Seetharama Reddy, J.:— The question which has been referred for answer at the instance of the Revenue is whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is justified in holding that the sales tax collections made by the assessee are not income of the assessee and not liable to be assessed in their hands and, in any event, liable to be deducted in computing the income.

2. The undisputed facts are: The assessee is a registered firm dealing as commission agent in several agricultural commodities and it was acting as the commision agent on behalf of the agriculturists, that is to say, the agriculturists bring their produce to the assessee for sale and it sells it on behalf of the agriculturists to various parties. Under the A.P General Sales Tax Act, the commission agent, i.e, the assessee, is liable for sales tax if it is not able to prove that the sales made by it were not on behalf of the agriculturist principals. However, if it proved that it was acting on behalf of the agriculturist principals, then such goods will be exempted from tax. The assessee, at the point, when it was dealing on behalf of the agriculturists, was not in a position to know as to how the transaction would be viewed by the sales tax authorities at the time of assessment. The assessee admitted the method adopted by it as follows:

When the goods were sold on behalf of the agriculturist principals to various purchasers, it issued what are known as “Tak Patties” (somewhat akin to account sales) showing therein the name of the agriculturist principal, the name of the purchaser, the commodity, the quantity of the commodity sold, the rate and the sale proceeds. It also collected sales tax from the purchasers. From the gross proceeds which included the the sales tax collected, it deducted its expenses, like commission, interest and “Hamali” as well as sales tax. On that basis, the sales tax has to be paid to the Government on assessment. This deduction of sales tax has been clearly shown in the “Tak Patties” and the balance arrived at being the net sale proceeds payable to the agriculturist principals, was neither paid in cash then and there nor credited to the accounts of the agriculturist principals. The sales tax, however, collected was credited to the sales tax account. The sales-tax account was debited with the payments made as and when assessments were completed; the sales tax amounts were paid on monthly returns to the Department in Form No. 10 under the A.P General Sales Tax Act and so at the end of the year when the assessment was completed it was established that the commission agent was only acting for the agriculturist principals and if each of the agriculturist principal's turnover was less than Rs. 10,000, then the amounts so paid during the course of the year were refunded. On such refund, the assessee debited the sales tax account with the amount of the tax relatable to the exempted turnover, and credited to an account called “Chillara Asamies Sales Tax Refund Account” (Sundry Asamies Sales Tax Refund Account). But, however, in the daybook through which the general entry was passed crediting this Asamies Account, the name of each agriculturist principal was mentioned coupled with the amount refundable to him. The aggregate amount only was credited to the Asamies Account in the main ledger. The assessee also maintained what was called “Debtors Ledger” wherein a separate account was opened for each agriculturist principal and his account was credited with the amount of sales tax refundable to him, so that the total of the credits given in the separate debtors ledger accounts was equal to the total of the credits standing in the Asamies Account in the main ledger account.

3. On this frame of facts, the assessee claimed that the refunded sales tax amount should not be treated as trading receipt and, therefore, it should not be included in the income of the assessee as it has to be made over by the assessee in favour of the agriculturist principals. However, the ITO included this amount of sales tax refunded to the assessee to the income and assessed the same. However, the Appellate Assistant Commissioner gave relief to the assessee on the basis of the order of the Income-tax Appellate Tribunal made in similar cases holding that such collections were not to be treated as income liable to tax. On further appeal, the Appellate Tribunal, based on the decisions of this court in Addl. CIT v. Nagi Reddy and Co. [1976] 105 ITR 669, Buddala China Venkata Rao & Co. v. CIT [1978] 112 ITR 58 and the decisions of the Supreme Court in Commissioner Of Income Tax, Madras v. Mir Mohammad Ali [1964] 53 ITR 165 (SC) (sic) and in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), held that the assessee created the liability by opening separate accounts for each of the agriculturist principals. The creation of the liability under the system of accounting adopted by the assessee amounted to a legal liability which has to be deducted in computing the income. Even on the authority of those Supreme Court decisions, since a liability to pay the amounts has been created legally, the amounts, though trading receipts, must be allowed as a deduction, in which case, nothing will remain for addition. It further held that “since the assessee in his case followed the mercantile system of accounting and as soon as the assessments of sales tax were over, transferred the sales tax refundable on exempted turnover to the agriculturist principals to their personal accounts and even refunded, whether in a big way or small way, to the principals, that amount constituted a liability in the hands of the assessee, and, consequently, that amount could not be taken as the income of the assessee This was the view expressed by the two learned Accountant Member, whereas the Judicial Member, while concurring, held:

