JUDGMENT
Srinivasa Iyengar, J.
1. These two references are made by the Income-tax Appellate Tribunal, the first at the instance of the department and the other at the instance of the assessee, in respect of the assessment for the assessment year 1971-72, the relevant previous year being the one ending October 30, 1970. The question relates to certain amount which had been refunded by the Dy. CCT to the assessee by way of refund of sales tax that had been credited by the assessee which is a registered firm, in respect of certain earlier years on its dealings as a dealer.
2. The question referred at the instance of the department is :
“Whether, on the facts and in circumstances of the case, the Appellate Tribunal was right in holding that the sales tax refund of Rs. 76,918 is not assessable for the assessment year 1971-72 ?”
In the other reference, the question referred is :
“Whether, on the facts and in circumstances of the case, the Tribunal was right in holding that the sales tax amount referred, amounting to Rs. 76,918 was income in the hands of the assessee assessable to income-tax ?”
3. Few material facts not in dispute are : The amounts refunded to the assessee were in relation to the assessment years 1964-65, 1965-66 and 1966-67. The order of the Dy. CCT holding that the assessee was not liable to pay sales tax in respect of chilies that had been sold on commission basis was made on March 17, 1969. Pursuant therefore, the CCT wrote to the assessee on July 8, 1969, notifying him the result of the order of the Dy. CCT and also asked the assessee to come and take the refund vouchers which were kept ready. The assessee, however, actually received the amount on December 12, 1969, so far as the assessment year 1964-65 was concerned and on December 26, 1969, in regard to the other two assessment years.
4. In the return filed for the year 1971-72, the assessee had shown the amount of refund, viz., Rs. 76,918, in part IV of the return and that it represented the sales tax refund. The assessee also wrote a letter to the ITO dated December 24, 1971, to the effect that the amount would have to be refunded to the constituents and giving a list of the creditors to whom the amounts were to be refunded. It also gave an undertaking before the ITO that adjustment would be made in subsequent years. In view of this, the ITO did not bring to tax the amouut. The Commissioner being of the opinion that the assessment made by the ITO on January 4, 1972, for the assessment year 1971-72 was erroneous, issued notice to the assessee under s. 263 of the I.T. Act, 1961. The assessee filed its objection contending that the refund of sales tax was not a trading receipt and the amounts collected even in the first instance were not trading receipt and, in any event, the right to receive refund accrued to the assessee on or immediately after March 17, 1969, when the Dy. CCT made the order which would fall within the accounting period relevant to the assessment year 1970-71, and, therefore, could not be taxed in the assessment year 1971-72. The Commissioner did not accept the contentions of the assessee and held that the sum of Rs. 76,918 was assessable as income of the assessee for the assessment year 1971-72 and directed the ITO to revise the assessment of the firm and its partners accordingly. The Commissioner referred, inter alia, to the decisions of the Supreme Court in the case of Chowringhee Sales Bureau P. Ltd. v. CIT and Ikrahnandi Coal Co. v. CIT [1968] 69 ITR 488 of the Calcutta High Court and held that the amount collected by way of sales tax from its constituents was a trading receipt of the assessee and the refund also was in relation to this the assessee had credited the amount in December, 1969, in its books and as it was within the previous year relevant to the assessment year 1971-72, it was liable to be included in the computation of the income for that assessment year.
5. The assessee feeling aggrieved by this order, preferred an appeal to the Appellate Tribunal. The main contentions raised in the appeal were that the amount was not the income of the assessee and in any event was not taxable in the assessment year 1971-72. The Tribunal held that the method of accounting adopted by the assessee was the mercantile system and it had not been disputed and the only reason given by the Commissioner to reject the contention based upon the method of accounting was the fact that the assessee had credited the amount on the basis of actual receipt and, therefore, the regular method of accounting followed by the assessee cannot be said to be mercantile system. The Tribunal held that the departure made by the assessee would not destroy the system of accounting regularly followed and the I.T. authorities could not reject the regular method of accounting followed and bring to tax an item which has accrued in one year in a subsequent year merely on the ground that the assessee had entered it in the year relevant to the subsequent assessment year. The Tribunal, however, rejected the contention of the assessee that the amount was not taxable. The Tribunal noticing the decision of the Calcutta High Court in Ikrahnandi Coal Co.’s case [1968] 69 ITR 488, observed that the facts in the instant case were similar to the said case and held that the amount of refund was taxable. In view of that finding, it held that it was necessary to consider the applicability of s. 41(1) of the I.T. Act, 1961. In the result, it allowed the appeal filed by the assessee holding that the amount of refund was not assessable for the year 1971-72.
