Equalised sales tax deduction is limited to payable tax, but revenue neutrality can defeat demand and penalty.

Equalised deduction of sales tax under the circular was available only where the tax was payable on the goods and the deduction was supported by records; it could not be claimed for goods manufactured in an exempt unit on which no sales tax was payable or paid. Even so, the overall arrangement was revenue neutral because the assessee was entitled to deduct the full tax paid on taxable clearances, and disallowance in one part would only shift the deduction elsewhere. On that basis, the demand and penalty were unsustainable, and the duty demand was set aside.

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Issues: Whether deduction towards sales tax on an equalised basis was permissible where the goods manufactured in one unit were exempt from sales tax, and whether the resulting demand and penalty could be sustained in view of revenue neutrality.

Analysis: The circular permitting equalised deduction of sales tax, octroi and similar levies applies where such taxes are payable on the goods and the claimed deductions are substantiated from records. It does not extend to goods on which no sales tax is payable or actually paid, as the expression used in the governing provision contemplates tax payable on such goods. Even so, the overall arrangement showed that the assessee was entitled to deduct the full tax paid on taxable clearances, while only a part of that burden was being spread across exempt clearances. Denial of deduction in one place would only require allowance of a larger deduction elsewhere, making the exercise revenue neutral.

Conclusion: The equalised deduction was not available for goods on which no sales tax was payable, but the demand and penalty were unsustainable because the transaction was revenue neutral and the duty demand was therefore set aside in favour of the assessee.

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