SABYASACHI MUKHERJI, J.

( 1 ) THE method of accounting followed by the assessee and accepted by the department is mercantile. For the assessment year 1961-62, the assessee had made provision in its account for the sum of Rs. 22,642 on account of the sales tax payable by the assessee. The assessee claimed deduction of the said sum in its income-tax assessment. The Income-tax Officer disallowed the claim on the ground that the amount represented a mere provision for taxes which had neither been paid nor ascertained by the sales tax authorities. The assessee preferred an appeal before the Appellate Assistant Commissioner who confirmed the order of the Income-tax Officer. Thereupon, the assessee went up in appeal before the Income-tax Appellate Tribunal. The Tribunal found that, having regard to the scheme of the Sales Tax Act, the charge is created not upon the assessment but as soon as the sales are effected. In that view of the matter and inasmuch as there was no dispute that the amount of Rs. 22,642 represented the estimated amount of sales tax payable on the sales effected by the assessee during the year, the Tribunal was of the view that the amount represented an accrued liability which the assessee had to discharge. The Tribunal, therefore, allowed the claim of the assessee for deduction.

( 2 ) ON an application being made under Section 66 (1) of the Indian Income-tax Act, 1922, the following question has been referred to this court:"whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing deduction in respect of the sum of Rs. 22,642 in the computation of the total income of the assessee for the assessment year 1961-62?"

( 3 ) IT was contended by counsel for the revenue that sales tax is not deductible from the income for the purpose of payment of income-tax. It was contended that payment of sales tax was not necessary for the purpose of carrying on the business inasmuch as sales tax was payable on the "taxable turnover" and not on all sales but on sales beyond the limits of "taxable turnover". It was further contended that the liability for payment of sales tax arises upon assessment or demand being made by the sales tax authorities. Therefore, it was urged that, on the facts of this case, as there was no assessment or demand notice, the amount representing provision made for sales tax is not to be deducted from the income of the assessee. Reliance was placed by the counsel for the revenue on the decision in In the matter of Recols (India) Ltd. , [1953] 4 S. T. C. 271 ; 57 C. W. N. 468 (S. B.) It was then contended that a mere legal liability would not be enough for claiming deduction in respect of the sales, tax under the Indian Income-tax Act, 1922. Reliance was placed on the case of Kedarnath Jute Manufacturing Co. v. Commissioner of Income-tax, [1968] 67 I. T. R. 56 Counsel for the revenue also relied on the decisions of Commissioner Income-tax v. Chowringhee Sales Bureau (P.) Ltd. , [1969] 71 I. T. R. 131, Ikranandi Coal Co. v. Commissioner of Income-tax, [1968] 69 I. T. R. 438 and the unreported judgment of this court in Income-tax Reference No. 164 of 1963 (Commissioner of income-tax v. Sinclair Murray and Co. (P.) Ltd. , [1970] 75 I. T. R. 494 ).

( 4 ) COUNSEL for the assessee, on the other hand, contended that sales tax is deductible from the income of the assessee for the purpose of payment of income-tax. It was urged thai payment of sales tax is necessary for the purpose of carrying on the business of the assessee. It was urged that under Section 10 (2) (xv) of the Indian Income-tax Act, 1922, the assessee is entitled to claim deduction of sales tax. It was further urged that under Section 10 (1) of the Indian Income-tax Act, 1922, the amount of sales tax payable should be deducted in computing the total income of the assessee. It was also urged that, inasmuch as the sales tax created a statutory charge, there was diversion of the income of the assessee to the extent of

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