1. In this reference petition under s. 256(2) of the I.T. Act, 1961, the Revenue seeks a direction from this court to the Tribunal to refer the following two questions for the opinion of this court :
'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the surplus amount of Rs. 14,138 in the sales tax account representing excess collections over payments made cannot be treated as the assessee's income and should not therefore, be assessed to tax
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is adopting the mercantile system of accounting especially when the assessee is debiting the said amount as and when it pays sales tax to the Government ?'
2. The assessee is a company engaged in the business of manufacturer and sale of paper cones and allied products used as textile accessories. In the course of assessment proceedings for the assessment year 1976-77, the ITO noticed that the accounts of the assessee disclosed an excess collection of the Rs. 14,138 by way of sales tax over and above the amount paid to the Sales Tax Department. The ITO further noticed that the assessee was following the mercantile system of accounting in respect of its business while it followed cash system in regard to sales tax collections and payments. In view of his finding that in relation to sales tax collections and payments, the assessee has been adopting the cash system, the ITO applied the decision of this court in CIT v. E.A.E.T. Sundararaj : 99ITR226(Mad) and held that the excess collections represent the assessee's income of the year and, therefore, it is liable to be included in the total income. This view of the ITO was challenged before the Commissioner of Income-tax (Appeals). It was contended before the Commissioner of Income-tax (Appeals) that the assessee followed mercantile system of accounting even in respect of sales tax payments and, therefore, so long as the liability to pay sales tax existed even as regards the alleged excess, he is entitled to deduction. The Commissioner of Income-tax (Appeals) accepted the contention of the assessee and held that the assessee maintained his accounts even in respect of sales tax on the basis of mercantile system, since the assessee has credited the sales tax collections due in the sales tax account even in regard to the very sales in respect of which the assessee had not actually realised any sales tax from the customers. The Appellate Assistant Commissioner, therefore, concluded that since the assessee has maintained the sales tax account also on the basis of the mercantile system, he is entitled to seek deduction of the entire sales tax liability, notwithstanding the fact that the entire amount of sales tax liability has not been discharged during the year of account. In this view, the Appellate Assistant Commissioner allowed the appeal and deleted the addition of Rs. 14,138 representing the excess collection of sales tax available with the assessee.
3. As against the order of the appellate authority, the Revenue filed an appeal to the Appeal to the Appellate Tribunal. Before the Tribunal, the Revenue contended that the assessee was following cash system of accounting in respect of sales tax and hence the excess disclosed in the accounts over and above the payments actually made to the Sales Tax Department is liable to be taxed as the assessee's income. The Tribunal rejected the contention urged by the Revenue and held that them assessee maintained accounts even in respect of sales tax on mercantile basis and hence the entire collections made towards a statutory liability should be deducted in the year of account. The Revenue, aggrieved by the order of the Income-tax Appellate Tribunal, seeks a direction under s. 256(2) to refer the questions set out above for the opinion of this court.
4. In this case, the ITO has proceeded on the basis that the method of accounting followed by the assessee in respect of collections and payments of sales tax was cash system and that, therefore, the decision of this court in CIT v. E.A.E.T. Sundararaj : 99ITR226(Mad) stood attracted. The appellate authority as well as the Tribunal have, however, found that the method of accounting adopted by the assessee so far as the sales tax collections and disbursements are concerned is not on cash basis as found by the assessing authority but it is mercantile basis and, therefore, even though the entire amount of sales tax collections have not been actually paid to the Sales Tax Department, the entire sales tax collections have to be deducted, as the liability to sales tax has accrued and that the principle of the decision in CIT v. E.A.E.T. Sundararaj : 99ITR226(Mad) cannot, therefore, apply. It is not in dispute that the excess collections made towards sales tax have to be treated as income of the assessee in view of the decision of the Supreme Court in Chowringhee Sales Bureau Private Limited v. CIT : 87ITR542(SC) . But the question is whether the assessee is entitled to deduct in computing the total income, the accrued liability towards sales tax. In CIT v. E.A.E.T. Sundararaj : 99ITR226(Mad) , this court has held that if the assessee has adopted the cash basis in maintaining the sales tax account, the excess amount retained in the hands of the assessee after the actual payments to the Sales Tax Department cannot be deducted. But that division will not apply to a case where the assessee maintained the accounts on the mercantile basis so far as the sales tax collections and payments are concerned. In this case, though the ITO found that the method of accounting adopted by the assessee is cash system so far as sales tax in concerned, the appellate authority as well as the Tribunal have concurrently held that the assessee has maintained mercantile system of accounting and, therefore, the principle of the decision CIT v. E.A.E.T. Sundararaj : 99ITR226(Mad) will not apply. The learned counsel for the Revenue contends that the appellate authority has not given a definite finding on the methods of accounting adopted by the assessee so far as sales tax is concerned and the Tribunal while accepting that finding has not also considered the relevant matters. However, we find from the order of the appellate authority that he considered the separate accounts maintained by the assessee with reference to sales tax and since even in respect of credit transactions sales tax has been credited in the accounts, he held that the assessee had been maintaining the sales tax accounts on mercantile basis. Therefore, it cannot be said that the appellate authority has no basis for giving a finding that the sales tax accounts were maintained by the assessee on mercantile basis. This finding of the appellate authority has been accepted by the Tribunal and the ultimate decision of the Tribunal is based on that finding. It may be, as contended by the learned counsel for the Revenue, that the Tribunal could have gone into the method of accounting adopted by the assessee in regard to sales tax in some detail, without merely endorsing the finding of the appellate authority on the question of the method of accounting. However, as we find that the appellate authority has given germane reasons for disagreeing with the finding of the ITO that the method of accounting adopted by the assessee is cash basis, we are not in a position to differ from the finding rendered by the appellate authority which has been accepted by the Tribunal. There cannot be any dispute that if the assessee maintained mercantile system of accounting so far as sales tax is concerned, then the entire sales tax accrued liability has to be deducted and not only the actual sales tax paid to the Sales Tax Department. In this view, we do not think that the case calls for a direction to the Tribunal to refer the above said questions for our opinion.
5. The tax case petition is dismissed. No costs.