1982 (7) TMI 36 - HC - Income Tax

Summary

Issues:
Whether the sum of sales tax collected but not paid by the assessee can be brought to tax as income for the assessment year 1968-69.

Analysis:
The case involved a reference under section 256(1) of the Income Tax Act, 1961, regarding the taxation of Rs. 9,987, being the amount of sales tax collected by the assessee from customers but not paid. The assessee, a firm in the kirana business, had shown this amount as a liability in its balance sheet. The Income Tax Officer (ITO) added this amount to the income of the assessee, considering it as income. However, the Appellate Assistant Commissioner (AAC) allowed a deduction for the amount, stating that the assessee was bound to pay the sales tax to the government and failure to do so entailed a penalty. The Income Tax Appellate Tribunal also dismissed the Department's appeal. The key issue was whether the assessee should be taxed for the amount not paid as sales tax.

The court referred to the decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT, where it was held that the obligation to pay sales tax arises when sales subject to tax are made, regardless of assessment proceedings. The court noted that the liability to pay the amount to the government arose in the relevant previous year, even though it was not paid during that year. The court highlighted that the ITO's order suggested the assessee was following the mercantile system of accounting, as the amount was shown as a liability in the balance sheet. The court emphasized that the burden was on the Department to prove the amount was taxable and the accounting system followed by the assessee.

The court distinguished the case cited by the Revenue, Deep Chand Shyam Sunder v. CIT, where the liability arose due to subsequent amendments, unlike the present case where the liability existed during the relevant previous year. The court also rejected reliance on another case where the assessee disputed the liability till the Tribunal's decision. Ultimately, the court held in favor of the assessee, stating that the amount should not be taxed as income for the assessment year 1968-69. The court directed the Commissioner to pay the costs of the reference.

In conclusion, the court ruled that the amount of sales tax collected but not paid by the assessee should not be brought to tax as income for the assessment year 1968-69, based on the principles of the obligation to pay tax when sales subject to tax are made and the accounting system followed by the assessee.