Mercantile accounting and accrued sales tax liability: jaggery commission collections were not taxable income and remained deductible.

Under the mercantile system, a statutory sales tax liability on commission sales of jaggery accrues when the taxable sale occurs, so the amount collected as "rusum" and shown as payable to the sales tax authorities was not a trading receipt or taxable income in the assessee's hands. The Andhra Pradesh High Court also held that the same amount was deductible as sales tax payable, because an accrued business liability may be claimed in computing income and the retrospective amendment did not alter the character of the liability for the relevant period.

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Issues: (i) Whether the amount collected as "rusum" towards sales tax on commission sales of jaggery constituted income taxable in the assessee's hands. (ii) Whether the same amount was allowable as a deduction as sales tax payable under the Andhra Pradesh General Sales Tax Act, 1957, as amended.

Issue (i): Whether the amount collected as "rusum" towards sales tax on commission sales of jaggery constituted income taxable in the assessee's hands.

Analysis: The assessee maintained accounts on the mercantile basis. On that basis, liability is recognised when it accrues, not only when it is discharged. The sales tax liability attached to the jaggery turnover under the statutory scheme, and the amount collected represented a tax liability shown in the books as payable to the sales tax authorities. The cases treating sales tax collections as income were distinguished because, on their facts, the collections were found to be part of the sale price or otherwise trade receipts. Here, the amount was linked to a statutory liability and not to any accretion to trading profit.

Conclusion: The amount of Rs. 51,220 did not constitute taxable income of the assessee.

Issue (ii): Whether the same amount was allowable as a deduction as sales tax payable under the Andhra Pradesh General Sales Tax Act, 1957, as amended.

Analysis: The liability to pay sales tax arises when the taxable sales occur, and an assessee following the mercantile system is entitled to deduct accrued business liabilities. The retrospective amendment to the sales tax law did not alter the character of the liability for the accounting period in question. Since the amount represented sales tax payable to the authorities, it was deductible in computing the assessee's income.

Conclusion: The amount of Rs. 51,220 was allowable as a deduction as sales tax payable.

Final Conclusion: The reference was answered by holding that the disputed collection was neither taxable income of the assessee nor an inadmissible claim, and the amount was deductible as statutory sales tax liability.

Ratio Decidendi: Under the mercantile system, a statutory sales tax liability accrues when the taxable sale occurs, and an amount collected and retained as a shown tax liability is not necessarily a trading receipt.

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