Subramonian Poti, Actg. C.J.
1. These cases have come up before the Full Bench on a reference by a Division Bench of this court.
2. I.T.R. No, 84 of 1978, arises out of the assessment under the I.T. Act for the assessment year 1974-75, against a firm. The relevant accounting year is April 1, 1973, to March 31, 1974. The method of accounting is mercantile. The business of the assessee is one of processing, cashewnuts. Up to September 1, 1970, the assessee was directly importing cashewnuts from outside India. Cashewnuts were liable to be taxed at the point of last purchase in the State. Since the purchases up to August 31, 1970, were in the course of import the assessee was not being taxed on such purchases. From September 1, 1970, the Cashew Corporation of India alone was permitted to import cashewnuts. The assessee and other traders like the assessee had to purchase cashewnuts from the Cashew Corporation. Thereupon the assessee became liable to pay sales tax on the purchase of cashew from September 1, 1970. It appears that the cashew traders had taken up the question of liability to pay such tax, with the government and pending a decision thereon were not paying the tax. The government took no action for recovery. This attitude of the government was followed up by a government order dated October 12, 1973, exempting such purchases under Section 10 of the Kerala General Sales Tax Act. By that order the government, in exercise of the powers under Section 10 of the Sales Tax Act, made ' an exemption in respect of the tax payable under Section 5 of the said Act by the cashew manufacturers in the State on the purchase turnover of cashew-nuts imported from outside India through the Cashew Corporation of India for the period from 1st September, 1970, to the 30th September, 1973'. The explanatory note attached to this order explained that the government considered that the purchase of cashewnuts with shell imported from outside through the Cashew Corporation of India by cashew manufacturers in the State was exempted from sales tax payable under Section 5 for the period from 1st September, 1970, to 30th September, 1973, and the notification was intended to achieve the above object. It appears that the government had second thoughts on this matter. Soon after the government order on October 12, 1973, a cancellation order was passed by G.O. dated November 9, 1973. This order was purportedly made in exercise of the power conferred under Sub-section (3) of Section 10 of the Sales Tax Act and purported to cancel the notification issued on October 12, 1973, published in the Gazette dated October 23, 1973. The explanatory note mentioned that the government had, since passing the order, reconsidered the matter in all its aspects and were convinced that the said notification should be cancelled. Thus the notification dated October 12, 1973, published on October 23, 1973, was alive only for a few days. The accounts of the assessee were closed on March 31, 1974. In such accounts it claimed for the accounting year ended March 31, 1974, a deduction of Rs. 6,38,659 as purchase tax payable for the years 1970-71, 1971-72 and 1972-73. By that time, the assessment for the years ended March 31, 1972, and March 31, 1973, had not been completed and the assessee has claimed the deductions in respect of these years an the assessments for these years. These were allowed, For the year ended March 31, 1974, also, the claim stood allowed by the order of the AAC. Therefore, it is only a sum of Rs. 71,005 debited as purchase tax for the period from September 1, 1970, to March 31, 1971, that is in dispute. Whether the purchase tax payable in the above said period could be debited in the accounting period ending on March 31, 1974, was the only question that had to be decided by the Tribunal. The Tribunal found by its order that the liability to pay purchase tax was exempted by the government notification which was later on withdrawn and since the date of withdrawal fell within the relevant accounting year the liability in respect of the purchases made in the earlier accounting year ended March 31, 1971, actually arose during the accounting year ended March 31, 1974. It is the correctness of this view that was the subject of the question referred, namely:
'Whether, on the facts and circumstances of the case, the assessee is entitled to a deduction of the liability towards purchase tax in respect of purchases made during the accounting year ended March 31, 1971, in the assessment year 1974-75 '
3. In I.T.R. No. 33 of 1978, a similar question arises. There the assessee is an individual. There again the question concerns the purchase tax on raw nuts purchased from the Cashew Corporation from September 1, 1970. The assessee was keeping books of account on mercantile basis which bookswere closed on 30th June, every year. In respect of the accounting years which closed on June 30, 1971, and June 30, 1972, the assessee did not make any provision, towards the purchase tax liability under the impression that there will be no payment called for. But since by the time he could finalise the books of account for the year ended June 30, 1973, he had knowledge of the cancellation notification dated November 9, 1973, he made a provision for the purchase tax for that year. The question for reference concerned only the first two years that is that ending on June 30, 1971, and on June 30, 1972. In respect of these periods the claim was made in the accounting year corresponding to the assessment year 1975-76. In this case, the Appellate Tribunal took the view that the liability for the purchase tax arose for the first time when the notification was cancelled in November, 1973. So it held that November, 1973, was the point of time when the liability arose for payment of the purchase tax from September 1, 1970, onwards and that being so the deduction by the assessee who kept his books under the mercantile basis could be claimed for the accounting year in which 9th November, 1973, fell. It is the correctness of this view that is subject of reference in I.T.R. No. 33 of 1978, the question referred being:
'Whether, on the facts and in the circumstances of the case, the assessee is entitled to a deduction of the liability towards purchase tax in respect of the purchases made during the accounting years ended on June 30, 1971, and June 30, 1972, in the assessment year 1975-76 '
4. The plain question calling for answer in these cases concerns the time at which the liability to pay sales tax is incurred by an assessee. That, in both the cases, the assessee is keeping the accounts on the mercantile system, and, therefore, it is the time at which liability is incurred that is relevant, is not in dispute. But according to the assessees, in both these cases, though they were liable under the charging provision in the General Sales Tax Act to pay purchase tax on the last purchases from 1970, that such liability was really not being enforced, indicated that it was not intended to be enforced and that intention is further evidenced by the exemption notification dated October 12, 1973, published in the Gazette dated October 23, 1973. Therefore, it is said that when once the said notification was passed it operated to save the assessee from the liability to pay tax from September 1, 1970, and it was only when by the subsequent notification dated November 9, 1973, the earlier notification was cancelled that the liability arose for the first time. It is, therefore, said that, consequently, such liability had to be debited in the books of account only then.
