1. This is a case staled under Section 66 (1) of the Indian Income Tax Act, 1922. (hereinafter referred to as the Act). The question referred is:
'Whether the sum of Rs. 27,167 debited by the assessee to the profit and loss account and credited to the sales tax account is an admissible deduction?'
1-a. The material facts are these: The relevant assessment year is 1056-57, the year ending on 28th August, 1957 The assessee is a dealer in cloth both purchased locally and imported from outside. Uptill the 31st March, 1956, sales tax was charged by the Government of Uttar Pradesh on sales of cloth imported from outside Uttar Pradesh at the rate of 3 pies to 6 pies per rupee. On the 31st of March,1956, the Govt. of Uttar Pradesh issued an Ordinance raising sales tax to one anna per rupee. This Ordinance was subsequently replaced by the U. P. Sales Tax (Amendment) Act, 1956, which purported to regularise the provisions of the said Ordinance Subsequent to this the U. P. Sales Tax (Amendment) Act,1957, was passed on 30th September 1957, the main purpose of which was to hold that the amendment brought by the U. P. Ordinance of 31st March. 1956, was valid on and from 31st March, 1956. The validity of these enactments was challenged by certain assessees and also ultimately by the assessee by a writ petition in 1957. This Court by its order dated the 5th May 1957, declared Ordinance No. IX of 1956, issued on 31st March, 1956, to be ultra vires on a writ petition filed by another assessee.
This decision of a Full Bench of Court is reported in Messrs Adarsh Cloth Bhandar of Aligarh v. Sales Tax Officer, Aligarh : AIR1957All475 . The further amendment made in the Act by the U. P Sales Tax (Amendment) Act, purporting to rectify the defects was also declared to be ultra vires by a Full Bench of this Court on 14th February, 1958, in Firm Bengali Mal Satish Chandra Jain Cloth Merchants of Agra v. Sales Tax Officer. Agra : AIR1958All478 After the decision in Firm Bengali Satish Chandra's case : AIR1958All478 (supra) was given, the Act was further amended by the U. P. Government by the U. P. Sales Tax (Validation) Act (XV of 1958) This Act was published on the 6th of May, 1958. Against this also writ petitions were filed but the High Court in Ram Chandra Textiles v. Sales Tax Officer, Hathras : AIR1965All24 relying on J.K. JuteMills Co., Ltd. v. State of U. P., : 2SCR1 overruled by the earlier Full Bench decision of this Court Firm Bengali Mal Satish Chandra's case : AIR1958All478 (supra). In J.K. Jute Mills v. State of U.P. AIR 1901 SC 1534 (supra) the controversy had already been set at rest, and it was held that the U. P. Sales Tax (Validation) Act (XV of 1958) is valid and intra vires. This meant that the levy of Sales Tax at one anna per rupee as from 31st March. 1956, was valid, and sales tax was payable for the relevant assessment year by the assessee at that rate.
2. While the writ petitions were pending in the High Court as to the validity or otherwise of the Sales Tax (Amendment) Act, the assessee on the last date of the previous year which ended on 28th August, 1957, debited the profit and loss account with Rs. 27,167/-, being the estimated sales tax liability as imposed by the legislation which was being impugned by other cloth dealers of Uttar Pradesh at that time. It was admitted that the assessee's system of accounting was mercantile and it had accordingly put forward a claim to deduct the said sum of Rs. 27,167/- on the ground that the said sales tax was payable under the aforesaid Ordinance and Notifications and the Validation Act.