“In my opinion, in the case now before us, the decision that the sales tax receipts are not of the character of income in the hands of the assessee herein cannot be based on the authority of the two rulings of the Andhra Pradesh High Court, one in the case of Nagi Reddy & Co. [1976] 105 ITR 669, and the other in the case of Buddala China Venkata Rao & Co. v. CIT [1978] 112 ITR 58. In those two cases, the basis of the relief given to the assessees therein was that the liability to pay sales tax to the Government on sales of jaggery was incurred in the relevant previous years in view of the said liability amounting to expenditure deductible in the computation of the total income of the assessees. In other words, they were cases of application of income after it reached the assessee wholly and exclusively for the purpose of the business of the assessee. These rulings cannot, therefore, be regarded as authorities for the proposition that the amounts collected by way of sales tax by commission agents on sales of agricultural commodities other than jaggery on behalf of the agriculturist principals, which sales are not liable to sales tax are not of the character of trading receipts or income of the assessees. I would, however, regard those sales tax collections, though of the character of trading receipts, as not of the character of the income of the assessee-commission agents for the reason that those receipts, even before they reached the assessees, were diverted to the agriculturist principals by overriding legal obligation undertaken under the contracts of agency with the principals, and the obligation to divert the entire proceeds of sales including amounts collected by way of sales tax, after deducting the commission due to the assessee, attached itself to that source”.

4. While so, the learned Judicial Member held that the sales tax collections are not the income of the assessee and not liable to be assessed in their hands.

5. The contention of the learned standing counsel for the Department is that the nature and method of accounting adopted by the assessee and the amount which was received by the assessee from the purchasers including the sales tax, would amount to trading receipt, and so must be included in the income of the assessee, so long as it remains unpaid to the agriculturist principals. Since in this case, though certain amounts have been disbursed, but in so far as those amounts that have not been disbursed during the assessment years in question, will have to be added to their income. Reliance was placed on the decisions of the Supreme Court reported in Sinclair Murray & Co. Pvt. Ltd. v. CIT [1974] 97 ITR 615 (SC), and Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542 (SC).

6. The counter-contention of Sri Y.V Anjaneyulu, the learned counsel for the assessee, is that the receipt is not a trading receipt; that no mercantile system of accounting is adopted in this case, that the liability has been created in favour of the agriculturist principals, that the amount which has been refunded after due assessment under the A.P Sales Tax Act by the Government was paid earlier by the assessee and the assessee is subjected to that liability which has to be refunded to the agriculturist principals and, therefore, it cannot be added to the income of the assessee. In any event, it cannot be treated as income at all, since even at the inception there is an overriding obligation on the assessee to return the amount, the liability accruing to the agriculturist principals themselves, and, there-, fore, the said amount cannot be added to the income of the assessee. We are undoubtedly of the view that the lower Tribunal's decision is correct, both on authority as well as on the interpretation of the provisions involved, and there is no compelling reason for us to come to a conclusion at variance with the one arrived at by the Tribunal.

7. The two Supreme Court decisions relied upon by the learned standing counsel are clearly distinguishable and, therefore, they are of no assistance to the Revenue. In Sinclair Murray & Co. Pvt. Ltd. v. CIT [1974] 97 ITR 615 (SC), a company in Calcutta sold jute to certain mills for being used in Andhra Pradesh, charged sales tax under a separate head in the bill as “sales tax buyers” account to be paid to the Orissa Government”. The sales tax was not paid to the Orissa Government on the ground that the sales were inter-State sales. The Appellate Tribunal held that where a dealer collected sales tax under the provisions of s. 9B(3) of the Orissa Sales Tax Act, the amount of the tax did not form part of sale price and the dealer did not acquire any beneficial interest therein and that the sum collected by the appellant (the company in question) did not form part of its total income.