5. Learned counsel, Sri Sugumaran submitted that though this court had earlier taken the view that the executive power under a statutory provisioncould not be exercised retrospectively that view expressed by a Full Bench of this court in Sreedharan Pillai v. State of Kerala  KLT 151, can no longer be said to be right in view of the decision of the Supreme Court in Government of A.P. v. D. Janardhana Rao, : (1977)ILLJ12SC . Retrospectivity of operation, by reason of the exercise of power under Rule 47 of the Andhra Pradesh State and Subordinate Service Rules, was upheld in that decision. We do not think that this is of any material relevance in this case, for, the question before us is not whether an exemption's notification could retrospectively operate.. It was a notification which operated to exempt from tax a transaction of a specific period, namely, from 1st September, 1970, to 30th September, 1973, a period which had expired even before the issue of the notification. Its very character was to exempt certain sales of a previous period. The question of retrospectivity does not arise in such a case. Under the sales tax law of the State, the liability to pay tax arises in the year in which the transactions take place. For the period from September 1, 1970 to March 31, 1973, the assessee had effected purchases. Such purchases were liable to tax under the law as it stood then. The liability to tax arose under such law. That the Government took no steps for recovery of tax is irrelevant. That possibly pressure was brought to bear upon the Government by the trade not to enforce recovery of tax on such sales is also irrelevant. The liability having arisen in the year in which the transaction took place provision had to be made for such liability. If the assessees had not made provision in that year but such provision was made in a later year that would not mean that the liability arose only in such later year. If by an exemption notification in a subsequent year the transactions of an earlier period are exempt from tax that would only mean that the existing liability is no longer in force by reason of the notification of exemption. In the case of the assessees before us, the liability to pay tax arose in the years in which the transactions of purchase took place, the liabilities had to be provided for in the respective years, when the exemption notification was published in October, 1973, such liability ceased to be operative, but on the later cancellation of such exemption notification by the notification of November 9, 1973, the liability revived. If that be so, it cannot be said that the liability arose for the first time on the cancellation notification of November 9, 1973.
6. The Supreme Court had, in Kedarnath Jute Mfg. Co. Ltd. v. CIT : 82ITR363(SC) , considered the liability of an assessee who had followed the mercantile system of accounting. The court held that although the liability to pay tax could not be enforced till quantification was effected by assessment proceedings, the liability for payment of tax was independent of the assessment. The liability for payment of sales tax had accrued during the year of assessment even though it had to be discharged on afuture date. Though an attempt was made by the Gauhati High Court in CIT v. Nathmal Tolaram  88 ITR 234, to take a different view explaining this decision of the Supremo Court, this court in L.J. Patel & Co. v. CIT : 97ITR152(Ker) , rightly disagreed with the approach in that decision. Adopting the view expressed in the decision of the Supreme Court in Kedarnath Jute Mfg. Co, Ltd. v. CIT : 82ITR363(SC) , this court held that the liability of a past year cannot be taken into account for computing the income of a subsequent year.
7. In this view, we think that the Tribunal was in error in holding that the liability to pay tax for the period from September 1, 1970, up to March 31, 1973, in one case and the assessment year ending on June 30, 1971, and that ending on June 30, 1972, in the other case arose only in the accounting year in which the cancellation notification of 9th November, 1973, was issued. We, therefore, answer the questions referred to us in the negative, that is, in favour of the department and against the assessees.
8. A copy of this judgment under the seal of the High Court and signature of the Registrar shall be sent to the Income-tax Appellate Tribunal, Cochin Bench, under Section 260(i) of the Act.