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Issues Involved:
1. Whether the collection as and by way of sales tax was a trading receipt of the assessee liable to tax. Detailed Analysis: Issue 1: Whether the collection as and by way of sales tax was a trading receipt of the assessee liable to tax. The Income-tax Appellate Tribunal referred the question under section 66(1) of the Indian Income-tax Act. The assessee, a commission agent in rice, collected sums towards sales tax for the assessment years 1958-59 and 1959-60, fearing liability due to the imposition of central sales tax on inter-State trading from July 1, 1957. These collections were credited to a "deposit account" and not treated as part of the sale proceeds. The invoices indicated these amounts as deposits. The assessee contended that the amounts collected as sales tax were held in trust for the customers and would be refunded if not demanded by the government. The Income-tax Officer rejected this contention, treating the collections as trading receipts taxable as income. He stated that if the amounts were later paid to the government or refunded to customers, they would be allowed as deductions in the relevant year. The assessee's appeals to higher authorities were unsuccessful. The assessee's advocate argued that the amounts were deposits returnable if the Central Government did not levy the tax, akin to moneys borrowed from customers. Several precedents were cited to support this argument, including Morley (Inspector of Taxes) v. Tattersall, K.M.S. Lakshmanier & Sons v. Commissioner of Income-tax, and Punjab Distilling Industries Ltd. v. Commissioner of Income-tax. An examination of these cases established that if the amount received is part of the price or each transaction, it is deemed a trading receipt. If it is for the due performance of an obligation or service, it is akin to borrowed money. The character of the transaction is determined at the time of receipt, not by subsequent operations. In Morley v. Tattersall, the Court of Appeal held that unclaimed balances of purchase moneys were liabilities and could not be turned into trading receipts by subsequent operations. Similarly, in K.M.S. Lakshmanier & Sons, the Supreme Court distinguished between advance payments as part of the price and security deposits, treating the former as trading receipts. In Punjab Distilling Industries Ltd., additional amounts described as security deposits were considered part of the sale price and thus trading receipts. The Supreme Court reaffirmed this principle, stating that the amounts were trading receipts if they had a profit-making character and were part of each transaction. A review of the case law indicated that deposits with a profit-making character are trading receipts. In this case, the deposits were equal to the sales tax leviable on inter-State trading and formed part of the price charged. The trader's disbursement of the amount is immaterial, as the price includes all amounts paid by the customer. Even if returnable, the amounts are part of the price and hence trading receipts. The court concluded that the income-tax authorities were correct in treating these amounts as trading receipts. The reference was answered in the affirmative, with costs awarded to the department. Question answered in the affirmative.
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