Sales tax collected in business is a trading receipt, while the accrued liability remains deductible under mercantile accounting.

Amounts collected from purchasers as sales tax in the course of business were trading receipts, because their true character, not the accounting label, determined taxability; the collections were therefore assessable to income-tax. Under the mercantile system, the corresponding sales tax liability accrued when the taxable sale occurred, so deduction was allowable for the relevant years even though the tax had not yet been quantified or paid. The absence of an assessment by the sales tax department did not make the liability contingent, and any excess claim could be adjusted later if the liability ceased or was reduced.

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Issues: (i) Whether the sales tax collected by the assessee in auction sales constituted trading receipts liable to income-tax. (ii) Whether the assessee was entitled to deduction in respect of the sales tax liability for the relevant assessment years, even though the tax had not been quantified or paid.

Issue (i): Whether the sales tax collected by the assessee in auction sales constituted trading receipts liable to income-tax.

Analysis: Amounts realised by the assessee from purchasers as sales tax were collected in the course of its business and were credited in a separate sales tax account. The true nature of the receipt, and not the label given in the books, was decisive. The earlier and later decisions relied upon by the Court confirmed that sums collected as sales tax in the course of business form part of trading receipts, irrespective of the assessee's dispute as to liability or the non-payment of the amount to the State.

Conclusion: The amounts were trading receipts and were assessable to tax in the hands of the assessee, in favour of the Revenue.

Issue (ii): Whether the assessee was entitled to deduction in respect of the sales tax liability for the relevant assessment years, even though the tax had not been quantified or paid.

Analysis: Under the mercantile system, liability to sales tax accrues when the taxable sale is effected, and quantification or actual payment is not a condition for accrual. The absence of assessment by the sales tax department did not make the liability merely contingent. If the assessee made a bona fide estimate of the liability for the relevant years, the amount was deductible, subject to adjustment under the provision dealing with later cesser of liability if the estimate ultimately proved excessive.

Conclusion: The assessee was entitled to deduction for the sales tax liability relating to the relevant years, in favour of the Assessee.

Final Conclusion: The reference was answered against the assessee on the character of the collections as trading receipts, but in its favour on deductibility of the accrued sales tax liability for the relevant years.

Ratio Decidendi: Under the mercantile system of accounting, sales tax collected in the course of business is a trading receipt, while the corresponding statutory liability accrues on the taxable sale itself and is deductible even before quantification or payment, subject to later adjustment if the liability ceases or is reduced.

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