Y.V. Anjaneyulu, J.
1. Under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal referred the following three questions for consideration of this court :
'(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the interest paid by the assessee to the Government on arrears of purchase tax would constitute an admissible deduction for 1973-74 and 1974-75
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the assessee was entitled to deduction under section 36(1)(iii) in respect of interest on purchase tax loan for the assessment years 1973-74 and 1974-75
(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the amount of Rs. 8,75,277 did not belong to the assessee and that it was not a trading receipt for the assessment years 1973-74 and 1974-75 ?'
2. So far as questions Nos. 1 and 2 are concerned, learned counsel for the assessee submits that they are covered in his favour by the decisions in Mahalakshmi Sugar Mills Co. v. CIT : 123ITR429(SC) and Triveni Engineering Works Ltd. v. CIT : 144ITR732(All) and the learned Standing Counsel for Revenue did not dispute this. Following the principle enunciated in these cases, the assessee is entitled to claim deduction of the interest paid to the Government on arrears of purchase tax for the income-tax assessment years 1973-74 and 1974-75. The same principle holds good in respect of the interest paid by the assessee to the Government on the loan taken for the payment of purchase tax. It is not in dispute that the loan taken by the assessee from the Government was utilised for the purpose of paying purchase tax due and interest was paid on such loan and consequently the interest qualifies for deduction under section 36(1)(iii) of the Act, following the principles enunciated in the two cases above-referred. We, therefore, answer the first and second questions in the affirmative, that is to say, in favour of the assessee and against the Revenue.
3. As regards the third question, a few facts may be noticed :
The Government of India introduced an order called the Levy Sugar Supply (Control) Order, 1972, dated June 15, 1972. By the above order, the Government fixed the rate at which sugar should be sold by the sugar mills in the country. A number of sugar mills objected to the validity of the above-mentioned order and filed writ petitions in the Supreme Court. Before the Supreme Court, the contention urged by the sugar mills was that the Government have no power to fix the price in respect of the levy sugar and they should be permitted to sell the sugar at the rates existing prior to the introduction of the control order. The assessee in this case had also filed a similar writ petition in the Supreme Court. The Supreme Court admitted the writ petition and passed a conditional order that the assessee may collect the price of sugar at the rates existing prior to the introduction of the control order, but that the difference in price collected should be deposited in a separate account, or a bank guarantee of an equal amount should be furnished to the Registrar of the Supreme Court in respect of the excess collection made. It is not denied that pursuant to the above conditional orders, the assessee collected Rs. 8,76,277 which represented the difference between the price which was existing prior to the introduction of the control order and the price as fixed by the Government under the control order. It is stated that the assessee had furnished the necessary bank guarantee to the Registrar of the Supreme Court in respect of the above-mentioned sum pending the final decision on the writ petition filed. Eventually the writ petitions filed by the sugar mills including that of the assessee were dismissed by the Supreme Court, upholding the validity of the control order dated June 15, 1972. The result was that the excess amount of Rs. 8,76,277 collected by the assessee in the meantime had to be refunded to the constituents from whom the collections were made. In connection with the assessment year 1974-75, for which accounting year ended on June 30, 1973, the assessee-company claimed that the sum of Rs. 8,76,277 collected from the constituents in excess of the price fixed by the control order above referred to could not be treated as a trading receipt and could not, therefore, be included in its total income. It was also alternatively contended that the excess collections made by the assessee did not partake of the nature of income as the receipt was impressed with the obligation to refund the same in the event of the assessee not succeeding in the writ petition filed. In any event, it was claimed that the liability to refund the amount to the constituents entitles the assessee to claim by way of deduction the sum of Rs. 8,75,277 as business expenditure following the mercantile system of accounting employed by the assessee. The Income-tax Officer declined to accept the above contentions of the assessee and treated the sum of Rs. 8,75,277 as the assessee's income, constituting a trading receipt.
4. Aggrieved by the above addition, the assessee carried the matter in appeal The Appellate Assistant Commissioner held that the assessee was clearly governed by the Levy Sugar Price Equalisation Fund Act, 1976, under which there was an obligation to pay the money to the constituents if eventually the price fixed by the control order was upheld. The Appellate Assistant Commissioner also held that the excess collection made by the assessee did not constitute a trading receipt. In that view, the Appellate Assistant Commissioner deleted the addition of Rs. 8,76,277.
