1. JUDGMENT : M. P. Mehrotra, J. - This is an application u/s 256(2) of the IT Act, 1961 which has been moved by the CIT, Agra.
2. The facts, in brief, are these. The opposite party M/s. Glorious Shoe Factory, Shoe Market, Agra, (herein-after described as the assessee) is a partnership carrying on business in the purchase and sale of shoes mostly on commission basis. In the course of the assessment proceedings for the asst. yr. 1976-77, the ITO found an account in the name and style of O.H.C.C. Account. It showed a credit balance of Rs. 35,540. The said amount represented the collection made by the assessee from its customers on account of Purchase Tax. This amount was added by the ITO to the assessees income for the detailed reasons given by him in the assessment order for the asst. yr. 1975-76. The ITO relied on the decision of the Supreme Court in the case of Sinclaire Murray & Co. (P) Ltd. v. CIT, Calcutta (1974) 97 ITR 615 (SC). The ITO further observed that if the assessee paid this amount to the Government or to the other parties in the future the such payment would be allowed as a deduction in the year in which it would be made.
3. The assessee filed an appeal but did not succeed. Thereafter, a second appeal was filed before the IT Appl. Tribunal and the same succeeded. Before the Tribunal the assessee placed reliance on the decision of this Court in CIT, Lucknow v. Poonam Chand Trilok Chand (1976) 105 ITR 618 (All.) On behalf of the department reliance was placed on the decision of this Court reported in CIT v. Brijmohan Das Laxman Das (1979) 117 ITR 121 (All). The Tribunal in its order observed :
"There is no dispute that the facts and circumstances relating to this addition of Rs. 35,540 are the same as considered by the Appl. Tribunal for the earlier asst. yr. 1975-76 when a similar addition of the credit balance in O.H.C.C. account was deleted by the Appl. Tribunal accepting the assessees contentions. Apart from the above, the decision of the Allahabad High Court in CIT, Lucknow v. Poonam Chand Trilok Chand reported in (1976) 105 ITR 618 (All) supports the case of the assessee. In that case also the assessee, a commission agent, was following the mercantile system of accounting. The assessee in the said case had collected from customers Rs. 43,165 on account of Purchase Tax leviable on the sale of Rab under an account styled as Reserve for Purchase tax. It appears that the said assessee contested its liability to pay purchase tax; that when submitting the first quarterly return, it paid to the Sales-tax Department a sum of Rs. 11,534. Eventually purchase tax was levied and the assessee appealed. Meanwhile, the ITO treated the balance amount of Rs. 31,631 as the assessees income rejecting the assessees contention that the amount was payable to the Government for purchase tax and could not be included in its income. This claim of the assessee was upheld by the Appl. Tribunal on reference, at the instance of the Commissioner. Their Lordships of the Allahabad High Court held that the assessee, who followed the claim the deduction even though the expenditure was not actually incurred, that it was enough if the liability for such expenses accrued, that the fact that the assessee that did not pay any amount to the Government in the relevant accounting year did not alter the position and that similarly, the fact that the assessee did not make appropriate entries in its books of account, would also not alter the position. Their Lordships pointed out that the entries in the books of accounts are not in any way determinative of an item of income or expenditure, and that the assessee is entitled to a deduction when the liability accrues and that the liability accrues as soon as a transaction of sale or purchase takes place. Their Lordships further held that as an assessment under the U.P. Sales Tax Act had been made against the assessee, the liability to purchase tax had, therefore, already arisen, and that if the assessee should succeed in the appeal, action could be taken u/s 41 of the IT Act. Their Lordships, therefore, held that the assessee was entitled to claim the sum of Rs. 31,630 as an allowable deduction. In our view, this decision of the Allahabad High Court in the case of Poonam Chand Trilok Chand is more opposite than the decision relied on by the Revenue to the facts of the present case. In the case before us also, the assessee has collected purchase tax from his customers which was introduced by the U.P. Government with effect from 1-9-1974 u/s 3D of the U.P. Sales Tax Act, and credited such collections of Purchases Tax to O.H.C.C. A/c. There is no dispute that the assessee is following the mercantile system of accounting. We, therefore, respectfully follow the said decision of the Allahabad High Court and hold that the assessee is entitled to claim the sum of Rs. 35,540 as an allowable deduction in the computation of its business income, even if the collections of purchases tax are to be treated as part of the trading receipts of the assessee. Accordingly, this addition of Rs. 35,540 is deleted."
The CIT, Agra felt aggrieved with the said decision of the Tribunal and filed an application u/s 256(1) of the IT Act, 1961 seeking a reference of certain question of law which were claimed to arise from the said order of Tribunal. The said application however, was rejected by the Tribunal by its order dated 28-2-1980. It was observed by the Tribunal that it had followed the aforesaid decision of this Court reported in 105 ITR 618 (supra) which was directly applicable to the facts of the instant case, and that
"In view of this direct decision of the Allahabad High Court, the answers to the three questions posed by the Commr. are self evident and hence they are purely, academic. We are, therefore, unable to refer any of these three questions to the High Court."
