2001 (7) TMI 79 - HC - Income Tax

Sales tax transferred to profit account is taxable income under Section 41(1)

Commissioner of Income Tax. Versus Balabus Birla And Co.

Commissioner of Income Tax. Versus Balabus Birla And Co. - [2001] 252 ITR 372, 169 CTR 328, 118 TAXMANN 577 Issues Involved:1. Whether the sum of Rs. 90,279 can be assessed to income-tax during the assessment year 1970-71 under section 41(1) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Nature of the Amount Collected as Sales Tax:The respondent-assessee collected sales tax at two percent from its customers during the assessment years 1964-65 to 1967-68. This amount was credited to a separate 'General Sales Tax Account' and not included in the profit and loss account. The assessee contended that the amount collected was a deposit from customers and not a trading receipt. The Income-tax Officer disagreed, treating the sales tax collected as a trading receipt and therefore taxable when transferred to the profit and loss account in 1970-71.2. Treatment by the Income-tax Officer:The Income-tax Officer included the amount of Rs. 90,279 in the total income of the assessee for the assessment year 1970-71, arguing that the sales tax collected was a trading receipt. The officer held that the sales tax paid to the Government constituted a trade expenditure, and the ultimate refund of such sales tax amounted to remission of liability or expenditure under section 41(1) of the Income-tax Act, 1961.3. Appellate Assistant Commissioner's Decision:The appeal by the assessee was dismissed by the Appellate Assistant Commissioner, who affirmed that the sales tax realized along with the sale price was a trading receipt. The Commissioner upheld the view that the sales tax paid constituted a trading expenditure, and the refund of sales tax amounted to remission of liability or expenditure.4. Tribunal's Decision:The Tribunal accepted the assessee's claim, stating that the amount of Rs. 90,279 was not liable to be assessed during the assessment year 1970-71 but should be taxed in the years when the sales tax was actually received. The Tribunal also held that section 41(1) was not applicable since the assessee had not claimed the amount of sales tax paid as a deduction by way of trading expenditure in earlier years.5. High Court's Analysis:The High Court examined whether the sum of Rs. 90,279 could be assessed to income-tax in 1970-71 under section 41(1). The court noted that the assessee followed the mercantile system of accounting and had treated the sales tax collected as a liability or deposit, not including it in the profit and loss account. The court observed that the liability ceased during the assessment year 1970-71 when the sales tax authority accepted the assessee's claim regarding 'combing waste,' making the amount part of the assessee's income and thus taxable.6. Application of Section 41(1):The court held that section 41(1) was applicable. The section provides that if an allowance or deduction has been made in respect of a trading liability and subsequently, the liability ceases, the amount obtained is deemed to be profits and gains of business. The court found that the cessation of liability occurred during the assessment year 1970-71, making the amount taxable.7. Reliance on Precedents:The court referred to the decision in Saraswati Industrial Syndicate's case, where a similar situation was found taxable. The court also distinguished the present case from the Supreme Court decision in CIT v. Sugauli Sugar Works (P.) Ltd., noting that the transfer of the amount was not a unilateral act but followed the acceptance of the assessee's claim by the sales tax authority.8. Conclusion:The High Court concluded that the amount collected by the assessee as sales tax, kept in a separate account, and later transferred to the profit and loss account due to cessation of liability, was exigible to income-tax. The Tribunal had erred in accepting the assessee's claim. The question was answered in favor of the Revenue and against the assessee, with no order as to costs.