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TMI Blog1975 (12) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... elating thereto was pending before the Supreme Court and a stay of payment was granted. That was a statutory liability and not a contingent one. The sales-tax authorities had reopened all the assessments consequent on appeal decision and revised orders may be passed by the authorities requiring the firm to repay the refund amount. The assessing authority rejected this contention of the firm and treated the entire amount of Rs. 25,938 as its income. In appeal, the Appellate Assistant Commissioner also held that the assessee could not claim anything towards sales-tax payment because it had been following cash basis for debiting sales-tax and claiming it as admissible expenditure. In second appeal before the Appellate Tribunal, the finding of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard to the amount of refund, i.e., Rs. 8,228, as includible in the assessee's total income for the assessment year 1968-69 under section 41(1) of the Income-tax Act, 1961. In view of this concession, we answer the second question in the affirmative and in favour of the revenue. On the first question Sri Polavarapu Rama Rao for the revenue contended that the sum of Rs. 17,710 was admittedly collected as sales-tax and so it is includible in the assessee's total income for that year. He relied on Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax and Sinclair Murray Co. P. Ltd. v. Commissioner of Income-tax, both of which are decisions of the Supreme Court. In the earlier case the appellant, who was an auctioneer, realised du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sum so paid or refunded. So far as the principle goes as stated by the Supreme Court, it is final. But it has to be noted that the Supreme Court was not considering in the above two cases what would be the effect if those sales-tax collections are entered in a separate account maintained under the mercantile system. An income accrues or arises when the assessee acquires a right to receive it. Traders follow two methods of accounting of their receipts, profits and gains. One is cash basis and the other is mercantile basis. The mercantile system of accountancy "brings into credit what is due immediately it becomes legally due and before it is actually received ; and it brings into debit expenditure the amount for which a legal liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of tax was independent of the assessment. The assessee, which followed the mercantile system of accounting, was entitled to deduct from the profits and gains of its business liability to sales-tax which arose on sales made by it during the relevant previous year. The assessee was entitled to the deduction of the amount of sales-tax which it was liable under the law to pay during the relevant accounting year. That liability did not cease to be a liability because the assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail. The fact that the assessee had failed to debit the liability in its books of account did not debar it from claiming the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner of Income-tax clearly applies to this case. Sri Swamy referred us to a number of other decisions. It is not, however, necessary to refer to all those cases in view of the authoritative pronouncement of the Supreme Court. We will only refer to the decision of the Allahabad High Court in Commissioner of Income-tax v. Poonam Chand Trilok Chand, where also the assessee was following the mercantile system and the court held that the purchase tax collected by him was an allowable deduction. For the foregoing reasons we hold that the amount of Rs. 17,710 is not includible in the total income of the assessee for the assessment year 1968-69. If and when the sales-tax claim was finally disposed of and any deduction was made, the balanc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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