2006 (10) TMI 142 - HC - Income Tax

Cessation of liability - Amounts collected as sales tax and Central sales tax were later found to be in excess of the amounts payable - assessee transferred the said amounts to the suspense account but did not credit the same to the profit and loss account - hold that the amount collected towards sales tax which remained unpaid and unpayable to the Department which was also not refunded to the customers was liable to be treated as income in the hands of the assessee under section 41(1) of the Act. As and when the amount is refunded to the customers the same may be claimed as deduction by the assessee

Summary

Issues:
Interpretation of section 41(1) of the Income-tax Act, 1961 regarding treatment of outstanding balance in sales tax account as income.

Analysis:
1. The case involved a question of law referred by the Income-tax Appellate Tribunal regarding the treatment of the balance outstanding in the sales tax account after the payment of sales tax assessed for the assessment year 1981-82 under section 41(1) of the Income-tax Act, 1961.

2. The assessee, engaged in the sale of vanaspati, collected sales tax and Central sales tax during the relevant years but later found the collected amounts to be in excess of the actual payable amounts. The excess amount was transferred to the suspense account without crediting it to the profit and loss account. The Commissioner of Income-tax initiated proceedings under section 263, treating the excess amount as income of the assessee, resulting in an enhancement of the assessee's income.

3. The Tribunal, however, accepted the assessee's claim, ruling that section 41(1) of the Act applied only to loss, expenditure, or trading liability, not to sales tax liability. The mere cessation of liability during the previous year, not in respect of any allowance or deduction, could not be considered as income under section 41(1) of the Act.

4. The Court heard arguments from the Revenue's counsel.

5. Referring to various precedents, including decisions by the Supreme Court and High Courts, the Court emphasized that amounts collected as sales tax, if not returned to the owner or deposited with the Department, should be treated as deemed income of the assessee. The Court highlighted that the treatment as income was not dependent on whether the amount was shown as trading receipt in the accounts books.

6. The Court further discussed a related issue in a previous case, emphasizing that the mere fact that an amount was not transferred to the profit and loss account did not prevent it from being treated as income. The Court reiterated that if no liability accrued during the year, the amount had to be treated as income, although any future expenditure on that account could be considered as permissible expenditure.

7. Based on the above legal principles and precedents, the Court concluded that the amount collected towards sales tax, which remained unpaid and unpayable to the Department without being refunded to customers, should be treated as income under section 41(1) of the Act. The Court also clarified that if the amount is later refunded to customers, the assessee could claim it as a deduction.

8. Consequently, the Court answered the referred question by affirming that the outstanding amount in the sales tax account should be treated as income.

9. The reference was disposed of accordingly.