N.K. Agrawal, Judicial Member -
(1.) THESE are cross-appeals relating to assessment year 1983-84. We shall first take up the assessee's appeal in which ground No. 1 relates to the addition of Rs. 3,15,000 sustained by the CIT(A) on account of sales-tax and surcharge paid by the assessee. The assessee derived income from extraction of timber from forests allotted by the State Govt. of Himachal Pradesh. The assessee was allotted certain lot by the District Forest Officer, Kotgarh, in the year 1979. The DFO charged sales-tax. @ 25% and surcharge @ 2.5%. The rate of sales tax was earlier 10% on the amount of royalty payable by the assessee. The rate was enhanced by the amendment of the relevant sales-tax law w.e.f. 1-2-1979, The assessee filed a writ petition before the High Court but that was dismissed on 23-4-1980. The assessee went before the Supreme Court in the month of June 1980 and a stay order was obtained on 18-6-1980. However, the stay was vacated by the apex court, though Special Leave Petition was granted by order dated 18-11-1982. The assessee, therefore, contended before the Assessing Officer that he was entitled to claim deduction for the payment of the amount of sales-tax and surcharge at the enhanced rate inasmuch as the demand arose after the stay was vacated on 18-11-1982. The Assessing Officer declined to allow deduction amounting to Rs. 3,15,000. The assessee had paid a sum of Rs. 1,80,000 on account of sales-tax at the existing rate of 10% against the demand of Rs. 4,95,000. For the balance amount of Rs. 3,15,000, stay was obtained. Since the stay order dated 18-6-1980 was vacated on 18-11-1982, deduction was claimed for Rs. 3,15,000 in the 'previous year' relevant to the assessment year 1983-84. The accounting year of the assessee ended on 31-3-1983. The Assessing Officer was of the view that the liability had actually accrued on the date of amendment of the sales-tax law, which was 1 2-1979. Therefore, the claim was rejected. The assessee was following mercantile system of accounting. The assessee went in appeal but the first appellate authority declined to accept the plea that the excess demand was created after vacation of the stay only.
(2.) The Id. counsel has argued before us that the liability accrued in part only in assessment year 1980-81 so far as demand of sales-tax at 10% is concerned. It. has been pointed out that the rate of sales-tax was 7% up to the year 1976 and it was raised to 10% thereafter. The law was again amended with retrospective effect and the rate was raised to 25% by virtue of the amendment made by the Legislative Assembly of H.P. The amending Bill was introduced in April 1979. The Bill received the assent of the Governor on 8-6-1979 and was published in the Official Gazette on 16-6-1979. Since it was a retrospective amendment to come into effect from 1-2-1979, the assessee challenged the amending law before the High Court and, thereafter, before the Supreme Court. The Id. counsel has, therefore, argued that the demand was under dispute and, therefore, the assessee was not required to make payment before the question of law was settled finally by the Supreme Court. Our attention has been drawn to the letter sent by the DFO wherein the demand is said to have been 'created'. Copies of DFO's letter dated 1-11-1985 and 20-11-1986 have been placed before us and our attention has been drawn to the fact that since the DFO created demand in this year, it was legitimate for the assessee to claim deduction for that amount.
The ld. D.R. has, in reply, submitted that the liability had actually accrued by virtue of the amendment of the relevant law and the assessee was not required to make a provision only after receiving any demand notice. The assessee was to pay sales tax to the DFO in the capacity of a customer and since notification had been issued in the Official Gazette, there was no question of any demand being raised or created by the DFO. The liability arose and accrued under a Govt. notification and it was incorrect to say that the liability was created by the DFO by any information in the year 1986. Our attention has been drawn to the terms of the agreement, between the DFO and the assessee, executed on 3-2-1979. Copy of the agreement has been placed at pages 12 to 18 of the assessee's compilation. Clause (F) at page 7 of the agreement reads as under :
(F) That the lessee whether registered or unregistered under the Him achal Pradesh General Sales Tax Act, 1968, will have to pay sales-tax @ 10% or at such other rate as may be levied by the Excise and Taxation Department on the sale value of the lot in addition along with the royalty installment pro rata. It is, however, evidently made clear that the lessee will have to pay the sales-tax on the due date as provided irrespective of the fact whether the period of payment of any installment extended by the competent authority or not. In case of his failure to do so, he will have to pay penalty at the rate of 15% per annum for the period of belated payment of sales-tax from the due date.
