2007 (9) TMI 13 - HC - Income Tax

Court rules on sales tax liability and accounting provision for assessment year.

The court ruled in favor of the Revenue regarding the liability to pay sales tax on the refund received by the assessee. However, the court sided with the ... Taxability of sales tax refund - deductibility of provision for a disputed trading liability under the mercantile system - accrual of liability to sales tax independent of assessment - application of Section 41 for remission or cessation of a trading liability - treatment of provision while appeal against liability is pendingTaxability of sales tax refund - The taxability of the sales tax refund of Rs.3,22,482 received by the assessee during the relevant year. - HELD THAT: - The parties agreed, in view of the Supreme Court decision in Polyflex (India) Pvt. Ltd. v. Commissioner of Income Tax, that the refund received by the assessee in the relevant year is chargeable to tax. The Court accepted that position and answered this part of the reference accordingly. [Paras 1]The sales tax refund received during the relevant year is chargeable to the total income of the assessee (answer in favour of the Revenue).Deductibility of provision for a disputed trading liability under the mercantile system - accrual of liability to sales tax independent of assessment - application of Section 41 for remission or cessation of a trading liability - treatment of provision while appeal against liability is pending - Whether the provision of Rs.1,01,507 made in the accounting period relevant to AY 1976-77 for sales tax is chargeable to tax. - HELD THAT: - The Court held that, following the principle in Kedarnath Jute Manufacturing Co. Ltd., the obligation to pay sales tax arises on the sale (or purchase) and accrues independently of its quantification by assessment. Given that the assessee follows the mercantile system of accounting, it was entitled to make a provision for the liability and deduct it from profits in that previous year even though the liability was disputed and appeals were pending. The Court noted decisions upholding deduction for provisions for excise/indirect tax liabilities (J.K. Synthetics and its affirmation) and observed that Section 41 permits taxation in a year in which any remission or cessation of such a provision occurs, thereby protecting Revenue where the liability is subsequently determined otherwise. On these grounds the Court concluded that making the provision while the appeal was pending did not render it taxable in AY 1976-77. [Paras 2, 3]The provision for sales tax made in the relevant accounting period is not chargeable to tax in AY 1976-77 (answer in favour of the assessee).Final Conclusion: Reference answered: the sales tax refund received in the relevant year is taxable (in favour of Revenue); the provision made for sales tax in the accounting period relevant to AY 1976-77 is not chargeable to tax (in favour of the assessee). Issues:Liability to pay sales tax on refund received and provision made in accounting period relevant to Assessment Year 1976-77.Analysis:1. The first part of the question pertains to the liability to pay sales tax on the refund received by the assessee during the relevant year. The court referred to the decision in Polyflex (India) Pvt. Limited v. Commissioner of Income Tax [2002] 257 ITR 343 (SC) and agreed that this liability is chargeable to tax. Therefore, the answer to this part was in favor of the Revenue.2. Moving on to the second part of the question, regarding the liability to pay sales tax on the provision made in the accounting period relevant to the assessment year 1976-77, the court considered the assessee's adoption of the mercantile system of accounting. Initially, there was a dispute over the sales tax on ice cream sold by the assessee, which was later resolved by a judgment of the Supreme Court. Despite the provision made by the assessee during the pendency of the appeal, the court held that since no sales tax was payable as per the court's decision and no actual payment was made, there was no requirement for the provision. The court cited the decision in Kedarnath Jute Manufacturing Co. Limited v. Commissioner of Income Tax [1971] 82 ITR 363 to emphasize that the liability for sales tax arises upon the sale of a commodity subject to tax, even if enforcement is pending. The court also referred to the Allahabad High Court and Supreme Court decisions supporting the deduction of such liabilities in the accounts. Therefore, the court ruled in favor of the assessee, stating that the provision made was not chargeable to tax.3. Consequently, the court answered the second part of the question in the negative, favoring the assessee and rejecting the revenue's claim.4. The reference was disposed of accordingly, settling the issue of the liability to pay sales tax on the refund received and provision made during the relevant accounting period for Assessment Year 1976-77.