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Commissioner Of Income-Tax, Karnataka-I v. Kabbur Brothers (And Vice Versa)

Karnataka High Court

Mar 19, 1980

Judgment

Subsequent
References

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Factual and Procedural Background

These are two references made by the Income-tax Appellate Tribunal (ITAT): one by the department (revenue) and the other by the assessee, concerning the assessment for the assessment year 1971-72 (relevant previous year ending 30 October 1970).

The dispute concerns a sales-tax refund of Rs. 76,918 paid to the assessee (a registered firm) by the Deputy Commissioner of Commercial Taxes (Dy. CCT). The refund related to amounts originally collected and credited in respect of assessment years 1964-65, 1965-66 and 1966-67, on account of the assessee's dealings as a dealer in chilies sold on commission basis.

Key chronological facts from the opinion:

Dy. CCT made an order on 17 March 1969 holding the assessee not liable to pay sales tax on the chilies sold on commission.
The Chief Commissioner of Taxes (CCT) notified the assessee by letter dated 8 July 1969 that refund vouchers had been kept ready; the assessee actually received the refund amounts on 12 December 1969 and 26 December 1969 for the different years.
In the return for 1971-72, the assessee disclosed the refund (Rs. 76,918) in Part IV and in a letter dated 24 December 1971 told the Income-tax Officer (ITO) that the amount would have to be refunded to constituents, supplied a list of creditors, and undertook that adjustments would be made in subsequent years. The ITO initially did not bring the amount to tax.
The Commissioner issued a notice under section 263 of the Income-tax Act, 1961, concluding on 4 January 1972 that the assessment by the ITO was erroneous and directing revision so as to assess the sum of Rs. 76,918 as income of the assessee for assessment year 1971-72.
The assessee appealed to the Appellate Tribunal. The Tribunal found that the assessee followed the mercantile system of accounting, held the refund to be taxable as trading receipt (following Calcutta High Court precedents) but concluded that the refund had accrued in the previous year relevant to assessment year 1970-71 and therefore was not assessable in 1971-72; it allowed the assessee's appeal on that timing ground.
References were then made by both parties to the High Court: the department questioned the Tribunal's timing conclusion; the assessee questioned the Tribunal's finding that the refund was income (though not assessable in 1971-72).

Legal Issues Presented

“Whether, on the facts and in the 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?” (reference by the department).
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sales tax amount refunded, amounting to Rs. 76,918 was income in the hands of the assessee assessable to income-tax?” (reference by the assessee).

Arguments of the Parties

Revenue's Arguments

The refund falls within the purview of section 41 of the Income-tax Act, 1961, and hence is taxable.
The amount was received by the assessee in its character as a trader and was therefore a trading receipt; authorities such as Ikrahnandi Coal Co.'s case support that principle.
Decisions of various High Courts (e.g., Allahabad High Court in Jagatnarain Durga Prasad; Allahabad in Indian Motor Transport Co.) were relied upon as analogous or supportive, and a decision of this court in Commissioner of Income-tax, Mysore v. Lakshmamma was referred to concerning the scope of the comparable provision in the earlier Act.
The assessee itself credited the amount in its books in the previous year relevant to assessment year 1971-72; it was open to the Commissioner to base his decision on that fact (i.e., that the assessee entered the amount in the books for that year).

