Sujata Manohar, J.
1. The assessees are a partnership firm dealing in purchase and sale of hides and skins. The assessments which are in dispute relate to assessment yeas 1967-68 and 1968-69. From the books of account produced by the assessee for the relevant years it was noticed that for the assessment year 1967-68 the assessee had collected sales tax of Rs. 25,213, out of which it had paid sales tax amounting to Rs. 13,538. There remained with the assessee the balance amount Rs. 11,675. For the assessment year 1968-69, the assessee collected sales tax amounting to Rs. 35,690, out of which it paid sales tax amounting to Rs. 15,974. There remained with the assessee the balance amount of Rs. 19,716. The assessee showed these amounts in a separate sales tax account and did not bring these amounts into its profit and loss account.
2. The ITO treated these two amounts of Rs. 11,675 and Rs. 19,716 as income of the assessee for the two relevant years. The view taken by the ITO was upheld by the AAC as well as by the Tribunal. From the decision of the Tribunal, at the instance of the assessee, the following question of law has been referred to us for our opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in treating the excess of the recoveries of sales tax made by the assessee during the relevant years over the payments thereof made during the same years as the income of the assessee and liable to tax under the provisions of the Income-tax Act, 1961 ?'
3. The assessee had contested its sales tax liability in respect of the excess amounts collected, in this High Court. At the date when the Tribunal gave its decision, the matter had not been decided in this court. Mr. S. J. Mehta, learned counsel for the assessee, has stated to us that this court has now held that the assessees are liable to pay the disputed amount of sales tax and the said two amounts have been paid by the assessee by now.
4. Mr. S. J. Mehta, learned counsel for the assessee, submitted before us that the excess amount of sales tax should not be treated as the income of the assessee. He has submitted that the receipt of the amount of sales tax by the assessee is coupled with a liability to pay over the amount to the sales tax authorities. Such an amount should not be treated as a trade receipt of the assessee. In any event, since it is subject to the liability to pay over the amount to the sales tax authorities, the liability to pay the amount to the sales tax authorities should be deemed to have arisen in the year in which the sales were effected and the amounts were received. He, therefore, submitted that it should be allowed, in any event, as a deduction under the provisions of s. 37(1) of the I.T. Act, 1961. Mr. S. J. Mehta further submitted that the assessee follows the mercantile system of accounting. Under the mercantile system of accounting, the liability to pay the sales tax should be allowed to be deducted in the year in which it arose. Hence, for the relevant years the excess amount of sales tax in the hands of the assessee should be adjusted against its liability to pay this amount over to the sales tax authorities. In support of his submission, he relied upon a decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT : 82ITR363(SC) . In that case the Supreme Court held that the assessees followed the mercantile system of accounting and hence were entitled to deduct from the profits and gains of their business liability to pay sales tax which arose on sales made by them during the relevant period. The Supreme Court further held that this liability did not cease to be a liability because the assessees had taken proceeding before higher authorities for getting it reduced or wiped out, so long as the contention of the assessees did not prevail. Further, the fact that the assessees had failed to debit the liability in their books of account did not debar them from claiming the same as a deduction either under s. 10(1) or under s. 10(2)(xv) of the Indian I.T. Act, 1992. Mr. Mehta also drew our attention to a decision to a decision of the Andhra Pradesh High Court in the case of Addl. CIT v. T. Nagireddy & Co. : 105ITR669(AP) , in this connection.
5. In the present case, however, there is nothing in the statement of the case, which is an agreed statement of the case, or in the record, which would show that the mercantile system of accounting was being followed by the assessee. The entire argument of Mr. Mehta, however, turns upon this fact. We also find that in the Tribunal's decision there is no reference to any deduction being claimed by the assessee in respect of the excess amount of sales tax collected by it on the basis that this amount represented a liability of the assessee-company to pay over the same to the sales tax authorities. In the absence of the relevant material it is not possible for us to apply to the facts of the present case, the ratio of the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. : 82ITR363(SC) .
6. Mr. Mehta argued that this ground was mentioned in the grounds of appeal before the Tribunal. It is not possible for us to go into the grounds of appeal. There is also nothing to show that this ground of appeal was argued before the Tribunal. Had such a point been argued before the Tribunal, it should have been reflected in the agreed statement of the case. In any event, the assessees ought to have got the statement of the case amended so that it would have reflected this submission made by the assessees. When the matter goes back before the Tribunal after the present reference is answered, if it is open to the assessees to take this stand before the Tribunal, it may do so. We, however, in the present reference cannot go into that aspect of the matter.
7. We are required to decided whether the excess sales tax recovered by the assessees can be treated as a trading receipt of the assessees and hence as a part of the income liable to tax under the provisions of the I.T. Act, 1961. In this connection, the Supreme Court in the case of Chowringhee Sales Bureau P. Ltd. v. CIT : 87ITR542(SC) , has held that the excess sales tax which was collected by the assessee in that case, which was neither deposited in the State Exchequer nor paid back to the actual purchaser, was a part of the assessee's trading receipts. It was held that the fact that the assessee credited the amount received as sales tax under the head 'Sales tax collection account' did not make any material difference because the true nature and the quality of the receipt was a trading receipt. It was, therefore, subjected to income-tax. The Supreme Court observed that the assessee would, of course, be entitled to claim deduction of the amount in question as and when it paid the amount to the State Government. This decision was followed by the Supreme Court in the case of Sinclair Murray and Co. P. Ltd. v. CIT : 97ITR615(SC) , where the Supreme Court held that the excess sales tax collected by the assessee constituted its trading receipt and had to be included in its total income. It also further held that if and when the assessee paid the amount collected to the State Government of refunded any part thereof to the purchaser, the assessee would be entitled to claim a deduction of the sum so paid or refunded. In view of these two decisions of the Supreme Court, which apply to the facts of the present case, the excess sales tax which has been collected by the assessees must be viewed as a trading receipt and liable to be included in the income of the assessees for the relevant assessment year. In view of the observations of the Supreme Court in the above two decisions, it will be open to the assessees to claim the amounts as a deduction as and when either they pay the amounts to the sales tax authorities or refund the amounts to the purchasers.
8. In the premises, the question is answered in the affirmative, that is to say, in favour of the Commissioner and against the assessee.
9. In the circumstances of the case, the applicant to pay to the respondent the costs of the reference.