JUDGMENT
Bharucha, J.
1. In this reference under section 256(1) of the Income-tax Act, 1961, three questions are raised. They read thus :
“(1) Whether, on the facts and in the circumstances of the case, the assessee was entitled to depreciation on the interest and the foreign tour expenses, bank charges, etc., amount to Rs. 4,72,744 capitalised in earlier years, as reduced by the depreciation already allowed ?
(2) Whether, on the facts and in the circumstances of the case, the assessee was entitled to relief under section 91 of the Income-tax Act, 1961, in respect of dividends from United Kingdom ?
(3) Whether, on the facts and in the circumstances of the case, the sum of Rs. 8,65,208, being excise duty arising from the Government’s notification could be allowed as deduction in the assessment year 1965-66 ?”
2. Counsel are agreed that the first question must be answered in the affirmative in favour of the assessee in view of the judgment of the Supreme Court in Challapalli Sugars Ltd. v. CIT . The question is so answered without elaboration.
3. Counsel are also agreed in regard to the answer to be given to the second question : that it should be answered in the affirmative and in favour of the assessee in view of the Supreme Court’s judgment in CIT v. Clive Insurance Co. Ltd. . The question is so answered without elaboration.
4. The facts that are stated are pertinent to the third question. The assessment year involved in 1965-66. The assessee follows thejmercantile system of accounting. The assessee manufacturers soda ash. In the course of such manufacture, it produces carbon dioxide, also call kiln gas. It uses this carbon dioxide too make soda ash.
5. Carbon dioxide was subject to excise duty under item 14H of Schedule I to the Central Excises and Salt Act, 1944. By a notification dated July 7, 1962, the Central Government exempted carbon dioxide used in the manufacture of soda ash from so much of the excise duty as was in excess of Rs. 25 per metric tone. The assessee received a demand notice for excise duty on carbon dioxide at the rate of Rs. 25 per metric tone. It filed a writ petition in the Supreme Court contending that it was not a manufacturer of carbon dioxide and that the said item in the Central Excise and Salt Act did not apply. The Supreme Court heard the assessee’s writ petition along with a writ petition filed by South Bihar Sugar Mills Ltd. and delivered judgment on February 5, 1968. (This judgment is ). It found that the carbon dioxide produced by the said sugar mills and the assessee did not attract the said item. It accordingly held that “the demand notices served on these concerns are illegal and must be quashed”.
6. The assessee had collected excise duty on carbon dioxide from purchasers of its soda ash after July, 1962. For the years ended June 30, 1963, and June 30, 1964, it had collected the sums of Rs. 12,14,626 and Rs. 8,65,208 respectively. These sums were credited to an account called “Carbon Dioxide Deposit Account” but were not paid too the Central Government in view of the pending writ petition. After the Supreme Court delivered its judgment thereon, these sums were credited as miscellaneous income in the profit and loss account of the assessee for the year ended June 30, 1968, and taxed in the assessment year 1969-70.
7. In the assessment for the assessment year here concerned, the Income-tax Officer included the sums collected for the years ended June 30, 1963, and June 30, 1964, in the assessable income of the assessee and levied income-tax thereon. On appeal, the Appellate Assistant Commissioner held that the sum of Rs. 12,14,626 collected in the year ended June 30 1963, could not be assessed in the assessment year 1965-66. As regards the sum of Rs. 8,65,208 collected in the year ended June 30, 1964, the Appellate Assistant Commissioner allowed it as a deduction.
8. An appeal was filed by the Revenue to the Income-tax Appellate Tribunal contesting the deduction of the sum of Rs. 8,65,208. The Tribunal found that there had been a demand for excise duty. The demand had been quashed by the Supreme Court. There had been, accordingly, a standing liability until the Supreme Court set it aside. The Appellate Assistant Commissioner had, therefore, rightly allowed the sum of Rs. 8,65,208 as a deduction.
9. Mr. Jetly, learned counsel for the Revenue, submitted to us that there had been no demand upon the assessee. Having regard to the finding of the Tribunal and the quashing by the Supreme Court of the demand notices served on the said sugar mills and the assessee, it is impossible to sustain Mr. Jetly’s submission.
10. Mr. Jetly next submitted that, even assuming that there had been a demand, the receipt by the assessee of the sum of Rs. 8,65,208 was a trading receipt, that no payment of excise duty had been made therefrom and that, accordingly, it was subject to tax.
