I never made a provision in my books for the demand, and I am disputing it in appeal. Can I still deduct it?
Yes. Whether a deduction is available is decided by the Act, not by what the assessee wrote or failed to write in the books, and not by the view the assessee takes of his own liability. A sales tax liability that had accrued on the demand being raised was deductible under the mercantile system even though no entry had been made for it and the assessment was under appeal.
Decided by the Supreme Court (Supreme Court of India (K.S. Hegde and A.N. Grover, JJ.; judgment by Grover, J.), Civil Appeal No. 1899 of 1967, by special leave) on 1971-08-17, reported as (1971) 82 ITR 363 (SC) / [1971] 28 STC 672 (SC) - Civil Appeal No. 1899 of 1967. It bears on section 37(1), section 10(1) of the Indian Income-tax Act, 1922, section 10(2)(xv) of the Indian Income-tax Act, 1922, section 10(5) of the Indian Income-tax Act, 1922 of the Income Tax Act 1961, in Deductions & Disallowances and Assessment & Scrutiny matters.
It cuts both ways and that is why it is worth having. Against the department, it answers the disallowance made because 'you never provided for it' or 'you are contesting it, so it is not your liability'. Against the assessee, it is the same principle the department uses to tax a receipt that was never credited to the profit and loss account. The corpus already holds the mirror image at cit-v-noble-hewitt-43b-not-debited-to-pl, where the assessee had not charged the amount to the profit and loss account; this entry supplies the authority for the underlying rule.
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The assessee, a public limited company in the jute business and the manufacture of jute goods, kept its accounts on the mercantile system. For assessment year 1955-56, the previous year having ended on 31 December 1954, it claimed a deduction of Rs. 1,49,776 for sales tax determined by the sales tax authorities as payable on sales it had made in that year. The dates matter and the judgment sets them out: the income-tax return was filed on 13 January 1956; the sales tax demand notice, dated 21 November 1957, was served on that date; the assessee filed a revised return claiming the deduction on 9 November 1959; and the Income-tax Officer completed the assessment on 11 March 1960, before any final decision in the sales tax proceedings. The assessee had taken the order creating the demand to the higher departmental authorities, contesting the amount determined. The Income-tax Officer disallowed the claim on two grounds - that the assessee had denied its liability and that it had made no provision in its books. The Appellate Assistant Commissioner and the Tribunal agreed. On a reference the Calcutta High Court held that an unpaid and disputed sales tax liability could not found a claim for deduction, reasoning that under s.10(2)(xv) mere legal liability is not enough - there must first be an expenditure, laid out or expended wholly and exclusively for the business - and that such a liability could not be deducted under s.10(1) either.
The appeal was allowed and the judgment of the Calcutta High Court set aside; the referred question was answered in favour of the assessee and against the revenue, with costs to the assessee in the Supreme Court and in the High Court. Under all sales tax laws the obligation to pay arises the moment a dealer makes purchases or sales that are subject to tax, and although that liability cannot be enforced until quantification by assessment, the liability is independent of the assessment. Here the liability had been quantified and a demand created by the notice of 21 November 1957, during the pendency of the income-tax assessment and before it was finalised. The liability does not cease to be one because the assessee has taken proceedings to get it reduced or wiped out, so long as its contention on quantum has not prevailed. An assessee on the mercantile system is entitled to deduct a liability that accrued during the period for which profits are being computed, even though it falls to be discharged later. And whether a deduction is available depends on the law relating to it, not on the view the assessee takes of his rights, nor can the presence or absence of entries in the books be decisive or conclusive.
