Full Judgment
2. The assessee is an individual having a business in sale of spirits and liquors. They had entered into an agreement with M/s. Vishindas Parasram regarding the purchase of their stock. By a letter dated 19-5-1979, M/s. Vishindas Parasram (V.P. for the sake of brevity) wrote to the assessee that as a condition of their purchases, the assessee should bear all the sales-tax liability raised on V.P. on all purchases made by the assessee. On 25-5-1979, the assessee wrote back stating that he was agreeable to the terms and conditions as stated in the assessee's letter. As far as sales-tax is concerned, he stated that he will be paying by way of Demand Draft or challan direct to the Commercial Tax Officer on the liquor sold by V.P. and purchased by the assessee.
3. On 3-11-1979, V.P. wrote another letter to the assessee. In this letter, it was stated that the additional sales-tax liability if any in addition to the sales-tax agreed to be paid by the assessee shall also be borne by the assessee, should the sales-tax department demand any additional sales-tax from V.P. This arrangement was in respect of the transactions commencing from 1-8-1979. The assessee had accepted this term also.
4. The assessee's accounting year is the financial year 1980-81. The accounting year of M/s. V.P. however is for the period from 1st July, 1979 to 30th of June, 1980. During the accounting year of the assessee, he received a letter from M/s. V.P. dated 3-7-1980. In this letter, it was stated that the additional sales-tax liability which was agreed to be paid by the assessee worked out to Rs. 8,15,208 and this amount was payable by the assessee.
5. It is necessary to explain the difference between the sales-tax and the additional sales-tax. It would appear that the rate of sales-tax on liquors during this year was 40.5 per cent. Now when the seller works out a bill for the sale of goods he adds sales-tax at the rate of 40.5 per cent. Supposing the goods were costing Rs. 100, the sales-tax levied to be Rs. 40.5 and the total bill amount will be Rs. 140.50.
However, the sales-tax department treats Rs. 140.50 as the sale of goods and levies the tax thereon. Thus, there will be tax on tax and the effective rate of sales-tax then goes up to Rs. 68.07. In this case, the seller will have to pay sales-tax of Rs. 68 on goods costing Rs. 100. The difference between Rs. 68 and Rs. 40.50 is the additional sales-tax. M/s. V.P. and many other dealers had actually filed writ petitions against the levy of the additional sales-tax. During the accounting year under consideration these writ petitions were pending.
But, it appears that in 1983 the High Court had dismissed these writ petitions and in January 1987 the Supreme Court had also upheld the Government's method of levy of sales-tax and additional sales-tax.
6. For the asst. year 1981-82, the assessee claimed before the Income-tax Officer that the additional sales-tax leviable on M/s. V.P.in respect of the goods purchased by the assessee is a liability of the assessee and it should be allowed as a deduction. The Income-tax Officer in a long and detailed order held that the assessee is not entitled to this deduction. He pointed out that the liability was only a contractual liability although it might constitute a statutory liability of M/s. V.P. Further, on going through the assessment orders of the sales-tax Department, he found that the department has not levied any additional sales-tax liability at all. He further found that the assessee had not unconditionally accepted the obligation to pay the additional sales-tax liability of M/s V.P. It was only contingent and was based on the department actually raising such an additional demand.
Since no such additional demand had been raised in the accounting year, he held that the assessee is not entitled to the deduction.
7. The assessee appealed. The Commissioner (Appeals) found that the amount payable as an additional sales-tax and claimed by the assessee was not an ad hoc estimate but one which is correctly calculated. He then referred to the agreement between the assessee and V.P. and pointed out that the assessee has to pay the sales-tax and additional sales-tax. After noting that V.P. had disputed the levy of additional sales-tax in a writ petition filed before the Andhra Pradesh High Court and had obtained the stay of collection of tax, he held that the additional sales-tax was an accrued liability which had been disputed but since that was an accrued liability it should be allowed as a deduction. In paragraph 18, he gave his findings as follows : 18. Summing up the above factual and legal position, I hold that the sales-tax provision of Rs. 8,15,208 made in the appellant's books of account, being in respect of the discharge of the statutory liability to pay sales-tax on the turnover of the dealer (VP), would constitute an accrued and ascertained liability, considering the mercantile system of accounting followed and the relevant principle of law as laid down in various Supreme Court decisions and in the Andhra Pradesh High Court decision in the case of CENTRAL WINES, regarding the treatment of the sales-tax paid by the purchaser as forming part of the sellers' turnover. Merely because the seller had disputed the tax liability in its own sales-tax assessment proceeding and the fact that the sales-tax assessment in its case was completed long afterwards, would not make the impugned liability a contingent liability or a liability de-futuro. On the contrary, the impugned liability is a liability in praesenti. Accordingly, the impugned addition of Rs. 7,56,590 is deleted.
The department is in appeal before us. We have heard Sri Santhanam for the department and Sri Dasaratharama Reddy for the assessee. The first question to be decided is the nature of this liability. Is this a contractual liability or is this a statutory liability We have no doubt in our mind that it is only a contractual liability. The payment of additional sales-tax by V.P. may be a statutory liability for V.P.but as far as the assessee is concerned, this is only a part of the cost of the goods, he had purchased from V.P. As per the agreements entered into by him, the cost of the goods would be the cost as filed by V.P., the sales-tax payable thereon and the additional sales-tax payable. As far as the cost and the sales-tax payable thereon is concerned, there is no dispute that they are fixed at the point of time of purchase and the assessee had made arrangements for its payments.