6. Before us, the learned for the revenue submitted that the amount of refund fell squarely within the purview of s. 41 of the I.T. Act, 1961, and was, therefore, taxable and, in any event, it was the amount which was received by the assessee in its character as a trader and was a trading receipt and, therefore, in the light of the principle enunciated by the Calcutta High Court in Ikrahnandi Coal Co.’s case [1968] 69 ITR 488, the amount was liable to tax. He invited our attention to a decision of the High Court of Allahabad in the case of Jagatnarain Durga Prasad v. CIT , where the matter had been considered as coming within the purview of s. 10(2A) of the Indian I.T. Act, 1922. The counsel also relied upon another decision of the Allahabad High Court in the case of India Motor Transport Co. v. CIT [1978] 114 ITR 677. His further submission was that the assessee had credited the amount in its books for the previous year relevant to the assessment year 1971-72 and, therefore, the Commissioner was correct and the conclusion reached by the Tribunal was not correct. His submission was that when the assessee itself had entered the amount on a particular day in the books of account, it was open to the Commissioner to base his decision on the basis of that fact and also referred to a decision of this court in the case of CIT v. Lakshmamma [1964] 52 ITR 789 in which the scope of s. 10(2A) of the Indian I.T. Act, 1922, has been considered.
7. So far as the arguments of the learned of the learned counsel for the revenue based on the provisions of s. 41 of the I.T. Act are concerned, it appears that this aspect of the matter does not arise for consideration in this reference because the Tribunal did not consider its applicability and no reference was sought by the department, that the Tribunal had erred in not applying s. 41 or erred in declining to consider the applicability of s. 41. But we must mention that the facts squarely fall within the purview of s. 41. However, it is clear that the amounts were collected by way of sales tax by the assessee and the amounts were also credited to the Government. Reductions in that behalf were also claimed in the earlier year and it had been allowed. The correctness of the order was contested and, ultimately, the Dy. CCT held that the assessee was not liable to pay sales tax and an order of refund was made. Therefore, this amount was also received by the assessee in its character as a trader and it represented a trading receipt. The Supreme Court held in the case of Chowringhee Sales Bureau P. Ltd. v. CIT and also in Sinclair Murray and Co. P. Ltd. v. CIT [1974] 97 ITR 615, in which the earlier decision was followed, that the amounts collected by way of sales tax by a dealer formed part of his trading receipt and were includible in the computation of the total income.
8. The Supreme Court, in decision in Rajputana Trading Co. Ltd. v. CIT , while considering the matter in relation to s. 102(2A) of the Indian I.T. Act, 1922, observed that where a creditor had waived his right to recover certain amount of debt, there is proximate relationship between what is deemed to have been received by the assessee in that behalf, and to the business which the assessee was carrying on and it would be illogical to treat the receipt as having a neutral source and not springing out of the same category of business which had led the assessee to incur loss or liability. Therefore, the view of the Tribunal that the refund amount represented trading receipt and was taxable is correct.
9. The contention for the revenue, however, is that this refund amount was liable to be taxed in the assessment year 1971-72. The specific finding of the Tribunal is that the regular method of accounting employed by the assessee was the mercantile system. Under s. 145 of the I.T. Act, income chargeable under the head “Profits and gains of business or profession” has to be computed in accordance with the method of accounting regularly employed by the assessee. Therefore, the computation of income had to be made on the basis of the mercantile system of accounting regularly followed by the assessee. The Commissioner’s order does not dispute that the method of accounting regularly employed was the mercantile system but his reason for not following it up was that the assessee had made a departure and credited the amount in the books of account in the previous year relevant to the assessment year 1971-72. Such a departure itself would not destroy the method of accounting regularly employed and the regular method could not be ignored. The High Court of Patna in the case of CIT v. Jug Sah Muni Lal Sah [1939] 7 ITR 522 observed thus (head-note) :
“Where the income-tax authorities have once adopted the method of assessing interest on the accrued or mercantile basis it is not open to them to turn round and adopt the cash basis when the interest is subsequently realised by the assessee, so as to get over the period of limitation prescribed by section 34 for assessment of income which had escaped assessment.”
10. At another place, it was observed thus (p. 534) :
“What the law requires the Income-tax Officer to see it not a system of account to be kept by the assessee in respect of a particular loan which may have been omitted in that account, but the system of accounting which the assessee regularly employs for his own purpose with respect to all the loans which he discloses. If any loans are deliberately left out from the account kept regularly by the assessee, then it is open to the income-tax department to disbelieve the accounts and to proceed in any way they chose by acting under the proviso (to section 13) but on exercising a judicial discretion.”
11. The Supreme Court in the case of Laxmipat Singhania v. CIT has observed thus (p. 294) :
“It is not open to the Income-tax Officer, if income has accrued to the assessee, and is liable to be included in the total income of a particular year, to ignore the accrual and thereafter to tax it is income of another year on the basis of receipt.”
In the case of T.M.M. Madalai Nadar & Co. v. CIT [1956] 30 ITR 191, the High Court of Madras, observed thus (headnote) ;
“If the assessee, who maintains his accounts on the mercantile basis, is bound to credit himself with an amount in the year of account itself, his omission to make the credit entry would not absolve him of his liability.”
12. The High Court of Gujarat in the case of Motilal Ambaidas v. CIT [1977] 108 ITR 136 has observed thus (headnote) :
“Nextly, as to in which particular assessment year the amount could be brought to tax. The assessee was maintaining its accounts on mercantile basis, and, therefore, it is the date of the accrual of the right to receive the amount that is material and not the date of the actual payments by the Government to the assessee.”
