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Commissioner Of Income Tax v. Shiv Nath Prasad
Factual and Procedural Background
The statement of the case concerns assessment year 1959-60. The assessee is a firm registered under the Income-tax Act, 1922, engaged in wholesale cloth business and a registered dealer under the U.P. Sales Tax Act. The assessee maintained a separate "sales tax account" in which receipts from customers on account of sales tax were credited and payments to the Government were debited.
Up to the end of the assessment year 1957-58 there was a debit balance in that sales tax account which the assessee transferred to its profit and loss account and claimed as a deduction. For the accounting year relevant to assessment year 1958-59, collections exceeded payments, producing a closing credit balance of Rs. 1,30,044; the assessee, however, showed that excess as a liability in the balance-sheet rather than crediting profit and loss. The Income-tax Officer initially overlooked these account manipulations and did not tax the excess earlier.
For the later relevant accounting year the sales tax account showed a credit balance of Rs. 2,47,615, with an opening balance of Rs. 1,30,044 — meaning collections during the period exceeded payments by Rs. 1,17,571. The Income-tax Officer included Rs. 1,17,571 in the assessee's assessment for 1959-60.
The assessee appealed to the Appellate Assistant Commissioner against the inclusion; that appeal failed. The assessee then appealed to the Tribunal. The Tribunal, following consideration, recorded the matter and framed for the High Court the question: "Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,17,571 represented taxable income of the assessee?"
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,17,571 represented taxable income of the assessee?
- Whether the sales tax charged and collected by a dealer forms part of the dealer's trading receipts and is taxable immediately on receipt, or becomes taxable only if and when the dealer fails to pay the amount to the Government?
Arguments of the Parties
Appellant's (Assessee's) Arguments
- The sales tax collected was not a trading receipt of the assessee because the assessee was required to pay the entire amount to the Government.
- The assessee maintained accounts on the mercantile system and treated the amount as a liability even when not actually paid to the Government, showing it separately in the "sales tax account".
- Any amount received on account of sales tax was payable to the Government under Section 8A(iv) of the U.P. Sales Tax Act, 1948 (which had not been declared ultra vires at the relevant time), and therefore the excess collections of Rs. 1,17,571 were not assessable as the assessee's income.
Departmental (Revenue) Arguments
- Originally, the departmental representative contended that sales tax received by the assessee was a revenue receipt and, if not paid to the Government, became the assessee's income.
- Ultimately, before the Tribunal the department conceded that sales tax charged and received by the assessee did not become its income at the time of sale; the department's case was that it became income only when the assessee did not account for it to the Government (i.e., when retained and not paid over).
- At the High Court stage Dr. Misra on behalf of the Commissioner of Income-tax argued that the departmental concession before the Tribunal was incorrect; he contended that sales tax collected formed part of the total sale price and should therefore be regarded as a trading receipt taxable at the time of receipt. He invited the court to decide the referred question on the correct state of the law, disregarding the earlier concession.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd, [1961] 42 I.T.R. 589; [1962] 1 S.C.R. 788 | The principles for identifying what constitutes a "question of law" arising out of a Tribunal order: (1) if a question was raised before and dealt with by the Tribunal it arises; (2) if raised but not dealt with it is deemed dealt with; (3) if not raised but dealt with it arises; (4) if neither raised nor considered it does not arise out of the order. | The court applied this test to determine scope of the reference and held the question whether sales tax was taxable on receipt was not a question arising out of the Tribunal's order because it had not been raised before the Tribunal. This restricted the High Court to the question as framed by the Tribunal. |
| Upper India Sugar Exchange Ltd. v. Commissioner of Income-tax, [1969] 72 I.T.R. 331 (All.) | The taxability of an amount depends on the nature and character of the receipt at the initial stage: if initially a trading receipt it is taxable; if initially not taxable, subsequent accumulation or appropriation does not convert it into taxable income. | The court relied on this principle to conclude that because it was common ground before the Tribunal that the sales tax initially received was not the assessee's revenue receipt, the subsequent retention or appropriation of the sums did not change their character into assessable income. |
Court's Reasoning and Analysis
The court proceeded by first examining what question properly arose out of the Tribunal's order. It noted the departmental concession before the Tribunal that sales tax collected did not constitute the dealer's income at the time of sale but became income only if the dealer did not pay it over to the Government. The Court rejected the Commissioner's later submission that this concession should be ignored and that the Court should decide the matter on a different legal basis.
To determine the scope of the reference, the Court applied the criteria from Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. The Court held that the question whether sales tax collected by the assessee was taxable at the time of receipt had not been raised before the Tribunal and therefore did not arise out of the Tribunal's order. Consequently, the High Court's inquiry was restricted to the question whether the particular sum of Rs. 1,17,571 could be regarded as taxable income in the circumstances where it was not disputed that the amount was not initially taxable.
