1971 (8) TMI 44 - HC - Income Tax

Sales tax debited by the assessee to the purchase account - sales-tax paid by the assessee to the Government is allowable as expenditure incurred wholly and exclusively for the purpose of business under section 10(2)(xv) of 1922

Issues Involved:
1. Is sales tax an integral component of the sale price?
2. Is sales tax a trading receipt?
3. Is the character of sales tax as a trading receipt altered if it is shown separately in the transaction of sale?
4. Does the liability of the assessee to pay sales tax to the State or to refund money to the purchasers affect its initial and intrinsic character as a trading receipt?
5. Is sales tax deductible as business expenditure from the total income to determine the taxable income when it has not been paid to the State or refunded to the purchasers in the accounting year?

Detailed Analysis:

Point No. (i): Is sales tax an integral component of the sale price?

The court examined the definitions of "sale price," "turnover," and "taxable turnover" as they stood at the relevant time. It was concluded that sales tax is included within the sale price. This conclusion was supported by statutory definitions and authoritative judgments, including Tata Iron & Steel Co. Ltd. v. State of Bihar and George Oakes (Private) Ltd. v. State of Madras, which affirmed that sales tax is part of the sale price and is included in the gross turnover to determine the taxable turnover.

Point No. (ii): Is sales tax a trading receipt?

The court determined that sales tax is a trading receipt because it is received by the assessee in the course of business or trade. The court distinguished this case from others, such as Morley (Inspector of Taxes) v. Tattersall and Bijli Cotton Mills (P.) Ltd. v. Commissioner of Income-tax, where the amounts received were held in trust or were not part of the business transactions. The court concluded that sales tax, being an integral part of the sale price, constitutes a trading receipt and is directly connected with the sale transaction.

Point No. (iii): Is the character of sales tax as a trading receipt altered if it is shown separately in the transaction of sale?

The court held that the character of sales tax as a trading receipt is not altered merely because it is shown separately in the course of the transaction of sale. Whether the sale price charged is a lump sum or the sales tax is separately noted is irrelevant; it remains a trading receipt.

Point No. (iv): Does the liability of the assessee to pay sales tax to the State or to refund money to the purchasers affect its initial and intrinsic character as a trading receipt?

The court referred to Chhatrasinhji Kesarisinhji Thakore v. Commissioner of Income-tax, stating that the liability of the assessee to pay sales tax to the State or to refund the money to the purchaser does not affect the intrinsic character of the receipt as a trading receipt.

Point No. (v): Is sales tax deductible as business expenditure from the total income to determine the taxable income when it has not been paid to the State or refunded to the purchasers in the accounting year?

The court noted that the answer to this point depends on the system of accounting maintained by the assessee. Since the assessee did not maintain regular accounts and did not claim to follow the mercantile system, the case was examined on the cash basis system. Under this system, sales tax paid in the accounting year is deductible as business expenditure. However, since no sales tax was paid during the accounting year in this case, the amount of Rs. 18,592 is not deductible.

Conclusion:

(i) Sales tax constitutes an integral part of the sale price.
(ii) Sales tax is a trading receipt.
(iii) The fact that the assessee had ultimate liability to pay sales tax to the State or to refund the same to the purchasers does not alter its true character of being a trading receipt.
(iv) On the cash basis system, sales tax is deductible from the total income as being laid out or expended wholly and exclusively for the purpose of such business if paid during the accounting year.
(v) The accounts of the assessee, which were not properly maintained, were on a cash basis system, and as no sales tax was paid during the accounting year, the same is not deductible from the total income.

The court concluded that the sum of Rs. 18,592 collected by way of sales tax should be included in the total income of the assessee and is not deductible for determining the taxable income in the accounting year. The reference was accepted with costs, and the Tribunal's view was found to be contrary to law.

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