13. In the instant case, the order of the Dy. CCT was made on March 17, 1969, and the assessee became entitled to the refund of the amount. Assuming that the actual calculation had not been made, the communication by the CTO, consequent upon the order of the Dy. CCT gave details and also notified that the refund vouchers had been kept ready. The assessee by merely postponing his taking the vouchers would not result in the payment not having been made. The date of accrual cannot be postponed by the assessee at his own choice. Merely because, the assessee chose to receive the amount in December, it would not mean that the refund had not accrued to him earlier. Both the dates, March 17, 1979, and July 8, 1969, when the CTO sent his communication to the assessee, fell within the previous year relevant to the assessment year 1970-71. As the actual date cannot be kept in abeyance, the view taken by the Tribunal that the refund of the amount must be held to have accrued to the assessee within the previous year relevant to the assessment year 1970-71, and not in the previous year relevant to 1971-72, must be held to be correct.
14. So far as the question referred at the instance of the assessee is concerned, many of the observations made by us earlier would cover it. However, the precise submission by Sri Sarangan, on behalf of the assessee, is that even on the basis that the amounts collected by way of sales tax were part of the trading receipts of the assessee, it was under a liability to return the same to its constituents, and, therefore, there was a liability on the assessee and as the method of accounting was the mercantile system, it was entitled to claim the liability and, therefore, the amount would not be taxable. He relied on the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT , wherein it was held that the liability in regard to payment of sales tax could be claimed as deduction where the assessee was following the mercantile system of accounting and on the two decisions of the Calcutta High Court in the case of Chowringhee Sales Bureau P. Ltd. v. CIT and in the case of CIT v. Kumardhubi Engineering Works Ltd. [1978] 115 ITR 58. He also relied on the decisions of the High Court of Allahabad in the case of CIT v. Poonam Chand Trilok Chand of the High Court of Andhra Pradesh in the case of Addl. CIT v. T. Nagireddy & Co. and also of the Gujarat High Court in the case of Motilal Ambaidas v. CIT [1977] 108 ITR 136. The decision of the Supreme Court in Kedarnath Jute Mfg. Co.’s case is clear that the liability even though it has not actually been paid up, can be claimed where the assessee is maintaining his account according to the mercantile system. The other decisions cited by the learned counsel for the assessee virtually follow the decision of the Supreme Court in the aforesaid case. But the circumstances in the instant case are somewhat different. The liability claimed to exist to make payment to the constituents is not a statutory liability. The provisions of the Sales Tax Act do not contemplate any such actual return of the amount to the customer by the dealer. The amounts refunded was not on the conditions that it should be returned to the customer. It is also not clear that there was any contract between the customer and the assessee to return any such amount. All that can be said is, on the facts and circumstances, that the customer may have a claim against the dealer for refunding the amounts of sales tax wrongly collected from him or which was found subsequently not to be payable by him. A mere claim of such a nature cannot be said to be an existing liability which is bound to be met at a future point of time. The stand of the assessee was clear, as in the note made by the ITO. All that was mentioned was that the assessee had given a letter “that this amount will have to be refunded to the constituents”, and that he had undertaken to effect adjustment in the subsequent year. It is, therefore, clear that the assessee had not treated it as its present liability to be met in future. The Commissioner has extracted what the assessee had stated in Para III of the return filed by it for the assessment year 1973-74 in regard to this amount Rs. 76,918. It was stated that only a sum of Rs. 15,608 had been proportionately divided among the partners and credited to their capital account. It is, therefore, seen that at no given point of time the entire amount was paid back to the constituents. The Commissioner has observed that the amount that had been paid to the constituents may be claimed as a deduction in the relevant assessment year.
15. The Supreme Court in the case of Abdul Quader & CO. v. STO [1964] 15 STC 403 observed thus (p. 408) :
“If a dealer has collected anything from a purchaser which is not authorised by the taxing law, that is a matter between him and the purchaser, and the purchaser may be entitled to recover the amount from the dealer.”
Basu J. in Ikrahnandi Coal Co.’s case [1968] 69 ITR 488 observed in similar circumstances thus (p. 500) :
“When the refund has been received by the assessee, there is no conditions imposed upon the refund that the money must be paid back to the purchasers. It may be that the purchasers may resort to some litigation to try their luck to have share of the money which was refunded by the State and it is in that sense that the Supreme Court observed in Abdul Quader’s case that the question of any recovery by the purchasers was one as between the dealer and the purchaser.”
16. In these circumstances, the bare principle that a liability can be claimed as deduction in the computation of the total income if the accounts are maintained on mercantile system of accounting, would not be of any avail to the assessee. Therefore, the basis on which the amount was claimed to be not taxable, must fail.
17. In the result the question in ITRC No. 38 of 1976 is answered in the affirmative and against the department. The question in ITRC No. 121 of 1977 is also answered in the affirmative, but against the assessee.
