Kerala High Court
Sea Mates India vs Commissioner Of Income-Tax on 15 September, 1999
Equivalent citations: [1999]240ITR484(KER)
JUDGMENT K.K. Usha, J.
1. This tax reference case at the instance of the asses-see arises out of an order passed by the Income-tax Appellate Tribunal, Cochin Bench in I.T.A. 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 Income-tax Appellate 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 circumstances of the case, the Income-tax Appellate 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 Kedernath Jute Mfg. Co. Ltd. [1971] 82 ITR 363 ?
3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the purchase tax provision was not a statutory liability to the sales tax department ?"
2. 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.
3. It is contended by 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 [1995] 213 ITR 694 and Baby Marine Exports v. CIT [1997] 225 ITR 631.
4. The facts of the case in Abad Fisheries v. CIT [1995] 213 ITR 694 (Ker), 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 Deputy CST v. Neroth Oil Mills Co. Ltd. [1982] 49 STC 249, and the Supreme Court in Sterling Foods v. State of Karnataka [1986] 63 STC 239, 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 v. CIT [1997] 225 ITR 631 (Ker). We are in respectful agreement with the above view taken in the two decisions.
5. 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 the mercantile system, the assessee cannot be found entitled to the benefit of the dictum laid down by this court in Abad Fisheries v. CIT [1995] 213 ITR 694 and Baby Marine Exports v. CIT [1997] 225 ITR 631. The learned standing counsel brought to our notice a decision of this court in CIT v. Bell Foods (Marine Division) [1991] 191 ITR 219, where this court refused to answer the question whether the purchase tax liability was deductible 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.
6. We do not find that the decision in CIT v. Bell Foods (Marine Division) [1991] 191 ITR 219 (Ker), 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 [1971] 82 ITR 363 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 the mercantile system of accounting. In the assessment order it is mentioned that according to the decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), 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 the mercantile system of accounting it could have observed that the principle in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), cannot be made applicable in the present case, merely for the reason that the assessee is not following the mercantile system of accounting. No such reason is given in the assessment order to find that Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), 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 the mercantile system of accounting.
7. In the light of the above, we answer all the three questions in the negative against the Revenue and in favour of the assessee.
8. A copy of this judgment under the seal of this court and the signature of the Registrar will be sent to the Income-tax Appellate Tribunal, Cochin Bench.