K.C. SRIVASTAVA, A.M. This Departmental appeal is directed against order of CIT (A) relating to asst. yr. 1974-75. grounds raised by Department relate to treatment of balance in Purchase-tax Account and such question have been raising between Department and assessees in large number of cases. circumstances in which problem has arisen are as under : 2 . assessee firm is commission agent of food-gains and does its own trading also. ITO found that in various accounts pertaining to purchase- tax there were total credits to extent of Rs. 1,88,912. After certain adjustments net credit was shown at Rs. 1,84,335. There is not dispute about this figure. ITO further found that after considering payments made relating to current year s liability in accounting period as after close of year, there was surplus of Rs. 74,180 in purchases-tax account. According to ITO, this surplus was to be included as assessee s income. 3. assessee explained that firm was following mercantile system of accounting and it was debiting party s account and crediting purchase- tax account for each transaction. According to assessee, it had not interest in this amount of purchase-tax as it was to be paid to Sales-tax Department under provisions of law. It was also submitted that in certain cases amount was not payable to Sales-tax Department but was to be paid back to parties concerned. This was so when parties concerned produced certificates from Sales-tax Department that they have paid tax directly on relevant transaction. assessee had relied certain case-law on for proposition that balance in account represented assessee s liability to Sales-tax Department under Sales-tax law. 4 . ITO was of view that assessee could not be treated as discharging liability of somebody also and collection of purchase-tax was as law requires assessee to collect it and responsibility of payment to government was on assessee. According to ITO purchase-tax collected was trading receipt in hands of assessee and whatever had not been paid to government had remained as trading and was, therefore, taxable in hands of assessee. assessee had relied on decision of Allahabad High Court in case of CIT vs. Poonam Chand Trilok Chand (1976) 105 ITR 618 (All) but ITO distinguished facts of case on ground that sales-tax assessment stood completed before income-tax assessment were taken. ITO also considered decision of Supreme Court in case of Kedarnath Jute Manufacturing Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC) but according to him, facts of that case were different. This case was considered in light of assessee s contention that balance represented accrued liability in hands of assessee. According to ITO, determination of purchase tax liability can only be at time of sales tax assessment and at that time assessee can claim deduction. Thus, ITO came to conclusion that purchase tax realised in so far it exceeded purchase tax paid was taxable in hands of assessee. He relied on decision of Supreme Court in case Sinclair Murray & Co. vs. CIT 1974 CTR (SC) 283 : (1974) 97 ITR 615 (SC). He, therefore, held that Rs. 74,180 taxable in hands of assessee. 5 . When matter came before CIT(A), he found that ITO had considered payment of current liability year. However, assessment had been made on 22nd Jan., 1977 and certain payment were made after this date and before matter was heard by CIT(A). Considering all payment made at time when appeal was heard, CIT(A) found that out of total credit of Rs. 1,84,335 assessee had paid total amount of Rs. 1,59,200 at various times starting from year itself upto 1979. Only amount of Rs. 25,135 remained to be accounted for. It was explained by assessee that this amount was also to be refunded to parties or to be paid to Sales tax Department according to provisions of ST Act. It was contended on behalf of assessee before CIT(A) that liability for paying purchase tax accrued and arose at time of purchase either made on assessee s own account or on account of other parties. It was, therefore, contended that even if there was surplus in purchase tax account assessee was treating it as its liability to be paid to Sales tax Department in view of decision of Supreme Court in case of Sales tax Department in view of decision of Supreme Court in case of Kedarnath Jute Manufacturing Co. Ltd. vs. CIT (1971) 82 ITR 368 (SC). Reliance was also placed on Allahabad High Court in CIT vs. Poonam Chand Trilok Chand (1976) 105 ITR 618 (All). 6. CIT(A) was of view that surplus in account represented liability which had arisen and as assessee was maintaining accounts on mercantile basis, assessee could claim it as deduction. CIT(A) also found support from decision of Allahabad High Court in case of CIT vs. Poonam Khand Trilok Chand (1976) 105 ITR 618 (All). CIT(A) held that payment by assessee in different years after close of accounting year was not important and as assessee was following mercantile basis purchase tax was liability which arose at time of purchase itself and this had to be considered against surplus in purchase account. According to learned CIT(A), decision of Supreme Court in case of Sinclair Murray & Co. vs. CIT 1974 CTR (SC) 283 : (1974) 97 ITR 615 (SC) relevant to issue under consideration and he held that addition of Rs. 74,180 was not justified. 