8. On a reference, the High Court held that the sales tax collected was a part of trading receipt and was to be included in the appellant's total income, since the money realised from the purchaser on account of tax was employed by the appellant for the purpose of making profit and the appellant did not earmark the amount realised as sales tax and did not put it in a different account or deposit it with the Government in terms of the statutory provisions. On appeal, the Supreme Court held, affirming the decision of the High Court, (i) that, assuming that s. 9B(3) of the Orissa Sales Tax Act, 1947, was valid, the fact that the dealer was compelled to deposit the amount of sales tax in the State exchequer, did not prevent the applicability of the principle laid down by the Supreme Court in Chowringhee Sales Bureau Pvt. Ltd. v. CIT [1973] 87 ITR 542 (SC); (ii) that the amount collected by the appellant as sales tax constituted its trading receipt and had to be included in its total income; (iii) that if and when the appellant paid the amount collected to the State Government or refunded any part thereof to the purchaser, the appellant would be entitled to claim deduction of the sum so paid or refunded.

9. In Chowringhee's case [1973] 87 ITR 542 (SC), the appellant, a private company, dealing in furniture, also acted as an auctioneer. In respect of the sales effected by it as auctioneer, the appellant realised during the relevant period, in addition to the commission, Rs. 32,986 as sales tax. This was credited separately in its account book under the head “Sales tax collection account.” The appellant did not pay the amount of sales tax to the actual owner of the goods nor did it deposit the amount realised by it as sales tax in the State Exchequer, because it took the position that the statutory provision creating that liability upon it was not valid, or refunded it to the persons from whom it had been collected. In the cash memos issued by the appellant to the purchasers in the auction sales, the appellant was shown as the seller. The Supreme Court held that, (i) that the sum of Rs. 32,986 realised as sales tax by the appellant in its character as an auctioneer formed part of its trading or business receipts; (ii) that the fact that the appellant credited the amount received as sales tax under the head “Sales tax collection account” did not make any material difference. It was also held that the appellant, of course, would be entitled to claim deduction of the amount as and when it pays it to the State Government. In contradistinction to this, the Supreme Court, while dealing with the method of mercantile system, held in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), that the assessee while following the mercantile system of accounting, incurred liability of Rs. 1,49,776 on account of sales tax determined to be payable by the sales tax authorities on the sales made by it during the calendar year. The sales tax demand was raised pending the income-tax assessment for that year. The ITO rejected the assessee's claim for deduction on the ground, (i) that the assessee has contested the sales tax liability in appeals, and (ii) that it had made no provision in its books with regard to the payment of that amount. The appeals to the higher authorities and also the courts resulted in dismissal and on further appeal it was held “that the moment a dealer made either purchases or sales which were subjected to sales tax, the obligation to pay the 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 which followed the mercantile system of accounting was entitled to deduct from the profits and gains of its business liability to sales tax which arose on sales made by it during the relevant previous year.

10. The assessee was entitled to the deduction of the sum of Rs. 1,49,776 being the amount of sales tax which it was liable under the law to pay during the relevant accountiug year. That liability did not cease to be a liability because the assessee had taken proceedings before the higher authorities for getting it reduced. Further, the fact that the assessee had failed to debit the liability in its books of account did not debar it from claiming the sum as a deduction. The Supreme Court further held that whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books be decisive or conclusive in the matter.

11. This court also while placing reliance on the aforesaid Supreme Court decisions held in Addl. Commissioner Of Income-Tax v. T. Nagireddy & Co. [1976] 105 ITR 669, that the assessee, a firm dealing in jaggery, had collected sales tax amounting to Rs. 17,710 and got refund from the Department in a sum of Rs. 8,228. They were not accounted for as trading receipts and it was maintained by the assessee before the ITO that the sales tax account in its entirety is recorded as a liability since it had to be paid.

