Ashwini Kumar Sinha, J.:— In a reference under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’), the Income-tax Appellate Tribunal, Patna Bench, ‘A’, Patna, has referred the following questions of law for the opinion of this Court:—

“(1) whether on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of Sales-tax liability has got to be excluded from the gross turnover to arrive at the gross profit disclosed in the trading account?

(2) whether on the facts and in the circumstances of the case, the Tribunal was correct in holding that the provisions of section 68 of Income-tax Act 1961, were not applicable for considering the cash credits appearing in the accounting years relevant to the assessment year 1961-1962 and earlier years and in deleting the additions of the cash credits amounting to Rs. 31,000 and Rs. 32,344?”

2. I may take the facts from the statement of the case. The assessment year involved is 1958-1959. The method of accounting followed by the assessee is admittedly a merchantile system. The assessee is a dealer in foodgrains, sugar and other goods. The Income-tax Officer found that in the original assessment in this case, the turn-over had been disclosed at Rs. 3,67,560/-. Later on, certain books of accounts were seized by Sales-tax authorities and on the basis of that, an assessment was made by the Income-tax Officer by estimating the profits on the suppressed business. This assessment was set aside in appeal by the Tribunal who had directed the books to be examined and a balance-sheet to be prepared. As the balance-sheet was not filed before the Income-tax Officer and as no day-to-day stock register was produced before him and also as the applicability of the provisions of section 145 was not disputed as stated before the appellate Assistant Commissioner, the Income-tax Officer proceeded to assess the income by adopting a rate of gross profit of 5 per cent. However, while making an addition, the Income-tax Officer took the view that the gross profit shown by the assessee at Rs. 1,12,910/- on a turnover of Rs. 29,22,074/- was not correct gross profit. According to him, the gross profit should have been reduced by an amount of Rs. 51,607/- which represented the sales-tax liability. On this calculation, the Income-tax Officer arrived at a gross profit of Rs. 61,303/- as disclosed by the assessee's books. The Income-tax Officer, therefore, made an addition of Rs. 82,220/- to bring the gross profit to the level of 5 per cent. The Income-tax Officer further found several cash credits for which he did not find satisfactory explanation. Some of these credits were in the capital account where as certain others were in the account of Smt. Sarbati Devi and Ganga Sahay Ram Chandra as well as in the account named ‘Cash from Home’. There were also credits in the account of Sri Satyanarain of Jharia and Rs. 11,000/- as realisation from the debsors. The details of these credits are given in the order of the Income-tax Officer and he made an addition of Rs. 85,149/- as income from other sources. A copy of the order of the Income-tax Officer has been marked as Annexure ‘A’ to the statement of this case.

3. The matter came up before the Assistant Commissioner and he upheld the action of the Income-tax Officer in not accepting the book results and in estimating the profits. The Appellate Assistant Commissioner considered the estimate made to be reasonable. However, the Appellate Assistant Commissioner held that the sales-tax liability was not to be deducted from the gross profit and he held that the amount of Rs. 51,607/- should have been allowed as sales-tax liability in determining the income of this year. The Appellate Assistant Commissioner, therefore, reduced the addition of Rs. 33,194/- by adopting the gross profit as shown by the assessee at Rs. 1,12,910/- and thus he allowed a relief of Rs. 49,026/-.

4. Regarding the income from other sources, the Appellate Assistant Commissioner found that the credit of Rs. 11,000/- as claimed by the assessee as realised from the debtors of the cloth business appeared on 10th January, 1957. The deposited in the name of Sri Satyanarain Pd. of Jharia to the extent of Rs. 20,000/- appeared in the books on 9th January, 1957. The assessee was following Diwali Accounting Year and the accounting Year and the accounting year of the assessee ended on the 22nd October, 1957. The Appellate Assistant Commissioner accepted the argument advanced on behalf of the assessee that these credits were assessed as income from other sources and for income from other sources, no separate books were being maintained. It was, therefore submitted that the assessment of these amounts could be made only under the provisions of the Income-tax Act, 1922 and according to the legal position, under the old Act, these credits could be considered for assessment only in the assessment year 1957-1958. The Appellate Assistant Commissioner held that in respect of the income from the undisclosed sources, the accounting year should be taken as business year and on this basis, he deleted the addition of Rs. 20,000/- and Rs. 11,000/- from the assessment. The Appellate Assistant Commissioner, for the reasons given in his order, also deleted the addition of Rs. 32,344/-. Regarding the amount in the account of Smt. Saibati Devi, the Appellate Assistant Commissioner agreed with the submission advanced on behalf of the assessee and deleted that addition also. ‘With regard to the addition of Rs. 4,712/- which was shown as ‘Cash from home’, the Appellate Assistant Commissioner held that this amount should be taken as having been received from trading income which had not been fully shown in the books. He, therefore, deleted this addition also. A copy of the order of the Appellate Assistant Commissioner has been marked Annexure ‘B’ to this Statement of the ease.