The additional sales-tax payable, although it also forms part of cost is not quantified at that stage. That is clear from the letter of V.P.obliging the assessee to pay the additional sales-tax. That letter is reproduced below : The additional sales-tax liability if any in addition to the sales-tax agreed to be paid by you shall also be borne by you, should the sales-tax department demand any additional sales-tax from us. This arrangement is in respect of the transaction commencing from 1-8-1979.
It would be seen that the letter is conditional, i.e., "should the Sales-tax Department demand any additional sales-tax" then the assessee has to pay that amount This letter was written on 3-11-1979 and reflected the doubts of V.P. regarding the likelihood of such a liability accruing to them. This is not the first year when V.P. had been called upon to pay this amount. It is quite likely that for the earlier year also, they were called upon to make these payments and the matter had already been disputed. That is why, they make it conditional "should the Sales-tax Department demand any additional sales-tax". This may be contrasted by the agreement between them with regard to the payment of sales-tax itself. That letter dated 19-5-1979 reads as follows : We have to bring to your notice, further to our oral discussions and the conditions already listed out, that you should also bear all the sales-tax liability raised on us on all purchases made by you from us.
There is no doubt expressed in this letter regarding likelihood of sales-tax liability being raised. It is a clearcut and direct contract under which the assessee should bear all the sales-tax liability on purchases made by the assessee. They have not made it contingent on sales-tax department raising a demand. This vital point has been missed by the Commissioner (Appeals).
8. Therefore, according to the contract between the assessee and V.P., the assessee's liability to pay the additional cost of the goods equivalent to the additional sales-tax payable by V.P. would accrue and arise only when V.P. in turn is, required by the sales-tax department to pay this additional sales-tax. It cannot be earlier. Since the additional sales-tax was not demanded during this accounting year, it cannot be a liability of this year. Therefore, the Income-tax Officer is justified in his finding that it cannot be allowed as a deduction.
9. Sri Reddy submitted that the letters embodying that contract should not be read as statute. They are letters of businessmen and it should be understood in a way the businessmen understand these letters. By these letters the assessee had taken over the liability of additional sales-tax. It is true that this liability is a contractual liability but according to Sri Reddy the statutory liability of V.P. becomes a contractual liability of the assessee as soon as the purchases are made. According to him, it may be that it is not demanded by the sales-tax department but it is very easy to quantify them. Such a quantified additional cost of the goods must be allowed in the year in which the goods were purchased. We are unable to agree with this submission. It is true those letters should not be treated like statutory provisions and its meaning to be ascertained by applying the rules regarding interpretations of the documents. At the same time, the plain tenor of the letter should not be ignored. We have noticed earlier the difference between ordinary sales-tax and additional sales-tax. It is in unmistakable terms that the additional sales-tax liability is passed on the assessee only when the sales-tax department raises the demand. As far as the regular sales-tax is concerned, the assessee as per contract has even agreed to pay by way of demand draft and challan direct to the Commercial Tax Officer on the liquor purchased by him. This is contained in the assessee's commitment to V.P. in letter dated 25-5-1979. There is no such commitment for the additional sales-tax. Thus, both V.P. as well as the assessee has understood the additional sales-tax liability as something different in nature from regular sales-tax liability. Even while reading these letters as businessmen, this point cannot be overlooked.
10. It was next submitted by Sri Reddy that it is not always correct to say, only when a demand is raised a liability can accrue. A prudent businessman would make a provision for a contingent payment also. When such a contingent payment is interlinked with statutory payment, a businessman in order to get correct profit is obliged to make a provision for a contingent liability. It will be only reasonable and would help in ascertaining the correct profits of the year. He submitted that the additional liability is more than 20 per cent and no businessman would take over himself such a large liability. He submitted that assessment order was only a matter of quantification and the claim for the liabilitjr need not wait till such a quantification is done.
11. We are unable to accept this submission also. Under the mercantile system of accounts, only a liability which has arisen must be allowed as a deduction. It is quite true that sometimes provisions are allowed but in those cases the liability was definite and only the payment is postponed. In this case there is no definiteness about the accrual of the liability. The whole matter was in dispute. V.P. had not admitted such a liability. Whether the High Court would uphold the Validity of such an imposition was very much debatable at that stage. The Andhra Pradesh High Court's decision and the Supreme Court's decision on this point came long after the end of the accounting year. That being so, we cannot accept that the provision made to cover a possible liability on this should be treated as an allowable deduction. Sri Reddy had cited several cases in support of his contentions. But all these cases are easily distinguishable. He had cited the Supreme Court's decision in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 but that was a case dealing with the statutory liability whereas we are dealing with contractual liability. The Andhra Pradesh High Court's decision in the case of Buddala China Venkata Rao & Co. v. CIT [1978] 112 ITR 58 was also dealing with the sales-tax liability on the dealer.
The other decisions cited like the decisions of the Calcutta High Court in the case of CIT v Rajeshwari Distributors (P.) Ltd. [1980] 125 ITR 618 and the Allahabad High Court in the case of IT AT v. B. Hill & Co.
(P.) Ltd. [1983] 142 ITR 185 also dealing with statutory liabilities arising directly on the dealers. These are not relevant in deciding the issue at the point of time the contractual liability to reimburse the statutory liability arises.
12. In ground No. 7, the department is contesting the finding that the sales-tax liability on refundable deposits would also be an admissible deduction to the assessee. At the time of hearing, Sri Reddy for the assessee conceded that there was no such liability on the assessee.