1975 (12) TMI 59 - HC - Income Tax

Summary

Issues involved: Assessment of sales-tax amount collected and refund received by a firm for the assessment year 1968-69.

The judgment of the court addressed the contention of the firm that the sales-tax amount collected and refund received should not be treated as income. The firm collected sales-tax amounting to Rs. 17,710 and received a refund of Rs. 8,228. The assessing authority treated the entire amount of Rs. 25,938 as income of the firm. The Appellate Assistant Commissioner also held that the firm could not claim anything towards sales-tax payment as it had been following cash basis for accounting. However, the Tribunal allowed the firm's appeal and deducted both amounts from the assessable income, stating that sales-tax was a liability and did not form part of the income. The Tribunal noted that the firm was holding the amount as a trustee due to a pending dispute. The questions referred to the court were whether the sales-tax amount collected was deductible as a liability and whether the sales-tax refund was includible in the total income for the assessment year 1968-69.

The court considered the Supreme Court decisions in Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax and Sinclair Murray & Co. P. Ltd. v. Commissioner of Income-tax, which held that sales-tax collections constitute trading receipts and must be included in total income. The court discussed the difference between cash basis and mercantile basis of accounting, emphasizing that under the mercantile system, income accrues when the right to receive it arises, regardless of actual payment. Citing Commissioner of Income-tax v. Gajapathy Naidu and Kedernath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax, the court affirmed that under the mercantile system, liabilities are deductible in the year they arise, even if not yet paid. The court found that the firm followed the mercantile system, as confirmed by the assessment order, and therefore, the sales-tax amount collected was not includible in the total income for the assessment year 1968-69.

The court referred to the decision of the Allahabad High Court in Commissioner of Income-tax v. Poonam Chand Trilok Chand, where it was held that under the mercantile system, purchase tax collected is an allowable deduction. Based on the principles established by the Supreme Court and considering the firm's accounting method, the court concluded that the sales-tax amount collected should not be included in the total income for the assessment year 1968-69. The court directed the parties to bear their own costs in the matter.