12. This court held in Nagi Reddy & Co.'s case [1976] 105 ITR 669 (AP), that (p. 672):

“So far as the principle goes, as stated by the Supreme Court, in Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax [1973] 87 ITR 542 (SC) and in Sinclair Murray & Co. P. Ltd. v. Commissioner of Income-tax [1974] 97 ITR 615 (SC), it is final. But it has to be noted that the Supreme Court was not considering in the above two cases what would be the effect if those sales tax collections are entered in a separate account maintained under the mercantile system. An income accrues or arises when the assessee acquires a right to receive it. Traders follow two methods of accounting of their receipts, profits and gains. One is cash basis and the other is mercantile basis. The mercantile system of accountancy brings into credit what is due immediately it becomes legally due and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed.

Only the book profits are adopted for the purpose of assessment of tax though the credit amount is not realised or the debit amount is not actually disbursed. If an income accrues within a particular year, it is liable to be assessed in the succeeding year. Whether the right to receive an amount under a contract accrues or arises to the assessee has to be found out upon the terms of a particular contract. If the method of accounting adopted by the assessee is cash system, it would qualify for deduction only in the year in which it was actually paid. If the method is mercantile system, then the deduction will be permissible in the year in which the liability relates irrespective of the point of time when the liability has actually been discharged. (Vide Supreme Court decisions in Commissioner Of Income Tax, Madras. v. A. Gajapathy Naidu, Madras [1964] 53 ITR 114 (SC) and Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC)).

In the latter case, the assessee company, which followed the mercan-. tile system of accounting, incurred a liability of a large sum on account of sales tax determined to be payable by it. The sales tax demand was raised pending the income-tax assessment for the same year. The Supreme Court held that the moment a dealer made either purchases or sales, which were subject to sales tax, the obligation to pay the 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, which followed the mercantile system of accounting, was entitled to deduct from the profits and gains of its business liability to sales tax which arose on sales made by it during the relevant previous year. The assessee was entitled to the deduction of the amount of sales tax which it was liable under the law to pay during the relevent accounting year. That liability did not cease to be a liability because the assessee had taken proceedings before the higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail.”

13. In Addl. Commissioner Of Income-Tax v. T. Nagireddy & Co. [1976] 105 ITR 669 (AP), it was further held that (p. 673):

“The facts and the enunciation of the principle relating to mercantile system of accountancy as stated by the Supreme Court in the above case apply on all fours to the present case.”

14. This court reiterated the same principle in Buddala China Venkata Rao & Co. v. CIT [1978] 112 ITR 58 (AP), wherein it was held (headnote):

“An assessee, who maintains his books of account on mercantile basis, is entitled to deduct from the profits and gains of the business any liability which had accrued during the period for which the profits and gains were being computed. Where the liability to pay sales tax accrued during the year of assessment, even though it had to be discharged at a future date, it has to be deducted from the profits and cannot be held to be the income of the assessee.”

15. Before answering, we may as well advert to the argument of Sri Y.V Anjaneyulu, the learned counsel for the assessee, for which he invited our adjudication on the point as to whether the receipt by the assessee towards sales tax would constitute income so as to be included for the purpose of computation in the assessee's income.

16. The following decisions were referred in Morley (H.M Inspector of Taxes) v. Tattersall [1938] 22 TC 51 (headnote):

“The respondent firm, which carried on the business of auctioneers of horses, had as one of the conditions of sale that no purchase money would be paid or remittance sent by post without a written order. Unclaimed balances amounting in course of time to considerable sums remained in the firm's hands; at all times the firm considered itself liable to pay such balances as and when claims were made. Under the partnership deed by which the existing firm was constituted, part of the unclaimed balances was transferred to the credit of the partners and provision was made for subsequent annual transfers. The deed provided also that any payments which might be claimed and made in respect of the balances should be borne by the partners in proportion to their shares of profits at the date of payment.

Held, that the unclaimed balances so transferred to the partners were not trading receipts in respect of which the firm was assessale to income-tax.”

17. In the case of CIT v. Sandersons and Morgans [1970] 75 ITR 433 (Cal), the assessee, a firm of solicitors, credited a sum of Rs. 4,078 to its profit and loss account, representing the aggregate of the unclaimed balances in as many as 83 ledger accounts of the assessee's clients who had advanced money to them in connection with the cases entrusted to the assessee some years back.