5. The Income-tax Officer filed an appeal against the Appellate Assistant Commissioner's order and the Tribunal upheld the view of the Assistant Commissioner and dismissed the appeal. Thereupon, this reference was made to this court at the instance of the Revenue.
6. Learned standing counsel for the Revenue, Sri Suryanarayana Murthy, reiterated the same contentions before us. It is contended that the excess collections made by the assessee were against the sale price of the sugar and, therefore, constituted a trading receipt. It is, therefore, submitted that the Income-tax Officer was justified in including the sum as the assessee's trading receipt and subjecting the same to assessment. Learned counsel for the assessee, Sri Parvatha Rao, resisted the above pleas of the Revenue. According to him, the assessee was merely a custodian of the moneys collected during the pendency of the writ petition in the Supreme Court and did not have title to appropriate the moneys to itself, as was clear from the provisions of the Levy Sugar Price Equalisation Fund Act. It is further submitted that, in any event, the assessee acknowledged unequivocally its liability to repay these moneys to the constituents from whom the sale price was collected in excess of the price fixed by the control order and the acknowledgment clearly impressed the same with the character of the liability which should be deducted even if the amount is treated as a trading receipt. According to the learned counsel, the trading receipt and the corresponding liability offset each other with the result that no part of the sum of Rs. 8,76,277 falls to be included in the total income of the assessee.
7. We consider that the Tribunal was justified in its conclusion that the amount of Rs. 8,76,277 did not partake of the nature of a trading receipt and on that ground itself the amount fell to be excluded from the total income of the assessee. It may be pointed out that the right to collect the amount in excess of the price fixed by the control order was saddled with the obligation to deposit the amount in a separate account and the assessee is always held accountable for the excess collection, pending decision of the Supreme Court. The provisions of the Levy Sugar Price Equalisation Fund Act, 1976, clearly imposed an obligation on the assessee to repay the money to the constituents whether the excess price was collected before or after the commencement of the Act. Thus the assessee did not collect the excess sale price as part of its trading receipt. An exactly identical issue came up for consideration before this court in R.C. No. 11 of 1981.
8. This court in its judgment CIT v. Devatha Chandraiah & Sons : 154ITR893(AP) dated April 13, 1983, upheld the contention of the assessee in that case that the sales-tax collections made did not constitute trading receipts, inasmuch as the amounts were collected from agriculturists to whom the amounts have to be eventually refunded. That was a case where there was no statutory provision obliging the assessee to refund the money to the constituents from whom collections were made, pending final decision of the disputes. Even so, this court held that the acknowledgment of the assessee that the amounts collected were refundable clearly established the fact that the assessee was acting merely as a custodian or a trustee for the constituents from whom the moneys were collected and to whom the moneys are repayable, after the matter is finally concluded.
9. Even otherwise, it is clear that the collections made by the assessee were subject to the obligation to repay the amount based on the final decision on the validity of the control order. As eventually the validity of the control order has been upheld, the obligation to repay the moneys to the constituents from whom the amounts were collected entitled the assessee to claim the impugned sum by way of business expenditure, so that the so-called trading receipt is offset by a corresponding liability which is fastened on the assessee during the previous year relevant for the assessment year under consideration.
10. It is not denied that the assessee has been maintaining its accounts in the mercantile system and that the excess collections relate to the transactions concerning the assessment year 1974-75. Irrespective of the fact whether the money was repaid to the constituents wholly or otherwise before the close of the accounting year, the assessee is entitled to claim the sum as a deduction following the mercantile system of maintaining accounts employed by it. In any view of the matter, we are satisfied that the decision of the Tribunal excluding the addition of Rs. 8,76,277 is correct. We accordingly answer the third question also in the affirmative, that is, in favour of the assessee and against the Revenue.
11. In the result, all the three questions are answered in favour of the assessee and against the Revenue. In the circumstances, the parties shall bear their own costs.