7 . We have heard Departmental Representative, who has strongly relied on decision of Supreme Court in case of Sinclair Murray & Co. vs. CIT 1974 CTR (SC) 283 : (1984) 97 ITR 615 (SC). He also submitted that once purchase tax was collected, it was revenue receipt in hands of assessee and till assessee pays to Sales tax Department or to any other person, it will represent revenue receipt in his hands and has to be assessed as such. He further contended that CIT(A) should have asset Rs. 25,130 which balance even according to him in purchase tax account. ld. counsel for assessee relied on case of Kedarnath Jute Manufacturing Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC) as well as decisions of Allahabad High Court in case of CIT vs. Poonam Chand Trilok Chand (1976) 105 ITR 618 (All) as well as in Poonam Chand Trilok Chand vs. CIT (1982) 21 CTR (All) 320 : (1982) 136 ITR 537 (All). 8. There cannot be dispute now that sales tax or purchase tax collected by person under provisions of Sales tax Act is revenue receipt in hands of that person and has to be treated like that. That is decision in case of Chowringhes Sales Bureau (P) Ltd. vs. CIT 1973 CTR (SC) 94 : (1973) 87 ITR 542 (SC), which was relied upon by Supreme Court in case of Sinclair Murray & Co. vs. CIT (1974) 97 ITR 615 (SC). question for consideration in present case is, however, different. question is whether in view of assessee s claim that surplus in this account should be allowed as deduction as it represented liability in hands of assessee who was following mercantile system of accounting. Thus, decision of Supreme Court in case of Sinclair Murray & Co. (supra) has to be read alongwith decision of Supreme Court in case of Kedarnath Jute Manufacturing Co. Ltd. (1971) 82 ITR 363 (SC). 9. liability in present case arises under s. 3 of UP ST Act, 1948 read with s. 3-D (x) of that Act. According these provisions, tax is levied on turnover to be determined in prescribed manner of purchases of certain notified goods. liability arises as soon purchase as contemplated in that section are made. quantication of actual liability comes later on but charge is created by section itself. Our attention was also drawn to provisions of s.29-A of that act under which any amount realised by dealer as realisation of tax dealer had to deposit entire amount into government treasury within prescribed period notwithstanding that dealer may not be liable to pay such amount as tax or that only part of it was due from him, as tax under this Act. Any amount deposited by any dealer shall, to extent to which is not due as tax car be held by dealer in trust for person from whom it was realised by dealer. There are provisions for refund of such amount of those persons from whom it is originally realised. Thus, law contemplates charge on purchases and also provides for deposit of tax collection with Government in all cases. 10. We are dealing with case of Uttar Pradesh and we have got decisions of Allahabad High Court in similar cases which have been relied upon by assessee as well as by CIT(A). In case of Poonam Chand Trilok Chand (1976) 105 ITR 618 (All). High Court was dealing with case of assessee who was commission agent like present assessee. In previous year assessee has collected purchase tax and had credited it to account styled as reserve for purchase tax. part of this tax was paid and account styled as reserve for purchase tax. part of this tax was paid and balance of Rs. 31,631 was treated as assessee s income by ITO. Tribunal, however, hold that this amount represented assessee s liability which had arisen and, therefore, amount could not be added as assessee s income. High Court held that assessee, who followed mercantile system of accounting was entitled to claim deduction even though expenditure was not actually incurred and it was not entered in books of account. According to High Court, fact that assessee did not pay amount to Government in relevant accounting year, did not alter position. Court further held that entries in books of accounts are, not in any way, determinative of item of income or expenditure. Court had further observed that if assessee gets any refund as result of appeal section could be taken under s. 41. High Court had decided this case after considering ratio of decision in case of Kedarnath Jute Mfg. Co. Ltd. (supra). 11. same assessee s case came before High Court and had been considered in (1982) 136 ITR 537 (All) (supra). In this case it was held that even where assessee was disputing its liability to purchase tax to State Government and had not made any debit entry in his books of account, assessee could claim liability as it had accrued at time of purchase. facts in that year also were similar where after collecting purchase tax amount was not paid to Government and yet assessee claimed that balance represented accrued liability under provisions of Allahabad High Court, which are binding in case of present assessee, we hold that CIT(A) was justified in deleting addition made by ITO. 12. appeal is dismissed. S.S. MEHRA, J.M. I have benefit of going through order prepared my ld brother Shri K. C. Srivastava. However, I regret my inability to agree with conclusion arrived at. facts have in detail been discussed in said order. 2. There was clear surplus of Rs. 74,180 in purchase tax account. In fact, total receipt amounted to Rs. 1,88,912. Before arriving at surplus, all purchase tax liabilities had been satisfied. No. liability in respect of year under consideration was outstanding. There was no demand pending. surplus of Rs. 74,180 was clear of all cloge. May be assessee collected more money by way of purchase tax then was required to deposit in State Treasury. Such surplus had got no outstanding and conceivable liability. It was therefore, clear receipt includible in income. learned CIT(A) therefore, not justified to delete inclusion of Rs. 74,180 factual position is absolutely against assessee. deletion was, therefore, not justified on facts, ruling to contrary notwithstanding. In my considered view, addition made by learned ITO should have not been deleted by ld. CIT(A). IT is therefore, difficult to support such finding and I quash same. 3. In result Revenue s appral succeeds. 