1972 (5) TMI 21 - HC - Income Tax

Assessee is a partnership firm which carried on wholesale business in cloth. During the previous year relevant to the assessment year 1958-59, it collected from its customers sales tax amounting to Rs. 4,46,944 and paid a sum of Rs. 3,16,899 to the sales tax department leaving a balance of Rs. 1,30,045. The Income-tax Officer treated the sum of Rs. 1,30,045 as the assessee s income for the assessment year in question and levied tax thereon. When a dealer collects sales tax from customers and paid only a portion of it to the Government whether the balance is an income assessable in his hands - Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,30,045 represents income of the assessee for the assessment year 1958-59 ?

Summary

Issues:
1. Whether the surplus amount in the sales tax account of a partnership firm constitutes income for the assessment year.
2. Whether the tax collected by a dealer is held on trust for the government under the U.P. Sales Tax Act.
3. Whether the sales tax realized by the assessee is a trading receipt or a revenue receipt.

Analysis:
1. The High Court was presented with a reference under section 256(1) of the Income-tax Act, 1961, regarding a partnership firm engaged in wholesale cloth business. The firm collected sales tax from customers, leaving a surplus amount in the sales tax account. The Income-tax Officer treated this surplus as income for the assessment year. However, the Appellate Assistant Commissioner and the Tribunal held that the surplus did not constitute revenue receipt, based on the nature of sales tax collection and payment process by the assessee.

2. The Tribunal found that under the U.P. Sales Tax Act, the liability to pay sales tax rests solely on the dealer, not the purchasers. Even though the dealer can recover tax from customers, it does not make them an agent of the government holding tax on trust. The court cited precedents emphasizing that tax collected by a dealer is part of the sale price, not a separate entity held in trust for the government. The court rejected the notion that the tax collected by the assessee was held on trust for the government, as the liability to pay tax was unequivocally on the dealer.

3. The court examined whether the sales tax realized by the assessee constituted a trading or revenue receipt. It was established that the tax charged by the dealer from customers is essentially part of the sale price, making it a revenue receipt. Any amount paid to the government as sales tax is deductible, and any surplus beyond the liability to pay tax would be deemed as income. The court referenced a Supreme Court decision to support the position that tax collected by the assessee is considered income, particularly when following the cash system of accounting. Consequently, the surplus in the sales tax account was treated as income for the assessee following the cash system of accounting.

In conclusion, the court answered the question in the affirmative, favoring the department and ruling that the surplus amount in the sales tax account constituted income for the assessment year.