3. The Income Tax Officer found that the assessee had shown the correct turnover of sales at Rs. 5,33,046 as well as the gross profit thereon at Rs. 48,663. He further found: 'Most of the purchases are vouched. Sales are also fully vouched ......As the past history of the caseis of accepted version and trading accounting results are much better than that of the preceding year, the trading account results are accepted'. The claim of the assessee to the debit of Rs. 27,167/- being the estimated sales tax for the relevant assessment year was, however, not allowed on the ground that the amount did not represent as ascertained liability, as some other assessees had challenged the levy thereof and the matter was before the Supreme Court and as such sub judice. The Income Tax Officer, however fairly conceded: 'I fully agree with the assessee that in case the amount represents an ascertained liability it would be allowable deduction in the case of a person who follows the mercantile method of accountancy, but, where the very liability is in dispute, it cannot he said to be ascertained and it cannot be allowed as a deduction, as according to the mercantile system of accountancy the liability will be allowed only if it is ascertained.' On appeal, the Appellate Assistant Commissioner and the Tribunal endorsed this view Hence, this reference at the instance of the assessee
4. The liability to sales tax arises under the charging Section 3 of the Act which lays down that 'subject to the provisions of this Act every dealer shall for each assessment year pay a tax at the rate of ......' The quantification thereof is made under Section 7 of the Act which provides for determination of turnover and assessment of tax. Section 8-A (2) (B) of the Act gives the dealer the authority to recover, if he so likes an amount equal to the amount of sales tax payable from the person to whom thegoods are sold by him. Section 3, the charging section however, fixed the liability of the dealer to pay the sales tax whether he has realised the tax from the customer or he chooses to pay it from his own pocket. The liability is finally and irrevocably fixed by Section 3 of the Act.
Rule 41 of the U. P. Sales Tax Rules (hereinafter referred to as the Rules) makes it obligatory on every dealer who is liable to pay tax to submit to the Sales Tax Officer a return of his gross turnover for the quarters ending 30th June, 30th September, 31sl December and March 31, respectively, in form 4. Under Sub-rule (2) the dealer is under an obligation to 'deposit in the treasury the amount of the tax collected by him on the turnover shown in such return and shall submit the treasury challan with the return or submit with the return a cheque for the amount so calculated'. If no return is submitted in respect of any quarter or the return is not accompanied by the requisite treasury challan, the Sales Tax Officer is empowered under Section 3 to make an assessment and to demand the sum payable. After the close of the assessment year, a final assessment under Rule 41 (5) has to be made. There cannot be any doubt that there was a liability fixed under the charging section on every item of sale unless exempted or the total turnover of the assessee fell below the minimum taxable limit. If there was a statutory liability, which undoubtedly there was, to pay the sales tax, then it is idle to contend that there was no such liability. The liability arose at the end of each quarter and certainly on the last date of the accounting year.
The Judicial Committee in the case of Wallace Brothers v. Commissioner of Income Tax Bombay (1948) 16 ITR 240: AIR 1946 PC 118 held, ''the liability to tax arises by virtue of the charging section alone, and it arises not later than the close of the previous year, though quantification of the amount payable is postponed'. The liability to sales tax, undoubtedly, existed and was known and ascertainable throughout the accounting year. In the circumstances the only question that arises is, whether such sales tax liability had become a contingent or an unascertainable liability merely because this Court had, as it turned out subsequently, erroneously taken the view that the said Validation Act (No. XV of 1958) was ultra vires. In the case of a statutory liability imposed by a charging section of the Act, it cannot be said that merely because notification or Amending Act or Validation Act has been declared to be ultra vires, the assessee is relieved from his liability to pay the sales tax.
5. In Willoughby on the Constitution of the United States. Vol. I second edition, at page 10, it is stated, relying on a decision of the Court of West Virginia in Shephard v. Wheeling, 30 W Va 479:
'The Court does not annul or repeal the statute if it finds it in conflict with the Constitution. It simply refuses to; recognise it, and determines the rights of the parties just as if such statute had no application. The court may give its reasons for ignoring or disregarding the statute, but the decision affects the parties only and there is no judgment against the statute.'
There are, however reproduced on the same page, observations by Mr. Justice Field in Norton v. Shelby County, (1885) 118 U. S. 425, wherein he held: 'An unconstitutional Act is not a law, it confers no rights, it imposes no duties, it affords no protection, it creates no offence; it is, in legal contemplation, as inoperative as if it had never been passed'. This, as pointed out by the learned author, is a proposition which is dependent on the law having been 'declared unconstitutional by a competent court of last resort'. It is, however, unnecessary for us to pursue this question any further. As already observed the Supreme Court, which is the Court of ultimate resort, in : 2SCR1 (supra) has held the U. P. Sales Tax Validation Act (No. XV of 1958) to be intra vires and to have validated previous Acts, Ordinances and Notifications which had been declared invalid by this Court. In these circumstances, it is not possible to say that the liability to sales tax did not exist during the relevant year nor that the liability was an unascertained one.
