JUDGMENT
1. The Income-tax Appellate Tribunal, Allahabad has referred the following question of law under Section 256(1) of the Income-tax Act, 1961, for the opinion of this Court :
Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee's claim for Rs. 15,498 representing sales tax liability and penal interest on it for earlier years was an allowable deduction under the Income-tax Act, 1961, specially when the said amount was offered for taxation in the assessment year 1979-80 on refund ?
2. The assessee opposite party deals in staple and yarn. For the assessment year 1978-79, the Income-tax Officer found that the assessee firm had debited a sum of Rs. 15,498 on account of sales tax. He was of the opinion that the aforesaid amount relates to payment on account of penalty and interest imposed by the sales tax authorities for earlier years and, therefore, disallowed the same. In the appeal, the Commissioner of Income-tax (Appeals), Lucknow, held that neither the amount should be allowed as deduction, nor the amount which was refunded subsequently be brought to tax. In further appeal, the Tribunal has held that the respondent-asses-see is entitled for deduction of the aforementioned amount as this is the additional demand created by the sales tax authorities on November 2, 1976. An additional demand created in the relevant assessment year, ought to have been allowed as a deduction. The Tribunal also found that when the aforementioned demand was set aside in appeal, the amount was refunded then, it has been subjected to tax in the assessment year 1979-80.
3. We have heard Shri A.N. Mahajan, learned Counsel appearing for the Revenue. Nobody has put in appearance on behalf of the respondent-assessee. Learned Counsel submitted that as the demand of sales tax related to the earlier assessment year and the assessee was following the mercantile system of accounting, deduction should have been allowed only in the year in which liability to pay sales tax accrued and not during the year in which it has actually been paid. The submission is misconceived. It is not in dispute that the respondent-assessee has realized sales tax from its customers and whatever amount has been realized had been paid over to the sales tax authorities. The demand appears to be over and above the admitted amount of tax liability, which had been created pursuant to the assessment order passed on November 2, 1976. Thus, the liability to pay the aforesaid amount was came into existence and accrued for the first time on November 2, 1976 and, therefore, the Tribunal was justified in allowing its deduction during the assessment year in question.
4. We, therefore, answer the question of law referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue. Since nobody has appeared for the assessee, there shall be no order as to costs.