Assessee's Arguments

The refund was not a trading receipt or income of the assessee.
In any event the refund was not taxable in assessment year 1971-72 because the right to receive the refund accrued on or immediately after 17 March 1969 (date of Dy. CCT's order), which falls within the previous year relevant to assessment year 1970-71.
The assessee followed the mercantile system of accounting and therefore the date of accrual (not actual receipt) determined the year of assessment.
The assessee contended there was a liability to return the amount to constituents (customers), so the amount should not be treated as the assessee's income; it relied on Kedarnath Jute Mfg. Co. Ltd. and a group of High Court decisions that support deduction for liabilities under mercantile accounting.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Chowringhee Sales Bureau (P) Ltd. v. CIT, West Bengal ([1973] 87 ITR 542)	Amounts collected by way of sales tax by a dealer form part of his trading receipts and are includible in computation of total income.	The court relied on this Supreme Court authority to support the proposition that sales tax collected (and the corresponding refund) are trading receipts and hence part of income.
Sinclair Murray and Co. P. Ltd. v. CIT ([1974] 97 ITR 615)	Followed the principle in Chowringhee that sales tax collected by a dealer are trading receipts.	The court noted this decision as following the earlier Supreme Court authority and used it to reinforce the trading-receipt characterization.
Ikrahnandi Coal Co. v. CIT ([1968] 69 ITR 488, Calcutta H.C.)	Illustrated that when a refund is received by the assessee there may be no condition that it must be paid back to purchasers; purchasers' claims are matters between dealer and purchaser.	The Tribunal had relied on this decision to hold the refund taxable; the High Court noted its reasoning (including Basu J.'s observations) to show that purchasers' claims do not automatically convert the refund into a non-assessable item of the dealer.
Jagatnarain Durga Prasad v. CIT ([1970] 76 ITR 214, Allahabad H.C.)	Consideration of matters under section 10(2A) of the Indian Income-tax Act, 1922 (as relied on by revenue).	The revenue relied on this authority; the court recorded it as a case cited by revenue but did not base its primary conclusion upon it in rejecting the department's timing/contention.
Indian Motor Transport Co. v. Commissioner Of Income-Tax ([1978] 114 ITR 677, Allahabad H.C.)	Authority cited by the revenue in support of its position (context: characterization/taxability).	Recorded as one of the authorities relied upon by the revenue; the High Court did not adopt it as the principal basis of its decision on timing and mercantile accounting.
Commissioner Of Income-Tax, Mysore v. Lakshmamma ([1964] 52 ITR 789)	Decision considered relevant to the scope of s.10(2A) of the 1922 Act (relied on by revenue).	Referred to by the revenue; the court noted the reference but proceeded to decide on principles of accrual and mercantile accounting instead.
Rajputana Trading Co. Ltd. v. CIT ([1969] 72 ITR 286, Supreme Court)	Where a creditor has waived a debt, there is a proximate relationship between the receipt and the business which gave rise to the loss/liability — receipts connected with business should not be treated as neutral.	The High Court used this Supreme Court observation to support the conclusion that the refund had a proximate relationship to the trading business and thus represented a trading receipt (i.e., was taxable in principle).
Laxmipat Singhania v. Commissioner Of Income Tax, U.P. ([1969] 72 ITR 291, Supreme Court)	The ITO cannot ignore accrual and thereafter tax the amount in another year on the basis of receipt; accrual matters under mercantile accounting are decisive.	The court relied on this authority to emphasise that the mercantile system governs the year of assessment and that the ITO/Commissioner cannot re-characterize year of tax by focusing on receipt date.
CIT v. Jug Sah Muni Lal Sah ([1939] 7 ITR 522, Patna H.C.)	Once the accrual (mercantile) basis is adopted, authorities cannot switch to a cash basis later to evade limitation or change the taxation year.	The court cited the decision to show that the I.T. authorities are not permitted to adopt a cash basis when the assessee follows mercantile accounting in order to bring an item into a later year.
T.M.M. Madalai Nadar & Co. v. CIT ([1956] 30 ITR 191, Madras H.C.)	If assessee maintains accounts on mercantile basis, omission to credit an amount in the books does not absolve liability; accrual is binding.	Invoked to support the principle that mercantile accounting determines accrual and year of assessment notwithstanding omissions in entries.
Motilal Ambaidas v. CIT ([1977] 108 ITR 136, Gujarat H.C.)	Where accounts are on mercantile basis, the date of accrual of the right to receive an amount is material, not the date of actual payment by the Government.	Used to support the conclusion that accrual (March 17, 1969 / July 8, 1969) determined the year of assessment, not the actual receipt in December 1969.
Kedarnath Jute Mfg. Co. Ltd. v. CIT ([1971] 82 ITR 363, Supreme Court)	Under mercantile accounting a liability not yet paid can nonetheless be claimed as a deduction if it is an existing liability.	The assessee relied on this decision to argue that a liability to return amounts to constituents would allow deduction; the High Court analysed facts and concluded the claimed liability here was not an existing statutory or contractual liability and so this principle did not assist the assessee.
Abdul Quader & Co. v. STO ([1964] 15 STC 403, Supreme Court)	If a dealer has collected anything from a purchaser not authorised by law, recovery is a matter between the dealer and purchaser (purchaser may be entitled to recover from dealer).	The court relied on this principle to hold that a purchaser's right to recover wrongly collected tax is a separate matter between purchaser and dealer and does not automatically convert the refund into a non-assessable item of the dealer.
Commissioner Of Income-Tax, (Central), Calcutta v. Kumardhubi Engineering Works Ltd. ([1978] 115 ITR 58, Calcutta H.C.)	Authority cited by the assessee as following the Supreme Court approach in distinguishing how sales-tax liabilities/refunds are treated under mercantile accounting.	Noted as one of the decisions cited by the assessee; the High Court observed these decisions follow the Kedarnath principle but found the facts in the present case materially different.
CIT v. Poonam Chand Trilok Chand ([1976] 105 ITR 618, Allahabad H.C.)	High Court authority cited by the assessee in support of its accounting/liability contentions.	Recorded as relied upon by the assessee; the High Court considered these authorities but found the factual setting here did not establish an existing liability to constituents.
Addl. Commissioner Of Income-Tax v. T. Nagireddy & Co. ([1976] 105 ITR 669, Andhra Pradesh H.C.)	Authority cited by the assessee in the line of cases on mercantile accounting and treatment of liabilities/refunds.	Recorded as cited; the High Court distinguished the present facts from those decisions when assessing whether a present liability existed to constituents.

