1. In this reference under Section 256(1) of the Income-tax Act, 1961, two questions have been referred to this court:

(1) Whether, on the facts and in the circumstances of the case, the sums of Rs. 59,330 and Rs. 20,060 are trading receipts assessable to tax in the hands of the assessee ? and (2) If the answer to the above question is in the affirmative, whether the assessee is entitled to have deduction in respect of the above amounts or otherwise towards its liability to sales tax in respect of the goods sold by it in auction sale ?

2. The reference relates to the assessment years 1962-63 and 1963-64, corresponding previous years being financial years 1961-62 and 1962-63, respectively.

3. The assessee is a private limited company. It carries on, inter alia, auction business, being the business of auction of furniture, curios and other household goods belonging to others. In the said auction business the assessee received goods from the owners and stored the same in his auction room and sold these to the highest bidder in auction in consideration of commission from the owner of the goods. When the goods were sold to the highest bidder, the assessee charged in his bills of cash memos the sale price together with the sales tax thereon and realised the same from the purchasers. The sales tax thus realised was credited to the sales tax account. For the assessment year 1962-63, the amount of such sales tax realised by the assessee was Rs. 59,330 and for the assessment year 1963-64 such amount was Rs. 20,060. It may be mentioned that there was a dispute as to whether in its auction business the assessee was liable under the provisions of the Bengal Finance (Sales Tax) Act, 1941, to pay sales tax. The assessee had disputed such liability and had not deposited the sales tax realised by it with the Government, nor was any sales tax assessment made against the assessee for the years under consideration. This dispute between the Government and the assessee was considered by the High Court in the case of Chowringhee Sales Bureau Ltd. v. State of West Bengal [1961] 12 STC 535 (Cal), which was relevant for the assessment year 1954-55, where it was held by a learned single judge of this court that the provisions of the Act by which an auctioneer could be treated as a dealer were ultra vires and as such bad. An appeal has been preferred from the aforesaid decision of the learned single judge. So far, however, the relevant assessment years, being assessment years 1962-63 and 1963-64 are concerned, the Income-tax Officer was of opinion that the sales tax collected by the assessee were trading receipts liable to tax as the income of the assessee. Having regard to the fact that the assessee had denied its liability to pay any sales tax in respect of the goods sold in auction, the Income-tax Officer was of the opinion that the amounts should be added as his income. The Income-tax Officer, accordingly, added the sums of Rs. 59,330 and Rs. 20,060 respectively as part of the business income of the assessee.

4. There was an appeal to the Appellate Assistant Commissioner. He confirmed the order of the Income-tax Officer. The Appellate Assistant Commissioner was also of the opinion that the collections could not be ignored on the footing that the assessee was under liability to pay the same to the State Government because the sales tax department had made no assessment on the assessee and its liability to pay the sales tax was at best, according to the Appellate Assistant Commissioner, a contingent liability. There was a further appeal to the Tribunal. It was contended on behalf of the assessee that the above two sums should not be treated as income of the assessee as he was an auctioneer and was liable to pay sales tax under Explanation 2 to Section 2(c) of the Bengal Finance (Sales Tax) Act, 1941, and, secondly, the sales tax was realised as the assessee's liability and could not be treated as income and, thirdly, it could not be treated as income until the assessee's liability ceased. The Tribunal held that the question whether the sales tax collected by the assessee constituted the assessee's trading receipts or not was concluded by the decision of the Calcutta High Court in the assessee's own case in the case of Commissioner of Income-tax v. Chowringhee Sales Bureau P. Ltd. [1969] 71 ITR 131 (Cal) and, following the said decision, the Tribunal held that the sales tax receipts formed part of the assessee's trading receipts and were assessable as such. As to the question whether the assessee could claim deduction in respect of the liability for sales tax, the Tribunal, following the decision of the learned single judge in Chowinghee Sales Bureau P. Ltd. v. State of West Bengal [1961] 12 STC 535 (Cal), held that the assessee had no such liability. The Tribunal was also of the opinion that the position at the end of the previous year was that the assessee's liability to sales tax was at best controversial, though not in respect of these years. There was, therefore, according to the Tribunal, no definite and ascertained liability of the assessee to pay the sales tax. The Tribunal, therefore, confirmed the order of the Appellate Assistant Commissioner and dismissed the appeal of the assessee. In the circumstances, the Tribunal has referred the aforesaid two questions to this court. "