18. After referring to Morley (H.M Inspector of Taxes) v. Tattersall [1938] 22 TC 51 and Punjab Distilling Industries Ltd. v. CIT [1959] 35 ITR 519 (SC), it was held that the sum of Rs. 4,078 was not revenue receipt liable to income-tax. When a solicitor receives money from his client, he does not do so as a trading receipt, but he receives the money of the principal in his capacity as an agent and that also in a fiduciary capacity. The money thus received does not have any profit-making quality about it when received. The fact that the money was paid to the solicitor by a client will not make any difference, if initially the money was hot received as a trading receipt. It further reiterated the observation in Morley v. Tattersall [1938] 22 TC 51 (CA) as under (p. 442 of 75 ITR):

“All that this case decided was that moneys which were not, when received, income—and as to this there was no question—could never later become income.”

19. In CIT v. Karam Chand Thapar & Bros. (Coal Sales) Ltd. [1979] 117 ITR 621 (Cal), the assessee was the del credere agent of collieries and also the agent of the consumers. It collected from the consignees only the sale price of the coal which was despatched by the collieries to the consumers, the freight being paid by the consumers to the railways. As the freight was not charged on the actual weight of the coal despatched but on the carrying capacity of the wagon, the assessee claimed from the colliery the extra freight incurred where the freight was charged on a weight more than that of the coal actually despatched. The assessee collected the under-loading charges from the colliery, independent find irrespective of any demand from the consignees. There were cases where the consignees demanded the under-charges and the assessee passed on the amounts received by it. But there were also cases where the amounts were not demanded. The collieries had to pay these under-loading charges only out of the price of coal supplied by them as there was no way of their making any recoveries from the railways. On the question, whether the amounts collected by way of under-loading charges and remaining with the assessee were assessable in its hands:

Held, that the amounts collected by way of under-charges had been received by the assessee as an agent and, therefore, in a fiduciary capacity vis-a-vis the consignees. Such amounts did not constitute trading receipts and accordingly neither the surplus of the receipts remaining unpaid nor the amounts transferred by the assessee to the profit and loss account could be assessed as income of the assessee.

20. On the basis of the above conspectus, we are of the view that the money received towards sales tax by the assessee from the purchasers was received on behalf of the agriculturist principals and the same did not constitute a trading receipt. That apart, the said amount which was paid periodically during the course of the year in question to the Government by way of sales tax and later, on the assessment being completed, the turnover of the individuals whose turnover was less than Rs. 10,000 only, the amount of tax paid became refundable, in fact, refunded to the assessee. Therefore, initially the amount of sales tax received by the assessee cannot bear the insignia of income or trading receipt so as to be assessable to income-tax. Hence, we have no hesitation in holding that the amount representing sales tax received in the first instance by the assessee cannot be treated as trading receipt so as to be includible in its income for the purpose of computation.

21. Even otherwise, on the basis of well-settled decisions of the Supreme Court as well as of this court, the money representing the sales tax received by the assessee has been received by him in a fiduciary capacity, as in the nature of things, the very contract brought about the relationship of principal and agent between the agriculturist principals and the assessee, and, therefore, there is an obligation on the part of the assessee to return the said tax. Even at the very outset as and when the money representing sales tax is received from the purchasers, in fact, it is received for and on behalf of the agriculturist principals with a liability and so with an obligation to pay the same as and when it is refunded by the Government to the agriculturist principals.

22. Further, in this case, it is not in dispute that mercantile system of accountancy has been followed by the assessee. If that be so, the contention of the learned standing counsel, that relief will have to be given as and when the money is refunded, is devoid of merit and substance because the very underlying principle behind the mercantile system is that the moment it is received and entered in books of account, it will be deemed that the liability has accrued at that point itself and it does not depend upon the time, when it is determined and becomes due, unlike the cash system wherein the liability is discharged as and when it is paid or made. Hence we hold:

(i) that the amounts collected in the form of sales tax did not constitute trading receipts; and

(ii) that, in any event, since the assessee followed and maintained the mercantile system of accountancy and which in turn creates an obligation and a liability to repay as and when it is refunded, the same cannot be included in the income of the assessee for the purpose of computation.

23. In the result, the question is answered in the affirmative and in favour of the assessee.