11. The judgment of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v.jCIT , is the clearest answer to Mr. Jetly’s submission. The assessee-company in that case followed, as the assessee before us does, the mercantile system of accounting. It incurred the liability of a certain amount on account of sales tax determined to be payable by the sales tax authorities on sales made by it during a particular previous year. A demand for sales tax was raised pending the income-tax assessment for that year. The Income-tax Officer rejected the assessee-company’s claim for deduction of that amount on the ground that it had contested the sales tax liability and had made no provisions in its books in regard to the payment thereof. The proceedings taken by the assessee-company to contest its liability to pay sales tax ultimately failed. When the matter in regard to the assessee-company’s income went to the Supreme Court, it was held that the moment a dealer made either purchases or sales which were subject to sales tax, the obligation to pay sales tax arose. Although that liability could not be enforced till quantification was effected by assessment proceedings, the liability for payment of tax was independent of the assessment. The assessee-company which followed the mercantile system of accounting was entitled to deduct from the profits and gains of its business the liability to sales tax which arose on sales made by it during the relevant previous year. The liability did not cease to be a liability because proceedings had been taken before high authorities for getting it reduced or wiped out. It remained a liability so long as the contention of the assessee did not prevail.
12. In the instant case, the assessee followed the mercantile system of accounting. It had received a demand for payment of excise duty. It was entitled to deduct from the profits and gains of the business its liability on account of excise duty in the relevant previous year. That liability remained a liability until extinguished by the Supreme Court’s decision on the assessee’s writ petition on February 5, 1968.
13. Mr. Jetly, however, placed reliance upon the judgment of the Supreme court in Chowringhee Sales Bureau P. Ltd. v. CIT . The appellant before the Supreme Court was an auctioneer. In respect of the sales effected by it as an auctioneer, the appellant realized during the relevant period certain amounts as sales tax. These were credited in its account books under the head “Sales tax Collection Account”. The appellant did not deposit the amounts in the State exchequer because it took the position that the statutory provision creating the liability upon it was not valid. The appellant also did not refund the amounts collected. It was held that the amounts realized as sales tax by the appellant in its character as an auctioneer formed part of its trading or business receipts. It did not make any difference that the amounts had been shown in the books under the head “Sales tax Collection Account”. The appellant would be entitled to claim a deduction as and when it paid the amounts to the State Government.
14. The principal question before the Supreme Court in the case just noted was whether the amounts which had been collected by the appellant were trading receipts. There had been no demand made upon the appellant for sales tax. It was the appellant’s stand that it was not liable to pay sales tax. The appellant had not paid sales tax. The appellant had, however, collected amounts towards sales tax and not refunded them. In these circumstances, the Supreme Court held that the amounts collected were trading receipts. The facts before us are quite different.
15. Our attention was also invited by Mr. Jetly to the judgment of the Calcutta High Court CIT v. Sinclair Murray & Co. (P.) Ltd. . We do not think it necessary to deal with this decision injany detail because it proceeded upon the evidence that the assessee had, after it had received an amount as sales tax, mixed it up with its own fund, treated it as its own money and used it in its business for the purposes of making profit. In the circumstances, the Calcutta High Court came to the conclusion that the amount was a trading receipt. No such evidence exists upon the record before us.
16. Mr. Joshi, learned counsel for the assessee, invited our attention to the judgment of the Calcutta High Court in CIT v. Century Enka Ltd. . This is apposite to the facts before us. The assessee-company was engaged in the manufacture of nylon yarn and was informed by the excise authorities that it was liable to pay excise duty on its production of polymer chips. The assessee disputed its liability on the ground that the polymer chips were utilised by itself in the manufacture of nylon yarn. The Assistant Collector of Excise held that the assessee was liable to pay excise duty. No demand notice was, however, served upon the assessee. The assessee made a provision for the liability for excise duty in its accounts, which were maintained on the mercantile system, and claimed the amounts, were maintained on the mercantile system, and claimed the amount so provided as business expenditure. The Calcutta High Court held that the provision for excise duty was allowable as a deduction.
17. Having regard to the aforesaid discussion, we are of the view that the sum of Rs. 8,65,208 was rightly allowed to the assessee as a deduction both by the Appellate Assistant Commissioner and by the Tribunal. We answer the third question in the affirmative and in favour of the assessee.
18. To recapitulate, all the questions are answered thus : In the affirmative and in favour of the assessee.
19. The Revenue shall pay to the assessee the costs of the reference.