1984 (7) TMI 35 - HC - Income Tax

Court Upholds Disallowance of Sales Tax Claims as Trading Receipts

The High Court dismissed the petition challenging the disallowance of sales tax claims for assessment years 1978-79 and 1979-80. The court upheld the ... Reference Issues:1. Disallowance of sales tax claim for assessment years 1978-79 and 1979-80.2. Treatment of the disallowed amount as trading receipt.3. Justification of claiming accrued liability of sales tax on actual payment basis.Analysis:For the assessment years 1978-79 and 1979-80, the applicant, an assessee company engaged in manufacturing various products, including items subject to sales tax, filed a reference application under the Income Tax Act, 1961, seeking clarification on three questions of law. The questions primarily revolved around the disallowance of sales tax claims, treatment of the disallowed amounts as trading receipts, and the method of claiming accrued sales tax liability. The company followed the mercantile system of accounting, crediting the sales tax amount in its books but paying it only upon demand, with the remaining balance held in a sales tax account. The Income Tax Department had historically accepted this practice. However, the assessing officer added back the credited amounts in the business income calculation for the respective years.Upon appeal, both the CIT (Appeals) and the Income-tax Appellate Tribunal upheld the disallowance, considering the excess sales tax collections as trading receipts. The Tribunal rejected the applicant's argument that the accrued liability should be allowed under the mercantile system, citing precedents that sales tax collections constitute trading receipts and the liability can only be claimed upon payment to the government. The applicant relied on various court decisions to support its position, emphasizing the periodic obligation to pay the sales tax amount collected.The Revenue's counsel contended that the company not only treated the excess collections as a liability but also claimed it as a deduction in income computation, contrary to Supreme Court rulings. The Tribunal, therefore, declined to refer the questions to the High Court, deeming them academic and unnecessary. Ultimately, the High Court dismissed the petition, stating that the proposed questions of law did not arise based on the facts and case law presented, leading to the rejection of the application with no order on costs.