An assessee who follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed, even if the liability has not been paid.

G.S.Singhvi, J.

1. These four petitions have been filed by the Revenue under Section 256(2) of the Income-tax Act, 1961, for directing the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh to refer the question of law, which according to the petitioner, arises in these cases. Although these petitions related to different assessment years, the facts of all these petitions and the issues raised therein are identical and in view of this, we are deciding them by a common order.

2. In the returns filed by it in different years, the assessee sought adjustment of the purchase tax liability. The assessing authority did not accept the claim made by the assessee and computed the income without excluding the amount of purchase tax. Appeals filed by the assessee were partly allowed by the Commissioner of Income-tax (Appeals) on the ground that the assessee was maintaining the mercantile system of accounting and, therefore, its liability to purchase tax had to be taken into consideration while making assessment. Aggrieved by the orders of the Commissioner of Income-tax (Appeals), the Revenue approached the Income-tax Appellate Tribunal which affirmed the view taken by the appellate authority in regard to the claim of the assessee for deduction of the amount of purchase tax. Thereafter, the Revenue filed applications under Section 256(1) of the Income-tax Act, 1961, for reference of the question of law. The Tribunal rejected all the applications by placing reliance on a decision of this court in Sirsa Industries v. CIT [1989] 178 ITR 437.

3. Shri R. P. Sawhney, learned senior counsel appearing for the Revenue, argued that as the assessee had not paid the amount of purchase tax, it was not entitled to claim exemption on the basis of notional figures of purchase tax. Shri Sawhney submitted that the competent authority constituted under the Punjab General Sales Tax Act, 1948, had not made assessment of the purchase tax and, therefore, the petitioner was not entitled to claim any relief and the Commissioner of Income-tax (Appeals) as well as the Tribunal committed serious illegality in accepting the claim of the petitioner with reference to purchase tax. He relied on CIT v. Guranditta Mal Shanti Parhash Zira [1987] 164 ITR 774 (P&H) ; CIT v. Ashok Iron and Steel Rolling Mitt [1993] 199 ITR 815 (All) and Peico Electronics and Electricals Ltd. v. CIT [1993] 201 ITR 477 (Cal). On the other hand Shri M. R. Sharma argued that the principles laid down by this court in Sirsa Industries v. CIT [1989] 178 ITR 437 have been correctly applied by the Commissioner of Income-tax (Appeals) and the Tribunal and no question of law arises for adjudication by this court.

4. In order to determine whether any question of law arises in these petitions which the Tribunal ought to have referred to this court and whether the Tribunal should be directed to refer any such question of law, we may refer to some of the decisions of the Supreme Court and this court in which a similar point has been examined. In Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363; AIR 1971 SC 2145, their Lordships of the Supreme Court examined the scope of Section 10(2)(xv) of the Indian Income-tax Act, 1922. The assessee in that case was engaged in the business of jute and manufacturing of jute goods. It was following the mercantile system of accounting. During the assessment year 1955-56, the assessee was awarded a deduction of Rs. 1,49,776 on account of sales tax determined to be payable by the sales tax authorities on the sales made by the assessee during the previous year. The assessing authority completed the assessment before any final decision was taken by the sales tax authorities. The Income-tax Officer held that the assessee was not entitled to claim the deduction of the aforesaid amount of sales tax because it had contested its liability to pay that amount and had made no provision in its books with regard to the payment of that amount. Appeals filed b