Manchanda, J. - (1.)THIS is a case staled under Section 66 (1) of the Indian Income Tax Act, 1922. (hereinafter referred to as the Act). The question referred is:
"Whether the sum of Rs. 27,167 debited by the assessee to the profit and loss account and credited to the sales tax account is an admissible deduction?"

1-a. The material facts are these: The relevant assessment year is 1056-57, the year ending on 28th August, 1957 The assessee is a dealer in cloth both purchased locally and imported from outside. Uptill the 31st March, 1956, sales tax was charged by the Government of Uttar Pradesh on sales of cloth imported from outside Uttar Pradesh at the rate of 3 pies to 6 pies per rupee. On the 31st of March, 1956, the Govt. of Uttar Pradesh issued an Ordinance raising sales tax to one anna per rupee. THIS Ordinance was subsequently replaced by the U. P. Sales Tax (Amendment) Act, 1956, which purported to regularise the provisions of the said Ordinance Subsequent to this the U. P. Sales Tax (Amendment) Act, 1957, was passed on 30th September 1957, the main purpose of which was to hold that the amendment brought by the U. P. Ordinance of 31st March. 1956, was valid on and from 31st March, 1956. The validity of these enactments was challenged by certain assessees and also ultimately by the assessee by a writ petition in 1957. THIS Court by its order dated the 5th May 1957, declared Ordinance No. IX of 1956, issued on 31st March, 1956, to be ultra vires on a writ petition filed by another assessee.

THIS decision of a Full Bench of Court is reported in Messrs Adarsh Cloth Bhandar of Aligarh v. Sales Tax Officer, Aligarh, (1957) 8 STC 666: (AIR 1957 All 475). The further amendment made in the Act by the U. P Sales Tax (Amendment) Act, purporting to rectify the defects was also declared to be ultra vires by a Full Bench of this Court on 14th February, 1958, in Firm Bengali Mal Satish Chandra Jain Cloth Merchants of Agra v. Sales Tax Officer. Agra, (1958) 9 STC 492: (AIR 1958 All 478) (FB) After the decision in Firm Bengali Satish Chandra's case 1958-9 STC 492: (AIR 1958 All 478) (FB) (supra) was given, the Act was further amended by the U. P. Government by the U. P. Sales Tax (Validation) Act (XV of 1958) THIS Act was published on the 6th of May, 1958. Against this also writ petitions were filed but the High Court in Ram Chandra Textiles v. Sales Tax Officer, Hathras, 1964 All LJ 396: (AIR 1965 All 24) (FB) relying on J.K. Jute Mills Co., Ltd. v. State of U. P., AIR 1961 SC 1534 overruled by the earlier Full Bench decision of this Court Firm Bengali Mal Satish Chandra's case, 1958-9 STC 492: (AIR 1958 All 478) (FB) (supra). In J.K. Jute Mills v. State of U.P. AIR 1901 SC 1534 (supra) the controversy had already been set at rest, and it was held that the U. P. Sales Tax (Validation) Act (XV of 1958) is valid and intra vires. THIS meant that the levy of Sales Tax at one anna per rupee as from 31st March. 1956, was valid, and sales tax was payable for the relevant assessment year by the assessee at that rate.

(2.)WHILE the writ petitions were pending in the High Court as to the validity or otherwise of the Sales Tax (Amendment) Act, the assessee on the last date of the previous year which ended on 28th August, 1957, debited the profit and loss account with Rs. 27,167/-, being the estimated sales tax liability as imposed by the legislation which was being impugned by other cloth dealers of Uttar Pradesh at that time. It was admitted that the assessee's system of accounting was mercantile and it had accordingly put forward a claim to deduct the said sum of Rs. 27,167/- on the ground that the said sales tax was payable under the aforesaid Ordinance and Notifications and the Validation Act.
The Income Tax Officer found that the assessee had shown the correct turnover of sales at Rs. 5,33,046 as well as the gross profit thereon at Rs. 48,663. He further found: "Most of the purchases are vouched. Sales are also fully vouched ......As the past history of the case is of accepted version and trading accounting results are much better than that of the preceding year, the trading account results are accepted". The claim of the assessee to the debit of Rs. 27,167/- being the estimated sales tax for the relevant assessment year was, however, not allowed on the ground that the amount did not represent as ascertained liability, as some other assessees had challenged the levy thereof and the matter was before the Supreme Court and as such sub judice. The Income Tax Officer, however fairly conceded: "I fully agree with the assessee that in case the amount represents an ascertained liability it would be allowable deduction in the case of a person who follows the mercantile method of accountancy, but, where the very liability is in dispute, it cannot he said to be ascertained and it cannot be allowed as a deduction, as according to the mercantile system of accountancy the liability will be allowed only if it is ascertained." On appeal, the Appellate Assistant Commissioner and the Tribunal endorsed this view Hence, this reference at the instance of the assessee

The liability to sales tax arises under the charging Section 3 of the Act which lays down that "subject to the provisions of this Act every dealer shall for each assessment year pay a tax at the rate of ......" The quantification thereof is made under Section 7 of the Act which provides for determination of turnover and assessment of tax. Section 8-A (2) (B) of the Act gives the dealer the authority to recover, if he so likes an amount equal to the amount of sales tax payable from the person to whom the goods are sold by him. Section 3, the charging section however, fixed the liability of the dealer to pay the sales tax whether he has realised the tax from the customer or he chooses to pay it from his own pocket. The liability is finally and irrevocably fixed by Section 3 of the Act.

