JUDGMENT C.S.P. Singh, J.
1. The Income-tax Appellate Tribunal, Delhi Bench 'B', has referred the following question for our opinion:
"Whether, on the facts and in the circumstances of- the case, the Income-tax Appellate Tribunal was justified in upholding the addition of Rs. 49,768 to the income of the assessee and not allowing the same as business expenditure ?"
2. In the relevant previous year, the assessee acted as a commission agent and also purchased different varieties of grains like chana, matar, moong, matar ka dal, etc. In the course of his business, the assessee had collected an amount of Rs. 57,865 as purchase tax in respect of arhar dal but had deposited only an amount of Rs. 8,000 with the State Government and had retained the rest, that is, Rs. 49,769. The ITO included this amount in the income of the assessee. The appeal filed by the assessee was allowed by the AAC on the ground that on account of the amendment in the U.P. Sales Tax Act in 1970, the amount of purchase tax realised may have to be paid by the assessee and further that in any event it did not constitute a trading receipt. The revenue appealed against this order and the matter was remanded by the Tribunal for the purposes of scrutinising the record of the sales tax case and finding out whether the assessee was liable to pay Rs. 57,769.10 as purchase tax for the relevant year. On the appeal being reheard, the AAC found that the purchase tax liability of the assessee for the financial year 1968-69, which was the relevant previous year for the assessment year 1969-70, had been determined at Rs. 57,855.65 by an order dated March 21, 1973. Taking into account the fact that the assessee had furnished quarterly returns for the relevant period, he held that the entire collection had been made by the assessee towards his sales tax liability. On this finding he held that the purchase tax collection constituted a liability which could not be treated as income of the previous year on the mere fact that the assessment order was passed later. The revenue appealed to the Tribunal. The Tribunal, to begin with, held that the tax collected by the assessee constituted his trading receipt. Turning attention to the question as to whether the assessee was entitled to claim deduction of the amount in question on account of his being liable to pay purchase tax up to the same amount, it held that deduction for this liability should be allowed in the year in which it is paid and not in the year in which the assessee had debited it in his books. In doing so, it purported to follow two decisions of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 and Sinclair Murray and Co. P. Ltd. v. CIT [1974] 97 ITR 615 in preference to another decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363.
3. Before we consider the question about the justification of the claim made by the assessee under the I.T. Act, it is necessary to consider the question of the liability of the assessee to pay purchase tax on arhar dal under s, 3D of the U. P. Sales Tax Act. It has already been noticed that the relevant previous year for this assessment was the financial year 1968-69. In that year arhar as also other pulses and foodgrains were liable to purchase tax under Section 3D of the U.P. Sales Tax Act. The tax was, however, a single point tax, which had to be paid by the first purchaser and subsequent purchasers were not liable to pay any tax at all. Further, once the transaction had been taxed under Section 3D, no other tax under the U.P. Sales Tax Act could be imposed in respect of subsequent sales or purchases. This is evident from the relevant part of Section 3D as it then stood, which ran as under:
" 3D. Levy of purchase or sales fax on certain goods.--(1) Except as provided in Sub-section (2) there shall be levied and paid, for each assessment year or part thereof, a tax on the turnover, to be determined in such manner as may be prescribed on first purchases made by a dealer or through a dealer, acting as a purchasing agent in respect of such goods or class of goods, and at such rates, not exceeding two paise per rupee in the case of foodgains, including cereals and pulses, and five paise per rupee in the case of other goods and with effect from such date, as may, from time to time, be notified by the State Government in this behalf......