6. Admittedly, the assessee's system of accounting was mercantile in the past years and the Income Tax Officer has fairly and properly conceded that if the amount was an accrued and ascertained liability, it would be deductible as revenue expenditure. As to what is exactly the mercantile system of accountancy as distinguished from the cash or receipt basis was considered by the Supreme Court in Keshao Mills Ltd. v. Commissioner of Income Tax, Bombay : 23ITR230(SC) , and again in, Commissioner of Income Tax, Bombay (1953) pathy Naidu. : 53ITR114(SC) , and it was observed:
'It is common place that there are two principal methods of accounting for the income, profits and gains of a business; one is cash basis and the other, the mercantile basis. The latter system of accountancy 'brings into credit what is due immediately it becomes legally due. and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed'.
As already observed, the legal liability under the Act had been incurred, and, therefore under the mercantile system of accounting, the assessee was obliged to debit that expenditure in his accounts.
7. Merely, because that liability was estimated and may not have been a precise or exact figure will not make the liability to sales tax any the less an accrued or ascertained liability. In Calcutta Co. Ltd. v. Commissioner of Income-tax West Bengal : 37ITR1(SC) the Supreme Court, in a case where under some contract the assessee had undertaken to carry out development within six months of the date of the sale of the plots and the amount of development costs were estimated, held: 'that undertaking imported a liability on the appellant which accrued on the dates of the deeds of sale, though that liability was to be discharged on a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of the business, and the amount to be expended could be debited in the accounts maintained on the mercantile system of accounting before it was actually disbursed. The difficulty in the estimation thereof did not convert the accrued liability into a conditional one because it was always open to the Income Tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case'.
If a mere estimated liability could be said to accrue on the basis of a contract which had to be performed in the future, there can be no justification for saying that the statutory liability in the instant case was not an accrued liability or that it was an unascertained liability. If, as pointed out by the Supreme Court, the estimate was wrong, the Department could have substituted its own estimate but that will not make the statutory ascertained liability into an unascertained one, particularly, in a case where admittedly the sales and purchases are duly vouched and the accounts are properly maintained.
8. Some support for the view we are taking is to be found in two cases, one from Andhra Pradesh and the other from Madras. In S. R. V. G. Press Co. Kurnool v. Commissioner of Excess Profit Tax, Hyderabad, : 30ITR583(AP) Subba Rao, C. J. (as he then was) and Vishwanath Sastry, J. observed:
'Now, sales tax is levied on sales or purchases of goods by traders and not upon the profits or gains made by them from the business. Sales Tax is payable irrespective of any profits being earned and without such payment, the business of buying and selling cannot be carried on. It is, therefore, deductible as a business expense before arriving at the taxable profits'.
8-a. In Pope The King Match Factory v.the Commissioner of Income Tax, Madras : 50ITR495(Mad) , the Madras HighCourt in a case where though a demand forexcise duty amounting to Rs. 21,373/7/- wasmade but the assessee had objected to the demand and was seeking to get the order reversedand yet on the last date of his accounting yearhad raised a debit in his account's maintainedon the mercantile basis and claimed this amountas a deductible allowance in computing his income for the assessment year 1955-56 held thatthe assessee was entitled to debit the amountas an accrued liability and the amount in question was, properly deductible in computing theassessee's income for the relevant assessmentyear, notwithstanding the fact that he was disputing his liability.
9. The Standing Counsel for the Department, however, has relied on serveral causes to show that there is no liability at all until an assessment order is made and a demand is issued pursuant thereto and there is' no enforceable liability He relied upon the aforesaid case of : 53ITR114(SC) . That was a case of a contractor supplying bread to a Government Hospital under a contract during the period April, 1, 1948 to March 31, 1949. The assessee there had made certain representations to the Government after the close of the year that he had incurred a loss and subsequently in the assessment year 1950-51, a sum of Rs. 12,447 was received by the assessee and the question arose as to whether the said amount ought to have been included in the profits of 1951, relevant to the assessment year 1951-52 or in the assessment year relevant to the accounting year 31st March. 1949, i.e. 1949-50. It was held, on the facts and circumstances of that case that 'such amounts are under law received by the assessee only in the year when they are paid'. This case has no relevance to the facts of the present case.