Court's Reasoning and Analysis

The court's analysis proceeded in two related strands: (A) characterisation of the refund (whether it constituted the assessee's income/trading receipt), and (B) determination of the correct year of assessment (timing/accrual) under mercantile accounting.

(A) Characterisation — Trading receipt and applicability of s. 41

The court observed that the Tribunal had not been asked to consider or erred in failing to consider the applicability of section 41; hence that specific statutory point was not before the court on reference. Nevertheless, the court noted that on the facts the matter would fall within the purview of section 41.
The court accepted that the amounts had been collected by the assessee as sales tax and credited to the Government, and that reductions (deductions) had been claimed in earlier years. The Dy. CCT ultimately held the assessee was not liable and directed refund.
Relying on Supreme Court decisions (Chowringhee Sales Bureau and Sinclair Murray), the court affirmed the principle that amounts collected by way of sales tax by a dealer form part of trading receipts and are includible in total income. The court therefore concluded that the refund represented a trading receipt — i.e., in principle it was taxable.
The court also relied on Rajputana Trading Co. (Supreme Court) to support the proximate relationship between the receipt and the business giving rise to it; that is, the refund sprang from the trading activity and could not be treated as having a neutral source.

(B) Timing / Year of Assessment — Mercantile accounting and accrual

The Tribunal had found that the assessee regularly employed the mercantile system of accounting. Under section 145 of the Income-tax Act the income under "Profits and gains of business or profession" must be computed according to the method of accounting regularly employed.
The court emphasized settled authority that where mercantile accrual is the regular method, the date of accrual, not the date of actual receipt, determines the year of assessment (citing Laxmipat Singhania, Jug Sah Muni Lal Sah, Motilal Ambaidas, T.M.M Madalai Nadar & Co.).
The Commissioner attempted to disregard the mercantile basis because the assessee had credited the item in its books in the previous year relevant to assessment year 1971-72 (i.e., appeared to have made a later entry). The court held that a mere departure or an entry in a particular year would not destroy the method regularly employed; the authorities could not reject the regular method simply because of that entry and bring an item to tax in a later year on the basis of receipt.
Applying those principles to the facts, the court concluded that the assessee's right to the refund accrued on 17 March 1969, on the Dy. CCT's order, and was further notified by the CCT’s communication of 8 July 1969. Both dates fell within the previous year relevant to assessment year 1970-71. The mere postponement by the assessee of physically taking the vouchers or receiving payment in December 1969 could not postpone the date of accrual. Consequently, the refund had accrued earlier and was not assessable for assessment year 1971-72.

