Home › Income-Tax Act › Kedarnath Jute Manufacturing Co Ltd v. CIT (1971) 82 ITR 363 (SC) (367)

Kedarnath Jute Manufacturing Co Ltd v. CIT (1971) 82 ITR 363 (SC) (367)

S. 37(1) : Business expenditure – Method of accounting – Entries in the books of account cannot decide whether a receipt is taxable or not or whether expenses are allowable as deduction or not – Courts are compelled to go by the true nature of the receipts and not go by the entries in the books of account – Once a liability to pay has accrued during the assessment year deduction can be allowed even though it had to be discharged at a future date – Even if the assessee disputes the liability to pay sales tax by filing an appeal, once the demand for payment has been received, the said amount can be claimed as a deduction. [ S. 28(1), 37(1) , 145, Indian Income-tax Act, 1922, S. 10(2)(xv)]

Facts

The assessee is a public limited company doing the business of jute and manufacturing of jute goods. It followed the mercantile system of accounting. It filed its tax return on 13.01.1956. Thereafter, as a result of sales tax assessment,      a demand notice was served by the sales tax authorities on 21-11-1957 for an amount of Rs. 1,49,776/-. Accordingly, the assessee filed a revised return on 09.11.1959 claiming the aforesaid deduction. The assessee also filed an appeal against the sales tax assessment disputing its liability. Assessing Officer rejected such claim of deduction of the assessee on the ground that the assessee had denied its liability to pay that amount and had made no provision in its books   with regard to the payment of that amount. CIT(A) and ITAT  confirmed the action    of the Officer. 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.

 

Issue

Can a deduction be claimed by an assessee where liability to pay the expense   had accrued during the year of assessment even though it had to be discharged      at a future date? Where deduction of an expense be disallowed to an assessee on the ground that suchdeduction was in fact not claimed in the books of account?

 

View

If an assessee follows mercantile system of accounting, deduction of an expense is allowed in the year in which the liability to pay arises even though the payment    is to be made in subsequent year. This is the very essence of mercantile system      of accounting, that thechargeability of any income and allowability of any

 

 

expense is not contingent upon the actual receipt or payment. This view has been consistently taken by the Apex  Court. Further,  in case of sales tax, once the order  of the assessing authority is received, it crystallises the liability and an assessee  can claim deduction of such amount of tax on the ground that the same has accrued though he has not accepted the liability and has filed an appeal against   thesame.

Further, allowability of an expense and taxability of any income is not contingent upon the entries made in the books of account rather the same is governed by      the provisions of the Act. Thus, even if there is no entry in the books of account making provision for any expenses, the same can be  claimed as  a  deduction  if otherwise the liability to pay has accrued in the assessment year under consideration.

 

Held

The Court held that an assessee who follows the mercantile system of accounting  is entitled to deduct from the profits of the business such liability which had accrued during the period for which the profits and gains were being computed.    In  the facts of  the present case, the Court held that the liability for payment    of sales tax had accrued during the assessment year even though it had to be discharged at a future date. Further, the Court also held 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 Officer, the assessee will not lose the right of claiming or will not 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. (AY. 1955-56) (CA No. 1899 of 1967 dt. 17-8-1971)

Editorial: Earlier and Subsequent decisions on the issue may be referred, CIT v. India Discount Co Ltd (1970) 75 ITR 191 (SC) (195), Sinclair Hurray & Co Ltd

v. CIT (1974) 97 ITR 615 (SC), Sutlej Cotton Mills Ltd v. CIT (1979) 116 ITR 1(SC) (5), State Bank of India v. CIT (1986)  157 ITR 67 (SC), Godhra Electricity Co Ltd v. CIT (1997) 225 ITR 746 (SC), Tuticorin Alkai Chemicals & Fertilizers Ltd v. CIT (1997) 227 ITR 172 (SC), CIT v. Bokaro Steel Ltd (1999) 236 ITR 315 (SC)

“You must not lose faith in humanity. Humanity  is an ocean; if a few drops of the ocean are   dirty, the ocean does not become dirty.”

– Mahatma Gandhi