Income-tax---

----Reference---Business expenditure---Mercantile system of accounting-- Purchase tax---Liability not in dispute---Deduction permissible though amount not actually paid---No question of law arises for reference---Indian Income Tax Act, 1961, Ss.37 & 256(2).

In the return filed by the assessee for different assessment years the assessee claimed deduction of its purchase tax liability under the Punjab General Sales Tax Act, 1948. The Income-tax Officer rejected the claim of the assessee and computed the income without excluding the amount of purchase tax. The Commissioner (Appeals) allowed in part the claim of the assessee on the ground that the assessee was maintaining its accounts on the mercantile system of accounting, and therefore, its liability for purchase tax had to be given deduction while making the assessment. The Appellate Tribunal affirmed the order of the Commissioner (Appeals). Thereafter, the Revenue filed applications under section 256(1) of the Income-tax Act for referring a question of law. The Tribunal rejected the application of the Revenue. On an application filed by the Revenue under section 256(2) for directing the Tribunal to refer a question of law, the Revenue contended that as the assessee had not paid the amount of purchase tax, it was not entitled to claim deduction on the basis of the notional figures of purchase tax

Held, that for the assessment year 1973-74, assessment was made by the Income-tax Officer by taking into account the assessee's liability to purchase tax and the liability to pay purchase tax under the Punjab General Sales Tax Act, 1948, was not .in dispute. The decision of the Tribunal affirming the order of the Commissioner (Appeals) was correct and no question of law arose for reference.

Sirsa Industries v . CIT (1989) 178 ITR 437 (P&H) fol.

CIT v. Ashok Iron and Steel Rolling Mill (1993) 199 ITR 815 (All.); CIT v. Chowringhee Sales Bureau (P.) Ltd. (1969) 71 ITR 131 (Cal.); CIT v. Guranditta Mal Shanti Parkash Zira (1987) 164 ITR 774 (P&H); CIT v. Royal Boot House (1970) 75 ITR 507 (Cal.); Chowringhee Sales Bureau (P.) Ltd. v. CIT (1973) 87 ITR.542 (SC); Chowringhee Sales Bureau (P.) Ltd. v. CIT (1977) 110 ITR 385 (Cal.); Jonnalla Narashimharao & Co. v. CIT (1993) 200 ITR 588 (SC); Kedarnath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) and Peico Electronics and Electricals Ltd. v. CIT (1993) 201 ITR 477 (Cal.) ref.

R. P. Sawhney instructed by Sanjay Goyal for the Commissioner,

M. R. Sharma for the Assessee.

JUDGMENT

G. S. SINGHVI, J.---These four petitions have been filed by the Revenue under section 256(2) of the Income Tax Act, 1961, for directing the Income-tax Appellate Tribunal, Chandigarh Bench. Chandigarh to refer the question of law, which according to the petitioner, arises in these cases. Although these petitions related to different assessment years, the facts of all these petitions and the issues raised therein are identical and in view of this we are deciding them by a common order,

In the returns filed by it in different years, the assessee sought adjustment of the purchase tax liability. The assessing authority did not accept the claim made by the assessee and computed the income without excluding the amount of purchase tax. Appeals filed by the assessee were partly allowed by the Commissioner of Income7tax (Appeals) on the ground that the assessee was maintaining the mercantile system of accounting and, therefore, its liability to purchase tax had to be taken into consideration while making assessment. Aggrieved by the orders of the Commissioner of Income-tax - (Appeals), the Revenue approached the Income-tax Appellate Tribunal which affirmed the view taken by the appellate authority in regard to the claim .of the assessee for deduction of the amount of purchase tax. Thereafter, the Revenue filed applications under section 256(1) of the Income Tax Act, 1961, for reference of the question of law. The Tribunal rejected all the applications by placing reliance on a decision of this Court in Sirsa Industries v. CIT (1989) 178 ITR 437.

