2006 (2) TMI 127 - HC - Income Tax

Collections of contingency deposit - amounts collected by the assessee were amounts which were meant to be utilised by the assessee for meeting its tax liability. Even if the assessee paid over the entire amount received by it as deposit towards sales tax to the State Government, it would still have been open to the assessee to seek refund if the assessee wished to claim such refund on the ground that the tax had been levied at a higher rate than the rate permissible. The fact that the assessee had chosen to adopt the device of labelling a part of the amounts collected towards its sales tax liability as contingency deposit , could not make a difference. The amount formed part of the assessee s income.- Tribunal was not justified in deleting the addition made in respect of collections of contingency deposit

Summary

Issues:
1. Whether the Appellate Tribunal was right in law in deleting the addition of Rs. 1,57,133 from the business income of the assessee?

Analysis:
The judgment pertains to an appeal against the order of the Income-tax Appellate Tribunal regarding the addition of Rs. 1,57,133 collected as contingency deposits from parties towards sales tax liability. The Assessing Officer treated the amount as income, not allowing it as expenses under section 43B. The Appellate Commissioner upheld this decision, citing a Supreme Court case and emphasizing that the nature of the collection remains unchanged even if labeled as a "contingency deposit." However, the Appellate Tribunal later deleted the addition, leading to the Revenue's appeal.

The court emphasized that the true nature of a receipt determines its treatment, not the accounting entry. Referring to precedents, it was noted that if the amount collected is eventually paid to the government or refunded to purchasers, the assessee can claim a deduction at that point. The court also discussed a previous case where the character of a receipt was analyzed based on the reasons for collection and the liability it aimed to meet. In cases of statutory liabilities, such collections are considered trading receipts, irrespective of labels like "deposit."

In the present case, the amounts collected were intended to cover the assessee's tax liability. Even if the full amount was paid to the government, the assessee could still seek a refund if necessary. The court rejected the argument that labeling a portion as a "contingency deposit" changed the nature of the collection. Ultimately, the court held that the Tribunal erred in deleting the addition, ruling in favor of the Revenue and allowing the appeal.