1983 (10) TMI 13 - HC - Income Tax

Summary

Issues:
1. Whether the surplus amount in the sales tax account can be treated as the assessee's income and assessed to tax?
2. Whether the assessee is adopting the mercantile system of accounting for sales tax payments?

Analysis:
The judgment pertains to a reference petition under the Income Tax Act, 1961, where the Revenue sought a direction to the Tribunal regarding two questions. The first issue revolved around the treatment of a surplus amount of Rs. 14,138 in the sales tax account as the assessee's income for taxation purposes. The second issue questioned whether the assessee was following the mercantile system of accounting specifically concerning sales tax payments.

The assessee, a company engaged in the manufacture and sale of paper cones, was found to have an excess collection of Rs. 14,138 in sales tax over the payments made to the Sales Tax Department during the assessment year 1976-77. The Income Tax Officer (ITO) initially considered this excess as the assessee's income based on the cash system of accounting for sales tax. However, the Commissioner of Income-tax (Appeals) and the Appellate Assistant Commissioner held that the assessee maintained accounts on a mercantile basis, allowing the deduction of the entire sales tax liability, including the excess collection.

The Revenue challenged this decision before the Appellate Tribunal, arguing that the assessee followed a cash system for sales tax accounting. Nevertheless, the Tribunal upheld the mercantile accounting method used by the assessee, allowing the deduction of the entire sales tax collections towards the statutory liability in the year of account.

The High Court analyzed the conflicting views on the accounting method adopted by the assessee for sales tax collections and payments. While the ITO considered it as a cash system, the appellate authority and the Tribunal found it to be on a mercantile basis. The Court emphasized that if the assessee maintained accounts on a mercantile basis for sales tax, the accrued sales tax liability should be deducted, not just the actual payments made to the Sales Tax Department. As a result, the Court concluded that the case did not warrant a reference to the Tribunal for opinion and dismissed the tax case petition.

In conclusion, the judgment clarified the importance of the accounting method in determining the treatment of sales tax collections and upheld the decision that if the assessee follows a mercantile system, the entire sales tax accrued liability should be deducted for taxation purposes.