2025 (10) TMI 1186 - HC - VAT / Sales Tax

Tax authority's appeal dismissed: Section 56 inapplicable; taxpayer not shown to have collected sales tax; exemption applies

HC upheld the Tribunal's finding that the taxpayer did not collect any sales tax despite showing a tax component in US GAAP entries later reversed in ... Non-collection of any amount by way of tax - applicability of provisions of section 56 of the Gujarat Sales Tax Act in the present case - availment of exemption from payment of sales tax under Entry 69 of section 49(2) of the Sale Tax Act for a period of six years - Revenue assumed that the sale price fixed by the respondent-assessee to for its product was inclusive of the sales tax amount though the sale of the goods was exempted from payment of sales tax - HELD THAT:- The respondent-assessee was bifurcating its sale price by showing separately the sales tax component embedded therein as sales tax payable which was later on transferred to sales tax incentive and deferred sales tax account to be spread over overlooking period as per the agreement between the respondent-assessee and the Government to run the plant at Goblej, District-Kaira. However, it is clarified by respondent-assessee that such entries were passed in account only under USGAAP and later, such entries were reversed in the Books of Accounts maintained in IGAAP which otherwise could have been deleted but, in order to maintain audit trail such entries were reversed and the entire amount of sale consideration was shown as gross sale without any bifurcation between the sale price and the amount of sales tax payable by the respondent-assessee. The Tribunal has also referred to the affidavits filed by the distributors indicating that there was no agreement regarding payment of sales tax on the sale of product in question made by the assessee to the distributors and no sales tax was ever paid to the respondent-assessee by any such distributors, retailers or customers - The Tribunal has therefore, rightly held that the amount of tax could not have been bifurcated by the Revenue simply because the sales has been inclusive of tax. The Hon’ble Apex Court in case of M/s. Hindustan Liver Limited [2016 (7) TMI 76 - SUPREME COURT] observed that the reasoning given in case of Amrit Banaspati Co. Ltd, on the contrary, would support the stand of the respondent-assessee who, on the basis of the exemption notification, had set up a new undertaking incurring expenditure as such exemption was granted by way of valid notification to encourage investment in the backward districts and to overcome initial financial problems for establishing new industries and to recoup an ensure reasonable return on capital expenditure and associated other risks. Considering the facts of the case, the only ground on which the penalty was levied under section 46 read with section 56(1) of the Sales Tax Act was that the price while fixed by the respondent-assessee was inclusive of tax which was required to be bifurcated and thereby alleging that the respondent-assessee had collected the tax in spite of availing exemption would not stand as rightly held by the Tribunal by discarding submissions made by the Revenue to the effect that the assessee had collected the amount by way of tax from the distributors and retailers - it is completely agreed with the reasons assigned by the Tribunal holding that the Assessing Officer and the Appellate Authority had committed an error in appreciation of the evidence on record resulting into wrong finding that the assessee had collected some amount by way of tax from the distributors and retailers. The Tribunal cannot be said to have committed any error by holding that the respondent-assessee had not collected any amount by way of tax and therefore, the provision of section 56 of the Sales Tax Act could not be attracted in the facts of the case - the questions are therefore, answered in favour for the assessee and against the Revenue. Appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether there is evidence that the dealer collected any amount by way of sales tax from distributors, retailers or consumers such that section 56(1) of the Sales Tax Act is attracted. 2. Whether the existence of uniform prices, parallel accounting entries (USGAAP and IGAAP), computerized reports (Jaguar/Scala) and notional bifurcation of tax in internal books amount to collection of tax for purposes of penalty under section 46 read with section 56(1). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Evidence of collection of tax under section 56(1) Legal framework: Section 56(1) penalizes collection of any amount by way of tax in contravention of statutory exemption; penalty under section 46(1)(i) can be imposed where such collection is established in proceedings under the Act. Precedent treatment: The Court relied on higher-court authority holding that a market price declared 'inclusive of taxes' may be a starting point but does not, by itself, prove collection of sales tax; uniform pricing or inclusive-legend alone cannot substitute for evidence that a tax component was in fact collected. Decisions distinguishing a promissory-estoppel/refund context were also applied to show that price-setting for business policy does not imply illegal collection. Interpretation and reasoning: The Tribunal's finding - affirmed by the Court - rests on