1995 (2) TMI 101 - AT - Income Tax

Summary

Issues Involved:
1. Liability for turnover tax under section 5(2A) of the Kerala General Sales-tax Act.
2. Application of section 43B of the Income-tax Act, 1961.
3. Validity of the addition of Rs. 3,40,000 to the assessee's income.
4. Existence and verification of the understanding between the assessee and its principals.
5. Compliance with the directions of the CIT (Appeals) in the reassessment process.

Issue-wise Detailed Analysis:

1. Liability for Turnover Tax under Section 5(2A) of the Kerala General Sales-tax Act:
The assessee, a commission agent, was initially held liable for turnover tax under section 5(2A) of the Kerala General Sales-tax Act, which mandates a turnover tax at the rate of 1/2% on the total turnover for dealers with a turnover exceeding Rs. 25 lakhs. However, the assessee argued for exemption based on Notification No. 1341/87, which exempted dealers whose aggregate commission and expenses were less than 1 1/2%. The Sales-tax Department initially rejected the claim but later accepted it for the assessment years 1989-90, 1990-91, and 1991-92, recognizing that the assessee had no purchase turnover for spices like pepper and dry ginger.

2. Application of Section 43B of the Income-tax Act, 1961:
The Assessing Officer invoked section 43B, which disallows deductions for certain expenses unless they are paid within the previous year. The officer noted that the amount collected by the assessee was not paid as turnover tax within the previous year but was collected as commission and incidental charges. However, the Tribunal found that these collections were made under a specific understanding with the principals and were not in the nature of tax collections. Hence, section 43B was not applicable.

3. Validity of the Addition of Rs. 3,40,000 to the Assessee's Income:
The addition of Rs. 3,40,000 was made on the grounds that the amount collected was not paid as turnover tax and was considered income. The Tribunal held that the collections were made under an understanding with the principals and were not trading receipts or tax collections. Therefore, the addition was invalid.

4. Existence and Verification of the Understanding Between the Assessee and its Principals:
The CIT (Appeals) directed verification of the understanding between the assessee and its principals. The Assessing Officer examined two principals who confirmed the understanding. The Tribunal found that the understanding was genuine and the collections were to be refunded to the principals if the assessee was not liable for turnover tax. The Tribunal concluded that the collections were not income but amounts withheld under a fiduciary relationship.

5. Compliance with the Directions of the CIT (Appeals) in the Reassessment Process:
The CIT (Appeals) had directed the Assessing Officer to verify the understanding with the principals and the liability for turnover tax. The Tribunal found that the Assessing Officer exceeded these directions by considering irrelevant factors such as the principals' treatment of the collections as expenditure. The Tribunal emphasized that the authorities must adhere to the specific directions in the appellate order and set aside the CIT (Appeals) order for not complying with these directions.

Conclusion:
The Tribunal allowed the appeal, holding that the collections made by the assessee were not income but amounts withheld under a specific understanding with the principals. The collections were not in the nature of tax and section 43B was not applicable. The addition of Rs. 3,40,000 was deleted, and the reassessment process was found to have exceeded the directions of the CIT (Appeals).