1. This is a reference under s. 256(1) of the I. T. ACt, 1961. The questions referred to use for our determination in this reference is as follows :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 9.9987 being the amount of sales tax allocated by the assessee from his customers but no paid could be brought to tax as income for the assessment year 1968-69?'
2. The relevant facts are that the assessee is a from deriving income from Kirana business. In respect of the relevant proviso year to the assessment year 1968-69, with which we are concerned, in the separate seals tax account, there were credits of Rs. 20,445 a d debits of Rs. 10,458. The closing balance was shown at Rs. 9,9987 in the balance sheet. this shows that the total credits for sale tax allocated during the said year amounted to Rs. 20,445 whereas only Rs. 10,458 were paid to the Government on account of sales tax and the assessee retained the balance of Rs. 9,9987 in its hands. However, the order of the ITO shows that the assessee has shown the said amount of Rs. 9,987 as liability in its balance-sheet. There is nothing to show that the assessee disputed its liability to pay this amount of Rs. 9,9987 to the government on account of sales tax and in fact, the assessee paid it in the following year. The ITo added the said amount of Rs. 9,987 to the income of the assessee on the basis that, although it was shown as a liability in the balance-sheet it wa not an ascertained liability. On an appeal preferred by the assessee, the AAC held that under the Bombay Sales TAx Act, 1959, the appellant, i.e., the assessee was bound to pay the amounts collected by it as sales tax to the Government and failure to do so entitled a penalty and hence the assessee should be allows a deduction in respect of the said amounts. The appeal preferred by the assessee was allowed. The Department preferred an appeal against this order to the Income-tax Appellate Tribunal, but the said appeal was demised,. It is from that decision of the Tribunal that the said question has been refereed to us.
3. The submission of Mr. Sajani, the learned counsel for the Revenue, is that the assessee must be taxed in respect of the said amount, unless the assessee has paid over the said amount to the Government, in the relevant previous year. It was submitted by him that no order of assessment under the Bombay Sales TAx ACt has been made against the assessee during there relevant previous year. In the said year, the assessee has not incurred any liability in respect of the amount collected by way of sales tax. He submitted in the alternative, that the assessee would be liable to pay tax on the said amount in the assessment year, but might be entitled to claim a deduction for it in the next assessment year in which he paid over the said amount to the Government.
4. It is not possible for us to accept the submission of Mr. Sajani. In Kedarnath Jute Mfg. Co. Ltd. v. CIt : 82ITR363(SC) , it has been held by the Supreme court that the moment a dealt made either purchases or sales which were subject to seal tax, the obligation to pay the tax arose. Although that liability could not be enforced till qualification was effected by assessment proceedings, m the liability for payment of tax was independent of the assessment. In view of this decision, the liability to pay over the said amount of Rs. 9,9987 to the Government clearly arose in the relevant previous year. The only questions is whether the assessee could not be entitled to claim that amount as a liability merely because the assessee has not paid over the said amount to the Government during the said previous year. In this regard, m it must be pointed out that although it is not specifically so said the order of the ITO clearly suggest that the assessee was following the mercantile system of accruing because the ITO has declined to treat the said amount as a liability, although shown as such in the balance-sheet, on the ground that it was not an ascertained liability. If the assessee has been following the each stem of accounting the ITO would DAVE celery said so and rejected the claim of the assessee on the ground that the said amount has not been actually paid over to the Government and hence could not be allowed to be deducted on the cash system of accounting. Moreover, it was for the Department to show that the said amount was taxable and it was for the Department to establish that the assessee followed the cash system of accounting if that was their case. The aforesaid decision in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIt : 82ITR363(SC) , clearly shows that the liability to pay the said amount arose during the relevant previous year when the sales in question were made and the assessee was clearly entitled to claim it as a liability, as the assessee never disputed the same.
5. In support of this contention Mr. Sajnani relied upon the decision of a Division Bench of the Allahabad High Court in Deep Chand Shyam Sunder v. Cit : 125ITR724(All) . In that case, during the previous year relevant to the assessment year in question, as pointed out by the Division Bench, the assessee was not liable to pay purchase tax on arhar deal at all but his liability to pay the said tax arose by reason of a subsequent amendment to the relevant Sales Tax ACt. In view of this, w e fail to see how that case has any application to the question before us, m because the assessee before us never disputed his liability before us because the assessee before us never disputed him liability to pay the sales tax and the said liability clearly existed during the relevant provision year. In fact the Allahabad High Court in the aforesaid decision has held that where the mercantile system of accounting is being followed by an assessee, he would be entitled to debit sales tax a liability in the year in which that liability arose. But before such an entire can be made, m the liability must be a legal liability and no a mere hypothetical one. mr. Sajnani next placed reliance on the decision of a Division Bench of this court in. Income-tax Reference No. 153/73, decided on 26th April, 1982, Deccan Hydes & Skins Co v CIT : 142ITR175(Bom) . Reliance on that case is equally misplaced, m because in that case also the assess disputed his liability to pay the sales tx right till the time when the proceedings were disposed of by the Income-tax Appellate Tribunal.
6. In view of what we have said above, m the question refereed to us must be answered in the negative and in favour of the assessee. The Commissioner to pay costs of the reference.