COMMISSIONER OF INCOME-TAX, ORISSA versus M/S. KALINGA TUBES LTD.

Citation: [1996] 1 S.C.R. 197 · Decided: 08-01-1996 · Supreme Court of India · Bench: B.P. JEEVAN REDDY · Disposal: Appeal(s) allowed

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Judgment (excerpt)

COMMISSIONER OF INCOME-TAX, ORISSA 
v. 
MIS. KALINGA TUBES LTD. 
JANUARY 8, 1996 
[B.P. JEEVAN REDDY AND S.B. MAJMUDAR. JJ.] 
Cei1trai Sales Tax Act. 1956 : 
Sales Tt.v.:-Assessee-Follo\VillR 1nerca11t;/e sysfe1n of accnunting-
Liability to pay tax--Held arises when the assess~e nuule the sale. 
Income Tax Act, 1961 : Sectio11 37. 
Assessee 's sale's tax liabili(v arisinR duri11s: the previous year relevant to 
assessment year 1962-63-Tax de!ennined by Sales Tax Officer in a subsequent 
year-Tax denuuul reduced by Tribunal during previous .vear relevant to 
a~·.\·essn1ent year 1971-72-Held assessee \Vas not entitled to clairn deduction 
(~fthe said an1nunt in assessn1ent .vear 1971-72. 
The rospondent-Company was engagt!d in the manufacture and sales 
of steel tubes and was liable lo pay sales lax under the Central sales Tax 
A 
B 
c 
D 
Act, 1956. In respect of assessment year 1962-63 the Sales Tax Officer 
E 
completed the assessment on 31st March, 1996 and demand additional tax 
of Rs. 11,02,698. This amount was reduced to Rs. 2,21,161 by the Tribunal 
in second appeal. The respondent-assessee claimed deduction of the said 
amount as business expenditure in respect of the assessment for the previous 
year 1970-71 since according to it the sales-tax liability was of the assessment 
year 1971-72. The Income-tax Officer disallowed the said deduction in the 
F 
relevant assessment year on the ground that the assessee was following 
mercantile system of accounting and hence the liability lo pay sales tax 
accrued to it prior to the said year. The appellate Commissioner allowed 
the said deduction holding that as the said liability became determinate and 
known only during that assessment year, it could he ~llowed for that 
G 
assessment year. 
The Iucomc-Tax Tribunal reversed the finding of the Appellate 
Commissioner and held that the said sales tax liability was not admissible 
as deduction during the relevant assessment year. The High Court held that 
the liability to pay sales tax can be said to have initially accrued when the 
H 
197 
A 
B 
198 
SUPREME COURT REPORTS 
(1996] 1 S.C.R. 
sales were effected but till the liability had ceased, it shall be treated to have 
continued to accrue and that when pursuant to the Tribunal's order a fresh 
demand notice was served by the Sales Tax Officer on the assessee, the 
liability on the assessee can be said to have accrued on receipt of such 
demand notice and, therefore, the assessee could claim the deduction under 
Section 37 of the Income Tax Act during the assessment year 1971-72 even 
though the liability was of the assessment year 1962-63. 
In appeal to this Court it was contended for the revenue that (i) the 
decision of the High Court was erroneous; (ii) as the assessee was following 
mercantile system of accounting the liability to pay the central sales tax 
C accrued to the respondent:assessee, the moment the sales, which were 
subject to sales tax, were made; and (iii) the liability could not cease to be 
a liability 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. 
D 
Allowing the appeal preferred by Revenue and setting aside the 
E 
F 
decision of the High Court, this Court 
HELD : 1. The decision of the High Court is not sustainable at all. 
When the assessee is following mercantile system of accounting, in case of 
sales tax payable by the assessee, the liability to pay sales tax would accrue 
the moment the dealer made sales, which are subject to sales tax. At that 
stage the obligation to pay the tax arises. Raising of dispute in this connection 
before the higher authorities would be irrelevant. [202-A, 203-E] 
2. In the present case, the liability to pay central sales tax arose or 
accrued on the basis of mercantile system of accounting followed by the 
assessee, during the previous relevant year 1962-63. It is a fact that the 
assessment forthat year was completed by the Sales Tax Officer on 31.3.1966. 
However, in mercantile system of accounting, liability to pay the quantified 
sales tax dues as per order of Sales Tax Officer can be said to have accrued 
to the assessee for the relevant assessment year 1962-63. It is true that the 
G 
assessee challenged the same and ultimately got the liability to pay the sales 
tax for the assessment year 1962-63, reduced in second appeal before the 
Sales Tax Tribunal on 28.5.1970 to Rs. 2,22,161. B

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