10. Another case relied upon was Commissioner of Income Tax, Madhya Pradesh v. Swadeshi Cotton and Flour Mills (Private) Ltd. : 53ITR134(SC) . The question which arose in this case for the decision of the Supreme Court was as to the year in which a bonus payment could be said to accrue or arise. There the assessee had paid a sum of Rs. 1,08,325/9/3 by way of profit bonus to its employees for the calender year 1947 in terms of an award made on January 13, 1949 under the Industrial Disputes Act. The assessee debited the amount in his profit and loss account for the year 1948 but in fact the bonus was paid to its employees in the year 1949. It was held that it was only in 1949 that the claim to profit bonus was settled by an award and the only year to which the liability under the award could be properly attributed was 1949 and, therefore, the sum of Rs. 1,08,325/9/3 had to be deducted in the calender year 1949, relevant to the assessment year 1950 51, This case again has no application to a case such as the present one which depends not for determination of 'liability under a contract or an award of the Industrial Tribunal or an agreement between the parties but on a statutory liability imposed under the charging Section 3 of the Art.
11. This Court on a question of accrual of liability to pay bonus in Commissioner of Income Tax, U. P. v. Amrit Banaspati Co. : 59ITR388(All) , following the aforesaid Supreme Court decision, held that as the employer followed the mercantile system of accounting the liability of the employer arose only when it was finally settled amicably or by adjudication by an Industrial Tribunal and the claim to deduction was admissible only in the year when the liability under the award was finally determined.
12. Another case relied upon was Tika Ram and Sons v. Commissioner of Income Tax : 51ITR403(All) , a decision given by one of us. The question there was whether ever before an assessment is made the Income Tax Dept. can be said to be a creditor, contingentor prospective, of the company within the meaning of Section 391 of the Companies Act and whether the income tax assessment proceedings are 'other legal proceedings' within the meaning of Section 446 of the Companies Act, 1956. The facts of that case and the questions which arose were quite distinct and apart from those that, arise in the present case and have little or no bearing on the present case. It is not possible for the Department to derive any benefit from this case for the determination of the question which arises here.
13. For the reasons given above we would answer the question in the affirmative arid in favour of the assessee. The Department will pay the costs of this reference which we assess at Rs. 200 Counsel's fee is also assessed at the same figure.
14. In considering the question before us, I would like to bring out the distinction between the question whether the liability of an assessee has to be classed as ascertained or contingent and the very different question whether the law imposing that liability is itself valid and in existence or invalid and non-existent. This distinction appears to have been overlooked by the Income Tax Appellate Tribunal.
15. In answering the question whether a liability is ascertained or contingent, the provisions of law imposing a statutory liability, such as those of the U. P. Sales Tax Act have to be assumed to be valid. After that, it has to be determined whether the assessee has acted in a manner in accordance with the provisions of the statute so that the liability which becomes ascertained under the provisions of the statute has been so treated by him. If an assessee himself treats a statutory liability as a matter of uncertainty and sets aside a sum of money out of which the statutory liability is intended to be met in case it has to be met, the assessee's conduct in treating the liability as contingent should be taken into account.
A contingent liability is one which couldarise on the happening of some event or thefulfillment of some condition in a case in whichthe happening of the event or the fulfillment ofthe condition itself are uncertain. A statutoryliability, such as the liability to pay sales tax,under the U. P. Sales Tax Act, affixes itselfautomatically to income from sales as and whengoods are sold. In the present case, the assessee appears to have treated the liability to paysales tax as an automatic liability. The metefact that he did not charge sales tax separatelyfrom his customers would not make his liability contingent. The assessee has, it appears calculated his liability and appropriated an amounttowards meeting that liability, and, thereby, theassessee has certainly treated his liability asascertainable and has ascertained it.
16. The next question which arose was whether the liability so ascertained and so treated by the assessee, on the assumption that the statutory liability exists, could be deemed to become a contingent liability merely because the existence of the law imposing the liability is doubtful. No case has been brought to our notice in which a statutory liability, which attaches itself automatically to income has been held to have been converted automatically into a contingent liability merely because there is some, uncertainty whether the law imposing that liability exists. If the law is clear that there is no statutory liability, there is no question of any liability whatsoever whether ascertained or contingent. It would then be a case of no liability and the so called liability would not be an admissible deduction at all irrespective of the way in which the assessee has treated it. The two questions must, however, be kept apart and examined separately.
