Viswanatha Sastry, J.:— The question referred for decision is as follows:
“whether there are materials for the Tribunal to hold that the aforesaid sales tax pay-ments of Rs. 30,221/- were unreasonable and unnecessary having due regard to the requirements of the business and not consequently deductible under Rule 12 of Schedule I of the Excess Profits Act?”
2. The assessee is a registered firm carrying on business in the manufacture and sale of groundnut oil. The groundnuts and kernels are bought and crushed into oil and the oil is then sold. The assessee was assessed to sales-tax on the purchase of groundnuts and kernel used for the manufacture of oil and also on the sales of oil. The assessee is entitled to a rebate of the sales tax paid on groundnuts and kernel purchased and used for the manufacture of oil on furnishing the necessary particulars to the assessing authority. The assessee adopted a system of paying sales-tax provisionally, calculated on the turnover of the previous accounting year and having the liability adjusted at the end of the accounting year on the basis of the actual turnover in the accounting year and after taking into account the rebate allowable on the value of groundnuts and kernel crushed into oil. The final adjustment after the end of the accounting year resulted either in the assessee's liability to tax in excess of the provisional payment or a right to a refund of the excess tax provisionally paid.
3. For the official year ending 31-3-1945, there was a provisional demand of sales-tax and a payment of Rs. 47,276/-. The final assessment to sales-tax for the year resulted in a refund of Rs. 27,239/-, to the assessee. Similarly, for the official year ending 31-3-1946, there was a provisional demand and payment of Rs. 45,315/- as sales-tax. The final assessment for that year resulted in a refund of Rs. 31,936/-. The refunds of Rs. 27,239/- and of Rs. 31,936/- were received on and shown in the books of the assessee under dates 18-4-1946 and 12-11-1946 respectively. The assessee maintained its books according to the Dewali year. Purchases and sales of goods on credit were duly accounted for in the books. In respect of sales-tax, the actual cash payments made less recoveries by way of refunds or rebates were claimed as an expense annually without regard to any outstanding liability or refunds due pending adjustment at the final assessment to sales-tax. This practice was consistently adopted by the assessee and accepted for the assessee's income-tax assessments throughout. The sum of Rs. 47,276/- paid in respect of the provisional demand for the year ending 31-3-1945 was allowed as an expense in full for the assessment of income-tax for the assessment year 1946-1947. Till the chargeable accounting period ended on 17-10-1944, the assessments to excess profits tax were also made on the same basis as income-tax. However, for the chargeable accounting period 13-10-1944 to 4-11-1945 the Excess Profits Tax Officer allowed only Rs. 17,055/- instead of Rs. 47,276/- the provisional payment for sales-tax made by the assessee. The sum of Rs. 17,055/- allowed by the Excess Profits Tax Officer represented the actual liability for sales-tax apportioned on time basis, for the turnover of the chargeable accounting period in question on the basis of the final assessments whose figures are given supra. Proceeding on this basis, the Excess Profit's Tax Officer added Rs. 30,221/- in the computation of profits for the purpose of excess profits tax for the chargeable accounting period 18-10-1944 to 4-11-1945, though for purposes of income-tax, the entire sum of Rs. 47,276/- paid as sales-tax on provisional assessments had been allowed as a deduction in favour of the assessee. The Excess Profits Tax Officer purported to apply the provisions of Rule 12 of Schedule I of the Excess Profits Tax Act and disallowed the claim of the assessee to Rs. 30,221/- paid for sales-tax under the provisional assessment, on the ground that the said payment was in excess of the amount reasonable and necessary having cue regard to all the requirements of the assessee's business. The Appellate Tribunal to which an appeal was taken under Rule 12 confirmed the order of the Excess Profits Tax Officer and differentiated the assessment for income-tax purposes from the assessment for purposes of excess profits tax in this manner.
“Excess profits-tax, however, has ended with the profits upto 31-3-1946 and receipts or income relating to periods covered by the levy, and known to be recoverable on 31-5-1916, clearly require to be assessed in one or the other of the various chargeable accounting periods.”
