1. The assessee, whose business is of a commission agent in arecanut, claims under Section 10(2)(xv) of the Income-tax Act deduction of sums assessed payable as sales-tax. Act XVIII of 19155 had become operative on October 1955, and had amended the General Sales-tax Act, XI of 1125. Thereafter a single point levy of six pies in the rupee had become chargeable under Section 3(1) on the purchase turnovers of the last dealers in the Kerala State. The assessee was collecting till October 1, 1955, the tax on sales made by him in addition to his commission of 6 1/4 per cent, but thereafter he raised the commission to 7 1/2 per cent. On November 24, 1955, the Sales-tax Department made provisional assessment on the assessee for the last purchases he had made on behalf of the non-resident arecanut dealers, which assessment was finally revised on September 15, 1955
The tax was then computed at Rs. 31,000. On March 31, 1956, the assessee entered Rs. 18,652-15-6 in his account books as expenditure for the sales-tax payable on account of the purchases be had made, but the levy of tax was challenged as unconstitutional, the transaction on which it was levied being claimed to be sales of inter-State nature. The High Court has dismissed the writ petition, but an appeal against it is pending before, the Supreme Court. The liability to pay the tax therefore is still in dispute. Meanwhile the assessee has claimed for the assessment year 1956-67 Rs. 18,652-15-6 as allowable deduction under Section 10(2)(xv) of the Income-tax Act, and the claim had been held by the Income-tax Officer not to be justified.
The Appellate Assistant Commissioner has found that the method hitherto followed by the assessee Ought to have been continued even for the purpose of the tax, and that the assessee's liability to pay the tax was still contingent, because the challenge to the legality of the tax was still being contingent, because the challenge to the legality of the tax was still being continued, The appeal to the Tribunal has been dismissed, find the Tribunal has held the assessee having adopted the cash system of accounting could not convert into a mercantile system, and even under the mercantile system of keeping accounts, there was no ascertained liability in the case to justify any claim. Thereafter the following question has been referred to this Court.
'Whether on the facts and circumstances of the case, the assessee is entitled to claim a sum of Rs. 18,652-15-6 as an allowable deduction in the year of account?'
2. It is clear that under Section 18 of the General Sales-tax Act, the agent of a non-resident purchaser incurs the liability of being assessed to the tax irrespective of the business of the nonresident, and the amount of the turnover being less than minimum. It is further clear that the agent has under Section 18(iii) of the Act the rightsof retaining the tax amount out of the principal's money with the agent. As the provision is important we would quote it.
Section 18: * * *
'(iii) Without prejudice to other rights, anyagent of non-resident who is assessed under thisAct in respect of the business of such non-residentmay retain out of any moneys payable to the nonresident by the agent, a sum equal to the amountof the tax or taxes assessed on or paid by theagent.'
3. We think the assessee's claim in this reference is not justified, because this right of the agent to compensation for the expenses has not been taken into consideration. In this connection tt would be remembered that the reason for permitting deductions on account of liabilities that have accused is that without taking them into account a fair appraisement of the assessee's profits for the account year would he impossible, and because of this principle the House of Lords has in Southern. Rly. of Peru Ltd. v. Owen 1957 A.C. 334 held that the claim, for deduction of liability that may be contingent can be allowed.
The facts of the case were that the assessee company operated a railway in Peru where an employee was entitled under the legislation on the termination of his services to receive from his employer a sum ior each month of his service provided he be not dismissed for misconduct, and the sum was calculated by reference to the rate of salary for each month of service. The assessee company contested that it became liable year by year to pay a specific sum as deferred remuneration for that year, and that therefore such a sum was an allowable deduction in computing the profits of the year.
The argument by the assessing authority was that no liability to make the payment arose until an obligation to pay came into existence, and therefore the sum would not be taken into account except in computing the profits of the year, in which it became clue to pay. It was held by Lord Radcliffe with whom Lord Jowitt, Lord Mac Dermott and Lord Tucker concurred that, the Company was entitled to charge against each year's receipt, the cost of making provision for the retirement payment which would ultimately be payable, provided the present value of the future payment should be fairly estimated. The relevant parts of Lord Radcliffe's judgment arc at pages 355 and 356.
'But there is no difficulty if we accept the main argument of the Crown. That argument is that, quite simply, there is a rule of law which forbids the introduction of any provision for future payments in or payments out, if the right to receive them or the liability to make them is in legal terms contingent at the closing of the relevant year. The rule, it seems, is absolute and must be adhered to whatever the current principles or practices or commercial accountancy may require as a method of ascertaining the year's profits. And this is the argument which hitherto has prevailed in the High Court and the Court of Appeal. Now, in my opinion there is no such rule of law governing the ascertainment of annual profits'.
4. Lord Radcliffe at p. 358 states the ground on which the claim by the assesses Company was being rejected.
'When account is taken of all the circumstances, I should have thought that the sums charged were a very long way from affording a scientific appraisement of the additional burden arising in respect of the year's services; and were, therefore in the nature of a rough reserve against the future rather than a measured provision. Because what the appellant has done is simply this. It has calculated what sum would be required to be paid to each employee in respect of retirement benefit if he retired, without forfeiture, at the close of the year, and the aggregate of what is required is set aside in so far as the year has contributed to the aggregate. I think that is a sufficiently accurate description of the process as it was explained to us. But it seems to me to leave out of account several factors that are essential to the appraisement.
5. It follows that in any claim for deduction on account of future liability the crucial point is whether the amount claimed as the deduction has been fairly estimated, and the decision by the Income-tax authorities about the liability being contingent would not be fatal, had the estimate of the liability been fairly arrived at. It is clear that that cannot be said in this reference, for the assessee in making the claim has not taken into consideration his right of retaining the tax amount under Section 18(iii) of the Sales-tax Act out of the principal's amount in his hands. In the case referred to about the right of the company to claim deduction was rejected on the short point that it did not take into account the discount which it would be entitled to when making payment. It follows that the assessee's claim in this reference is not justified, because of the omission, and we would therefore answer the question in the negative.
6. The assessee's learned Advocate has drawn our attention to Rajarathina Nadar v. Commissioner of Income-tax, Excess Profits Tax : 29ITR834(Mad) where it has been held that as the assessee maintained his accounts on the mercantile basis, a mere ascertained liability with a corresponding entry in his accounts would suffice for claiming revenue, expenditure. It was further held that the assessee's intention net to discharge the liability did not affect his legal liability and presumably would not be material. The learned Advocate has further argued that the liability to pay the tax arises as soon as the transactions are entered into irrespective of whether the assessments be concluded.
In support of this argument he relies on Abramai v. Commissioner of Income-tax 1958 K LJ 376. As we have based our answer in this reference against the assessee not because of the liability, which he had provided for was contingent, any detailed discussion of the cases referred to is not necessary. In this reference we think the claim falls because no correct estimate of the liability has been made due to the assessee's right to compensation having been omitted from consideration. Let the aforesaid answer be sent, andthe Department will be entitled to its costs, Advocate's fee being fixed at Rs. 100/-.