1. Under Section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal, Delhi Bench 'C', has submitted this statement of the case inviting the opinion of this court on the following question :
'Whether, on the facts and in the circumstances of the case, the assessee was entitled to claim the sum of Rs. 31,630 as an allowable deduction for the purpose of computation of income, profits and gains of the assessee ?'
2. The assessee carried on the business of commission agency. It is a dealer registered under the U.P. Sales-tax Act. During the previous year relevant to the assessment year 1966-67, the assessee collected from its customers an aggregate sum of Rs. 43,165 on account of purchase tax leviable on the sale of Rab, In its books of accounts a sum of Rs. 43,165 was credited in an account styled as 'Reserve for purchase tax', instead of debiting it to the profit and loss account. The assessee did so apparently because it was disputing its liability to pay the purchase tax on the ground that it was not the first purchaser of Rab and the purchase tax under Section 3D of the U.P. Sales-tax Act is leviable only on the first purchasers. However, at the time of submitting its quarterly returns it paid to the sales-tax department a sum of Rs. 11,534 retaining the balance of Rs. 31,630. Eventually, purchase tax was levied by the Sales-tax Officer and it was called upon to pay the tax assessed minus what it had already paid. The assessee appealed and contested its liability to purchase tax. In the meantime, its assessment for the year 1966-67 came to be made. The Income-tax Officer treated the sum of Rs. 31,631 as the assessee's income from business on the ground that it had realised this amount in its capacity as a trader from its customers along with the sale price and the amount was not payable by it to the Government. The assessee, on the other hand, claimed that this amount should be allowed to him as a deduction in the computation of its income being its liability to purchase tax, even though the amount had not been paid to the Government. The assessee's claim was not accepted by the Income-tax Officer nor by the Appellate Assistant Commissiner of Income-tax but was accepted by the Income-tax Appellate Tribunal on second appeal. The Commissioner is aggrieved and at his instance this reference has been made.
3. The assessee is maintaining its accounts on mercantile basis and, as such, he would be entitled to deduct any expenditure the liability for which is incurred in the relevant previous year. Admittedly, in this case the assessee was held liable to purchase tax by the sales-tax department in spite of its protests that it was not liable. The Tribunal found that the amount collected by the assessee as purchase tax represents the estimated sum of purchase tax which would be payable by the assessee on the transactions relating to the previous year in question. The question is as to whether in these circumstances the assessee is entitled to claim a deduction of this amount.
4. The learned counsel for the department does not dispute that the amount in question represents liability of the assessee on account of purchase tax and any purchase tax paid or payable by an assessee would be an allowable deduction in computing its income for the purposes of income-tax. His contention is that since the assessee did not debit the amount in its profit and loss account and allowed it to remain in a 'purchase reserve account', it was not entitled to a deduction. His further contention is that as the assessee is disputing its liability to pay purchase tax, the same is not an ascertained liability which he could claim as a deduction. In our opinion, the contention of the learned counsel for the department has no merits whatsoever. The legal position is clear and admits of no doubt. When the assessee realised purchase tax from its customers it did so in the capacity of a businessman and such collection would go to swell its gross profit but in order to determine the net profit of a business liable to tax any expenditure incurred by the assessee in connection with its business is an allowable deduction. An assessee who follows the mercantile system of accounting is entitled to claim a deduction even though the expenditure is not actually expended. It is enough if the liability for such expenditure accrues, The fact that the assessee did not pay this amount to the Government in the relevant accounting year did not alter the position. Similarly, the fact that the assessee did not make appropriate entries in its books of accounts but kept the amount in a reserve account, would also not alter the position. The entries in .the books of accounts are not in any way determinative of an item of income or expenditure. The contentions raised by the department in the instant case are similar to those raised before the Supreme Court in Kedarnath Jute . v. Commissioner of Income-tax, : 82ITR363(SC) . In that case also the assessee-company claimed deduction in the income-tax proceedings under the Income-tax Act of the sales-tax levied upon it. The Income-tax Officer rejected the assessee's claim for deduction on the ground that the assessee had contested the sales-tax liability in appeal and that it had made no provision in its books of accounts with regard to the payment of that amount. The Supreme Court held that the moment a dealer made either a purchase or sale, which was liable to sales-tax, the obligation to pay the sales-tax arose, and the assessee who followed the mercantile system of accounting was entitled to deduct from the profits and gains of its business the liability to sales-tax which arose on the sales made by it during the relevant previous year. It further observed that the liability did not cease to be a liability because the assessee had taken proceedings before the higher authorities for getting it reduced or wiped out and further the fact that the assessee had failed to debit the liability in its books of accounts also did not debar it from claiming the same as a deduction.
5. It is true that in the case before the Supreme Court the assessee's appeal against the sales-tax assessment had failed and in the instant case there is no such finding. But this circumstance again is immaterial. The assessee is entitled to a deduction when the liability accrues and the liability accrues as soon as a transaction of sale or purchase takes place. Admittedly, in the instant case an assessment order under the U.P. Sales-tax Act had been passed against the assessee. The liability to purchase tax, therefore, had already arisen. If the assessee ultimately succeeds in appeal and is held not liable to purchase tax or the liability is reduced, the Income-tax Act makes ample provision for such a situation. Section 41 of the Income-tax Act provides that where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by an assessee, and subsequently, during the previous year, the assessee has obtained whether in cash or in any other manner whatsoever any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession, and, accordingly, chargeable to income-tax as the income of that previous year. The position thus is clear that the assessee is entitled to a deduction of the purchase tax in the assessment year in question and in case he succeeds subsequently in appeal, he shall be taxed again to the extent of relief granted to him. Thus, there will be no loss of revenue to the Government.
6. For the reasons stated above we answer the question in the affirmative, in favour of the assessee and against the department. The assessee is entitled to costs which we assess at Rs. 200.