated liability for the current year (2011 Sambat): Rs. 20,050;
- Liability for 2008 Sambat (demand notice dated 8 Feb 1955): Rs. 9,675;
- Liability for 2009 Sambat (demand notice dated 8 Feb 1955): Rs. 17,780.
The Income-tax Officer allowed only amounts actually paid in the year (Rs. 253 for 2008 Sambat and Rs. 1,250 for 2009 Sambat) and added back Rs. 46,001 to the assessee's income. On further appeal the Appellate Assistant Commissioner allowed an additional Rs. 20,233-4-9, reducing the disallowance. The Income-tax Appellate Tribunal (the Tribunal) allowed the entire Rs. 47,505 as business expenses, holding that the liabilities arose when demand notices were served on 8 February 1955. The Commissioner applied for a reference to this Court; the Tribunal referred the question whether the Tribunal was right in holding the entire sum represented an accrued liability and was deductible.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the entire sum of Rs. 47,505 represented the accrued liability of the assessee on account of sales tax and was therefore allowable as a deduction in computing income from business?
Arguments of the Parties
Department's Arguments (Commissioner / Revenue — Mr. Chandan Banerji)
- Accepted that the provision for the estimated liability for the current year (2011 Sambat) must be allowed as a deduction, relying on the decision in Commissioner of Income-tax v. Royal Boot House [1970] 75 I.T.R 507 Cal..
- Contended that provisions in respect of the two earlier years (2008 and 2009 Sambat) represented disputed and unascertained liabilities for which no provision had been made in those earlier relevant accounting years and therefore could not be allowed merely because demand notices were received in the accounting year relevant to the assessment; the liability did not thereby become an ascertained and undisputed liability.
- Relied on Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner Of Income-Tax (Central) [1968] 67 I.T.R 56 Cal. to support disallowance where an assessee denied liability and made no provision in books.
Assessee's Arguments
The opinion does not contain a detailed account of the assessee's legal arguments beyond the Tribunal's description that it followed the assessee's accepted practice and treated liabilities as arising when demand notices were served.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-tax v. Royal Boot House [1970] 75 I.T.R 507 Cal.. | Allowing a provision for an estimated liability for the current year as a deductible business expense. | The court accepted that the provision for the estimated liability for the current (2011 Sambat) year must be allowed in accordance with this decision. |
| Kedarnath Jute Manufacturing Co. Ltd.… v. Commissioner Of Income-Tax (Central)…. [1968] 67 I.T.R 56 Cal.. | Supports disallowance of sales-tax deduction where the assessee denied liability and made no provision in its books. | The court held this decision did not assist the department on the facts here because there was no finding by any authority below that the assessee continued to dispute the liabilities after receipt of the demand notices. |
Court's Reasoning and Analysis
The Court reviewed the procedural history: the Tribunal had allowed the entire provision of Rs. 47,505 because demand notices for the 2008 and 2009 Sambat liabilities were received on 8 February 1955 (within the accounting year), and therefore the Tribunal treated the liabilities as having arisen in that accounting year.
The Court considered the department's concession and arguments. It accepted the department's concession that the provision for the estimated liability for the current year (2011 Sambat) was deductible, in line with the Royal Boot House decision. The department nevertheless argued that the provisions for the two earlier years were disputed liabilities that had not been provided for in the respective earlier accounting years and therefore could not be treated as undisputed accrued liabilities merely because demand notices were received in the accounting year.
The Court examined whether any of the three authorities below made a finding that, even after receipt of the demand notices, the assessee was disputing its liability to pay the sales tax for Sambat years 2008 and 2009. The Court noted that the department could not point to any such finding. On that basis the Court concluded that there was no evidence that the liabilities remained disputed after service of the demand notices and that the Tribunal was therefore justified in treating the amounts as accrued liabilities allowable as business expenses in the relevant accounting year.
Holding and Implications
Question answered in the affirmative.
Holding: The Court held that, on the facts and in the circumstances of the case, the Tribunal was right in holding that the entire sum of Rs. 47,505 represented accrued liability of the assessee on account of sales tax and was liable to be allowed as a deduction in computing the income from business for the relevant year.
Direct consequences: The deduction of Rs. 47,505 was sustained in favour of the assessee and there was no order as to costs of the reference.
Broader implications: The opinion confines its decision to the facts before the Court (accepting the Royal Boot House authority for current-year provisions and distinguishing Kedarnath Jute on the factual point that no post-demand dispute was found); the Court did not expound broader new principles beyond this application.