The Court took the deduction under both limbs argued. On s.10(2)(xv), read with s.10(5), which defines 'paid' as actually paid or incurred according to the method of accounting, sales tax payable is an expenditure and is laid out wholly and exclusively for the business; on the mercantile system the deduction is permissible in the year to which the liability relates, irrespective of when it is discharged. On s.10(1), profits assessed to tax must be real profits ascertained on ordinary principles of commercial accounting, so where the assessee is bound to make a payment out of gross receipts, the profits are the net amount after deducting it. It then rejected the two grounds relied on against the claim. The dispute: applying its own analysis of when the obligation arises, and approving Pope The King Match Factory v. CIT, where an excise demand was held to create an enforceable legal liability from the date of receipt and an appeal against it did not detract from or retard that liability. The books: the Solicitor-General argued that failure to debit the liability barred the claim, and the Court said it was wholly unable to appreciate the suggestion that an assessee who, under a misapprehension or mistake, fails to make an entry loses a deduction the law requires to be allowed. It also approved CIT v. Royal Boot House and rejected the revenue's attempt to distinguish it on the ground that liability there was undisputed and a provision had been made, holding that distinction to be without substance.
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 the existence or absence of entries in the books of account be decisive or conclusive in the matter.
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Handle my notice → Ask a CA on WhatsAppYes. Whether a deduction is available is decided by the Act, not by what the assessee wrote or failed to write in the books, and not by the view the assessee takes of his own liability. A sales tax liability that had accrued on the demand being raised was deductible under the mercantile system even though no entry had been made for it and the assessment was under appeal. This was decided by the Supreme Court (Supreme Court of India (K.S. Hegde and A.N. Grover, JJ.; judgment by Grover, J.), Civil Appeal No. 1899 of 1967, by special leave) and bears on section 37(1), section 10(1) of the Indian Income-tax Act, 1922, section 10(2)(xv) of the Indian Income-tax Act, 1922, section 10(5) of the Indian Income-tax Act, 1922 of the Income Tax Act 1961. It is reported as (1971) 82 ITR 363 (SC) / [1971] 28 STC 672 (SC) - Civil Appeal No. 1899 of 1967. It cuts both ways and that is why it is worth having. Against the department, it answers the disallowance made because 'you never provided for it' or 'you are contesting it, so it is not your liability'. Against the assessee, it is the same principle the department uses to tax a receipt that was never credited to the profit and loss account. The corpus already holds the mirror image at cit-v-noble-hewitt-43b-not-debited-to-pl, where the assessee had not charged the amount to the profit and loss account; this entry supplies the authority for the underlying rule. If it applies to you, the first step is this: Plead the accrual, not the entry: identify the event that fixed the liability in the year — here, the sales tax demand — and show that your method of accounting is mercantile.
The assessee, a public limited company in the jute business and the manufacture of jute goods, kept its accounts on the mercantile system. For assessment year 1955-56, the previous year having ended on 31 December 1954, it claimed a deduction of Rs. 1,49,776 for sales tax determined by the sales tax authorities as payable on sales it had made in that year. The dates matter and the judgment sets them out: the income-tax return was filed on 13 January 1956; the sales tax demand notice, dated 21 November 1957, was served on that date; the assessee filed a revised return claiming the deduction on 9 November 1959; and the Income-tax Officer completed the assessment on 11 March 1960, before any final decision in the sales tax proceedings. The assessee had taken the order creating the demand to the higher departmental authorities, contesting the amount determined. The Income-tax Officer disallowed the claim on two grounds - that the assessee had denied its liability and that it had made no provision in its books. The Appellate Assistant Commissioner and the Tribunal agreed. On a reference the Calcutta High Court held that an unpaid and disputed sales tax liability could not found a claim for deduction, reasoning that under s.10(2)(xv) mere legal liability is not enough - there must first be an expenditure, laid out or expended wholly and exclusively for the business - and that such a liability could not be deducted under s.10(1) either. The matter was decided on 1971-08-17 by the Supreme Court (Supreme Court of India (K.S. Hegde and A.N. Grover, JJ.; judgment by Grover, J.), Civil Appeal No. 1899 of 1967, by special leave). On those facts the Supreme Court held as follows. The appeal was allowed and the judgment of the Calcutta High Court set aside; the referred question was answered in favour of the assessee and against the revenue, with costs to the assessee in the Supreme Court and in the High Court. Under all sales tax laws the obligation to pay arises the moment a dealer makes purchases or sales that are subject to tax, and although that liability cannot be enforced until quantification by assessment, the liability is independent of the assessment. Here the liability had been quantified and a demand created by the notice of 21 November 1957, during the pendency of the income-tax assessment and before it was finalised. The liability does not cease to be one because the assessee has taken proceedings to get it reduced or wiped out, so long as its contention on quantum has not prevailed. An assessee on the mercantile system is entitled to deduct a liability that accrued during the period for which profits are being computed, even though it falls to be discharged later. And whether a deduction is available depends on the law relating to it, not on the view the assessee takes of his rights, nor can the presence or absence of entries in the books be decisive or conclusive.