18th Aug. 1984 ORDER UNDER s. 255(4) OF IT ACT 1961 K.C. SRIVASTAVA, A.M. We have difference of opinion in above case and we, therefore, proceed to state point of difference as follows : "Whether on facts and in circumstances of case, Rs. 74,100 representing unpaid balance in purchase tax account could be brought to tax in hands of assessee?" 2 . We refer above matter to President of ITAT so that matter could be decided by referring to one or more other, members of Tribunal. 24th Oct., 1985 G. KRISHNAMURTHY, SR. V.P.. In this appeal filed by Department relating to assessment made on M/s Ram Kishore Ram Gopal, Hathras in relation to asst. yrs. 1974-75, there was difference of opinion between my ld. brothers, who heard matter on question whether purchase balance in purchase tax account could be brought to tax as income of assessee. 2. assessee is registered firm carrying on business of acting as commission agents. There was in books of account purchase tax account where total credit balance of Rs. 1,88,812 was shown and it was made up as under : Purchase tax Rs. 1,19,539 Surcharge Rs. 10,564 Purchase tax til Rs. 64,693 Purchase tax gains Rs. 22,764 . Rs. 1,10,912 accounts further showed that total payment of Rs. 8,820 was made in year out of which Rs. 60,834 related to payments made to current year s liability and balance of Rs. 24,986 related to payments made after close of year but relating to current liability. There was further payment of Rs. 28,912 made in accounting year but relating to liability of earlier years so that total payment made was Rs. 1, 14 ,732. Deducting this payment from credit balance of Rs. 188,912, there is still credit balance of Rs. 74,180. dispute was in regard to treatment of this sum. assessee contended that this credit balance though appears as surplus in accounts did not really represent its. income because it was either pay to Government of UP on assessments being finalised to sales tax and purchase tax or to be made out to Govt. of UP as per provisions of UP ST Act, 1948 as amended from time to time or to be refunded to parties concerned. It was further contended with which we are more concerned in this matter that assessee was maintaining its accounts on mercantile basis and under that basis liability to pay amount to Govt. simultaneously arose alongwith collection of money and whether payment was made or not, that accrual liability should be allowed as deduction and if it is allowed as deduction there will be nothing lift by way of surplus. In other words, contention was that corresponding liability equal to amount of Rs. 74,180 simultaneously sprung up. In this connection strong reliance was placed on decisions of Andhra Pradesh High Court in Addl. CIT vs. V. Nagireddy & Co. (1976) 105 ITR 669 (AP) as well as on decision of Allahabad High Court in Poonam Chand Trilok Chand (1976) 105 ITR 18 (All). To substantiate view that as soon as dealer enters into transaction liability to pay sales tax arises although that liability could not be enforced till quantification was affected by assessment proceedings but liability for payment of tax was independent of assessment. ITO rejected these contentions and brought sum of s. 74,180 as income of assessee. Then matter went before CIT(A) Agra. He somehow could not agree with conclusions reached by ITO. He held that decision of Supreme Court in case of Kedarnath Jute Mfg. Co. vs. CIT (1971) 82 ITR 363 (SC) and decision of Allahabad High Court in case of CIT vs. Poonam Chand Trilok Chand (supra) directly applied and ITO was in error in making attempt to distinguish those direct cases. He also found as matter of fact from certificate issued by STO, Harthras that in subsequent years sales tax liability was completely cleared by assessee. Even though sales tax collection could be taken as income, since corresponding liability was created for payment of this sum as per decision of Supreme Court in case of Kedarnath Jute Mfg. Co. (supra) assessee s contention was correct and that surplus could not be regarded as income liable to tax. Aggrieved by this decision of CIT(A) there was appeal fled before Tribunal by Revenue. After hearing both Members could not agree on conclusion and following point of difference of opinion was made out by them, which was referred to President who nominated me as Third Member to express my opinion on matter : "Whether on facts and in circumstances of case, Rs. 74,180 representing unpaid balance in purchase tax account could be brought to tax in hands of assessee ?" 