Rule 41 of the U. P. Sales Tax Rules (hereinafter referred to as the Rules) makes it obligatory on every dealer who is liable to pay tax to submit to the Sales Tax Officer a return of his gross turnover for the quarters ending 30th June, 30th September, 31sl December and March 31, respectively, in form 4. Under Sub-rule (2) the dealer is under an obligation to "deposit in the treasury the amount of the tax collected by him on the turnover shown in such return and shall submit the treasury challan with the return or submit with the return a cheque for the amount so calculated". If no return is submitted in respect of any quarter or the return is not accompanied by the requisite treasury challan, the Sales Tax Officer is empowered under Section 3 to make an assessment and to demand the sum payable. After the close of the assessment year, a final assessment under Rule 41 (5) has to be made. There cannot be any doubt that there was a liability fixed under the charging section on every item of sale unless exempted or the total turnover of the assessee fell below the minimum taxable limit. If there was a statutory liability, which undoubtedly there was, to pay the sales tax, then it is idle to contend that there was no such liability. The liability arose at the end of each quarter and certainly on the last date of the accounting year.

The Judicial Committee in the case of Wallace Brothers v. Commissioner of Income Tax Bombay (1948) 16 ITR 240: (AIR 1946 PC 118) held, ''the liability to tax arises by virtue of the charging section alone, and it arises not later than the close of the previous year, though quantification of the amount payable is postponed". The liability to sales tax, undoubtedly, existed and was known and ascertainable throughout the accounting year. In the circumstances the only question that arises is, whether such sales tax liability had become a contingent or an unascertainable liability merely because this Court had, as it turned out subsequently, erroneously taken the view that the said Validation Act (No. XV of 1958) was ultra vires. In the case of a statutory liability imposed by a charging section of the Act, it cannot be said that merely because notification or Amending Act or Validation Act has been declared to be ultra vires, the assessee is relieved from his liability to pay the sales tax.

(3.)IN Willoughby on the Constitution of the United States. Vol. I second edition, at page 10, it is stated, relying on a decision of the Court of West Virginia in Shephard v. Wheeling, 30 W Va 479:
"The Court does not annul or repeal the statute if it finds it in conflict with the Constitution. It simply refuses to; recognise it, and determines the rights of the parties just as if such statute had no application. The court may give its reasons for ignoring or disregarding the statute, but the decision affects the parties only and there is no judgment against the statute."

There are, however reproduced on the same page, observations by Mr. Justice Field in Norton v. Shelby County, (1885-86) 118 U. S. 425, wherein he held: "An unconstitutional Act is not a law, it confers no rights, it imposes no duties, it affords no protection, it creates no offence; it is, in legal contemplation, as inoperative as if it had never been passed". This, as pointed out by the learned author, is a proposition which is dependent on the law having been "declared unconstitutional by a competent court of last resort". It is, however, unnecessary for us to pursue this question any further. As already observed the Supreme Court, which is the Court of ultimate resort, in AIR 1961 SC 1534 (supra) has held the U. P. Sales Tax Validation Act (No. XV of 1958) to be intra vires and to have validated previous Acts, Ordinances and Notifications which had been declared invalid by this Court. IN these circumstances, it is not possible to say that the liability to sales tax did not exist during the relevant year nor that the liability was an unascertained one.

Admittedly, the assessee's system of accounting was mercantile in the past years and the Income Tax Officer has fairly and properly conceded that if the amount was an accrued and ascertained liability, it would be deductible as revenue expenditure. As to what is exactly the mercantile system of accountancy as distinguished from the cash or receipt basis was considered by the Supreme Court in Keshao Mills Ltd. v. Commissioner of Income Tax, Bombay (1953) 23 ITR 230: (AIR 1953 SC 187), and again in, Commissioner of Income Tax, Bombay (1953) pathy Naidu. (1964) 53 ITR 114 at p. 118: (AIR 1964 SC 1653 at p. 1656), and it was observed:

"It is common place that there are two principal methods of accounting for the income, profits and gains of a business; one is cash basis and the other, the mercantile basis. The latter system of accountancy "brings into credit what is due immediately it becomes legally due. and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed".

As already observed, the legal liability under the Act had been incurred, and, therefore under the mercantile system of accounting, the assessee was obliged to debit that expenditure in his accounts.