2007 (10) TMI 254 - HC - Income Tax

Appellant collected some amount from its customers as contingent deposit - collection was in anticipation of the sales tax liability which was in dispute - Since there was a contingent liability fastened on the deposit the appellant did not treat the amount as trading receipts - AO rejected the contentions of the appellant action of AO is correct amount collected as contingent deposit was assessable as these are the trading receipts

Summary

Issues:
1. Whether the Tribunal was correct in treating the amount collected as contingent deposit as income of the appellant?

Analysis:
The judgment delivered by K. Raviraja Pandian J. addressed the issue of whether the Tribunal was justified in treating the amount collected as a contingent deposit as income of the appellant. The appellant, a non-banking company, collected a sum of Rs. 63,74,680 from customers as a contingent deposit during the relevant assessment year. This collection was in anticipation of a sales tax liability that was under dispute. The Assessing Officer added the contingent deposit to the taxable income of the appellant during the regular assessment under section 143(3). The appellant contended that due to the contingent liability attached to the deposit, it should not be considered as trading receipts. However, the Assessing Officer disagreed and taxed a sum of Rs. 49,83,021 after deducting a previously taxed amount of Rs. 13,91,839.

The Commissioner of Income-tax (Appeals) allowed the appeal, stating that the contingent deposit could not be treated as a trading receipt liability for taxation in the relevant year. Subsequently, the Revenue appealed to the Income-tax Appellate Tribunal, which ruled in favor of the Revenue. The appellant then approached the High Court by framing the substantial question of law mentioned earlier. The Division Bench of the High Court referred to previous judgments, including the case of CIT v. Southern Explosives Co., where it was held that collections made for statutory liabilities, such as sales tax, constitute trading receipts. The court emphasized that labeling a portion of the amount as a deposit does not alter its character as a trading receipt. The court further elaborated that even if the entire amount collected was paid towards sales tax, the appellant could still seek a refund if the tax was levied at a higher rate.

Based on the legal principles established in previous judgments and after considering the reasoning provided by the Division Bench, the High Court dismissed the appeal and ruled in favor of the Revenue. The court concluded that the amount collected for sales tax and held in deposit constituted a revenue receipt for the appellant. The judgment highlighted that the appellant's decision to label a portion of the collections as a deposit did not change the nature of the amount as part of its income. Therefore, the High Court upheld the Tribunal's decision to treat the contingent deposit amount as income, in line with the legal precedents and principles discussed in the judgment.