# Commissioner of Income-tax West Bengal II v. Royal Boot House

- **Citation:** [1972] 1 S.C.R. 277
- **Court:** Supreme Court of India
- **Decided:** 1971-08-17
- **Case number:** Civil Appeal No. 1899 of 1967
- **Bench:** K. S. Hegde, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-west-bengal-ii-v-royal-boot-house-5352
- **Pages:** 6

## Headnote

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 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 accepted by the appellant
and no provision had been made in its books with regard to payment
of the assessed amount. The authorities under 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 s.10(2)(xv) as well as s. 10(1) 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 purchases 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. Jn 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 v. Royal Boot House,
75· l.T.R. 507 and Pope The King Match Factory v . . Commissioner ~f
lnaome-tax Madras, 50 l.T.R. 495, applied.
278
SUPREME COURT REPORTS
[1972] l S.C.R.
The contention that since the assessee had failed to
debit the
A
.liability in its books of accounts, it was debarred from claiming the same
as deduction either under s.10(1) or s.10(2)(xv) 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]
B
Th' appeal must accordingly be allowed.

## Text

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 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 accepted by the appellant
and no provision had been made in its books with regard to payment
of the assessed amount. The authorities under 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 s.10(2)(xv) as well as s. 10(1) 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 purchases 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. Jn 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 v. Royal Boot House,
75· l.T.R. 507 and Pope The King Match Factory v . . Commissioner ~f
lnaome-tax Madras, 50 l.T.R. 495, applied.
278
SUPREME COURT REPORTS
[1972] l S.C.R.
The contention that since the assessee had failed to
debit the
A
.liability in its books of accounts, it was debarred from claiming the same
as deduction either under s.10(1) or s.10(2)(xv) 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]
B
Th' appeal must accordingly be allowed.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1899
of 1967.
Appeal by special leave from the judgment and order c
dated August 24, 1966 of the Calcutta High Court in
Income-tax Reference No. 91 of 1962.
G. C. Sharma, ff. Kumaria, B. R. Diwan and P. K.
Mukherjee, for the appellant.
Jagadish
Swarup,
Solicitor-Generql,
P. L. Juneja,
D
R. N. Sachthey 11.nd 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 iri an Jncome-.tax
Reference.
E
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,
F'
1954), the assessee claimed a deduction of Rs. 1,49,776/-
on 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
G
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 exte:;nt
8 :
that had been determined. The Income-tax ... Officer,
however, completed the assessment
on 11th March,
A
B
c
D
E
F
G
H
KEDAR NATH JUTE MFG. co. v. C.I.T. (Grover, /.)
279
1960 before any final decision was giyen 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 Lir the opinion of the High
Court:---
"Whether on the facts and in the circumstances of
the
case, amount of Rs. 1,49,776/-
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 fdrm 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 s. 10(2) (xv) of 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 purpos,e 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 s. 10 (I) of
the Act.
It has been submitted on behalf of the assessee that
sales tax paid or unpaid would be admissible deduction
under s. 10 (2)(xv) as
well as
under s,
IO(!). 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 when the
liability has actually been discharged. Section ( 10) 5 pr-0vides 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 orde1
19-Lt245SupCI/71
280
SUPREME COURT REPORTS
[1972] l S.C.R.
A
therefore, that sales tax may qualify for deduction under
s. 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
8
mercantile system. It is indisputable
that the amount
of sales tax paid or payable by the assessee is an 'expenditure' within the meaning of s. 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 c
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 s. 10 (2) (xv) of the Act, it is
a permissible deduction even under s. 10 (1). The proD
fits 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
EJ
amount is deducted from the gross profits or receipts.
In Commissioner of Income-tax,
West Benga(JT-V.
Royal Boot House,(1) 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
F
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
prov1s10n for sales tax from
his income under s. 10(2)
(xv) of the Act. It was pointed out that under the provisions of the Sales Tax statutes, the liability to pay the
G
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
an.d has been sought to be distinguished by the Revenue
011 ·the ground that the liability to pay the Sales Tax had
not been disputed and the assessee had made a provision
H
for its payment
in its account. As will be. presently
(I) 75 I.T.R. 507.
B
c
D
E
G
H
KEDAR NATH JUTE MFIJ. co. \'. C.J.T. (G'rover, J.)
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 asses~
ment. It is significant that in th1: present case, the liab1-
.lity had even been quantified and a demand had been
created in the sum of Rs. 1,49,776/-
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 v. 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
o'n 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 endeavour to get out of that
liability by preferring appeals could not in any way detract from or retard the efficacy of the liability which
(I) 501.T.R.495.
282
SUPREME COURT REPORTS
[1972) I S.C.R.
had been imposed upon him
authority. In
our judgment,
down the law correctly.
A
by the competent excise
the above decision lays
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
8
the same as deduction either under section IO (I) or under
s. IO (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 althpugh under the law, a deduction must c
be allowed by the Income Tax Officer, the assessee 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 ass.essee might take of his rights nor can the existence
0
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. 1,49,776/-
being the amount of sales tax which it was liable under the
law to pay during the relevant accounting year.
It
E
may be added that the liability remainoo 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
F
entitled to costs in this Court and in the High Court.
G. C.
Appeal allowed.
G
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