1973 (5) TMI 92 - HC - VAT and Sales Tax

Summary

Issues:
Interpretation of sales tax collection by a partnership-firm as income for assessment year 1958-59 under the Income-tax Act, 1961.

Analysis:
The judgment by the High Court of Allahabad pertains to a reference under section 256(1) of the Income-tax Act, 1961, involving a partnership-firm engaged in wholesale cloth business. The firm collected sales tax from customers amounting to Rs. 4,46,944 during the relevant assessment year but paid only Rs. 3,16,899 to the sales tax department, resulting in a surplus of Rs. 1,30,045. The Income-tax Officer treated this surplus as the firm's income for the year and levied tax on it. However, the Appellate Assistant Commissioner, relying on a previous tribunal decision, held that the surplus did not constitute revenue receipt and canceled the tax. The Income-tax department appealed to the Income-tax Appellate Tribunal, which dismissed the appeal but referred the question of whether the surplus represented income for the assessment year to the High Court for opinion.

The Tribunal found that under the U.P. Sales Tax Act, the dealer (assessee) was not obliged to collect sales tax from customers, and the tax collected was held in trust with the assessee until paid to the government. The High Court analyzed the provisions of the U.P. Sales Tax Act, emphasizing that the liability to pay tax rested solely on the dealer, not the purchasers. The court cited Supreme Court decisions to support the view that the tax collected by a dealer is not held on trust for the government, as the dealer is not an agent of the government in collecting tax. The court concluded that the surplus amount in the sales tax account did not constitute income for the firm.

The court further examined whether the sales tax collected by the assessee could be considered a trading receipt for income-tax purposes. It determined that the tax collected from customers was an integral part of the sale price of goods and, therefore, constituted a revenue receipt. However, any amount paid by the assessee to the government as sales tax would be deductible, and any surplus would be deemed as income. The court referenced the Supreme Court decision in Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax to support this interpretation.

Consequently, since the assessee firm followed the cash system of accounting and the surplus in the sales tax account was not paid to the government, the court held that the surplus of Rs. 1,30,045 should be treated as income for the assessment year. The court answered the reference question in favor of the department, allowing the surplus to be treated as income subject to tax.