(4) On the issue of notification under this section no tax shall be levied under any other section in respect of the goods so notified. "
4. There is no dispute that purchase tax was not paid on arhar, that is, the full grain of arhar dal, without its being dehusked. The assessee appears to have purchased arhar dal, that is, dehusked and broken arhar from the purchasers of arhar dal. In the case of Tilok Chand Prasan Kumar v. STO [1970] 25 STC 118 (All), it was held that dehusking of arhar dal and breaking the dal into smaller pieces does not change the nature of arhar dal so as to attract purchase tax at two points, one at the point of purchase of arhar dal as the full grain and the other of arhar dal after it has been dehusked and broken into smaller pieces. The matter was put thus at pages 120 and 121 of the report:
" It seems to us that the dal purchased by the petitioner is essentially the arhar dal purchased by the dal mills. There is no change in the chemical composition of the dal. There is no essential physical change except that the dust is shaken off, the husk or covering is removed and the dal itself is broken down into smaller pieces. We specifically enquired of learned counsel for the parties whether there was any essential difference between the dal before it was broken down and the zarda, kkanda, turra and dal obtained after the original grain was broken down, and we were told that except for the difference in size there is no other change. It would, therefore, appear that the broken down dal cannot be considered as a commodity essentially different from the grain purchased by the dal mills......
We are of opinion that the dal purchased by the petitioner cannot be said to be a commodity essentially different from the arhar dal purchased by the dal mills and accordingly the purchase effected by the petitioner cannot be regarded as the first purchase. The petitioner is, therefore, not liable to the levy of purchase tax under Section 3D(1) on the turnover of such purchases."
5. After this decision an amendment was effected in Section 3-D by adding an Explanation, being Expln. II. As a result of this Explanation, split or processed foodgrain was, by a fiction created by the Explanation, treated as a commodity different from unsplit and unprocessed foodgrain. As a result of this amendment, the view that was taken in Prakash Trading Company v. Commr. of ST [1972] 30 STC 345 (All) was that processed dal was different from original dal, and purchase tax could be levied on the first purchase of each of such commodities. Expln. II was given full retros-pectivity and as a result of the amendment in the law in 1970, the assessee had become liable for payment of purchase tax on dal. The law, however, took two other turns, one in 1974 and the other in 1976. The change was brought about by Section 2 of Act 17 of 1974 and Section 3 of U.P. Act No. 23 of 1976. These sections of the Amending Acts amended the Explanation to Section 3D with the result that in the case of Gouti Bandhu v. Commr. of ST [1978] UPTC 707, this court took the view that Expln. II, as introduced by the Amending Act of 1970, stood washed out and the decision in Tilok Chand's case [1970] 25 STC 118 (All) again ruled the field even for the assessment year 1968-69. No arguments have been addressed before us to show that the decision in Gouti Bandhu's case [1978] UPTC 707 (All) interpreted th" effect of these amendments wrongly. The position that emerges from the discussion is that in the financial year 1968-69, which was relevant to the assessment year 1969-70, the assessee, as matters then stood, was not liable to pay purchase tax under Section 3D in respect of arhar dal. He, however, became liable as a result of the amendment made in 1970, but in view of the subsequent amendment no liability for purchase tax can be fastened on him for those transactions. There is, however, an assessment order creating a liability for this amount passed on 21st March, 1973, which appears to have become final and the assessee has also deposited the entire disputed amount of purchase tax. The Tribunal, while disposing of the appeal, has given a direction that the assessee will be entitled to the deduction in^ the year in which the deposit has been made.