Shri R. P. Savhney, learned senior counsel appearing for the Revenue, argued that as the assessee had not paid the amount of purchase tax, .it was- not entitled to claim exemption on the basis of notional figures of purchase tax. Shri Sawhney submitted that the competent Authority constituted under the Punjab General Sales Tax Act, 1948, had not made assessment of the purchase tax and, therefore, the petitioner was not entitled to claim any relief and the Commissioner of Income-tax (Appeals) as well as the Tribunal committed serious illegality in accepting the claim of the petitioner with reference to purchase tax. He relied on CIT v. Guranditta Mal Shanti Parkash Zira (1987) 164 ITR 774 (P&H); CIT v: Ashok Iron and Steel Rolling Mill (1993) 199 ITR 815 (All and Peico Electronics and Electrical Ltd. v. CIT (1993) 201 ITR 477 (Cal. j. On the other hand Shri M. R. Sharma argued that the principles laid down by this Court inn Sirsa Industries v. CIT (1989) 178 ITR 437 have been correctly applied by the Commissioner of Income-tax (Appeals) and the Tribunal and no question of law arises for adjudication by this Court.

In order to determine whether any question of law arises in these petitions which the Tribunal-ought to have referred to this Court and whether the Tribunal should be directed to refer any such question of law, we may refer to some of the decisions of the Supreme Court and this Court in which a similar point has been examined. In Kedarnath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363, AIR 1971 SC 2145, their Lordships of the Supreme Court examined the scope of section. 10(2)(xv) of the

Indian Income-tax Act, 1922. The assessee in that case was engaged in the business of jute and manufacturing of jute goods. It was following the mercantile system of accounting. During the assessment year 1955-56, the assessee was awarded a deduction of Rs.1.49.776 on account of sales tax determined to be payable by the sales tax authorities on the sales made by the assessee during the previous year. The assessing authority completed the assessment before any final decision was taken by the sales tax authorities. The Income-tax Officer held that the assessee was not entitled to claim the deduction of the aforesaid amount of sales tax because it had contested its liability to pay that amount and had made no provision in its books with regard to the payment of that amount. Appeals filed by the assessee were dismissed by the Appellate Assistant Commissioner and the Tribunal. On a reference made to the High Court of Calcutta it was opined that unpaid and disputed sales tax liability, could not form the basis for a claim of deduction for the purpose of Income-tax. The High Court took the view that for the purpose of claiming deduction under section 10(2)(xv) of the Indian Income-tax Act; 1922 mere legal liability was not enough and the unpaid and disputed sales tax could not be validly deducted in the computation of business income: Their lordships referred to an earlier decision of the Calcutta High Court in CIT v. Royal Boot House (1970) 75 ITR 507, and also took cognisance of the distinction sought to be made by the Revenue on the ground that in that case the liability to pay the sales tax had not been disputed and the assessee had made a provision for its payment in its accounts and proceeded to observe (page 366):

"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. It can again not be disputed that the liability to payment of sales tax had accrued during the year of assessment even though it had to be discharged at a future date."

While rejecting the argument that the assessee had not debited the liability in its books of account, their Lordships of the Supreme Court further observed (page 367):

"We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although under the law, the deduction must be allowed by the Income-tax Officer, the assessee will lose the right of claiming or will be debarred for being allowed that deduction. Whether the assessee is entitled to a particular deduction or trot will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. The assessee who was maintaining accounts on the mercantile system was fully justified in claiming deduction of the sum of Rs.1,49,776 being the amount of sales tax which it was liable under the law to pay during the relevant accounting year. "

In Sirsa Industries v. CIT (1989) 178 ITR 437 (P&H), the assessee who was engaged in the business of cotton, ginning and pressing was following the mercantile system of accounting. During the assessment years 1968-69, 1969-70 and 1970-71, the Central Sales Tax was realised by the assessee but was not paid to the Government and was not shown as credited to the Central Sales Tax account in the books of account and balance-sheet. The Income-tax Officer did not add the amount of Central Sales Tax to the total income of the assessee and completed the assessment. Appeals filed by the assessee for two years were partly accepted. Thereafter, the Income-tax Officer issued notices under section 154/ 155 of the 1961 Act and called upon the assessee to show cause why the amount shown in the Central Sales Tax be not added to the total income of the respective years. These notices were challenged in Civil Writ Petition No. 883 of 1976. For the subsequent three years, similar proceedings were held by the Income-tax Officer and notices were issued to the petitioner under sections 147 and 148 of the Act. These notices were challenged in Civil Writ Petition No. 2196 of 1976. A learned Single Judge dismissed the writ petitions by placing reliance on the decision of the Supreme Court in Chowringhee Sales Bureau (P.) Ltd. v. CIT (1973) 87 ITR 542. The Division Bench considered the argument of the Revenue that the decision of the Supreme Court in Kedarnath Jute Manufacturing Co, Ltd. v. CIT (1971) 82 ITR 363; AIR 1971 SC 2145, had been diluted by the subsequent decision in Chowringhee Sales Bureau's (1973) 87 ITR 542, case (supra) and observed (pages 441 and 442 of 178 ITR):

