1975 (12) TMI 158 - HC - VAT and Sales Tax

Summary

Issues:
1. Whether the amount collected as sales tax by the assessee is deductible from its total income as a liability for the assessment year 1968-69?
2. Whether the sales tax refund received by the assessee is includible in its total income for the same assessment year?

Analysis:
Issue 1:
The assessee, a firm dealing in jaggery, collected sales tax amounting to Rs. 17,710 during the assessment year 1968-69. The firm also received a refund of Rs. 8,228 from the tax department. Initially, the assessing authority treated the entire amount of Rs. 25,938 as income of the firm, rejecting the firm's contention that the sales tax amount was a liability. However, the Appellate Tribunal, considering the mercantile system of accounting followed by the firm, allowed the appeal and deducted both the collected sales tax and the refund from the assessable income. The Tribunal held that the sales tax was a liability and did not form part of the income, as the amount was being held by the assessee as a trustee due to a pending dispute. The Tribunal's decision was based on previous cases and the principle that income accrues when the assessee acquires the right to receive it. The Tribunal concluded that the firm was following the mercantile system of accounting, and therefore, the sales tax amount was not includible in its total income for the assessment year 1968-69.

Issue 2:
Regarding the sales tax refund of Rs. 8,228, the assessee's counsel conceded that it should be included in the total income for the assessment year 1968-69 under section 41(1) of the Income-tax Act, 1961. The Court agreed with this concession and answered the second question in favor of the revenue. However, on the first question related to the sales tax amount collected, the revenue contended that it should be included in the total income for that year, relying on Supreme Court decisions emphasizing that the true nature of the receipt determines its treatment for tax purposes. The Court considered the principles of the mercantile system of accounting, which recognizes income when it becomes legally due, even if not yet received, and allows deductions based on liabilities incurred during the relevant accounting year. Citing relevant Supreme Court decisions, the Court held that the sales tax amount collected by the assessee, being accounted for under the mercantile system, was not includible in its total income for the assessment year 1968-69.

In conclusion, the Court answered the first question in the negative, ruling that the sales tax amount of Rs. 17,710 was not includible in the total income of the assessee for the relevant assessment year. The Court directed that if any deduction was made from the sales tax claim in the future, the balance would be included in the income during that year. The parties were directed to bear their own costs, and the reference was answered accordingly.