4. The Tribunal further held that while accepting the assessee's system of accounting, it was open to the Excess Profits Tax Officer to scrutinize each-head of expenditure in the computation of profits made from the assessee's books and that the impugned amount represented one such head of expenditure. According to the Tribunal, Rule of Schedule I of the Excess Profits Tax Act “hits the facts of the case truly and squarely …… and has been properly invoked to correct the anomaly created by allowing the entire sales-tax payments in the corresponding income-tax assessment, even though the payments in question are only advances, not properly ascertained till 31-3-1946”. The Tribunal further observed that if the Excess Profits Tax Officer had been so minded, he could have disallowed the whole amount of Rs. 47,276/- instead of Rs. 30,221/- and that he took a compassionate view of the case.
5. Now sales-tax is levied on sales or purchases of goods by traders and not upon the profits or gains made by them from the business. Sales-tax is payable irrespective of any profits being earned and without such payment, the business of buying and selling cannot be carried on. It is therefore deductible as a business expense before arriving at the taxable profits. The sales-tax was paid by the assessee according to the rules framed under the Madras General Sales Tax Act which allowed a provisional assessment to be made subject to adjustment at the time of the final assessment at the end of the year. In accordance with its regular method of accounting, the assessee firm debited actual payment of sales tax made by it under the provisional assessments and credited rebates or refunds as and when they were received from the assessing authority. In the books of the assessee, the payments of sales tax were entered in the year in which they were actually made and the refunds or rebates were entered as the receipts of the year in which they were actually received. This method of accounting has been consistently followed by the assessees and accepted by the department both for income-tax and excess profits tax assessments till the chargeable accounting period 18-10-1944 to 4-11-1945. Even for this period the income-tax assessment was made after allowing the whole of the disbursements shown in the assessee's books by way of payment of sales-tax during the year. It is difficult to anticipate the actual turnover of the year or the rebates likely to be granted to the assessee till the end of the year and it often happens that final assessments to sales tax are deleted for some months after the end of the year and the grant of refunds on rebates is delayed for more than a year after the end of the assessment year. The present case is an instance of a refund which was due in respect of the official year ended 31-3-1945, being actually made on 18-4-1946. The excess payments made by the assessee under the provisional assessments to sales-tax were not due to any manipulation or subterfuge adopted by the assessee. Nor was the delay in getting a refund or rebate due to the inaction or indifference of the assessee, who was pressing his claim on the assessing authority. When the provisional payments of sales-tax were made in 1944-1945, the assessee could not have expected the termination of the war or the expiry of the life of the Excess Profits Tax Act with 31-3-1946. In these circumstances, there is no justification for upsetting the basis of accountancy followed by the assessee consistently, irrespective of results which might at times prove favourable but at other times work out at a disadvantage, particularly when the department has accepted and acted upon the accounts consistently for incometax assessments even during the chargeable accounting period.
