At, High Court of Kerala
By, THE HONORABLE JUSTICE: K.K. USHA AND THE HONORABLE JUSTICE: R. RAJENDRA BABU
For Petitioner: P.G.K. Wariyar and P.Balakrishnan, for the Applicant P.K.R. Menonand, George K. George, for the Respondent
1. This tax reference case at the instance of the assessee arises out of an order passed by the Tribunal, Cochin Bench in IT Appeal No. 570 (Coch.) of 1989. The relevant assessment year is 1982-83. The following are the questions referred for the opinion of this Court :-
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the provisions made towards purchase tax amounting to Rs. 3,86,000 was not allowable expenditure ?
2. Whether, on the facts and in the ci
Please Login To View The Full Judgment!
rcumstances of the case, the Tribunal was correct in law in holding that a sum of Rs. 3,86,000 provided by the assessee in the profit and loss account towards the liability for purchase tax for that year was not allowable expenditure, since it was not a statutory liability, overlooking the Supreme Court decision in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT : 82ITR363(SC) ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the purchase tax provision was not a statutory liability to the Sales-tax department ?"
4. The relevant facts are as follows :-
The assessee is a registered firm. It has been carrying on business in the export of sea foods. For the assessment year 1982-83, the assessee in its profit and loss account had debited a sum of Rs. 3,86,000 towards purchase tax liability. The Income Tax Officer disallowed the provision made by the assessee on the ground that the liability was purely contingent liability and not at all ascertained. Both the first appellate authority as well as the Tribunal affirmed the above finding.
5. It is contended by the learned counsel for the assessee that the issue raised in this reference is directly covered by two decisions of this Court in Abad Fisheries v. CIT : 213ITR694(Ker) , and Baby Marine Exports v. CIT : 225ITR631(Ker) .
6. The facts of the case in Abad Fisheries (supra) are similar to the facts in this case. A provision in the accounts made by the assessee following the mercantile system of accounting for liability to sales tax (though disputed) was held to be allowable as business expenditure, if there is a bona fide reasonable apprehension on the part of the assessee that the amount will become payable. The question to be considered is whether on the date on which the provision was made in the accounts, the assessee could have had a reasonable apprehension of the liability being cast on it. After referring to a decision of this Court in Dy. CST v. Neroth Oil Mills Co. Ltd, and the Supreme Court in Sterling Foods v. State of Karnataka, this Court took the view that it could not be said that the assessee had acted fancifully or unreasonably in making the provision. Therefore, the assessee was entitled to deduction of the provision made for purchase tax liability in the assessment year 1982-83. This decision was followed in Baby Marine Exports' case (supra). We are in respectful agreement with the above view taken in the two decisions.
7. The learned standing counsel for the revenue pointed out that as there is no specific finding by the authorities under the Income Tax Act that the assessee is following mercantile system, the assessee cannot be found entitled to the benefit of the dictum laid down by this Court in Abad Fisheries' case (supra) and Baby Marine Exports' case (supra). The learned standing counsel brought to our notice a decision of this Court in CIT v. Bell Foods (Marine Division): 191ITR219(Ker) , where this Court refused to answer the question whether the purchase tax liability was deducted in the year 1978-79, since there was no finding by the authorities that the assessee was maintaining its account on the mercantile basis. The matter was, therefore, remanded.
8. We do not find that the decision in Bell Foods (Marine Division's case (supra) has any application in the facts of this case. In the assessment order, the Income Tax Officer after referring to the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT : 82ITR363(SC) , comes to the conclusion that the principle in that decision is not applicable in the assessee's case, for the reason that the assessee is not following mercantile system of accounting. In the assessment order it is mentioned that according to the decision in Kedarnath Jute Mfg. Co. Ltd.'s case (supra), duty, tax or other levy which is payable by the assessee does not become contingent merely because the assessee disputes the liability in further proceedings, it may be allowed as ascertained liability under the mercantile system of accounting. If the assessing authority was of the view that the assessee was not following mercantile system of accounting it could have observed that the principle in Kedarnath Jute Mfg. Co. Ltd's case (supra) cannot be made applicable in the present case, merely for the reason that the assessee is not following mercantile system of accounting. No such reason is given in the assessment order to find that Kedarnath Jute Mfg. Co. Ltd.'s case (supra) is not applicable to the assessee's case. We are, therefore, of the view that the assessing authority had no doubt that the assessee was following mercantile system of accounting.
9. In the light of the above, we answer all the 3 questions in the negative against the revenue and in favour of the assessee