1988 (11) TMI 38 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Central sales tax collected by the assessee forms part of the trading receipt.
2. Whether the assessee can claim deduction of the sales tax out of the trading receipts upon payment or when the liability to pay arises.
3. The validity of notices issued u/s 154/155 and 147/148 of the Income-tax Act, 1961.

Summary:

Issue 1: Central Sales Tax as Trading Receipt
The court confirmed that the Central sales tax collected by the assessee forms part of the trading receipt within the meaning of the Income-tax Act. This applies regardless of whether the sales tax is separately added or included in the sale price.

Issue 2: Deduction of Sales Tax in Mercantile System
The court addressed the question of when an assessee following the mercantile system of accounting can claim a deduction for sales tax. It referred to the Supreme Court's decision in Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363, which held that the liability to pay sales tax arises the moment sales are made, and thus, the assessee is entitled to deduct the liability from profits even if the tax has not been paid. The court clarified that the decision in Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542 did not change this legal position, as it dealt with a different issue regarding the status of an auctioneer under the Bengal Finance (Sales Tax) Act, 1941.

Issue 3: Validity of Notices u/s 154/155 and 147/148
The court found that the later decision of the Supreme Court in Chowringhee Sales Bureau's case did not alter the legal position established in Kedarnath's case. Therefore, the notices issued to the assessee for rectification or reopening the assessment were deemed without jurisdiction. The court emphasized that the original assessments, which allowed the deduction of sales tax based on the accrual of liability, were correctly framed. Consequently, the notices issued u/s 154/155 and 147/148 of the Act were declared illegal and quashed.

Conclusion:
The court set aside the decision of the single judge, allowed the writ petitions, and declared the notices issued u/s 154/155 and 147/148 of the Income-tax Act as illegal. The assessee was awarded costs quantified at Rs. 500 in each case.