5. Thereafter, the Department as well as the assessee both appealed against the order of the Appellate Assistant Commissioner and both the matters were heard together by the Tribunal. The Tribunal considered the question regarding reducing the gross profits by the amount of sales-tax and the Tribunal held that the gross profit shown by the assessee at Rs. 1,12,910/- should not have been reduced by the Income-tax Officer by deducting the sale-tax from the turn-over as well as the gross profits. According to the Tribunal, the sales-tax was a business liability to be allowed as a deduction in the profit and loss account and on the facts of the case, it could not go to reduce the trading results in the foodgrains. Thus, the Tribunal upheld the order of the Appellate Assistant Commissioner regarding the adjustment of the sales-tax.

6. Regarding the cash credits, the Tribunal upheld the order of the Appellate Assistant Commissioner in deleting these amounts and held that while making the assessment in the assessment year 1958-1959, the provisions of the old Act were applicable.

7. The attention of the Tribunal was drawn by the Departmental Representative to the provision of section 297(2)(d)(ii). This provision lays down that in the case of an escapement of income, notice under section 48 should be issued in respect of proceedings for the assessment years prior to the assessment year 1962-1963, and

“all the provisions of this Act (1961) shall apply accordingly.”

8. According to the Department, this provision would make section 68 applicable to any proceeding re-opened under section 148. The Tribunal did not accept this argument of the Departmental Representative. The Tribunal has observed that the law does not provide that an income which could not have been brought to charge in the original proceedings as it fell out of the accounting year would become chargeable in that very assessment year only because the proceedings had been re-opened under section 148. According to the Tribunal, the provisions of section 297(2)(d)(ii) refer only to the procedural law laid down in the Act. The Tribunal further held that the position of cases covered by section 297(2)(d) and the cases covered by section 297(2)(d)(ii) would be the same and any other interpretation would create anomalies. In this view of the matter, the Tribunal held that the credits in question did not fall in the financial year 1957-1958 and they could not be re-assessed as income from undisclosed sources to the assessment year 1958-1959.

9. With regard to the addition of Rs. 32,344/-, the Tribunal referred to the fact that these credits appeared on dates prior to 31st of March, 1957 and, therefore, could not be assessed in the assessment year 1958-1959. The Tribunal further considered the addition of Rs. 4,712/- and found that these amounts were deposited in the capital account on various dates and the Appellate Assistant Commissioner had deleted the addition on the ground that various additions have been made to the trading results and a further profit of Rs. 5,352/- had been added by the Appellate Assistant Commissioner out of the goods transferred by the old firms. The Tribunal agreed with the Appellate Assistant Commissioner that the profit from the old firms had not been credited in the books and, therefore, it could have been credited directly in the capital account. The Tribunal, therefore, confirmed the deletion of these additions. Thus, in the result, the Tribunal allowed in part, the appeal of the assessee and the appeal of the Department. A copy of the order of the Tribunal has been marked Annexure-‘C’ to the statement of case.

10. Learned counsel appearing for the Department has contended that a registered dealer under the Bihar Sales-tax Act is authorised to collect sales-tax on the sales by him from the customers and if the amount is collected which belongs to the sales-tax department, then that amount is neither an income nor an expenditure. It is only the excess amount which will be either income or the short fall will be the liability of the assessee. The learned counsel appearing for the Department has contended before us that in the instant case, the sales-tax amount was collected by the assessee and shown separately and hence it was neither an income nor expenditure. I may state here that this point was never raised at any stage and the learned Senior Standing Counsel has urged this point for the first time before this Court in course of hearing of this case, which is not permissible. Learned counsel appearing for the Department has further submitted that the sales-tax had to be excluded to find out the actual margin of profit on the trading commodities and the inclusion of the sales-tax gave a wrong picture of the result shown. He further submitted that the rate of 5 per cent was reasonable.

11. It is well settled that the momenta dealer made either purchases or sales which was subject to sales-tax the obligation to pay the tax arose. Although that liability could not be enforced till quantification was effected by the assessment proceeding, the liability for payment of tax was independent of the assessment. It is further well settled that the assessee, who had followed a mercantile system of accounting, was entitled to deduct from the profits and gains of its business liability to sales-tax which arose on tales made by it during the relevant previous year. It is further well settled that the amount of sales-tax paid or payable by the assessee is a business expenditure. The profits of business which are to be assessed to tax must be real profits and they have to be ascertained on ordinary principle of commercial trading and commercial accounting. If reference to a case is needed, reference may be made to the case of Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax (Central), Calcutta, 82 I.T.R 863 (Supreme Court). To the same effect is the decision in the case of Addl. Commissioner of Income-tax v. T. Nagireddy and Co. (105 I.T.R 669) in which the principle laid down in Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax (Central) Calcutta [82 I.T.R 363 (Supreme Court)] has been reiterated. The learned Senior Standing Counsel for the Department has tried to persuade me to accept his submission and, in support of his submission, has tried to press into service the case of Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income tax, West Bengal, (87 I.T.R 542) and the case of Sinclair Murray and Co. P. Ltd. v. Commissioner of Income-tax, Calcutta (97 I.T.R 615), but in my opinion, these decisions are irrelevant for the purpose at hand.