"We have closely read both the decisions of the Supreme Court and are of the opinion that while in Kedamath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363, the manner of keeping mercantile system of accounting and claim of deduction of sales tax from the profits without making actual payments, was allowed such a point did not directly arise in Chowringhee Sales Bureau's case (1973) 87 ITR 542. In Chowringhee. Sales Bureaus case (1973) 87 ITR 542, the sole point for consideration was whether an auctioneer would be a dealer within the meaning of the Bengal Finance (Sales Tax) Act; 1941. In the Sale of Goods Act, 1930, an auctioneer is neither the seller nor the buyer and is merely a commission agent. In an earlier decision (See (1969) 71 ITR 131), the Calcutta High Court had declared the provision whereby an auctioneer was made liable to sales tax, as ultra vires and, therefore, the precise question before the Supreme Court was whether the decision of the Calcutta High Court declaring the provision to be ultra vires was right or wrong and it did not agree with the Calcutta High Court and held that it was within the competence of the State Legislature to include within -the definition of the word 'dealer' an auctioneer who carries on the business of selling goods and who has, in the customary course of business, authority to sell goods belonging to the principal and, therefore, concluded that in law he was liable to pay sales tax and the sales tax received by him formed part of the trading or business receipts. The point whether the assessee was right in claiming deduction in the year in which liability to pay tax accrued or whether he was entitled to claim deduction in the year in which the amount was actually paid on the basis of its manner of maintaining accounts, did not directly arise. In spite of the point not having directly arisen, the following sentence was added:

'The party would, of course, be entitled to claim deduction of the amount as and when it passes it on to the State Government.'

The aforesaid sentence was considered by the Single Judge as if a Bench of three Judges had taken a view contrary to the decision of the two Judges in Kedarnath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363 (SC). The author who prepared tire headnote of the Income-tax Reports had treated the aforesaid sentence as per incuriam. We are of the view that the aforesaid sentence is a surplusage. In a later decision in Chowringhee Sales Bureau v. CIT (1977) 110 ITR 385, by the Calcutta High Court, the precise question, which is before us, arose relating to the same assessee, namely, Chowringhee Sales Bureau (P.) Ltd., who was also before the Supreme Court in (1973)87 ITR 542. In Chowringhee Sales Bureau (P.) Ltd.'s case (1977) 110 ITR 385, for two later assessment years, Chowringhee Sales Bureau (P.) Ltd. collected - certain amounts as sales tax and deduction was claimed on the basis of accrual of liability for maintaining the mercantile system of accounting, although the amount had not been paid to the sales tax authorities. Up to the Tribunal, the assessee failed but succeeded before the Calcutta High Court. The relevant headnote of the I.T.R. is as follows:

'That the amounts collected by the assessee as gales tax formed part of its trading receipts. However, the liability to pay sales tax arises the moment a sale or purchase is effected and an assessee who maintains accounts on the mercantile system is entitled to deduction of his estimated liability. to sales tax, even though they had not been paid to the sales tax authorities.'

In this judgment, the earlier decisions of the Supreme Court relating to the same assessee in (1973) 87 ITR 542 and in Kedarnath's case (1971) 82 ITR 363 were noticed and in view of the fact that the assessee was maintaining the mercantile system of accounting, deduction was allowed on the basis of accrual of liability. This decision further explains that the point in (1973) 87 ITR 542 was different from the point which was decided in Kedarnath Jute Manufacturing Co. Ltd. v. CIT (1971)82 ITR 363 (SC), the cases referred to above relating to other High Courts and this Court and the case before us.