(C) Assessee's claimed liability to constituents — Deductibility under mercantile system

The assessee had argued that it was under a liability to refund customers and therefore could claim a corresponding liability deduction under mercantile accounting (citing Kedarnath Jute and other decisions).
The court examined the nature of that claimed liability and found it was not a statutory liability under the Sales Tax Act, nor was there clarity of a contractual obligation to return the refunded amount to customers. At best customers might have a claim against the dealer; that claim is a matter between dealer and purchaser (relying on Abdul Quader & Co. and the observations in Ikrahnandi Coal Co.'s case).
The court noted the assessee's own conduct: in a later return (for 1973-74) it stated that only Rs. 15,608 had been repaid to constituents and the balance had been proportionately divided among partners and credited to capital accounts. This showed the assessee did not treat the whole sum as a present liability.
On these facts, the court held the mere statement or undertaking to refund did not create an existing liability that could be claimed as deduction under the mercantile system; therefore the assessee’s liability argument failed on the facts.

Holding and Implications

Core Ruling: The sales-tax refund of Rs. 76,918 represented a trading receipt (i.e., income in principle) but the right to receive that refund had accrued in the previous year relevant to assessment year 1970-71; therefore it was not assessable for assessment year 1971-72.

The court answered the two references as follows:

ITRC No. 38 of 1976 (department's reference): Answered in the affirmative and against the department — the Tribunal was right in holding the refund was not assessable in assessment year 1971-72 (i.e., department loses on the timing question).
ITRC No. 121 of 1977 (assessee's reference): Answered in the affirmative but against the assessee — the Tribunal was right in holding that the refund constituted income (a trading receipt) assessable to income-tax in principle (i.e., assessee loses on the character/ taxability point, though not on the timing for AY 1971-72).

Practical consequences and implications:

The refund is properly characterised as part of the assessee's trading receipts and therefore taxable in principle (subject to proper year-of-assessment determination and any applicable statutory provisions such as s.41 where relevant facts arise).
On the facts before the court, the date of accrual was earlier (March-July 1969) and thus the amount did not fall to be assessed in assessment year 1971-72. The department cannot, by focusing on date of receipt or a later book entry, bring the amount to tax in a later year where mercantile accrual applies.
The assessee's contention that an internal obligation to refund to constituents effected deductibility failed on the facts because there was no statutory or contractual liability established; amounts actually repaid were partial and the balance had been treated as partner capital — demonstrating no present enforceable liability.
No new broad legal principle was laid down; the court applied existing authorities (Supreme Court and High Court decisions) to the facts of the case to resolve the questions of characterisation and timing.

Show all summary ...

Srinivasa Iyengar, J.:— 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 the 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?”

3. In the other reference, the question referred is:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sales tax amount refunded, amounting to Rs. 76,918 was income in the hands of the assessee assessable to income-tax?”’

4. 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 thereto, 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. 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 objections 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 decision of the Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. v. Cit, West Bengal, [1973] 87 ITR 542 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 very amount and, therefore, it was part of its income. He observed that 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 counsel 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, [1970] 76 ITR 214, 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 Indian Motor Transport Co. v. Commissioner Of Income-Tax, [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 Commissioner Of Income-Tax, Mysore 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 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, West Bengal, [1973] 87 ITR 542 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 the decision in Rajputana Trading Co. Ltd. v. CIT, [1969] 72 ITR 286, while considering the matter in relation to s. 10(2A) of the Indian I.T Act, 1922, observed that where a creditor had waived his right to recover certain amount or 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 (headnote):

“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 is 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 purposes 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. Commissioner Of Income Tax, U.P., [1969] 72 ITR 291 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 as income of another year on the basis of receipt.”

12. 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.”

13. 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.”

14. 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. 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, [1971] 82 ITR 363, 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, West Bengal, [1977] 110 ITR 385 and in the case of Commissioner Of Income-Tax, (Central), Calcutta 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, [1976] 105 ITR 618 of the High Court of Andhra Pradesh in the case of Addl. Commissioner Of Income-Tax v. T. Nagireddy & Co., [1976] 105 ITR 669 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 [1971] 82 ITR 363 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 amount refunded was not on the condition 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 amount 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 Part III of the return filed by it for the assessment year 1973-74 in regard to this amount of Rs. 76,918. It was stated that only a sum of Rs. 15,608 had been paid back to the constituents and the balance of the amount 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.”

16. 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 condition 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 a 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, [1964] 15 STC 403 (SC) that the question of any recovery by the purchasers was one as between the dealer and the purchaser.”

17. 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.

18. In the result the question in ITRC No. 38 of 1976 is anwered 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.