1979 (11) TMI 78 - HC - Income Tax

Excess Sales Tax Transferred to Profit & Loss = Trading Receipt, Not Taxable Income

The High Court determined that the excess sales tax collected by the assessee in earlier years and transferred to the profit and loss account constituted ... Income Tax, Sales Tax Issues involved: The judgment deals with the issue of whether the excess sales tax realized by the assessee during earlier years and transferred to the credit of profit and loss account constituted trading receipt of the years in which it was received and consequently whether it can be assessed to tax in the year of assessment for 1971-72.Summary: The Appellate Tribunal referred the question of assessing the excess sales tax realized by the assessee to the High Court. The assessee, a private limited company, credited the excess sales tax to the profit and loss account in 1970. The Income Tax Officer (ITO) assessed this amount as income for the assessment year 1971-72. The Appellate Assistant Commissioner (AAC) upheld the assessment, but the Tribunal ruled that the excess sales tax could only be considered as trading receipts for the years it was collected, not for the assessment year 1971-72. The Tribunal also rejected the application of section 41(1) of the Act in this case. The Commissioner challenged the Tribunal's conclusion.The High Court analyzed the nature of the amount and determined it to be a trading receipt of the year it was collected. The Court cited a Supreme Court case to establish that sales tax collected by the assessee is considered a trading receipt. The Court emphasized that the transfer of the amount to the profit and loss account did not change its character as a trading receipt. Referring to a Court of Appeal decision, the Court explained that once a receipt is received, its nature for income tax purposes is fixed and cannot be altered by subsequent operations. Therefore, the excess sales tax collected in earlier years should have been taxed in those years and cannot be taxed in the assessment year 1971-72 due to the transfer to the profit and loss account.The Court distinguished a previous decision of the Allahabad High Court involving deposits from constituents, stating that in the present case, the excess sales tax was always a trading receipt, unlike the deposits in the Allahabad case. The Court concluded that the excess sales tax should not be taxed in the assessment year 1971-72. The question was answered in favor of the assessee, who was awarded costs.