Farooqi, J. - (1.) THE Income-tax Appellate Tribunal has submitted this statement of the case and has solicited our opinion on the following questions of law : (1) Whether the Tribunal was correct in allowing the assessee's claim for interest paid on the credit balance in the individual account of Sri Rajendra Kumar ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was in law justified in holding that the assessee's claim for Rs. 26,453 representing liability to Central Sales Tax which was quantified through an assessment made on 10-7-73 was an allowable deduction in the year under consideration ?
(2.) THE reference relates to the assessment year 1974-75. THE assessee was a registered partnership firm, having three partners, one of them being Rajendra Kumar. He was a partner representing his own HUF. THE firm maintained two accounts in the name of Sri Rajendra Kumar, a capital account and a deposit account. THE share of the profit of Rajendra Kumar was credited to the capital account, while to the deposit account the firm paid interest to Rajendra Kumar, amounting to Rs. 7,923 in this year. THE ITO added back this amount under Section 40(b) of the I. T. Act. This was upheld in appeal. THE Tribunal, relying on CIT v. Ram Laxman Sugar Mills [1973] 90 ITR 73 (All), deleted the add-back. THE Tribunal found that Rajendra Kumar was a partner in his capacity as karta of his HUF. THE interest was paid to him in his individual capacity. Hence the payment was not to a partner. It could not be disallowed under Section 40(b). This finding is the subject matter of the first question referred to us. In CIT v. London Machinery Co., ITR No. 608 of 78 decided on 26-10-78 (since reported in [1979] 117 ITR 111), this Bench took the view that interest paid to a person who was a partner was disallowable under Section 40(b), no matter in which capacity the payment was made. In view of that decision, the first question has to be answered against the assessee. In respect of the second question, the admitted position is that the assessee had been maintaining his account books on mercantile basis. The relevant transactions of sale were effected in the accounting period relevant to the assessment year 1969-70. The assessee did not make any provision for sales tax in his accounts for that year. The sales tax was assessed and demanded in the accounting period relevant to the assessment year 1974-75. The ITO took the view that the liability to pay sales tax accrued as and when the transactions of sale and purchases were effected. The liability had nothing to do with its quantification by the sales tax department. In this view he held that the liability could not be allowed as a deduction in the assessment year 1974-75. The AAC agreed with this view. The Tribunal, however, held that the assessee was not aware whether the Central sales tax would be payable by him and it was for this reason that he could not make provision in the relevant year and accordingly allowed the claim.
(3.) IN Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363, the Supreme Court has observed (page 366): "Now under all sales tax laws including the statute with which we are concerned, the moment a dealer makes either purchases or sales which are subject to taxation the obligation to pay the tax arises and taxability is attracted. Although that liability cannot be enforced till the quantifica- ation is effected by assessment proceedings, the liability for payment of tax is independent of the assessment." and then again as under : "An assessee who follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed." In the present case it is not disputed that the relevant transactions were effected in the accounting period pertaining to the assessment year 1969-70. In view of observations of the Supreme Court, it is clear that the obligation to pay the sales-tax arose in that year. The liability did not cease to be there merely because the assessee thought that in law it had not arisen or because the assessment was made and demand created in a subsequent year. The assessee, who was following the mercantile system of accounting, should have deducted from his profits and gains of business such liability in the year 1969-70 under Section 37(1) of the I. T. Act, 1961. His omission to do so disentitled him to claim the deduction in any subsequent year irrespective of the fact whether, he knew or not that the liability had arisen. For liability of one year cannot be taken into account for computing, under Section 28, the profits and gains of business in respect of a subsequent year.;