JUDGMENT
P.C. Balakrishna Menon, J.
1. The Income-tax Appellate Tribunal, Cochin Bench, has referred the following question for the decision of this court under Section 256(1) of the Income-tax Act:
” Whether, on the facts and in the circumstances of the case, Rs. 17,092 being the amount paid by the assessee by way of arrears of tax under the Kerala Motor Vehicles (Taxation of Passengers & Goods) Act, 1963, relating to earlier years is to be allowed as a deduction in computing the assessee’s income for the assessment year 1975-76 ? ”
2. The assessee is a firm carrying on business of passenger transport. The firm was constituted as per a deed of partnership dated November 1, 1959. Clause 11 of the partnership deed provides for the accounts of the firm to be maintained on mercantile basis and its accounts are maintained accordingly.
3. The firm filed a return for the assessment year 1975-76 disclosing an income of Rs. 77,930. It had claimed deduction of Rs. 33,672 being the tax paid under the Kerala Motor Vehicles (Taxation of Passengers and Goods) Act, 1963. The Income-tax Officer noticed that out of Rs. 33,672 paid during the accounting period, a sum of Rs. 17,091.72 related to tax payable during the earlier years. Accordingly, the income assessable to tax was determined, without permitting deduction of the amount of tax under the Taxation of Passengers and Goods Act relating to the earlier years paid during the previous year. In appeal, at the instance of the assessee, the Appellate Assistant Commissioner allowed deduction of the entire tax paid during the accounting period even though part of the payment related to tax accrued during the earlier years. The decision of the Appellate Assistant Commissioner was confirmed by the Income-tax Appellate Tribunal based on its earlier decision in I.T. A. No. 35 (Coch)/75-76 dated December 29, 1979. The Appellate Tribunal in its order observed that even though the liability for payment of tax under the Taxation of Passengers’ and Goods Act had accrued during the earlier years, the liability was not in force during the pendency of the proceedings before this court and the Supreme Court challenging the validity of the Act, and after the pronouncement of the Supreme Court upholding its validity, the State Government had agreed to receive payment of the arrears of tax under the Act in instalments. The sum of Rs. 17,091.72 paid during the accounting period relates to the instalment that had fallen due with respect to the arrears of tax accrued during the earlier years.
4. On the facts found by the statutory authorities, it cannot be disputed that the assessee is following the mercantile system of accounting. The assessee has no case that it has no liability to pay the tax due under the Taxation of Passengers and Goods Act during the earlier years in respect of which it was discharging the arrears of tax due in instalments. There is also no dispute that the deduction of Rs. 17,091.72 disallowed by the Income-tax Officer relates to payment made by the assessee in discharge of its liability pertaining to the periods prior to the accounting period. When the assessee is following the mercantile system of accounting, it should have made provision for the liability accrued during each accounting period and claimed deduction in respect of the same in the relevant assessment years. It is not the actual payment in discharge of an earlier liability that will qualify for a deduction during the accounting period.
5. The Supreme Court in the decision in State Bank of Travancore v. CIT [1986] 158 ITR 102 observed at page 138 :
“In this country, by and large, two systems of account keeping are followed–one is the cash and the other the mercantile. Plainly speaking,
the cash system postulates actual receipt of money ; and for exigibility of income-tax, such receipt from business, profession or vocation or from other sources has to be actual in the relevant year of account. The mercantile system, on the other hand, is one where accounts are maintained on the basis of entitlement to credit and/or debit, A sum of money, as soon as it becomes payable, is taken into account without reference to actual receipt and a debit becomes admissible when liability to pay is created even though the sum of money is yet to be paid.”
6. It is further observed at page 143 :
“In A. Krishnaswami Mudaliar’s case [1964] 53 ITR 122, this court had to refer to the distinction between the mercantile system and cash system. Referring, however, to the relevant section appropriate to Section 145 of the present Act, this court observed that the section did not compel the Income-tax Officer to accept a balance-sheet of cash receipts and outgoings prepared from the books of account; it was for him to compute the income in accordance with the method of accounting regularly employed by the assessee.”
7. A Full Bench of this court in the decision in CIT v. K. A. Karim and Sons [1982] 133 ITR 515, had to consider the question whether the tax under the Kerala General Sales Tax Act that had accrued prior to the accounting period but paid during the accounting period, was a permissible deduction. The Full Bench observed at page 519 :
” 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.”
8. The Full Bench, following the decision of the Supreme Court in Kedar-nath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 and dissenting from the view expressed by the Gauhati High Court in CTT v. Nathmal Tolaram [1973] 88 ITR 234, affirmed the decision of the Division Bench of this court in L. J. Paid & Co. v. CIT [1974] 97 ITR 152, wherein it is held that the liability of a past year cannot be taken into account for computing the income of a subsequent year.
9. The Supreme Court in Laxmipat Singhania v. CIT [1969] 72 ITR 291 stated at page 294 :
“Again, 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 as income of another year on the basis of receipt.”
10. The liability for payment of tax under the Taxation of Passengers and Goods Act had accrued by force of the statute itself and the agreement referred to by the Tribunal by which the State Government had permitted the operators of motor vehicles to discharge the liability in instalments does not in any way affect the accrual of liability and such accommodation granted by the Government is only with respect to its discharge. The Tribunal was not, therefore, justified in upholding the contention of the assessee that the payment made during the accounting period in discharge of liability of the tax under the Taxation of Passengers and Goods Act accrued during the earlier years is a permissible deduction under the Income-tax Act, for the assessment year under consideration. We, therefore, answer the question referred to us in the negative, i.e., against the assessee and in favour of the Revenue.
11. A copy of this judgment under the seal of the court and the signature of the Registrar, will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.