In view of the aforesaid discussion, although it is held that Chowringhee Sales Bureau (P.) Ltd. was maintaining the mercantile system of accounting, yet there is no conflict between Kedamath's case (1971) 82 ITR 363 (SC) and Chowringhee Sales Bureau (P.) Ltd. (1973) 87 ITR 542 (SC) as in (1973) 87 ITR 542 the precise point - was not under consideration. Accordingly, following Kedarnath's case (1971) 82 ITR 363 (SC), the two decisions of this court and of other High Corms referred to above, it is held that the income-tax Officer had rightly allowed the deduction in the original assessment framed by him. Once the assessment orders were rightly framed, no case for rectification or for reopening under sections 147/148 and 154/155 of the Act arises and the notices are clearly illegal and without jurisdiction'."

In Jonnalla Narashimharao & Company v. CIT (1993) 200 ITR 588 (SC), their Lordships partly reversed the judgment .of the Andhra Pradesh High Court and by following the law laid down in Kedarnath's case (1971) 82 ITR 363 (SC) held that the appellant who had maintained its accounts on the mercantile basis, the amounts were deductible as business expenditure for tote assessment year 1968-69 though they had not been remitted in that year. In that case, the assessee who was a commission agent in agar had collected the amount of sales tax but was disputing the very levy of sales tax which he had collected in the name of "Rasam". Provisions contained in the Andhra Pradesh General Sales Tax Act were amended so as to make the assessee liable with retrospective effect. The assessee had not remitted the amount of sales tax on the sales/purchases effected by him during 1968-69. He did it later. During the year 1968-69, section 43B was not in existence. Their Lordships followed the ratio of Kedarmath's case (1971) 82 ITR 363 (SC), and held that the assessee was entitled to the deduction of the amount of sales tax as business expenditure for the year 1968-69.

In view of this clear enunciation of law, it must be held that the Commissioner of Income-tax (Appeals) as well as the Tribunal have rightly held that the assessee was entitled to the deduction of the amount towards the purchase: tax liability. Indeed it is not in dispute that for the year 1973-74 assessment was made by the assessing authority by taking into consideration the assessee's liability regarding purchase tax and it is not to dispute that under the Punjab General Sales Tax Act, 1948, the assessee is liable to pay purchase tax. The view taken by the appellate authority as well as the Tribunal is consistent with the law laid down by the Supreme Court and, therefore, it is not possible to accept the submission of Shri Sawhney that the decision in Sirsa Industries v. CIT (1989) 178 ITR 437 (P & H) should be reconsidered. The two decisions of the Allahabad and Calcutta High Courts on which Shri Sawhney has placed reliance to show that these Courts have taken a view different than the one taken by this Court but on a careful reading of the two decisions, it becomes clear that they have no bearing' on these petitions. The Allahabad High Court was concerned with the claim of the assessee for deduction of the amount payable in the form of salary and wages. The Division Bench of Allahabad High Court held that till the liability of the employer crystallised or became due or could be ascertained the assessee was not entitled to claim deduction and it was entitled to claim such deduction in the year in which the amount actually became payable Before the Calcutta High Court, the facts were that the assessee was not under any statutory liability to pay excise duty. Rather it was a contingent liability. The Calcutta High Court held that in respect of such liability, the provision made by the assessee for differential duty was not deductible under section 37. Thus, neither of the two decisions relied upon by Shri Sawhney is of any assistance to the case of the petitioner. In Guranditta Mal Shanti Parkash Zira's case (1987) 164 ITR 774 (P&H), decided by this Court, the assessee was following the mixed system of accounting. This Court held that he assessee was entitled to claim deduction of the amount deposited in January, 1970, for the year 1970-71 and it was not entitled to the benefit of the same in the subsequent year. That, decision also has no bearing on these petitions.

For the reasons mentioned above, we hold that no question, of law arises for determination by this Court. Consequently, these petitions are dismissed.

M.B.A./3199/FC. Petitions dismissed.