The Court then turned to the substantive question and applied the principle from Upper India Sugar Exchange Ltd. v. Commissioner of Income-tax: taxability depends on the initial character of the receipt. Because it was common ground before the Tribunal that the sums of sales tax initially received were not the assessee's revenue receipts, the Court agreed with the Tribunal that later appropriation or failure to pay over the sums did not change their character into taxable income.
On that basis the Court concluded that the surplus collections of sales tax totaling Rs. 1,17,571 were not assessable as the income of the assessee.
Holding and Implications
Holding: The Court answered the referred question in the negative and in favour of the assessee: The sum of Rs. 1,17,571 did not represent taxable income of the assessee.
Direct consequences for the parties:
- The assessee's inclusion of Rs. 1,17,571 in taxable income is disallowed.
- The assessee is entitled to recover Rs. 200 as the costs of this reference from the Commissioner of Income-tax; counsel's fee is assessed at the same figure (Rs. 200).
Implications beyond the parties: The opinion confines itself to the question referred and applies existing authority (Scindia and Upper India Sugar Exchange). The Court did not state any broader new proposition of law beyond applying the cited precedents; accordingly, the direct effect is limited to the parties and the specific facts before the Court.
1. The statement of the case submitted by the Appellate Tribunal raises the following question of law:
"Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,17,571 represenled taxable income of the assessee ?"
2. The statement of the case relates to the assessment year 1959-60. The assessee is a firm which was accorded registration under the Income-tax Act, 1922, hereinafter referred to as the Act, and it carries on wholesale business in cloth. The aasessee was also a registered dealer under the U.P. Sales Tax Act and as such it collected sales tax from its customers and also paid out its liability on account of sales tax to the Government. The assessee used to maintain a separate account denominated as the "sales tax account" in which all receipts paid by the assessee's customers on account of sales tax were credited and all payments made by it to the Government debited. Up to the end of the assessment year 1957-58 there was a debit balance in the sales tax account maintained by the assessee and this debit balance was transferred by the assessee to its profit and loss account and allowed as a deduction in the income-tax assessment. In the accounting year relevant to the assessment year 1958-59, collections made by the assessee from its customers on account of sales tax were in excess of the payments made to the Government with the result that there was a closing credit balance of Rs. 1,30,044 in the sales tax account. The assessee, however, instead of crediting such excess to the profit and loss account, showed it as a liability in the balance-sheet. It appears, however, that the Income-tax Officer overlooked the manipulations in the accounts and failed to tax the excess of the sales tax collected as the income of the assessee. Coming to the relevant accounting year, the sales tax account maintained by the assessef showed a credit balance of Rs. 2,47,615 at the end of the year. There was an opening balance of Rs. 1,30,044 which meant that the collections on account of sales tax made by the assessee during the relevant period exceeded the payments made to the Government by the sura of Rs. 1,17,571. The Income-tax Officer included this amount in the assessment of the assessee for the assessment year 1959-60.
3. The assessee made an appeal to the Appellate Assistant Commissioner against the inclusion of the sum of Rs. 1/17,571 in its assessment but the appeal was unsuccessful.
4. The assessee then appealed to the Tribunal. Before the Tribunal it was contended on behalf of the assessee that the sales tax collected by it was not a trading receipt at all. It had to pay the entire amount collected by it to the Government. It was argued that the assessee maintained its accounts in the mercantile system and even when an amount was not actually paid to the Government the liability of the assessee subsisted and the amount was really debited in the sales tax account maintained by it. It was further argued that any amount received by the assessee from its customers on account of sales tax either legally or under a colour of authority was also payable to the Government under Section 8A(iv) of the U.P. Sales Tax Act, 1948, which, it may be mentioned, had not been declared as ultra vires at the relevant time. The assessee, therefore, contended that the amount in question, namely, Rs. 1,17,571, representing excess of collections over payments made to the Government was not assessable to tax as income of the assessee.
5. The departmental representative originally contended that the amount of sales tax received by the assessee was really in the nature of a revenue receipt and when the assessee did not pay such amount to the Government it became his income. It appears, however, from the agreed statement of the case submitted by the Tribunal that ultimately, the departmental representative conceded that the sales tax charged for and received by the assessee did not become its income as and when the sale was made but, later on, when the assessee did not make payment thereof to the Government and retained the amount, such amount represented the income of the assessee. In the agreed statement of the case the Tribunal has set out the contention of the department, as stated in paragraph 9 of its appellate order, in the following words:
"9. It was not the case of the department that the sales tax received by the assessee at the time of the sale itself was the income of the assessee. The department's case is that the sales tax so charged did not become the income of the assessee as soon as the sale was made but it became so later on, when it was not accounted for to the Government."