12. Thus in view of what has been held in the case of Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income tax (Central), Calcutta [82 I.T.R 363 (S.C)] (supra) the Tribunal was correct in holding that the amount of sales-tax liability had got to be excluded from the gross turn-over to arrive at a gross profit disclosed in the trading income.

13. Coming to the second point, the learned Senior Standing Counsel for the Department submitted that this was a proceeding under section 147 of the Income Act and in view of this, all the provisions of the new Act would apply. The learned Senior Standing Counsel submitted that all the provisions of the new Act would apply in a case where proceeding was re-opened under section 148 and, therefore, submitted that the provisions of section 68 would also apply and the credit appearing in the books of assessee in the previous year would be assessable to tax in the assessment year 1958-1959.

14. In my opinion, there is no force in the submission advanced by the learned Senior Standing Counsel appearing for the Department. It may be pertinent to note that there was no provision in the 1922 Act corresponding to section 68 of the Act. Nonetheless, this section gives statutory recognition to the principle that the cash credits which were satisfactorily explained may be assessed as the income. But, it has now been well settled that in two respects this section has changed the law which prevailed in the 1922 Act. One of the committed changes which is significant is that under the 1922 Act, it was held that where a large number of cash was credited on the very first day of the accounting year, and comsidering the extent of the business, it is not possible that the assessee earned such an amount in the course of one day, the amount cannot be assessed as the income of the assessee on the first day on which he had credit in the books of account. But in the present section even in the case of unexplained cash credit for the accounting year for which the books of accounts are maintained, the matter of inconvenience, therefore, has to give a go by to this statutory change. The question arises as to whether section 297(2)(d)(ii) of the Act can be said to save the operation of section 68 of the Act although introduced for the first time in the Act by holding that it was a matter of mere procedure or the machinery for the purpose of assessment and not a substantive right or liability either conferred on or chargeable against the assesse. Cases in this regard are unanimous and no decision has struck any discordant note. Reference be made to the case of Bhogilal Virchand v. The Commissioner of Income-Tax, Poona (127 I.T.R 591) wherein a Bench of the Bombay High Court held that the effect of section 68 is that statutorily a sum which is found are lied in the books of the assessee maintained for any previous year in respect of which either the assessee offers no explanation or the explanation offered by him is not accepted by the Income-tax Officer is to be charged to income-tax as the income of the assessee of that previous year. Therefore, section 68 is a charging provision in so far as the particular sum, which is a subject of legislation, is concerned. As a necessary corollary, if has further been held that the words “all provisions of this Act shall apply accordingly” occurring in section 297(2)(d)(ii) of the Act refer only to the machinery provided in that Act for the assessment of escaped income and that they do not apply to the substantive provisions of the new Act which create rights or liabilities. It has further been held that section 68 of the Act being a substantive charging section, it cannot be applied to a case of re-assessment governed by the 1922 Act. To the same effect, numerous decisions have taken the view, as for Commissioner of Income-tax v. Dharamchand Anandkumar (128 I.T.R 219), Commissioner of Income-tax v. N.L Satyanarayan Setty(129 I.T.R 226), Govinddas v. Income-tax Officer [103 I.T.R 123 (S.C)], Ganga Properties v. Income-tax Officer (118 I.T.R 999) and Sahinganj Electric Cables Pvt. Ltd. (115 I.T.R 408). In the Supreme Court case of Govinddas v. Income Tax Officer [103 I.T.R 123 (S.C)] (supra) it was held that the words “all the provisions of this Act shall apply accordingly” in clause (ii) of section 297(2)(d) of the Act merely refer to the machinery provided in the new Act for the assessment of escaped income and that they do not import any substantive provisions of the new Act which create rights or liabilities. The Supreme Court has further held in this case that the word ‘accordingly’ in the context means nothing more than ‘for the purpose of assessment’ and it clearly suggests that the provisions of the new Act which are made applicable are those relating to the machinery of assessment. The point is again squarely coveted by the judgment in the case of The Commissioner of Income-Tax, Bihar v. Hari Prasad Chaudhary (Taxation Case No. 24 of 1974 a Bench decision of this Court decided on 14th December, 1982) wherein the cases referred to above have been reviewed. Thus, the submission advanced on behalf of the Department by the learned Senior Standing Counsel fails.

15. In the result I answer both the questions in affirmative in favour of the assessee and against the Revenue and I hold that on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of sales-tax liability has got to be excluded from the gross turn-over to arrive at the gross profit disclosed in the trading account and I further hold that on the facts and in the circumstances of the case, the Tribunal was correct in holding that the provisions of section 68 of the Income-tax Act 1961, were not applicable for considering the cash credits appearing in the accounting years relevant to the assessment year 1961-1962 and earlier years and in deleting the additions of the cash credits amounting to Rs. 31,000/- and Rs. 32,344. The assessee will be entitled for cost. Hearing fee Rs. 250/-.