The Court took the deduction under both limbs argued. On s.10(2)(xv), read with s.10(5), which defines 'paid' as actually paid or incurred according to the method of accounting, sales tax payable is an expenditure and is laid out wholly and exclusively for the business; on the mercantile system the deduction is permissible in the year to which the liability relates, irrespective of when it is discharged. On s.10(1), profits assessed to tax must be real profits ascertained on ordinary principles of commercial accounting, so where the assessee is bound to make a payment out of gross receipts, the profits are the net amount after deducting it. It then rejected the two grounds relied on against the claim. The dispute: applying its own analysis of when the obligation arises, and approving Pope The King Match Factory v. CIT, where an excise demand was held to create an enforceable legal liability from the date of receipt and an appeal against it did not detract from or retard that liability. The books: the Solicitor-General argued that failure to debit the liability barred the claim, and the Court said it was wholly unable to appreciate the suggestion that an assessee who, under a misapprehension or mistake, fails to make an entry loses a deduction the law requires to be allowed. It also approved CIT v. Royal Boot House and rejected the revenue's attempt to distinguish it on the ground that liability there was undisputed and a provision had been made, holding that distinction to be without substance. In the words reproduced by the source cited on this page: "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 the existence or absence of entries in the books of account be decisive or conclusive in the matter." The decision followed or applied Pope the King Match Factory v. CIT [1963] 50 ITR 495 (Mad.) - approved; CIT v. Royal Boot House [1970] 75 ITR 507 (Cal.) - approved; Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1968] 67 ITR 56 (Cal.) - the judgment under appeal, reversed.
It was decided by the Supreme Court on 1971-08-17 and is reported as (1971) 82 ITR 363 (SC) / [1971] 28 STC 672 (SC) - Civil Appeal No. 1899 of 1967. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 37(1), section 10(1) of the Indian Income-tax Act, 1922, section 10(2)(xv) of the Indian Income-tax Act, 1922, section 10(5) of the Indian Income-tax Act, 1922, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was allowed and the judgment of the Calcutta High Court set aside; the referred question was answered in favour of the assessee and against the revenue, with costs to the assessee in the Supreme Court and in the High Court. Under all sales tax laws the obligation to pay arises the moment a dealer makes purchases or sales that are subject to tax, and although that liability cannot be enforced until quantification by assessment, the liability is independent of the assessment. Here the liability had been quantified and a demand created by the notice of 21 November 1957, during the pendency of the income-tax assessment and before it was finalised. The liability does not cease to be one because the assessee has taken proceedings to get it reduced or wiped out, so long as its contention on quantum has not prevailed. An assessee on the mercantile system is entitled to deduct a liability that accrued during the period for which profits are being computed, even though it falls to be discharged later. And whether a deduction is available depends on the law relating to it, not on the view the assessee takes of his rights, nor can the presence or absence of entries in the books be decisive or conclusive. It arises in Deductions & Disallowances and Assessment & Scrutiny matters, on section 37(1), section 10(1) of the Indian Income-tax Act, 1922, section 10(2)(xv) of the Indian Income-tax Act, 1922, section 10(5) of the Indian Income-tax Act, 1922 of the Income Tax Act 1961, and was decided by Supreme Court of India (K.S. Hegde and A.N. Grover, JJ.; judgment by Grover, J.), Civil Appeal No. 1899 of 1967, by special leave. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not let the officer close the point by asking where the provision is in the books; the absence of an entry is not an answer to a deduction the Act allows. Do not be deterred by your own appeal against the underlying demand; contesting the liability does not postpone it under the mercantile system. Check s.43B before you rely on this for a statutory levy, because for the heads listed there the deduction now turns on actual payment whatever the accrual position.