6. Section 21 of the Excess Profits Tax Act enacts that Section 13 of the Income-tax Act shall apply to assessments under the Excess Profits Tax Act as if Section 13 had been incorporated therein. Under Section 13 of the In-come-tax Act, the assessee is free to choose a proper method of accounting and the profits and gains have to be computed in accordance with the method of accounting regularly employed by the assessee. The assessing authority is bound by the assessee's choice of a method of accounting regularly employed by him unless the income, profits and gains cannot properly be deduced therefrom. As pointed out by the Judicial Committee in Commissioner of Incometax v. Sarangpur Cotton Manufacturing Co. 1938 I.T.R 36 at 40. Section 13 relates to a method of accounting regularly employed by the assessee for his own purposes and does not relate to a method of making up the statutory return for assessment to Income-tax. The section clearly makes such a method of accounting a compulsory basis for computation unless in the opinion of the Income-Tax Officer the income, profits and gains cannot properly be deduced therefrom. It may be that the account maintained by the assessee is neither purely on a cash basis nor purely on a mercantile basis but is a mixture of the two methods, one method being adopted in respect of one class of transactions and the other in respect of a different category. If the assessee employs such different methods regularly and consistently the profits would have to be computed in accordance with the respective methods provided a proper determination of the true profits could be arrived at. Dhakeshwar Prasad v. Commissioner of Income-Tax 1936 I.T.R 71., Commissioner of Income-Tax v. Singari Boi 1945 I.T.R 224, 227, 228., Fetehchand Chhakodilal v. Commissioner of Income-Tax 1945 I.T.R 198 at 202., Commissioner of Income-Tax v. M.A.L Chettiar Firm 1935 I.T.R 193.. As pointed out by the Judicial Committee, the name by which a method of accounting is called, is not so important; nor is it important whether the system of accounting adopted by the assessee conforms to the requirements of a known method of accounting so long as the profits of the business could fairly and properly be determined from the accounts. Feroz Shaw v. Commissioner of Income Tax 1933 I.T.R 219, 225.. In the present case, the payments of sales-tax under the provisional assessments were entered in the year in which they were made and the refunds or rebates were also entered in the year in which they were got and the refunds or rebates were subject to tax in the year of receipt. Consequently the Revenue authority accepted this method of accounting regularly employed by the assessee. It is not open to the Revenue authority to throw overboard the method of accounting regularly employed by the assessee and till then accepted by the department, for the chargeable accounting period, merely because the life of the Excess Profits Tax Act expires on 31-3-1946 and it would be advantageous to the revenue to disregard the payments of the provisional sales-tax made during the official year ending 31-3-1945 by bringing into the account of that year the rebates or refunds granted on 18-4-1946 and entered in the assessee's books under that date.
7. The further contention urged on behalf of the Commissioner of Income-tax is that under Rule 12 of Schedule I of the Excess Profits Tax Rules, in computing the profits of any chargeable accounting period, no deduction would be allowed in respect of expenses in excess of the amount which the Excess Profits Tax Officer considers reasonable and necessary having regard to the-requirements of the business and that the Excess Profits Tax Officer acted under that rule in the present instance. It is no doubt true that the language of Rule 12 is more stringent than the corresponding language of Sec. 10(2)(xv) of the Income Tax Act. It cannot be disputed that the expenditure in question was incurred by the assessee in his character as a trader. It cannot be stated that the payment of sales tax was made voluntarily and on grounds of commercial expediency without any actual necessity for such payment. Sales-tax is a compulsory levy under the sanction of the legislature and there is no discretion left to the assessee as regards the extent of the payment. The direct purpose for which the money is laid out, is not the benefit of the business and the payment goes for the benefit of the State. The expenditure is incurred during the year and the payments of sales tax are made in conformity with the rules made under the Madras General Sales Tax Act. The expenditure is unremunerative but is not the less a proper deduction, for without such expenditure the business of purchasing and selling could not be carried on. It does not require the presence of a receipt on the credit side to justify a deduction of such an expense. The payment of sales tax has no doubt the effect of diminishing the assessee's taxable income but such payment is necessary if the assessee is to carry on business at all and this is not a case where the assessee having a discretion to lay out money for the purpose of earning profits in a business, spends an unnecessarily large amount during the chargeable accounting period Neither the assessee nor the Excess Profits Tax Officer has a discretion in the matter of determining the amount payable by way of sales-tax and Rule 12 of Schedule I of Excess Profits Tax Rules does not enable the Excess Profits Tax Officer to cut down payments made by the assessee by way of sales-tax under provisional assessments. The levy is statutory and not a voluntary payment which might or might not be made at the discretion of the assessee.
8. For these reasons, we are of the opinion that the question referred to us must answered in the negative and in favour of the assessee. The Commissioner of Income-tax will pay the assessee's costs inclusive of Rs. 250/- as Advocate's fee.
T.A.B
9. Reference answered in favour of the Assessee.