1987 (3) TMI 79 - HC - Income Tax

Court rules sales tax must be excluded from gross profit rate calculation, upholding Income-tax Officer's decision.

Commissioner Of Income-Tax Versus Parekh Brothers

The court ruled in favor of the Revenue, holding that the Tribunal was not justified in applying the gross profit rate to gross turnover, including sales ... Accounting Issues Involved:1. Whether the Tribunal was justified in dismissing the Department's appeal without dealing with the points on merits.2. Whether the Tribunal was justified in holding that the gross profit rate should be applied to gross turnover, including the amount of sales tax.Summary:Issue 1: Dismissal of Department's Appeal Without MeritsThe Tribunal dismissed the Department's appeal without addressing the points on merits, based on the order passed in the assessee's appeal, despite the appeals not being heard together. However, since the Department's and assessee's cases were dealt with on merits while answering the second question, this issue loses its significance and need not be answered.Issue 2: Application of Gross Profit Rate to Gross Turnover Including Sales TaxThe Tribunal held that the gross profit rate should be applied to gross turnover, including the amount of sales tax. The assessee, a firm dealing in hosiery goods and ready-made garments, did not maintain a day-to-day stock account and included sales tax received from customers in the sales price while debiting the sales tax payment in the profit and loss account. The Income-tax Officer (ITO) found the gross profit shown by the assessee to be low and applied the proviso to section 145(1) of the Income-tax Act, estimating the profit at 16% on net sales each year.The Appellate Assistant Commissioner (AAC) upheld the application of the proviso to section 145(1) but adjusted the gross profit rates to 18% for 1972-73 and 20% for 1973-74 and 1974-75. The Tribunal, in the assessee's appeal, further adjusted these rates to 16% for 1972-73 and 19% for 1973-74 and 1974-75.The Department contended that the amount realized as sales tax forms part of trading or business receipts, citing Supreme Court cases Sinclair Murray & Co. (P) Ltd. v. CIT [1974] 97 ITR 615 and Chowringhee Sales Bureau (P) Ltd. v. CIT [1973] 87 ITR 542. The Supreme Court held that sales tax collected forms part of trading receipts, regardless of how it is recorded in the account books.The court concluded that the sales tax amount realized by the assessee formed part of its trading or business receipts. Therefore, the gross profit rate should not include sales tax, and the real gross profit should be calculated by excluding the sales tax amount. The proviso to section 145(1) was correctly applied by the ITO and AAC.Conclusion:Question No. 2 is answered in favor of the Revenue, holding that the Tribunal was not justified in applying the gross profit rate to gross turnover, including sales tax. Consequently, Question No. 1 need not be answered. Parties shall bear their own costs.