Still good law. Followed and relied upon by the Supreme Court in CIT v. Bharat Carbon & Ribbon Mfg. Co. (P.) Ltd. [1999] 105 Taxman 737 / 239 ITR 505 / 155 CTR 497 (SC), decided 17 August 1999 (D.P. Wadhwa and M.B. Shah, JJ., Civil Appeal No. 16688 of 1996), whose case review records this decision as followed. There the Court applied it to a quantified excise demand disputed in a writ petition and not debited in the books, holding there was nothing uncertain, tentative, provisional or contingent about the liability, and reproducing this judgment's sentence on the books of account. What has changed around it is s.43B, enacted long afterwards, which for the levies it lists makes the deduction depend on actual payment regardless of accrual; on a s.43B item this decision does not survive that provision. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read in full in the law report at [1971] 82 ITR 363 (SC); the report carries no numbered paragraphs. Two cautions. First, the sentence this case is universally cited for concerns the books of account, and the Court's own words are that the existence or absence of entries cannot be 'decisive or conclusive' - not that entries are irrelevant to everything. The wider formulation that circulates in digests, that allowability and taxability are governed by the provisions of the Act rather than by book entries, is a paraphrase and not the Court's language. Second, the decision is about when a statutory liability accrues under the mercantile system, and s.43B now overrides accrual for the levies it lists, so on a s.43B item the case does not carry the result it once did. The judgment is decided under ss.10(1), 10(2)(xv) and 10(5) of the Indian Income-tax Act, 1922; s.37(1) is carried in the section list only as the index tag for the corresponding provision of the 1961 Act. The judgment does not say what happens if the disputed demand is later reduced or cancelled - the answer lies in s.41(1), which it does not touch - and it does not address s.43B, enacted afterwards. It decides nothing about a liability that has not been quantified at all: the Court twice emphasised that here the demand had been created and the amount fixed before the income-tax assessment was finalised, so a wholly unquantified or purely anticipated liability is outside it. Nor does it deal with a provision made for a liability the assessee expects but has not yet been charged with. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed and the judgment of the Calcutta High Court set aside; the referred question was answered in favour of the assessee and against the revenue, with costs to the assessee in the Supreme Court and in the High Court. Under all sales tax laws the obligation to pay arises the moment a dealer makes purchases or sales that are subject to tax, and although that liability cannot be enforced until quantification by assessment, the liability is independent of the assessment. Here the liability had been quantified and a demand created by the notice of 21 November 1957, during the pendency of the income-tax assessment and before it was finalised. The liability does not cease to be one because the assessee has taken proceedings to get it reduced or wiped out, so long as its contention on quantum has not prevailed. An assessee on the mercantile system is entitled to deduct a liability that accrued during the period for which profits are being computed, even though it falls to be discharged later. And whether a deduction is available depends on the law relating to it, not on the view the assessee takes of his rights, nor can the presence or absence of entries in the books be decisive or conclusive.
TaxSphere, “Kedarnath Jute Manufacturing Co Ltd v CIT”, https://taxnotice.vittsphere.com/caselaw/case/kedarnath-jute-manufacturing-v-cit-books-do-not-decide/ (validity last checked 2026-08-22)
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