5. In order to determine the question it will be necessary to bear in mind the following facts. The assessee follows the mercantile system of accounting which will be evident from the assessment orders for the two relevant years with which we are concerned. It may also be mentioned that before the Tribunal, it was contended on behalf of the assessee that the assessee was an auctioneer and was liable to pay sales tax in accordance with the provisions of the Bengal Finance (Sales Tax) Act, 1941. Sales tax which were realised as liability of the assessee should not be treated as income. It may be also stated that though there was an estimate of the liability by the assessee for the payment of sales tax, that estimate had not been quantified by the sales tax authority or income-tax authority during the relevant years. The question in those circumstances is whether the assessee is liable to pay income-tax on these two amounts. In this connection it may be necessary to refer to certain principles enunciated by certain decisions. In the case of Commissioner of Income-tax v. Royal Boot House , it was held by this court that where the assessee followed the mercantile system of accounting and without disputing the liability to pay the sales tax, had made a provision for this payment in its account, even though the assessee had not actually paid the tax over to the authorities, the assessee was entitled to deduction in respect of the provision for sales tax from the income of the assessee under Section 10(2)(xv)of the Indian Income-tax Act, 1922. It was further observed that under the provisions of the Bengal Finance (Sales Tax) Act, 1941, and the Rules framed thereunder, there was an obligation on the part of every registered dealer, and one had to be a registered dealer if his sales were beyond a certain limit, to pay tax on all sales in certain specified manner. The liability to pay sales tax was not dependent upon the assessment or demand but was an obligation to pay the tax either annually, quarterly or monthly, as the case might be, under the particular rule guiding the particular dealer, In the case of Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income-tax , the Supreme Court held that the moment a dealer made either purchases or sales which were subject to sales tax the obligation to pay tax arose. Although that liability could not be enforced till quantification was made by assessment proceedings, the liability for payment of tax was independent of the assessment. In that case, the Supreme Court found that 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 the sales made by it during the relevant previous year. The assessee was entitled to the deduction of a certain sum of money being the amount of sales tax which it was liable to pay under the law during the relevant 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. 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 under Section 10(1) or under Section 10(2)(xv). The Supreme Court observed that whether the assessee was entitled to a particular deduction or not would depend on the provision of law relating thereto and not on the view which the assessee might have taken of his rights nor could the existence or absence of entries in his books of account be decisive or conclusive in the matter. The case of the Royal Boot House was sought to be distinguished by the revenue on the ground that the liability to pay the sales tax was not disputed by the assessee and that the assessee had made a provision for it. The Supreme Court observed that this distinction was without substance and did not affect the true legal position. The principle, therefore, as settled by the Supreme Court seems to be that under the sales tax law the moment sale or purchase is effected under the relevant statute legal liability to sales tax arises. Whether that liability is discharged by actual payment or provision for meeting that liability is made or provision is made for the same in the books of account are of irrelevant consideration. In order to consider the question of legal liability of the assessee in the mercantile system of accounting we are concerned only with the legal liability arising in the relevant assessment year.

6. Reference now need be made to the decision of the Supreme Court in the case of Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax . That was a decision relating to the assessment year 1960-61. There the Supreme Court found that in respect of the sales effected by the assessee as an auctioneer, the assessee had realised during the relevant period in respect of commission Rs. 32,986 as sales tax. This amount was credited separately in its account books under the head " sales tax collection account ". The assessee did not pay the amount of sales tax to the actual owner of the goods. Nor did the assessee deposit the amount realised by it as sales tax to the State Exchequer because the assessee took the position that the statutory provision creating that liability upon it was not valid, or refund it to the persons from whom it had been collected. In the cash memos issued by the assessee to the purchasers in the auction sales the assessee was shown as the seller. The Supreme Court held that the said sum of Rs. 32,986 realised as sales tax by the assessee in his character as an auctioneer formed part of its trading or business receipts. The Supreme Court further held that the fact that assessee credited the amount received as sales tax under the head "sales tax collection account" did not make any material difference. The Supreme Court reiterated that it was the true nature and quality of the receipt and not the head under which it was entered in the account books that would prove decisive. If a receipt was a trading receipt, the fact that it was not so shown in the account books of the assessee would not prevent the assessing authority from treating it as trading receipt. The Supreme Court observed that the assessee would be entitled to claim deduction of the amount as and when if paid the amount to the State Government. Regarding the contention that the auctioneer could not be included as a dealer, the Supreme Court was of the view that Explanation 2 to Section 2(c) of the Bengal Finance. (Sales Tax) Act, 1941, in so far as it included an auctioneer within the definition of "dealer" was within the legislative competence of the provincial legislature while legislating under entry 48 of List II of Schedule VII of the Government of India Act, 1935, relating to taxes on the sale of goods and advertisement. An auction sale, in view of the provisions of Section 4 read with Section 64 of the Sale of Goods Act, would have to be considered to be a sale for the purpose of the Sale of Goods Act. There was nothing, according to the Supreme Court, in entry 48 of List II of Schedule VII to the Government of India Act, 1935, which restricted the power of the legislature in the matter of imposition of sales tax to the levy of sales tax on the owner of the goods on whose behalf these were sold or the purchaser only. Where the transaction was one of sale of goods as known to law, the power of the legislature to impose a tax thereon was plenary and unrestricted, subject only to any limitation which might have been imposed by the Government of India Act or the Constitution. In view of the amplitude of the power of the State or provincial legislature to impose tax on transactions of sale of goods, it would be impermissible, according to the Supreme Court, to read a restriction in the legislative entry on the power of the State or provincial legislature as would prevent the legislature from imposing tax on an auctioneer who carried on the business of selling goods and who had, in the customary affairs of business, authority to sell goods belonging to the principal. What was sought to be taxed was the transaction of sale of goods. If there was a close and direct connection between the transaction of sale and the person made liable for the payment of sales tax, the statutory provision providing for such levy of sales tax would not offend the entry. It could not be disputed that there was close and direct connection between an auctioneer and the transaction of an auction sale. The Supreme Court, therefore, held that it was within the competence of the State legislature to include within the definition of the word "dealer" an auctioneer who carried on business of selling goods and who had in the customary course of business authority to sell goods belonging to the principal. Therefore, for that year, the Supreme Court held that the assessee was liable as auctioneer to pay sales tax.

