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TMI Blog1969 (6) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... h as there was no dispute that the amount of Rs. 22,642 represented the estimated amount of sales tax payable on the sales effected by the assessee during the year, the Tribunal was of the view that the amount represented an accrued liability which the assessee had to discharge. The Tribunal, therefore, allowed the claim of the assessee for deduction. On an application being made under section 66(1) of the Indian Income-tax Act, 1922, the following question has been referred to this court; "Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing deduction in respect of the sum of Rs. 22,642 in the computation of the total income of the assessee for the assessment year 1961-62?" It was contended by counsel for the revenue that sales tax is not deductible from the income for the purpose of payment of income-tax. It was contended that payment of sales tax was not necessary for the purpose of carrying on the business inasmuch as sales tax was payable on the "taxable turnover" and not on all sales but on sales beyond the limits of "taxable turnover". It was further contended that the liability for payment of sales tax arises upon assessment or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting, it was entitled to deduction in respect of the accrued liability of the sales tax. Reliance was placed by counsel for the assessee on the decision of the Supreme Court in the case of Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax[1966] 59 I.T.R. 767 (S.C.). and the decision of this court in the case of Textile Machinery Corporation Ltd. v. Commissioner of Wealth-tax[1968] 67 I.T.R. 122. In order to examine the rival contentions in this case, it would be necessary to bear in mind the following relevant facts found by the income-tax authorities and the Tribunal- (a) The method of accounting of the assessee is mercantile. (b) Provision has been made by the assessee for Rs. 22,642 as being payable as sales tax on account of the sales effected during the year. (c) There is no dispute that the said amount represents the estimated amount of sales tax payable on the sales effected by the assessee during the relevant year. (d) Amounts realised by charging sales tax from the customers by the assessee have been included in the gross sales. (e) The assessee has not filed quarterly returns before the sales tax authority declaring its sales and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner provided in sub-section (3) of the extra amount. " Section 11 gives power to the Commissioner to make assessments in certain circumstances. Rule 17 and onwards framed under the Act provide different times for different categories of dealers to file returns. It is obligatory under the Act that the Treasury challans showing payment of taxes should be filed along with the returns. An examination of the various provisions of the Bengal Finance (Sales Tax) Act, 1941, and the Rules framed thereunder reveals that there is an obligation on the part of every registered dealer, and one has to be a registered dealer if his sales are beyond a certain limit, to pay tax on all sales in certain specified manner. It is obligatory for such dealer to file returns either annually or quarterly or monthly, as the case may be, and the tax has to be paid prior to the filing of the returns and the sales tax authorities are entitled to make assessment and demand the balance sum from the dealer. There is also provision for enforcing payment and realisation of sales tax in case returns are not filed or payments not made in accordance with the returns filed. It appears, therefore, that the liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above the limit prescribed by the statute cannot lawfully carry on business without paying sales tax or without making arrangement for the payment of sales tax. It is a liability which arises to an assessee in connection with his business and is directly related to his business. It is a liability which an assessee incurs in his capacity as a trader. Viewing the question from the point of view of commercial expediency we are of the opinion that discharge of the liability for the payment of sales tax is necessary for carrying on of the business and is incidental to it and as such an assessee is entitled to deduction of the sales tax if other conditions are satisfied under section 10(2)(xv) of the Indian Income-tax Act, 1922. The question of sales tax liability came up for consideration before the Andhra Pradesh High Court in the case of S.R.V.G. Press Co. v. Commissioner of Excess Profits Tax[1956] 30 I.T.R. 583. Delivering the judgment of the court, Viswanatha Sastri, J., observed, at page 589 of the report, as follows: "Now sales tax is levied on sales or purchases of goods by traders and not upon the profits or gains made by them from the business. Sales tax is payable irrespe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Products Ltd. v. Commissioner of Income-tax[1966] 60 I.T.R. 277 (S.C.). the Supreme Court held that: "In determining whether an amount expended by the assessee is deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922, the nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and must be laid out by the taxpayer in his character as a trader. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, that is to say, between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business." Bearing the above principles in mind, in view of the nature of the sales tax liability, we are of the opinion that in respect of that liability, if the other conditions are satisfied, the assessee is entitled to deduction inasmuch as the said liability is incurred by the assessee in the capacity of a trader an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctible in computing the net wealth of an assessee. In the case of Textile Machinery Corporation Ltd. v. Commissioner of Wealth-tax[1968] 67 I.T.R. 122., Banerjee, J., delivering the judgment of this court, held that in view of section 4 of the Bengal Finance (Sales Tax) Act, 1941, if a provision is made for payment of taxes under the Bengal Finance (Sales Tax) Act, 1941, it stands on the same footing as provision made for income-tax liability and it is a debt. In view of the fact that the assessee follows a mercantile system of accounting and in view of the fact that the assessee has not disputed the liability to pay the sales tax but, on the other hand, has made a provision for its payment in its accounts and in view of the nature of the liability created in respect of the sales tax, we are, therefore, of the opinion that the assessee is entitled to deduction in respect of the provision made for payment of sales tax from the income of the assessee under section 10(2)(xv) of the Indian Income-tax Act, 1922. The facts of the case of Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income tax[1968] 67 I.T.R. 56., on which much reliance was placed by counsel for the revenue, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of auctioneers, collected from the purchasers in auction in addition to the price of the goods. the sales tax payable to the State under the Bengal Sales Tax Act. The amount collected as sales tax was separately shown in the memo. granted to the purchasers and was also credited to a separate account in the books, pending a decision of the Supreme Court as to whether an auctioneer was a dealer and was liable to pay sales tax to the State. The department contended that the receipts by way of sales tax were receipts bearing the same character as receipts from the assessee's trade itself and that such receipts did not change their character by being credited to a separate account other than trading account. The Tribunal, on the contrary, held that as the amount of sales tax was collected by the assessee, not as its profits or gains, but merely for the purpose of making it over to the State in due time, if it was found liable, it did not belong to the assessee either in the shape of a trading receipt or in the shape of gain. On a reference, the High Court held the amounts collected as sales tax were an integral part of the commercial transaction of sales by auction carried on by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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