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Issues: Interpretation of sales tax collection as trading receipt for taxation purposes.
The judgment delivered by the High Court of Madras involved the issue of whether sales tax collected by the assessee should be deemed a trading receipt liable for taxation. The assessee, a cotton yarn manufacturer, credited the sales tax account with a certain amount but debited it with a lesser sum remitted to the Sales Tax Department. The Income-tax Officer added the difference as income, based on the cash basis accounting for sales tax matters. The Appellate Assistant Commissioner upheld this decision, leading the assessee to appeal to the Tribunal, which then deleted the addition. The Department argued that the sales tax collected should be considered a trading receipt for taxation, citing legal precedents like Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542 and CIT v. E. A. E. T. Sundaraj [1975] 99 ITR 226 (Mad). These cases emphasized that the true nature of a receipt determines its taxability, regardless of how it is recorded in the accounts. However, the assessee contended that the sales tax collected was authorized to be retained as an interest-free loan by the State Government, repayable in installments over five years. Therefore, the amount credited in the books was considered a loan and not taxable income. The court agreed with the assessee, distinguishing the present case from the cited precedents, and held that the Tribunal was correct in deleting the addition made by the Income-tax Officer. As a result, the court ruled in favor of the assessee, answering the referred question in the affirmative and against the Department, with no costs awarded.
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