1969 (2) TMI 46 - HC - Income Tax

Assessee, a registered dealer under the Orissa Sales Tax Act - If a trader received money as trading receipt and employs that money as his own fund and is then called upon to refund the money, even then it is trading receipt of the trader but when he pays back that money the amounts refunded may be considered for deduction at the time when it is refunded.

Issues Involved:
1. Whether the sum of Rs. 7,14,398 was liable to be included in the total income of the assessee under the Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Inclusion of Sales Tax in Total Income:

The primary question was whether the sum of Rs. 7,14,398, realized as sales tax by the assessee, should be included in the total income for the assessment year 1953-54 under the Indian Income-tax Act, 1922. The assessee, a limited company, argued that the sales tax collected from purchasers did not form part of the sale price and was thus not a trading receipt. The Income-tax Officer, however, treated the sales tax as part of the sale price and included it in the total income.

2. Tribunal's Decision and Supreme Court's Influence:

The Tribunal, influenced by the Supreme Court's decision in the Orient Paper Mills case, concluded that the amounts realized as sales tax were not trading receipts but deposits meant for payment to the State Government or refund to purchasers. Consequently, the Tribunal allowed the appeal, leading to the Commissioner's application for reference to the High Court.

3. Legal Arguments and Precedents:

The department argued that sales tax is inherently a trading receipt, citing cases like Jay's the Jewellers v. Inland Revenue Commissioners and Tata Iron & Steel Co. v. State of Bihar. The principle established was that sales tax, when realized and used in business, forms part of the sale price and thus the trading receipt. The Supreme Court had held that sales tax included in the sale price constitutes part of the consideration paid by the purchaser and should be included in the turnover.

4. Treatment of Sales Tax by the Assessee:

The High Court examined whether the assessee mixed the sales tax with other business funds or treated it as a deposit for payment to the Government or refund to purchasers. The evidence indicated that the sales tax was not earmarked separately but was mixed with the sale price and used in the business. This treatment suggested that the sales tax was considered a trading receipt.

5. Tribunal's Findings and High Court's Evaluation:

The Tribunal's findings, based on the Orient Paper Mills case, suggested that the sales tax collected did not form part of the sale consideration. However, the High Court noted that the Tribunal did not find evidence that the sales tax was kept separate or not used in the business. The High Court emphasized that the nature of the receipt is determined at the time of receipt, and if mixed with business funds, it becomes a trading receipt.

6. Interpretation of Orissa Sales Tax Act and Related Provisions:

The High Court considered the provisions of the Orissa Sales Tax Act, particularly section 9B(3), which required sales tax collected to be deposited in the Government Treasury. The Supreme Court's interpretation in the Orient Paper Mills case was that if the dealer complied with this requirement, the tax would not be a trading receipt. However, the High Court found that the assessee did not comply with this requirement, thus treating the sales tax as part of the trading receipt.

7. Supreme Court's Decision in Abdul Quadar v. Sales Tax Officer:

The High Court referenced the Supreme Court's decision in Abdul Quadar v. Sales Tax Officer, which held that section 11(2) of the Mysore Sales Tax Act (similar to section 9B(3) of the Orissa Sales Tax Act) was ultra vires. This decision clarified that money collected as tax, if not authorized by law, could not be recovered by the State, but the dealer might still have to refund it to the purchaser.

8. Conclusion and Judgment:

The High Court concluded that the sales tax collected by the assessee was treated as a trading receipt and used in the business, thus forming part of the total income. The question was answered in the affirmative, and the assessee was ordered to pay the costs of the Commissioner.

Judgment:

The High Court, agreeing with the department's arguments and based on the evidence, held that the sum of Rs. 7,14,398 realized as sales tax was indeed part of the trading receipt and should be included in the total income of the assessee for the assessment year 1953-54. The question was answered in the affirmative, and the assessee was directed to pay the costs of the Commissioner.

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