1980 (3) TMI 75 - HC - Income Tax

Summary

Issues Involved:
1. Justification of the addition of Rs. 49,768 to the income of the assessee.
2. Allowance of the amount as business expenditure.
3. Liability of the assessee to pay purchase tax on arhar dal under Section 3D of the U.P. Sales Tax Act.
4. Applicability of Supreme Court decisions regarding sales tax liability and accounting methods.

Detailed Analysis:

1. Justification of the Addition of Rs. 49,768 to the Income of the Assessee:
The Income-tax Appellate Tribunal included Rs. 49,768 in the income of the assessee, which was collected as purchase tax but not deposited with the State Government. The Tribunal held that the tax collected by the assessee constituted his trading receipt. The court upheld this view, stating that sales tax collections form part of the trading receipt and, thus, part of the income of the assessee.

2. Allowance of the Amount as Business Expenditure:
The Tribunal held that the deduction for the purchase tax liability should be allowed in the year in which it is paid, not in the year it was debited in the books. The court referred to Supreme Court decisions in Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 and Sinclair Murray and Co. P. Ltd. v. CIT [1974] 97 ITR 615, which supported this view. The court found no conflict between these cases and Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363, which dealt with the mercantile system of accounting. The court concluded that the liability must be a legal one, not hypothetical, and since no liability existed in the relevant year, the Tribunal was justified in adding the amount to the income.

3. Liability of the Assessee to Pay Purchase Tax on Arhar Dal under Section 3D of the U.P. Sales Tax Act:
The court examined the liability under Section 3D of the U.P. Sales Tax Act. Initially, the assessee was not liable to pay purchase tax on arhar dal as per the decision in Tilok Chand Prasan Kumar v. STO [1970] 25 STC 118 (All). However, an amendment in 1970 changed this, making the assessee liable. Subsequent amendments in 1974 and 1976 reverted the position, making the assessee not liable for the purchase tax for the financial year 1968-69. Despite this, an assessment order in 1973 created a liability, which the assessee paid. The court held that the liability created by this order should be considered as arising on the date of the order, not the year the entries were made.

4. Applicability of Supreme Court Decisions Regarding Sales Tax Liability and Accounting Methods:
The court discussed the applicability of Supreme Court decisions. It emphasized that in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363, the Supreme Court held that the liability for sales tax is independent of the assessment order and flows from the statute. The court found that the Tribunal erred in not allowing the deduction based on the mercantile system of accounting, as the liability did not exist in the relevant year. The court concluded that the Tribunal was justified in adding the amount to the income, as the liability did not accrue in the relevant year.

Conclusion:
The court answered the question in the affirmative, favoring the department and against the assessee. The addition of Rs. 49,768 to the income of the assessee was justified, and the amount could not be allowed as business expenditure in the relevant year. The court upheld the Tribunal's decision, emphasizing the legal principles established by the Supreme Court regarding sales tax liability and accounting methods. No order as to costs was made.