On the basis of the said clause, it is clear that the assessee was to pay sales-tax at 10% or at such other rate as may be levied by the Excise and Taxation Department. Therefore, it was inherent in the agreement that the liability may arise so far as the rate of sales-tax is concerned. Since the rate of sales-tax was enhanced by virtue of an amendment of the relevant law, and not by any executive action of the DFO, it cannot be accepted that it was a demand created by the DFO by his letter sent to the assessee in the year 1986. The Id. D.R. has pointed out that the word 'created' was mistakenly used by the DFO and the actual effect of the amendment of law cannot be lost sight of. Our attention has been drawn to a telegram sent by the DFO to the assessee on 5-3-1979, reference to which has been made in the S.L.P. in para 4. It has been contended by the Id. D.R. that the assessee was duly informed as early as in he month of March 1979 that the rate was being raised by amendment of law. Therefore, the excess liability arose on account of statutory Act and not by any executive order of the DFO. As we have already seen, the relevant amending Bill was introduced in the Legislative Assembly in the month of April 1979 and had finally become law after its publication on 16-6-1979. Since the amendment was retrospective in nature, the enhanced rate became effective from 1-2-1979. So far as grant of stay and its vacation are concerned, we do not find that the demand could be said to have been either wiped out on the ground of stay or created on its vacation. The assessee might have challenged the constitutionality of the amending law but the question of creation of excess demand shall not depend on the order made by the Supreme Court for the stay of demand. The stay was for a short period and was ultimately vacated in the month of November 1982. The assessee cannot take a plea that the demand was created after vacation of stay order. The source of demand cannot be traced in the order of stay but it lay in the legislative amendment made in the relevant law.
(3.) THE Id. counsel has placed reliance on a decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT  82 ITR 363. That was a case where the assessee was following the mercantile system of accounting and had incurred a liability on account of sales-tax determined to be payable on the sales made by it. THE sales-tax demand had been raised pending income-tax assessment in that case. It was held that the assessee was entitled to deduct from the profits and gains of the business, liability to sales tax which arose on the sales made by it during the relevant year. THE liability did 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. THE Id. counsel has submitted that the said decision permitted the assessee to claim deduction on the basis of the liability which arise in the relevant year. We, however, find that the said decision would not help the assessee in the present circumstances of the assessee's case. Here the liability arose, after the amendment of law, in terms of the agreement dated 3-2-1979. THE liability did not depend on the quantification or on final adjudication of the constitutional question raised by the assessee. THE Id. counsel has also "placed reliance on a decision in the case of CIT v. Nathmal Tolaram  88 ITR 234 (Gauhati). That was a case where the assessee was following mercantile system of accounting but had claimed deduction with respect to sales-tax for earlier years. It was held that there was no express bar in law which disallows expenditure relating to a period other than previous year. THE assessee did not make any provision for payment of the amount in its accounts because the demand was made only in the accounting year 1957-58. THE assessee, therefore, made a debit entry in that accounting year and claimed it as a business expenditure. It was allowed. We, however, find that the main thrust of the decision is on the creation of demand and since the demand was made in the relevant accounting year in which debit entry was made, it was, in that situation allowed to be appropriate. THE Id. counsel has also placed reliance on a decision of the Madhya Pradesh High Court in the case of Suneeta Laboratorires Ltd. v. CIT  162 ITR 883. That was a case where certain payment of salary to the godown-keeper and watchman had been made and the assessee had to bear the expenditure for such payment which was actually paid by the bank but was recoverable from the assessee. It was held that the salary paid for several years by the bank was debited to the cash credit account of the assessee in the accounting year and the assessee was entitled to deduction of the entire amount recoverable by the bank in that year. We again find that the decision rests on the question of creation of demand. Since the bank did create a demand for earlier years, the assessee could not be said to have knowledge of the liability earlier. Our attention has also been drawn by the Id. counsel to a decision of the Kerala High Court in the case of CIT v. Grand Cashew Corpn.  182 ITR 216. That was a case where arbitrator passed certain awards determining the damages by the assessee for breach of contract. THE assessee claimed deduction of the damages payable in the assessment year 1978-79. THE ITO rejected the claim but the CIT(A) allowed it and the Tribunal upheld the order of the CIT(A). It was found that the liability to pay the unliquidated damages became crystallised when the amount of damages was accepted either by negotiation or was determined by an arbitrator or by a court. We find that the question there was different and the liability arose on its determination by arbitration.;