Hotel receipts tax collected in business is trading receipt, while accrued statutory liability remains deductible under mercantile accounting.

Amounts collected by a hotel as hotel receipts tax were treated as trading receipts because they arose in the course of the business, and their transfer to a separate liability account did not change that character. Under the mercantile system, the corresponding statutory liability was deductible when it accrued, and the interim order preserving the tax obligation did not prevent deduction once the liability had crystallised. The analysis also noted that section 21 of the Hotel Receipts Tax Act contemplated deduction of the amount paid to discharge the liability for the relevant assessment year. The reference was answered by recognising both the business-receipt character of the collections and the allowance of deduction in the appropriate year.

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Issues: (i) Whether hotel receipts tax collected by the assessee constituted trading receipts; (ii) Whether the assessee was entitled to deduction of the collected hotel receipts tax for the relevant assessment year.

Issue (i): Whether hotel receipts tax collected by the assessee constituted trading receipts.

Analysis: The amounts were collected in the course of the hotel business and were credited to a separate liability account, but that accounting treatment was not decisive. The stay order granted by the Supreme Court did not negate the liability in substance, because the interim protection expressly preserved the obligation to pay the tax irrespective of collection from customers. In that setting, the amount retained by the assessee had the character of business receipts.

Conclusion: The collected hotel receipts tax was trading receipt, against the assessee.

Issue (ii): Whether the assessee was entitled to deduction of the collected hotel receipts tax for the relevant assessment year.

Analysis: Under the mercantile system, a statutory liability is deductible when it accrues, and the relevant liability here arose with the taxable event and was reinforced by the interim order requiring eventual discharge of tax. Section 21 of the Hotel Receipts Tax Act also contemplated deduction of the amount paid to discharge the liability for the relevant assessment year. The fact that payment was deferred pending challenge to validity did not defeat deduction once the liability had crystallised.

Conclusion: The assessee was entitled to deduction of the hotel receipts tax to the extent payable in discharge of the statutory liability, in favour of the assessee.

Final Conclusion: The reference was answered by treating the collections as business receipts while recognising deduction of the statutory tax liability in the appropriate assessment year.

Ratio Decidendi: Amounts collected as statutory tax in the course of business are taxable as trading receipts, and where the liability to pay the tax has accrued under the mercantile system and is preserved by the governing legal order, the corresponding deduction is allowable in the year of accrual or discharge as provided by the statute.

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