2006 (2) TMI 104 - HC - Income Tax

Excess sales tax collected and retained as a deposit due to a dispute - accural of income - (a) Whether Tribunal was right in holding that excess sales tax collected and retained as a deposit due to a dispute cannot be taxed in the hands of the assessee? (b) Whether the excess sales tax collected cannot be treated as a trading receipt of the assessee in view of the fact that subsequently the Supreme Court had directed that it should be either refunded to the customers or paid over to a charitable trust? - It is a settled law that as long as the receipt of the amount by the assessee was clearly associated with a liability to refund the amount such receipt of amount would not be characterized as an income and therefore the same cannot be taxed - In the instant case the Supreme Court has more clearly held that the sum proposed to be taxed does not belong to the assessee at all and the same was directed to be refunded to the customers and any left over excess has to be paid to the charitable trust therefore we do not see any merit to entertain the appeals

Summary

Issues:
1. Whether excess sales tax collected and retained as a deposit due to a dispute can be taxed in the hands of the assessee?
2. Whether excess sales tax collected can be treated as a trading receipt of the assessee, considering the subsequent directive from the Supreme Court?

Analysis:
The High Court of Madras addressed the issue of excess sales tax collected and retained by an assessee due to a dispute. The assessee, a company engaged in the manufacture and sale of ayurvedic medicines, had collected sales tax at 30%, retaining it as a deposit amidst a dispute over the applicable tax rate. The Supreme Court later ruled that the products were taxable at 8%, directing the excess amount to be refunded to customers or donated to a charitable trust. The Assessing Officer reassessed the amount collected and taxed it, leading to appeals by the assessee. The Commissioner of Income-tax (Appeals) allowed the appeals, emphasizing that the reassessment lacked jurisdiction and that the sales tax collected was to be refunded or donated as per the Supreme Court's directive.

The Commissioner concluded that the inclusion of the sales tax collection in the assessment was not sustainable in law for the relevant years due to jurisdictional issues. Additionally, considering the Supreme Court's directive, the Commissioner held that the sales tax collected could not be treated as a trading receipt but as a fiscal transaction. The Tribunal upheld the Commissioner's order, prompting the Revenue to appeal, raising substantial questions of law. The High Court highlighted that when an amount is associated with a liability to refund, it cannot be characterized as income, citing legal precedent.

In this case, the High Court found that the amount in question did not belong to the assessee, as per the Supreme Court's direction to refund it to customers or transfer it to a charitable trust. Therefore, the Court dismissed the appeals, emphasizing that the sum in question was not income and should not be taxed. The appeals were deemed meritless, and the related petitions were also dismissed.