1978 (4) TMI 64 - HC - Income Tax

Summary

Issues:
- Interpretation of whether sales tax receipts are part of the sale price for income tax assessment.
- Allowability of deduction for sales tax collected by the assessee.
- Application of mercantile system of accounting in determining tax liability.

Interpretation of Sales Tax Receipts:
The Income-tax Officer initially treated the closing balance of sales tax account as income of the assessee, considering sales tax receipts as part of the sale price. The Appellate Assistant Commissioner, however, allowed a deduction for the sales tax actually paid during the year. The Tribunal deliberated on whether the sales tax realized formed part of the sale price and concluded that the liability for payment of sales tax was embedded in the receipts, entitling the assessee to a deduction.

Allowability of Deduction for Sales Tax:
The Accountant Member of the Tribunal emphasized that the assessee had no beneficial interest in the sales tax amounts collected, treating them as deposits. Conversely, the Judicial Member contended that the deduction claimed for sales tax collected was disallowable due to the corresponding liability under sales tax law. The Tribunal ultimately found that the assessee was under a legal obligation to realize and remit sales tax, allowing the deduction for the amount collected.

Mercantile System of Accounting:
Citing precedents like *Kedarnath Jute Mfg. Co. Ltd. v. CIT*, the High Court reiterated that under the mercantile system of accounting, the liability to pay sales tax accrues when sales subject to taxation occur. As the assessee maintained mercantile accounts and had a liability to pay the sales tax collected, the deduction for the amount collected was permissible. The Court affirmed that although the sales tax amount initially constituted trading receipts, it had to be allowed as a deduction in the final assessment.

Conclusion:
The High Court answered the reference question affirmatively in favor of the assessee, emphasizing the entitlement to claim a deduction for the sales tax collected. The judgment highlighted the application of the mercantile system of accounting in recognizing the accrued tax liability, ultimately allowing the deduction for the sales tax amount collected. Both judges concurred with the decision, and no costs were awarded in the case.