6. Counsel for the assessee contended that inasmuch as an assessment order under the U.P. Sales Tax Act has been passed for the financial year 1968-69. which was the relevant previous year for the assessment year 1969-70, the Tribunal erred in not allowing the amount claimed as a deduction. It was contended that the decisions in Chowringhee Sales Bureau [1973] 87 ITR 542 (SC) and Sinclair Murray and Co. [1974] 97 ITR 615 (SCJ cannot be appropriately applied to a case where the assessee was maintaining his accounts on the mercantile basis. It was urged that the principle laid down by the Supreme Court in the case of Kedarnath Jute Mfg. Co. [1971] 82 ITR 363 (SC) was fully applicable and as such the amount claimed should have been allowed as a deduction. To begin with, it is now settled that sales tax collection made by an assessee forms part of his trading receipt and forms a part of the income of the assessee; and that a liability for sales tax is to be allowed as deduction while computing the true income for the year concerned. Chowringhee Sales Bureau [1973] 87 ITR 542 (SC) and Sinclair Murray and Co. [1974] 97 ITR 615 (SC), authoritatively establish this proposition. In Chowringhee Sales Bureau and Sinclair Murray and Co., the Supreme Court held that deduction for sales tax liability was allowable as and when the amounts were paid to the State Government. In Kedarnath Jute Mfg. Co. [1971] 82 ITR 363 (SC), it was held that the assessee who was following the mercantile system of accounting was entitled to debit sales tax liabilities in the year in which they arose as the liability for payment of the tax was independent of the assessment. The Tribunal has, while rejecting the claim of the assessee for the deduction, followed the decisions in Chowringhee Sales Bureau [1973] 87 ITR 542 (SC) and Sinclair Murray and Co. [1974] 97 ITR 615 (SC) in preference to Kedarnath Jute Mfg. Co. [1971] 82 ITR 363 (SC), as in its view there was a conflict of opinion between the view expressed in these two cases and in Kedarnath Jute Mfg. Co.'s case. We are of the view that there is no conflict at all. In Chowringhee Sales Bureau and Sinclair Murray and Co. the question was not considered from the point of view of an assessee who was maintaining his accounts on the mercantile basis, as no such question appears to have arisen in those cases. The question directly came up for consideration in Kedarnath Jute Mfg. Co.'s case [1971] 82 ITR 363 (SC) and it was held that where the mercantile system of accounting was followed, entries regarding sales tax liability could be made in the year in which that arose. As Kedarnath Jute Mfg. Co.'s case directly deals with cases where mercantile system of accounting is followed and as the Chowringhee Sales Bureau [1973] 87 ITR 542 (SC) and Sinclair Murray and Co.'s cases [1974] 97 ITR 615 (SC) do not specifically deal with the question, we cannot read these two cases as expressing a view contrary to that taken in Kedarnath Jute Mfg. Co.'s case [1971] 82 ITR 363 (SC). The Calcutta High Court had occasion to consider this question in Chowringhee Sales Bureau P. Ltd. v. CIT [1977] 110 ITR 385 and again in the case of CIT v. Kumardhubi Engineering Works Ltd. [1978] 115 ITR 58 and has, after a detailed examination of the question, taken the same view which we have expressed earlier. Thus, where the mercantile system of accounting is being followed by an assessee he would be entitled to debit sales tax liability in the year in which that arose. But before such an entry can be made the liability must be a legal liability and not a mere hypothetical one. We have seen that in the year 1968-69, the assessee was not liable to pay purchase tax on arhar dal. Tilok Chand's case [1970] 25 STC 118 (All) only declared the true position of law and did not, as has been contended on behalf of the assessee, absolve the assessee of his liability as from the 8th January, 1969, when it was pronounced; the assessee was under no obligation to pay purchase tax under Section 3D on purchases of arhar dal as purchase tax had already been paid on arhar and the assessee was not the first purchaser of the basic commodity. Thus, in the year in which the assessee made debit entries, no liability could be fastened on him for payment of purchase tax and 110 such liability can be fastened even today in view of the decision in Gouti Bandhu's case [1978] UPTC 707 (All). However, an assessment order has been nude against the assessee which has become final and the assessee has also paid the tax, but that assessment order, in view of the decision of this court in Gouti Bandhu's case, is erroneous and as such the liability created by that order should be taken as having been created on the date when it was passed. To take a different view, in the circumstances of this case, would be to hold on the one hand that the assessee was not liable to pay tax under Section 3D at the time when he made the entries in his books, and to say at the second moment that there was a liability for tax as the assessment order had been passed. This, it is not possible to do. It must also be remembered that the Supreme Court in Kedarnath Jute Mfg. Co. [1971] 82 ITR 363 (SC) has held that the liability for the sales tax is independent of the assessment order which only quantifies it and that it flows from the statute itself. In view of the amendments effected in Section 3D, no liability to pay purchase tax flowed at the time when the entries were made. The fact that the assessee has become liable to pay the amount on account of the assessment order cannot alter the legal position, and all that the assessment order does is to make the amount allowable in the year in which it was paid for which the assessee has already been given relief. The liability for payment of tax not having accrued in the relevant previous year, the Tribunal was justified in adding the amount of Rs. 49,768 to the assessee's income.
7. We, therefore, answer the question in the affirmative, in favour of the department and against the assessee. In the circumstances of the case, there will be no order as to costs.