1. This appeal by the assessee is against the order of the AAC relating to the assessment year 1975-76. Though the assessee had taken two grounds, one relating to the refusal to renew the registration of the firm and the other relating to the addition of Rs. 31,845, before us, the learned counsel for the assessee submitted that he was only pressing Ground No. 2 regarding quantum. The reason for the above submission of the counsel is that the two grounds relate to two different orders passed under separate sections and separate appeals are provided against each. We, therefore, proceed to consider the assessee's appeal insofar as it relates to the addition of Rs. 31,845.
2. The ITO found that the assessee-firm had received a refund of Rs. 31,845 from the sales tax authorities, Jammu, which represented 5 per cent of the sales deposited as sales tax in the earlier year. The assessee had collected sales tax at 12 per cent on the total sales of Rs. 6,50,318 and the same had been paid to the sales tax department.
The assessee had, however, challenged the rate applicable and ultimately it was decided that sales tax was leviable at 7 per cent and not at 12 per cent. The gross amount of sales tax paid at 12 per cent was Rs. 76,429.44 which had been paid in the previous year. In the current year the assessee received sales tax refund of Rs. 31,845. The assessee showed this refund on the credit side of the balance sheet.
The ITO was of the view that the refund received was to be assessed as the assessee's income in the current year. It was submitted on behalf of the assessee that though the refund had been received from the sales tax authorities, it represented the assessee's liability to pay back the sales tax collected from different parties. It was also pointed out that an amount of Rs. 4,172 was refunded to S.R. Enterprises, Jammu, in the relevant year. It was also contended that the other two amounts of Rs. 8,113 and Rs. 19,560 was payable to Solar, Srinagar, and Speedways, Jammu. It was pointed out that the accounts of these parties had not been settled due to certain controversies and the refund of these parties could not be given. The ITO did not accept the contention of the assessee that the amount of refund represented the assessee's liability to different customers. He held that the receipt of sales tax refund was a trading receipt in the hands of the seller and deduction from income was admissible only to the extent of sales tax paid.
Reference was made to the decision of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT  87 ITR 542. A reference was further made to the decision of the Allahabad High Court in the case of Jagat Narain Durga Prasad v. CIT  76 ITR 214 where it was held that the sales tax refunded to the assessee formed the income of the assessee in the year in question. The ITO, therefore, added Rs. 31,845 to the assessee's income.
3. When the matter came before the AAC, the same arguments were repeated and the AAC upheld the finding of the ITO that the deduction of sales tax would be available to the assessee as and when he paid the amounts, which are stated to be due to the different parties.
4. It has been submitted before us by the learned counsel for the assessee that the lower authorities have erred in holding that the refund of sales tax was in the nature of trading receipt in the year in question. It was submitted that in the earlier year sales tax, which had been collected and had been paid to the sales tax department, had not been shown either as a trading receipt or as an expenditure. It.
was, therefore, contended that the amount had not been taken into consideration in computing the income of the assessee in the earlier year. It was, therefore, contended that the refund of sales tax received in this year could not be brought to tax under the provisions of Section 41(1) of the Income-tax Act, 1961, as the basic condition of this section was not satisfied. This section requires that where an allowance or deduction has been made in the assessment for any year in respect of expenditure or trading liability incurred by the assessee and subsequently during any previous year the assessee obtains any amount in respect of such expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him shall be deemed to be the profit and gains of the business or profession as the income of the previous year. It was, therefore, contended that the learned ITO erred in relying on the decision of the Allahabad High Court in the case of Jagat Narain Durga Prasad (supra) which dealt with a case under Section 10(2A) of the 1922 Act.
5. On the question of the assessability of the sales tax refund in this year, it was contended by the learned counsel for the assessee that though sales tax collected is a trading receipt in the hands of the assessee, in the present case it is not the sales tax collected but the refund of sales tax which is involved. It was submitted that the sales tax collected could be trading receipt of the immediately preceding year and not of this year. It was further submitted that even if the refund of sales tax represented trading receipt in the hands of the assessee, the ITO should have considered that this income was fastened with the liability to pay back these amounts to the parties from whom this had been collected. In this connection, it was submitted that the whole of this amount was due to be repaid to three different parties and had, in fact, been paid to one party, namely, S.R. Enterprises, Jammu, to the extent of Rs. 4,172. Regarding the other two, it was submitted that though the amount had not been paid, but it was claimed by those parties as due to them. In this connection a letter from Speedways, Jammu, have been filed where that party has claimed the payment of Rs. 19,560 on the ground that this was as per agreement. The party had also said that if this amount was not received, then they would compel to adjust the same out of commission payable. However, no document has been filed in respect of the third party, namely, Solar, Srinagar.