7. In these years, however, with which we are concerned, the assessee had not disputed or did not dispute before the Tribunal the liability to pay sales tax. This is of course unpaid sales tax. Reliance was placed by counsel for the revenue on the observations of the Supreme Court that when the assessee would pay the amount the assessee would be entitled to claim deduction as and when it paid sales tax amount to the State Government. It must be remembered in the relevant case with which the Supreme Court was concerned in the case of Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax ; the Supreme Court was not concerned with the question whether in a mercantile system of accounting the liability arose in order to merit deduction from this income, nor was the Supreme Court concerned with the question whether there was any liability to sales tax at all for the year for which the appeal went to the Supreme Court where money had been realised from the purchasers on account of sales tax but had not been paid to the sales tax authorities and where the assessee was not disputing liability to pay any sales tax or whether, in those circumstances, the amount received by the assessee can at all be treated as trading receipts.

8. Counsel for revenue contended, however, that quantification was necessary to determine the quantum to which the assessee was entitled to deduction. He, secondly, contended that if in the subsequent years there was determination of liability at a lesser amount by the sales tax authorities then such determination for the lesser amount could not be termed as cesser of liability in terms of Section 41 of the Income-tax Act, 1961. In those circumstances, counsel submitted, there was a possibility of evasion by the assessee if we did not read in the provision that in order to be entitled to deduction there must be quantification and that quantification should not be the estimate of the assessee but the quantification must be evidenced by determination by the sales tax authorities. It is difficult to accept the aforesaid contention advanced in behalf of the revenue. As clearly enunciated in the Supreme Court, the liability to pay sales tax arises the moment sale or purchase is effected. The fact that that liability has not been quantified for payment, which the law enjoins an assessee to do, is not relevant in determining accrual of legal liability. It is also clearly established by the decision of the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income-tax . If that is the position, in order to determine that liability where the assessee had not paid the amount, it must be, according to the scheme of the Sales Tax Act, an estimate of the assessee. In a particular case, however, where there are materials to show that the estimate is either frivolous or false or the estimate is disputed, other considerations might arise. But, in this case, from the contentions raised by the Income-tax Officer or before the Appellate Assistant Commissioner and the Tribunal, it does not appear that it was ever suggested that this estimate made by the assessee or this estimate for the relevant years was either excessive or inaccurate. Therefore, for an assessee who "was maintaining accounts under the mercantile system of accounting the liability has arisen and if the assessee has estimated his liability, that liability the assessee is entitled to deduction. But, if in subsequent years it is found out that the estimate was either excessive or wrong and the amount of sales tax payable would be less, then to that extent there would be a cesser of liability in terms of Section 41 of the Income-tax Act, 19V6J, and the assessee would be liable to pay tax to the department for that amount.

9. Counsel for the assessee, however, drew our attention to the decision in the case of Morley (Inspector of Taxes) v. Tatter sal [1939] 7 ITR 316 (CA) and also in the case of Calcutta Co. Ltd. v. Commissioner of Income-tax , and contended that before real income was computed these sums of money should be deducted and furthermore that these could not form part of trading receipts. In view, however, of the decision of the Supreme Court in the case of Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax and in view of the manner in which sales tax was received by the assessee, we must hold that these amounts formed part of trading receipts of the assessee. However, the assessee was entitled to deduction inasmuch as the liability had arisen for payment of these sales tax for the relevant years, for the sum of Rs. 59,330 and Rs. 20,060, even though these amounts had not been paid to the sales tax authorities.

10. In the aforesaid view of the matter, the answer to question No. 1 would be in the affirmative and in favour of the revenue and we answer the first question by saying that these two sums are part of the trading receipts and we answer the second question referred to us in the affirmative in favour of the assessee.

11. Each party will pay and bear its own costs.

Janah, J.

12. I agree.