3. I have heard Shri R. N. Bara for Revenue and Shri Ram Lal for assessee and perused records and I am of as opinion that view expressed byu ld. Accountant Member is more in accord with established principles of law and facts. ld Accountant Member pointed out in order that decision of Allahabad High Court in two cases CIT vs. Poonam Chand Trilok Chand (1976) 105 ITR 618 (All) and latter on in Poonam Chand Trilok Chand vs. CIT (1982) 27 CTR (All) 320 : (1982) 136 ITR 537 (All) were directly on issue and this case coming as it did from UP decision of Allahabad High Court was binding following which it must be held that sum in question could not be regarded as income of assessee. In both these case High Court held that corresponding liability to pay tax arose as per mercantile system of accounting adopted. In Poonam Chand Trilok Chand (1976) 136 ITR 537 (All) Allahabad High Court held whether assessee is entitled to deduction of certain payments or not will depend upon provision of law relating thereto and not on view which assessee might take of its liability nor can that existence or absence of entry in its books of account be decisive or conclusive of matter. During asst. yrs. 1968-69, 1969-70 and 1971-72 assessee, which follow mercantile system of accounting, realised purchase tax from its customers for payment to State Government. assessee did not include these amounts in its P&L a/c for any of these years., At time of assessments, ITO included these amounts as trading receipts of assessee. When matter reached High Court by way of reference, High Court held that though during relevant assessment years assessee dispute liability to pay purchase tax to State Government and had not made any debit entry in its books of account and lost case finally and that thought payments were made in subsequent years, that fact could not make any difference because it was accrual of liability under mercantile system of accounting which would decide question of t h e deduction. assessee, High Court held, was entitled during relevant assessment years to deduction from profits and gains of its business of liability to pay purchase tax which arose on purchase made by it during these years. Allahabad High Court applied decision of Supreme Court in case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC). it was in this assessee followed mercantile system of according, it was entitled to deduction from profits and gains of its business of liability to pay sales tax which arose on sales made by it during relevant previous year because liability to pay sales tax arose moment dealer made either purchase or sale, Although that liability could not be enforced till quantification is effected in assessment proceedings, liability for payment of tax was independent of assessment. same was decision reached by High Court in (1976) 105 ITR 618 (All) in same assessee s case as in (1982) 135 ITR 537 (All) (supra). High Court was more categorical in this case when it pointed out that assessee, who follows mercantile system of accounting is entitled to claim deduction even though expenditure was not actually incurred. It is enough if liability for such expenditure accrues. fact that assessee did not pay amount to Government in relevant accounting year did not alter position. It was following these two decisions ld. Accountant Member has observed above held that even if surplus of Rs. 74,180 is to be regarded as income, since contention corresponding liability to pay amount to Government arose, that amount should be allowed as deduction with result that no income result. ld. Accountant Member also noticed that under UP ST Act if any amount is realised by dealer purporting to be tax, such dealer shall deposit entire amount realised into Govt. Treasury within such period as may be prescribed notwithstanding that dealer is not liable to such pay such amount as tax or only part of it was due from him as tax. He pointed out relying upon this provision that liability to deposit same accrued and as consequence amount income question could not be regarded as in. But ld. Judicial Member pointed out in his order that (a) no liability in respect of year under consideration is outstanding (b) there was no demand pending (c) surplus of Rs. 741,80 was cleared of also clogs (d) may be assessee collected more money by any of purchase tax than was required to deposit in State Treasury and therefore clear receipt includible in income arose. It is pointed out in course of hearing that ld. Judicial Member had not correctly appreciated facts. It is not case where assessee collected more money by way of purchase tax than was required to deposit because there was clear finding recorded by CIT(A) that from subsequent order issued by STO, Hathras entire liability was cleared. This could not therefore be that more money was collected without there being any liability to pay to Government and secondly provisions of s. 29-D of UP ST Act were not noticed by him because that section provided that any amount collected by dealer purporting to be tax is to be deposited with Government and Government will hold it as interest on behalf of person from whom money was collected. liability to deposit money with Government made this collection liability in hands of assessee and not as income. In any case amount was paid by assessee. I find that this submission was not incorrect. Further ld. Judicial Member on basis of his earlier findings pointed out in order that factual position was absolutely against assessee. This does not seem correct. Then ld. Judicial Member has pointed out in his order that even though there were rulings to contrary by Allahabad High Court, there was no justification for deletion of this sum. submission made on behalf of assessee was that it is not open to ld. Judicial Member to disregard finding nature of jurisdictional High Court, unless there were distinguishing facts. Not having pointed out any distinguishing facts, learned Judicial Member was bound to follow decisions of Allahabad High Court as was done by ld. Accountant Member. It is in view of these submissions and in view of binding nature of Allahabad High Court decisions, I am persuaded that view taken by ld. Accountant Member is correct both on law and in facts. I am therefore in agreement with that view. 4. Now matter will go back to regular Bench for deciding appeal in accordance with majority by opinion. *** INCOME TAX OFFICER v. RAM KISHORE RAM GOPAL