6. In reply, the departmental representative submitted that refund of sales tax was a trading receipt in the hands of the assessee and had rightly been taxed in the hands of the assessee. He contended that the fact that the refund has been received in this year would not change the nature of the receipt and it was continued to be a trading receipt in the hands of the assessee. Reliance was placed on the decision of the Supreme Court in the case of Sinclair Murray & Co. (P.) Ltd. v. CIT  97 ITR 615, wherein it was held that the amount collected by the appellant as sales tax constituted its trading receipt and had to be included in its income and if and when the assessee paid the amount collected to the State Government or refunded any part thereof to the purchaser, he would be entitled to claim deduction of the sum so paid or refunded. The Supreme Court had upheld the decision of the Calcutta High Court in CIT v. Sinclair Murray & Co. (P.) Ltd.  75 ITR 494.
It was further contended that there was nothing to show that the refunded amount represented liability to the three parties.
7. We have carefully considered the facts of the case as well as the rival arguments. Now it is settled law that sales tax collected by the seller from the purchaser constitutes the trading receipt in his hands.
It is also settled law that where books are maintained on mercantile basis, the liability to pay sales tax to the sales tax department accrues at the time of sale and whether the amount has been debited in the books or not, the assessee can claim it as a deduction for the purpose of computation of its income. In the present case, the assessee had collected sales tax in the earlier year but this had not been shown in the trading or profit and loss account. The assessee had, however, paid the sales tax in the earlier year itself. There was no occasion for allowance of sales tax liability as a deduction in computing the assessee's income in any earlier year. In view of this position, the provision of Section 41(1) could not be applicable. If any, authority was required for the purposes, we may refer to the decision of the Madhya Pradesh High Court in the case of Nathubhai Desabhat  49 STC 185. In this case, it was held that unless it is proved that an allowance or deduction has been made in the assessment in any previous year in respect of expenditure or trading liability, it is not open to the revenue to refer to Section 41(1) for charging tax on the receipt by the assessee by refund or otherwise of such expenditure in a subsequent year. The ITO has referred to the decision of the Allahabad High Court in Jagatnarain Durga Prasad (supra) but that was a case falling under Section 10(2 A) of the 1922 Act which was similar to the provisions of Section 41(1) of the Act. We, therefore, hold that the amount of Rs. 31,845 could not be assessed by invoking the provisions of Section 41(1).
8. Now the question for consideration is whether the sales tax refund received by the assessee in this year as a result of an order of the sales tax authorities could be considered as a trading receipt in the hands of the assessee. We are of the view that the receipt of refund by the assessee was in his capacity as a trader and, therefore, it constituted trading receipt in his hands. It has been held by the Calcutta High Court in Ikrahnandi Coal Co. v. CIT  69 ITR 488 that a refund of sales tax was a trading receipt in the hands of the assessee and was assessable to income-tax as income of the assesse.
While doing so, their lordships of the Calcutta High Court had relied on the decision of the Supreme Court in the case of CIT v Punjab Distilling Industries Ltd.  53 ITR 75. The amount of sales tax collected being of trading nature, could not lose that nature if it was received by way of refund of this year. We, therefore, do not agree with the learned counsel for the assessee that the amount in question did not constitute a trading receipt in the hands of the assessee.
9. However, we have to consider the other aspect of the matter whether this trading receipt was fastened with some liability according to which the assessee had to pay the amount in question to different parties. The ITO and the AAC have referred to the earlier decision in the case of Chowringhee Sales Bureau (P.) Ltd. (supra) to hold that the amount could be deducted as and when it was actually paid to those parties. This question had come up for consideration again before the Calcutta High Court in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT  110 ITR 385 where while holding that the sales tax collected formed part of the trading receipt, the liability to pay sales tax is held to arise the moment a sale or purchase is effected and an assessee who maintains accounts on the mercantile system is entitled to deduction of his estimated liability to sales tax even though they had not been paid to the sales tax authorities. In this case, the Calcutta High Court considered the earlier decisions of the Supreme Court and held that the system of accounting which is followed by the assessee will have to be taken into consideration. It was held that where the assessee follows mercantile system of accounting that will have to be taken into consideration for determining the accrual of liability for payment of sales tax. It was further held that in an earlier decision reported in Chowringhee Sales Bureau (P.) Ltd. (supra), the Supreme Court was not concerned with the question whether in a mercantile system of accounting the liability arose in order to make deduction from this income, nor was the Supreme Court concerned with the question whether there was any liability at all for the year for which the appeal went to the Supreme Court. It is true that in the case of Sinclair Murray & Co. Ltd. (supra), the Supreme Court had observed that the assessee would be entitled to claim deduction of the amount of payment to purchasers if and when the amount of sales tax was refunded to the purchasers. We have to consider whether on the basis of the contract with the three parties the assessee was liable to pay this amount to these parties on the date of receipt of refund. Speedways had referred to such agreement but no other material has been brought on record to show that what was the nature of contract according to which this amount became due to those parties. The AAC has not gone into this matter at all. According to us, it is necessary to ascertain the facts regarding this liability. We would, therefore, set aside the order of the AAC and direct that the assessee should be called upon to produce necessary evidence to show the agreement with the above parties and then to determine whether on the basis of that contract the liability to pay these amounts had accrued in this year itself. For ascertainment of these facts, the order of the AAC is set aside for passing a fresh order after ascertaining full facts. The appeal shall be treated as allowed for statistical purposes only.