K.L Roy, J.:— This is a reference under section 66(1) of the Income-tax Act, 1922, at the instance of the Commissioner of Income-tax II, Calcutta. The assessment year concerned in this reference is 1956–57, the relevant previous year being 2011 Guzrati Dewali Sambat year corresponding to the period from 26th October, 1954, to 17th June, 1955. The assessee is Messrs. R. Shantilal and Company which was assessed in the status of an unregistered firm for the relevant assessment year, and which sold and transferred its business as a going concern to a private limited company styled as Messrs. R. Shantilal & Company Private Ltd. shortly before the close of the aforesaid accounting year and the assessee-firm was dissolved on the last date of the accounting year, viz., the 17th June, 1955. In its books of account for the current year which were maintained on the mercantile system of accounting the assessee made the following provisions for its liability under the Sales Tax Act:
Rs. (a) Estimated liability for the current year, i.e, from the 26th October, 1954, to 17th June, 1955 … 20,050 (b) Liability for 2008 Sambat year for which demand notice was issued on 8th February, 1955 … 9,675 (c) Liability for 2009 Sambat year for which the demand notice was issued on 8th February, 1955 … 17,780 Total 47,505
2. Out of the claim for deduction of the aforesaid sum the Income-tax Officer only allowed Rs. 253 for 2008 Sambat year and Rs. 1,250 for Sambat year 2009 actually paid during the accounting year and disallowed the claim for the balance and added back the sum of Rs. 46,001 to the assessee's total income.
3. On further appeal, the Appellate Assistant Commissioner allowed a further sum of Rs. 20,233-4-9 being the sales tax paid in the year of account and reduced the amount of disallowance to Rs. 27,271-4-9.
4. On the assessee's further appeal before the Income-tax Appellate Tribunal, it was contended on behalf of the department that unascertained and estimated liabilities for sales tax could not be allowed as a deduction.
5. The Tribunal observed that following the accepted practice of the assessee in this case the unascertained and disputed liabilities of the earlier years in respect of which no provision could possibly have been made, the liabilities could be deemed to have arisen for the first time only when the sales tax department had served the assessee with the demand notices. As in the present case such demand notices relating to the liabilities for the Sambat years 2008 and 2009 had been received by the assessee on the 8th February, 1955, the Tribunal held that the entire amount of Rs. 47,505 must be allowed as legitimate business expenses against the profits of the assessee of the Sambat year 2011.
6. On the application of the Commissioner the following question has been referred to this court by the Tribunal, viz.:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the entire sum of Rs. 47,505 represented the accrued liability of the assessee on account of sales tax and as such was liable to be allowed as a deduction in the computation of the income from business?”
7. Mr. Chandan Banerji, appearing for the department, accepted the position that, so far as the provision for the estimated liability for the current year, viz., 2011 Sambat year, was concerned, it must be allowed as a deduction in accordance with the decision of this court in Commissioner of Income-tax v. Royal Boot House [1970] 75 I.T.R 507 Cal.., the decision of a Bench of which my Lord was a member. Mr. Banerji, however, strenuously contended that, so far as the provisions made in the accounts for the liabilities of the two earlier years, 2008 and 2009 S.Y, are concerned, these are disputed liabilities for which no provision was made during the relevant accounting years and simply because the demand notices were received in the accounting year relevant to the assessment year concerned, it would not follow that the liability became an ascertained and undisputed liability in this year. There is nothing to show that the assessee accepted the liability for payment of the aforesaid two amounts as sales tax for those two years. Mr. Banerji also referred to the decision of the court in Kedarnath Jute Manufacturing Co. Ltd.… v. Commissioner Of Income-Tax (Central)…. [1968] 67 I.T.R 56 Cal.., where the disallowance of a claim for deduction of sales tax was sustained on the ground that the assessee had denied its liability to pay the sales tax and had made no provision in its books of account. In our opinion that decision does not help Mr. Banerji on the facts of the present case. We asked Mr. Banerji to show us any finding by any of the three authorities below that even after the receipt of the demand notices the assessee was still disputing its liability to pay the sales tax demanded in respect of Sambat years 2008 and 2009. Mr. Banerji was unable to bring to our notice any such finding by any of the authorities below. In these circumstances, we are of the opinion that the Tribunal was justified in allowing the deduction of the amounts of sales tax for the Sambat years 2008 and 2009 for which the demand notices had been served on the assessee during the current account year.
8. The question referred to this court must, therefore, be answered in the affirmative and in favour of the assessee. There will be no order as to costs of this reference.
Sankar Prasad Mitra, J.:— I agree.
9. Question answered in the affirmative.
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