17. This brings us to the question whether the Income Tax Authorities are bound by the declarations of law made by this Court relating to the validity of a statutory provision, when such a declaration is made in the exercise of this Court's jurisdiction to make that declaration. It appears to me that the whole purpose of Article 226 of the Constitution and other provisions of law which empower this Court to give declarations about the validity of the statutory provisions, after applying the constitutional tests, is that such declarations should be regarded as binding by all authorities and citizens within the State subjected to the jurisdiction of the High Court making the declaration. It also appears to me to be the purpose behind the advisory jurisdiction conferred by Section 66 of the Income Tax Act. 1922, upon the various High Courts, that Income Tax Authorities should be bound by the law declared by the various High Courts in their respective States on questions referred to them. It is true that there is no constitutional provision similar to Article 141 of the Constitution, relating to declarations of law by the Supreme Court of India, which can be relied upon in support of the proposition that declarations of law by this Court are binding upon all the authorities and citizens within the State of Uttar Pradesh. Nevertheless, that appears to me to be the object of the constitutional provisions giving the High Court the power to pronounce on the constitutional validity of legislative measures. The result flows logically from the Constitutional and other provisions of law making the High Court of a State the highest law- declaring authority within the State.
18. Mr. Hari Swarup, appearing for the assessee, tried to derive support for the contention that the pronouncements of this Court are binding only as between parties in such cases from the provisions of the Indian Evidence Act relating to the relevance of judgments in personam and judgments in rem. These provisions have nothing to do with a question which arises when any authority or a citizen within a State wants to ascertain what the law on a particular matter is. The Indian Evidence Act is not applicable to Income-Tax Authorities, but the doctrine deducible from the constitutional and other provisions relating to declarations of law by this Court has to be accepted by all authorities and citizens within a State quite apart from it. Even in courts where the Evidence Act is applicable,the binding force of the law declared by this Court is based upon considerations other than those contained in the doctrine of res judicata. The law applicable in a State can certainly be proved by producing the authorised Reports of the highest court of that State. This principle is recognised by the Indian Evidence Act which enables courts to take judicial notice of law in force in the country. The Evidence Act enables courts of law to look at authorized Law Reports. Section 84 of the Evidence Act contains a presumption as to the genuineness of law Reports published under the authority of the Government of every country.
19. Now, as everybody knows, the declaration of law contained in a judgment of a court may not necessarily be the last word on the subject. A judgment of a Division Bench may be overruled by a larger Bench of the same Court. The view taken by a High Court may be overruled by the Supreme Court. The Supreme Court itself may after sometime change its view. A larger Bench of the Supreme Court may overrule the view taken by a smaller Bench. The legislature may change the law in such a way as to validate what had been judicially declared null and void. Finally, the Constitution itself may be changed even after the declaration of invalidity of a legislative measure by the Supreme Court. I do not think that every such uncertainty should be taken into account by courts in deciding whether the declaration of law by a High Court at a particular time has to be treated as final and binding.
If there are grounds for the Authority to suppose that the matter is being agitated before a larger Bench of the same court or before the Supreme Court of India, the best course is to withhold its decision upon such a matter on which law has not been in its opinion, upon the existing declarations of law, laid down with sufficient clarity and certainty. It should start with the initial presumption that the legislation is valid. After that it can presume that the declaration of law by the High Court is correct and binding. In the present case, this question appears to be wholly academic, As the final and binding pronouncement of the Supreme Court is now before us we need not wait any further. The law as declared by the Supreme Court is binding upon us by reason of Article 141 of the Constitution of India.
20. The problem of ascertaining what the law is resolves itself into a problem which is very different from the question whether the liability of the assessee, upon the law, as it stands, has to be regarded as ascertained or contingent after taking into account the assessee's own actions with regard to the statutory liability. There is no duty cast upon an assessee to question the validity of a law. He is entitled to act on the assumption that the law imposing the liability is valid. The manner in which the assessee has acted must be considered by the income tax authorities in determining whether a liability has to be treated as ascertained or contingent. In the case before us, the assessee has acted in a way that leaves no doubt that he himself treated the statutory liability as ascertained and fixed by the statute automatically. Therefore, he was entitled to a deduction during the year in which the liability became ascertained for him irrespective of the time at which the actual payment of the sales tax was made by the assessee.