absence of direct, implied or indirect material proving that any amount was designated, demanded or received as sales tax from distributors/retailers/consumers. The following reasoning was employed: (a) statutory and assessment records (IGAAP books and returns) show no separate tax collected; (b) sales invoices carried 'Nil' in tax column and bore endorsement of exemption; (c) affidavits from distributors stated no payment of tax to dealer; (d) the dealer continued not to collect tax even after exemption period; and (e) the mere fact that MRP/Net price was uniform or 'inclusive' does not establish collection absent specific evidence the tax was actually imposed and received. The Court held that the Tribunal correctly preferred accounts and material relevant to statutory assessment (IGAAP) over notional or internal entries (USGAAP) for the purpose of deciding collection under the Sales Tax Act. Ratio vs. Obiter: Ratio - where there is no direct or reliable indirect evidence of an amount being collected as tax (separate invoice entry, accounting liability in statutory books, admissions or receipts from distributors/retailers), section 56(1) is not attracted merely because prices remained unchanged or internal accounts show notional tax entries. Obiter - observations on commercial policy and general business reasons for uniform pricing (though supported by precedent) operate as contextual guidance rather than the narrow decisive test. Conclusion: There was no proven collection of any amount by way of sales tax; consequently section 56(1) did not apply and penalty under section 46(1)(i) could not be sustained. Issue 2 - Effect of uniform pricing, parallel accounting systems and computerized reports on finding of collection Legal framework: Determination of 'collection' requires that an amount be designated and recovered as tax; evidentiary weight is given to statutory books and returns maintained in conformity with relevant accounting principles for assessment under the Act. Computerized reports and internal accounting entries are admissible as evidence but must be viewed in context and corroborated where they purport to demonstrate collection. Precedent treatment: The Court applied the principle that uniform MRP and an 'inclusive of taxes' legend are not conclusive proof of tax collection; prior authority confirms that a dealer may adopt uniform pricing for legitimate commercial reasons and that inclusion of tax in price does not ipso facto convert the price into illegal tax collection unless the tax component was separately collected or accounted for in statutory records. Interpretation and reasoning: The Sales Tax Officer relied on Jaguar/Scala reports and USGAAP entries to infer collection. The Tribunal and the Court examined: (a) the nature and purpose of USGAAP entries (notional bifurcation to reflect deferred incentive accounting and internal audit trail); (b) reversal of those entries in IGAAP books used for statutory reporting; (c) the absence of tax liability or collected-tax items in IGAAP/statutory returns; and (d) contemporaneous documentary and testimonial evidence (invoices, distributor affidavits) showing no collection. The Court accepted that internal software-generated columns showing 'amount with tax' or default zero tax fields do not, without corroborating records in statutory accounts or receipts, prove collection. The Court also noted that Tribunal's reliance on IGAAP statutory books was appropriate because assessment under the Sales Tax Act must proceed on books relevant to Indian statutory accounting. Precedent treatment of Amrit Banaspati-type reasoning: The Court distinguished authorities dealing with refund/promissory estoppel and those where statutory provisions expressly authorized collection; it held such authorities do not mandate bifurcation of sale price where exemption applies and statutory records show no collection. Ratio vs. Obiter: Ratio - parallel internal accounting entries and computerized reports which show a notional tax component do not establish illegal collection where statutory books and invoices used in trade show no tax charged, and there is no evidence of payment or receipt of tax by the dealer. Obiter - criticisms of permitting additional evidence at second-appeal stage were noted by Revenue but the Court treated the Tribunal's consideration of explanations and affidavits as permissible fact-finding; this observation is contextual rather than a definitive rule on admissibility. Conclusion: The internal bifurcation of price in USGAAP, Jaguar/Scala reports, and unchanged MRP do not amount to collection of tax for purposes of section 56(1) where statutory (IGAAP) books, invoices and distributor testimony demonstrate no tax was charged or received; therefore, the provisions of section 56 are not attracted on these grounds. Cross-references and final judicial determination The Tribunal's factual findings about absence of collection (see Issue 1) informed the conclusion on Issue 2 that accounting artifices and uniform pricing did not convert price into tax collection. The Court accepted the Tribunal's approach and precedent distinguishing cases where mere inclusion in price was insufficient, and accordingly answered both substantial questions in favour of the dealer and against the Revenue: no collection proved; section 56 not attracted; penalty order set aside.