6. Such being the contention of the revenue, the Tribunal held that the quality and nature of a receipt for income-tax purposes are determined once for all when it was received and they did not change with time and supervening circumstances. The Tribunal observed that if the amount of sales tax collected by the assessee was not initially its income it could not become income of the assessee thereafter under circumstances which came into existence some time later. The Tribunal, therefore, concluded that sales tax collected by the assessee and credited separately in the "sales tax account" did not constitute a trading receipt and, therefore, the surplus collection of sales tax represented by the figure of Rs. 1,17,571 was not taxable as the income of the assessee.
7. At the instance of the Commissioner of Income-tax the question set out hereinabove has been referred to this court for its opinion
8. From what has been stated in the statement of the case to which we have adverted above, it will be noticed that it was conceded by the department before the Tribunal that the amount of sales tax when received by the assessee from its customers at the time of sale did not constitute the income of the assessee but it became so later on, when the assessee did not pay the sum to the Government. Dr. Misra, learned counsel for the Commissioner of Income-tax, contended that the concession made by the departmental representative before the Tribunal was misconceived and should be disregarded. He argued that the amount of sales tax collected by a trader along with the price of the commodity sold constituted the total sale price and that being so the entire amount, namely, the aggregate of the sale price and the sales tax realised thereon, should be regarded as trading receipt and the departmental representative was wrong in conceding that such receipt could be taxed only when the assessee did not make payment of the amount to the Government. The learned counsel dealt at length with the nature of sales tax and invited the court to give its opinion on the question referred to it on the basis of the correct state of the law ignoring the concession of the department which was wrong in law.
9. We are unable to accept the submission of Dr. Misra in point. Under section 66(1) of the Act the Tribunal is required to state a case on the question of law arising from its order for the opinion of the High Court. In the case of Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd, [1961] 42 I.T.R. 589; [1962] 1 S.C.R. 788 their Lordships of the Supreme Court have indicated, at page 611 of the report, what are the questions of law which might be taken to arise out of the order of the Tribunal. Their Lordships have summarised the principles as below : "The result of the above discussion may thus be summed up:
(1) When a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order.
(2) When a question of law is raised before the Tribunal but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it, and is, therefore, one arising out of its order.
(3) When a question is not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order.
(4) When a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it.
Stating the position compendiously, it is only a question that has been raised before or decided by the Tribunal that could be held to arise out of its order." (Underlining is ours).
10. In the present case, as already pointed out, it was conceded on behalf of the department before the Tribunal that the amount of sales tax when collected by a dealer did not become his income immediately on the receipt thereof. The department took its stand only on the basis that the amount of sales tax so collected by the dealer became his taxable income Only when the dealer did not make payment thereof to the Government in the relevant accounting year. It was not contended before the Tribunal on behalf of the department that the amount of sales tax when received by the assessee at the time of the sale was liable to suffer tax. That being so, the present case comes within the purview of item No, 4 and the compendious summary made by the Supreme Court of its conclusion in the case of Scindia Steam Navigation Co. Ltd. The question as to whether or not the amount of sales tax when received by the assessee was liable to tax, was never agitated before the Tribunal and, therefore, it cannot be deemed to be a question arising out of its order.
11. In the circumstances, as stated above, the scope of this reference becomes very limited. We have only to decide the question whether the sum of Rs. 1,17,571 could be regarded as the taxable income of the assessee when it was not controverted that the amount was not liable initially to suffer tax. Almost an identical question came in for consideration by this court in the case of Upper India Sugar Exchange Ltd. v. Commissioner of Income-tax, [1969] 72 I.T.R. 331 (All.). It was held in that case that the taxability of an amount would depend on the nature and character of the receipts at the initial stage. If the amount initially received partakes of the character of a trading receipt the amount would necessarily be taxable as such; if, however, the amounts are initially not taxable, they cannot be taxed despite the magnitude of the accumulation and despite its appropriation by the assessee to its own credit subsequently. In the instant case, it was common ground before the Tribunal that the amounts of sales tax initially received by the assessee were not its revenue receipts. The Tribunal was, therefore, correct in taking the view that the subsequent appropriation by the assessee and its failure to pay the sum to the Government did not change the character of the receipts and it was, therefore, not assessable to tax.
12. We would, therefore, answer the question in the negative and in favour of the assessee. The assessee would be entitled to recover Rs. 200 as costs of this reference from the Commissioner of Income-tax. Counsel's fee is assessed at the same figure.
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