1991 (2) TMI 180 - AT - Income Tax

Assessment Order, Business Income, Custom Duty, Orders Prejudicial To Interests, Sales Tax, Trading Receipt

Summary

Issues Involved:

1. Addition of amounts in "Sales Tax Suspense Account."
2. Addition of amounts in "Collector of Customs (Party) Account."
3. Application of Section 43B of the Income-tax Act, 1961.
4. Characterization of deposits as trading receipts.
5. Validity of CIT's order under Section 263 of the Income-tax Act.

Detailed Analysis:

1. Addition of Amounts in "Sales Tax Suspense Account":

The Commissioner of Income-tax (CIT) directed the Assessing Officer to add Rs. 50,950 and Rs. 1,74,699 in the assessments for the years 1984-85 and 1985-86, respectively, representing credits in the "Sales Tax Suspense Account." The CIT held that the Assessing Officer failed to consider these entries, making the assessments erroneous and prejudicial to the interests of the revenue. The CIT reasoned that the amounts collected as sales tax were to be treated as sales tax collection and included in the trading account, thereby swelling the gross turnover. The CIT concluded that the Assessing Officer should have applied Section 43B of the Income-tax Act, which mandates that such liabilities must be paid to be deductible.

2. Addition of Amounts in "Collector of Customs (Party) Account":

The CIT also directed the addition of Rs. 45,45,744 credited in the "Collector of Customs (Party) Account" for the assessment year 1985-86. The CIT observed that the assessee, acting as an importer, was liable to pay customs duty, which should have been shown as a receipt of customs duty collected and reflected in the trading account. The CIT argued that the amount collected for customs duty was to be paid to the Customs authorities and thus fell within the scope of "any sum payable by the assessee by way of tax or dues under any law for the time being in force." The CIT concluded that the Assessing Officer erred by not considering this in the assessment.

3. Application of Section 43B of the Income-tax Act:

The CIT's order emphasized the application of Section 43B, which requires that certain statutory liabilities, including taxes, must be paid to be deductible. The CIT argued that the amounts collected as sales tax and customs duty were statutory liabilities that had not been discharged by the end of the relevant accounting period, thus attracting the provisions of Section 43B.

4. Characterization of Deposits as Trading Receipts:

The assessee contended that the amounts in dispute were taken under valid contracts and were refundable to purchasers, thus not constituting trading receipts. The assessee argued that the "Sales Tax Suspense Account" represented deposits taken from customers who were registered dealers but could not furnish the declaration forms at the time of sale. These deposits were refundable upon furnishing the declaration forms. Similarly, for the "Collector of Customs (Party) Account," the assessee acted as a handling agent, importing goods for its customers and collecting deposits to furnish bank guarantees for disputed customs duties. The assessee argued that these deposits were held under a fiduciary capacity and were not trading receipts.

5. Validity of CIT's Order under Section 263 of the Income-tax Act:

The Tribunal examined whether the CIT's order under Section 263, which allows revision of erroneous and prejudicial assessments, was valid. The Tribunal noted that the CIT had decided the matter on merits, holding the deposits as taxable income. The Tribunal considered the legal principles and relevant case law, including the Supreme Court's decisions in Chowringhee Sales Bureau (P.) Ltd. v. CIT and Sinclair Murray & Co. (P.) Ltd., which held that sales tax collected by a dealer is part of trading receipts. However, the Tribunal distinguished these cases based on the facts presented by the assessee, where the deposits were collected under specific contractual obligations and were refundable.

Conclusion:

The Tribunal concluded that the deposits in the "Sales Tax Suspense Account" and "Collector of Customs (Party) Account" were not part of trading receipts and thus not taxable in the assessee's hands. The Tribunal vacated the CIT's order passed under Section 263, allowing the assessee's appeals. The Tribunal emphasized that the deposits were collected under legal obligations and held in a fiduciary capacity, and the revenue had not challenged the validity of the arrangements made by the assessee with its customers.