JUDGMENT
1. In pursuance of the directions issued by this court under Section 256(2) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal at the instance of the Revenue, has referred the following two questions for the opinion of this court :
"1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that as and when the assessee effected the purchases of shoes from cobblers, the assessee's liability to pay the tax in respect of such purchases accrued and that the assessee was entitled to claim the deduction of this amount of purchase tax in the year of purchase ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the assessee was entitled to the deduction of the sum of Rs. 34,971 in the computation of its income ?"
2. The dispute pertains to the assessment year 1975-76, for which the previous year ended on March 31, 1975. During that year the assessee dealt in purchase and sale of readymade shoes. The Income-tax Officer found that in the books of the assessee there was a credit balance of Rs. 34,971 in an account called "overhead collection charges account" which he brought to tax with the remarks that if any part of that amount is paid by the assessee to the State Government or is refunded to a party, it would qualify for deduction in the computation of the total taxable income in the year. On appeal, the Appellate Assistant Commissioner of Income-tax upheld the action of the Income-tax Officer taking the view that the said amount consisted of sales tax charged by the assessee from its customers but was not paid to the Government, because the assessee was contesting its liability before the sales tax authorities. On second appeal at the behest of the assessee, the Income-tax Appellate Tribunal reversed the decision of the authorities below and held that when the assessee effected the purchases of shoes from cobblers, the assessee's liability to pay the tax in respect of such purchases accrued and that the assessee was entitled to claim the deduction of the amount of purchase tax on the mercantile system of accounting which was regularly followed by it even though the expenditure was not actually incurred. It is enough for the claim of deduction if the liability for such expenditure accrues. The fact that the assessee did not pay the amount to the Government in the relevant accounting year did not alter the legal position.
3. The decision of the Tribunal is in conformity with the view expressed by this court in CIT v. Poonam Chand Trilok Chand [1976] 105 ITR 618 ; CIT v. Brijmohan Das Laxman Das [1979] 117 ITR 121 (All).
4. Learned counsel for the parties agree that the controversy in issue is how covered by a decision of the Supreme Court in Jonnalla Narashimharao and Co. v. CIT [1993] 200 ITR 588. The facts of that case were that the assessee had collected certain amount by way of sales tax but inasmuch as he was disputing the very levy of sales tax during that year, he collected it under the name "rusum". The said amount was collected during the accounting period relevant to the assessment year 1968-69 when it was brought to tax in that assessment year. The claim for deduction was not allowed in the computation of the total income on the plea that the amount had not been deposited with the Government. The Supreme Court held that the amount collected by way of sales tax, though not deposited with the Government Treasury, was a permissible deduction as business expenditure on the finding that the assessee in that case maintained its accounts on mercantile basis. The Supreme Court referred to its earlier decision in Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363 while stating the above legal position.
5. Following the aforesaid decisions of the Supreme Court both the questions referred to this court are answered in the affirmative, in favour of the assessee and against the Revenue.