Commissioner of Income Tax vs Morinda Co-operative Sugar Mills Ltd.

G. S. Singhvi, J.—These four petitions have been filed by the Revenue u/s 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 Income Tax (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 u/s 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 Vs. Commissioner of Income Tax and Another, .

Shri R. P. Sawhney, 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 Commissioner of Income Tax Vs. Guranditta Mal Shanti Parkash Zira, ; Commissioner of Income Tax Vs. Ashok Iron and Steel Rolling Mill, and Peico Electronics and Electricals Ltd. Vs. Commissioner of Income Tax, . On the other hand Shri M. R. Sharma argued that the principles laid down by this court in Sirsa Industries Vs. Commissioner of Income Tax and Another, 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 The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, , 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 u/s 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 Commissioner of Income Tax Vs. Royal Boot House, , 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 not 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 Vs. Commissioner of Income Tax and Another, , 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 u/s 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. Vs. Commissioner of Income Tax , West Bengal, . The Division Bench considered the argument of the Revenue that the decision of the Supreme Court in The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, had been diluted by the subsequent decision in Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, case supra and observed (pages 441 and 442 ITR 178) :

"We have closely read both the decisions of the Supreme Court and are of the opinion that while in The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, 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 (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, . In Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, 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 COMMISSIONER OF Income Tax WEST BENGAL Vs. CHOWRINGHEE SALES BUREAU P. LTD., ), 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 The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, . The author who prepared the 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 P. Ltd. Vs. Commissioner of Income Tax, 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 Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, . In Chowringhee Sales Bureau P. Ltd. Vs. Commissioner of Income Tax, 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 ITR is as follows :

''That the amounts collected by the assessee as sales 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 Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, and in The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, 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 Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, was different from the point which was decided in The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, 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 Kedarnath''s case [1971] 82 ITR 363 and Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, as in Chowringhee Sales Bureau (P) Ltd. Vs. Commissioner of Income Tax , West Bengal, the precise point was not under consideration. Accordingly, following The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, the two decisions of this court and of other High Courts 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 u/s 147/148 and 154/155 of the Act arises and the notices are clearly illegal and without jurisdiction''."

In Jonnella Narashimharao and Co. etc. Vs. Commissioner of Income Tax, their Lordships partly reversed the judgment of the Andhra Pradesh High Court and by following the law laid down in The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, held that the appellant who had maintained its accounts on the mercantile basis, the amounts were deductible as business expenditure for the assessment year 1968-69 though they had not been remitted in that year. In that case, the assessee who was a commission agent in jaggery 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 The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, 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 in 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 Vs. Commissioner of Income Tax and Another, 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 u/s 37. Thus neither of the two decisions relied upon by Shri Sawhney is of any assistance to the case of the petitioner. In Commissioner of Income Tax Vs. Guranditta Mal Shanti Parkash Zira, decided by this court, the assessee was following the mixed system of accounting. This court held that the 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.