High Court rules in favor of assessee: Sales tax not business income, supports exclusion under mercantile accounting

The High Court ruled in favor of the assessee on both issues. It held that the sum collected for Central sales tax was not part of the business income as it constituted a liability, allowing for its exclusion under the mercantile system of accounting. The court emphasized that the sales tax collected formed part of trading receipts and that the liability to pay sales tax arose upon sale or purchase, supporting the assessee's position as a trustee in collecting the tax. The court referenced legal precedents and upheld the consistent application of principles regarding sales tax treatment under the mercantile system of accounting.

---

---

Issues:
1. Valid exclusion of sum from business income for relevant assessment year.
2. Nature of assessee's role in collecting Central sales tax from customers.

Issue 1: Valid Exclusion of Sum from Business Income
The case involved the exclusion of a sum of Rs. 59,025 from the assessee's business income for the relevant assessment year. The assessee, a registered dealer maintaining accounts on a mercantile basis, collected this amount from customers on account of Central sales tax but neither deposited it into the Government exchequer nor refunded it to customers. The Assessing Officer initially added this amount to the assessee's income, citing the Supreme Court's decision in Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542. However, the assessee contended that the Central sales tax collected was a liability and not a trading receipt, as it was credited to a separate account and paid upon finalization of assessments. The Appellate Assistant Commissioner eventually deleted the addition, and the Tribunal upheld this decision, referencing a similar outcome in a previous assessment year. The High Court, considering various judgments, including Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542, held that the sales tax amount received by the assessee formed part of the trading receipts and that the liability to pay sales tax accrued when a sale or purchase was effected. The court affirmed that under the mercantile system of accounting, the deduction of estimated liability to sales tax was permissible even if not paid to the tax authorities. Consequently, the court ruled in favor of the assessee, upholding the exclusion of the sum from business income.

Issue 2: Assessee's Role in Central Sales Tax Collection
The second issue pertained to the nature of the assessee's role in collecting Central sales tax from customers. The assessee argued that it acted as a trustee in collecting Central sales tax, maintaining that the tax collected was a liability owed to the government and not a trading receipt. The Revenue contended that the sales tax collected should be added to the assessee's income since it was neither deposited with the government nor refunded to customers. The High Court, after considering the arguments and relevant legal precedents, concluded that the assessee, following the mercantile system of accounting, was entitled to deduct the estimated liability to sales tax, even if not yet paid to the authorities. The court affirmed that the sales tax collected formed part of the trading receipts and upheld the assessee's position, ruling against the Revenue's contention. Therefore, the court answered both questions in favor of the assessee, emphasizing the correctness of the law laid down by the Division Bench in Sirsa Industries v. CIT [1989] 178 ITR 437 (P & H) and the consistent application of principles regarding the treatment of sales tax collections under the mercantile system of accounting.

---