2018 (4) TMI 1269 - AT - Income Tax

Addition to excess collection of sales tax - accrual of income - Held that - What was collected by the assessee was already deposited with the Sales Tax Department and there was confusion regarding the sales tax rate. The assessee collected 4% instead of 2%. The entire amount collected was deposited with the Sales Tax Department, therefore, nothing retained by the assessee. Hence, treating the same as trading receipt does not arise, therefore, the CIT(Appeals) has rightly deleted the addition. Additional sales tax collected by the assessee - assessment of income - Held that - CIT(Appeals) correctly found that the excess sales tax at the rate of 4% was collected by the assessee and the same was remitted to the Government account. The CIT(Appeals) also found that the sales tax collected and paid was not reflected in the Profit & Loss account. In those circumstances, this Tribunal is of the considered opinion that the excess sales tax collected and remitted to the Government account cannot be construed as income of the assessee. Disallowance u/s 40A(2)(b) - whether the standard of service maintained by the assessee is on par with the market rate which is otherwise available in the market? - Held that - It is necessary for the Assessing Officer and the CIT(Appeals) to ascertain from market what is the reasonable rate that could have been paid by the assessee for similar service to the third parties. In the absence of any such examination, this Tribunal is of the considered opinion that the matter needs to be re-examined. Accordingly, orders of both the authorities below are set aside and the disallowance made by the Assessing Officer under Section 40A(2)(b) of the Act is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter and bring on record the market rate of similar laundry service provided in the locality and thereafter decide the issue afresh

Summary

Issues involved:
1. Addition of excess collection of sales tax
2. Additional sales tax collected by the assessee
3. Disallowance under Section 40A(2)(b) of the Income-tax Act, 1961

Analysis:

1. Addition of excess collection of sales tax:
The first issue pertains to the addition of ?27,00,000 by the Assessing Officer due to the excess collection of sales tax by the assessee. The Revenue contended that the assessee collected 4% sales tax instead of the expected 2%, leading to the addition. However, the assessee argued that the entire amount collected was deposited with the Sales Tax Department, and there was confusion regarding the tax rate. The ITAT Chennai held that since the collected amount was deposited with the Sales Tax Department and no amount was retained by the assessee, treating it as a trading receipt was unwarranted. Thus, the CIT(Appeals) decision to delete the addition was upheld.

2. Additional sales tax collected by the assessee:
The second issue involves the additional sales tax collected by the assessee amounting to ?28,37,259. The Revenue claimed that a portion of this amount was refundable and another portion was adjusted towards penalty, disallowing these as deductions. Conversely, the assessee argued that the excess amount collected was remitted to the Government account and should not be considered as income. The ITAT Chennai agreed with the CIT(Appeals) that the excess sales tax collected and remitted to the Government account cannot be treated as income, thereby confirming the decision.

3. Disallowance under Section 40A(2)(b) of the Income-tax Act, 1961:
The final issue concerns the disallowance made by the Assessing Officer under Section 40A(2)(b) of the Income-tax Act, 1961. The disallowance was related to payments made to a sister concern for laundry services, deemed excessive compared to market rates. The CIT(Appeals) allowed the claim citing past approvals by the Assessing Officer. However, the ITAT Chennai found the lack of discussion on the reasonableness of the payments and the market rates. Consequently, the matter was remitted back to the Assessing Officer for re-examination to determine the market rate for similar services, emphasizing the need for a detailed assessment.

In conclusion, the Revenue's appeal for the assessment year 2005-06 was partly allowed for statistical purposes, while both the Revenue and assessee's appeals for the assessment year 2007-08 were allowed for statistical purposes.