An assessee who maintains accounts under the mercantile system of accounting is entitled to deduct the estimated liability for sales tax from its income, even if the liability has not been quantified by the sales tax authorities.

( 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,