Thereafter, the instant application u/s 256(2) of the Act was moved by the CIT Agra, and a prayer is made that the Tribunal should be directed to refer to this court the following three questions alongwith the statement of the case :
1. Whether on the facts and in the circumstances of the case, the IT Appl. Tribunal was correct in law in holding that the assessee was entitled to the deduction of Rs. 35,540 in the computation of its business income, even if the collection of purchase tax was to be treated as part of the trading receipts of the assessee ?
2. Whether on the facts and in the circumstances of the case, the IT Appl. Tribunal was correct in law in deleting the addition of Rs. 35,540 made by the ITO to the assessees income, which represented collection made by the assessee from its customers and which was credited to an account named O.H.C.C. account ?
3. Whether on the facts and in the circumstances revenue receipts taxable in the hands of the assessee firm ?
In support of the application, we have heard the ld. counsel for the Department and in opposition, the ld. counsel for the assessee had made his submissions.
4. The ld. counsel for the department contended that in the previous year relevant to the asst. yr. 1976-77 there was no liability for the payment of purchase tax under U.P. Sales Tax Act and, therefore, the assessee could not claim a deduction of any amount on the ground of liability to pay purchase tax. It was therefore, pressed that the aforesaid questions of law did arise in the instant case.
5. The ld. counsel for the assessee pointed out that it was not correct that there was no liability to pay purchase tax during the previous year in question. It may be stated here that the previous year of the assessee was the calander year ending on 31st Dec., 1975. The purchase-tax was levied u/s 3D of the U.P. Sales Tax Act on the purchase of footwears with effect from 1-9-1974. The relevant notification is dt. 31-8-1974. The said purchase tax was abolished with effect from 1-6-1975, the relevant notification is dated 30-5-1975, It is, therefore, clear that for the first six months of the calendar year 1975, the assessee was undoubtedly liable to pay purchase tax in respect of the purchase made by him. From the orders passed by the authorities below, it is not clear as to whether any purchase tax was realised by the assessee on or after 1-6-1975. It is not permisible to indulge in any surmises or guess-work and indeed non can be made in the facts of the present case. The department did not take the stand in the assessment proceedings or before the Tribunal that during the previous year in question, there was no liability in law to pay the purchase tax. If it were a pure question of law, it might have been possible for the department to contend that whenever there was controversy as to whether a certain amount should be allowed to be deducted from the gross profits it should be open to the Department to contend that such deduction should not have been allowed on the ground that in law there was no liability to make the payment, whose deduction was sought by the assessee, and that the mere fact that such a legal contention was not made before the authorities below, would not mean that it cannot be raised in the reference proceedings. In other words, it can be argued that it would not be a new question of law but it would be a new aspect inherent in the question of law arising from the order of the Tribunal the question of law would be whether in the facts and circumstances of the case a particular amount could be allowed as a deduction. The grounds on which the deduction should or should not be allowed, would raise only different aspects and not a new question of law. However, in the instant case, the position is different. It has already been stated above that there was a liability to pay purchase tax during the first half of the previous year of the assessee. It has not been set out in the orders passed by the authorities below, as to how much amount out of the said sum of Rs. 35,540 was collected in the period from 1-1-1975 to 31-5-1975 and whether any purchase tax was collected by the assessee after 31-5-1975. Therefore, we find that what the department is now seeking to raise, is not merely a new aspect of a question of law said to arise from the order of the Tribunal. It is seeking to raise new questions in respect of which there is no factual basis, and this cannot be permitted to be done u/s 256(2) of the Act. Ld. counsel for the department placed much reliance on the following expression occurring in the assessment order passed by the ITO while dealing with the said sum as "surplus beyond the admitted liabilities." It was contended that the said expression meant that the said sum of Rs. 35,540 was the excess amount which was realised as purchase tax in respect of the transactions of purchase which took place after 31-5-1975. In our view this contention cannot be accepted.
6. It should be seen that the ITO had added the amount of purchase tax collected by the assessee during the calendar year 1974 which was the previous year of the assessee for the asst. yr. 1975-76 and he sought to do the same thing in respect of the purchase tax collected by the assessee during the calendar year 1975. The ITO said that his reasons for doing so were similar in both the cases. Therefore, it will not be correct to think that by using the expression "surplus beyond the admitted liabilities" the ITO was suggesting some-thing new in the manner that he was stating that a sum of Rs. 35,540 was collected after 31-5-1975. It should further be seen that in its appellate order dated 21-8-1979, the Tribunal observed :
"There is no dispute that the facts and circumstances relating to this addition of Rs. 35,540 are the same as considered by the Appel. Tribunal for the earlier assessment year 1975-76 when a similar addition of a credit balance in O.H.C.C. account was deleted by the Appl. Tribunal accepting the assessees contentions."
It is, therefore, clear that before the Appl. Tribunal no contention was raised that compared to the earlier asst. yr. 1975-76, the position had undergone a change in the subsequent year due to the fact that the liability to pay purchase tax had ceased after 31-5-1975. Therefore, the Tribunal was justified in dealing with the controversy as to whether the sum of Rs. 35,540 was deductible or not on the footing that the assessee was liable to pay the same as purchase tax.
7. The department did not question the correctness of the decision of this Court in 105 ITR 618 (supra) and, therefore, in our view the Tribunal was right in holding that no reference was called for in the facts and circumstances of the instant case in view of the said decision of this Court.
8. Accordingly, the reference application is rejected with costs to the assessee which we assess at Rs. 125.