Apex Court in Kedarnath Jute - Relevance of Book Entries

September 26,2015
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Anish Thacker (Partner, Ernst & Young LLP)

The Income-tax Act, 1961 (Act) brings to tax ‘Profits and Gains’ of a business or profession of a taxpayer. The profits and gains to be brought to tax are the real profits and they have to be ascertained on ordinary principles of commercial trading and commercial accounting.

The question that arises in this regard is to what extent entries in the books of account would be relevant in computing the income of a taxpayer. To put it differently, in order to make a claim for an expense, is it necessary that the Profit and Loss account must be debited?

This issue has been examined by the Supreme Court in Kedarnath Jute Mfg Co. Ltd v. CIT [1971] 82 ITR 363/ [TS-7-SC-1971] by a two judge bench of K.S. Hegde and A.N. Grover, JJ. The taxpayer in that case was a public limited company carrying on the business of manufacture and sale of jute goods. For the Assessment Year 1955-56, the taxpayer claimed a deduction of sales tax liability of Rs. 1,49,776 which was on account of a demand raised by the sales tax authorities subsequent to filing of its original return of income. The original return of income was filed on 13 January 1956. In respect of the sales of the taxpayer during the previous year relevant to the Assessment Year 1955-56, the sales tax authorities raised a demand of Rs. 1,49,776 and the demand notice was served on the taxpayer on 21 November 1957 which the taxpayer disputed and the matter was appealed. On 9 November 1959, the taxpayer filed a revised return claiming the deduction. The assessment for that year was completed on 11 March 1960. Till the assessment was completed, the appeal filed by the taxpayer against the said sales tax demand was still pending.

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Fundamental concepts are universal. The learned author has nicely articulated the important ruling very aptly and is more relevant in the days of ICDS for computation of taxable Income. Regards Keshav