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Buddala China Venkata Rao & Co. v. Commissioner Of Income-Tax, A.P

Andhra Pradesh High Court
Aug 23, 1976
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Structured Summary of the Opinion in R.C. No. 4/75

Factual and Procedural Background

This reference (R. C. No. 4/75) raised two specific questions about the tax treatment of Rs. 51,220 described in the record as "rusum" (the local equivalent of sales tax) collected by commission agents in respect of jaggery commission business for the financial year 1968-69 (assessment year 1969-70).

M/s. Buddala China Venkata Rao & Co., a commission agent firm dealing in jaggery and chillies, collected Rs. 51,220 as rusum on jaggery transactions. In the assessment for 1968-69 the Income-tax Officer treated the rusum collected for jaggery as income of the assessee (while treating rusum for chillies as payable to the sales tax department). The Appellate Assistant Commissioner affirmed the Income-tax Officer's view. The Income-tax Appellate Tribunal followed a prior decision (I. T. A. No. 2/Hyd/70-71 of M/s. Shri Veera Venkata Satyanarayana & Company) and upheld the Appellate Assistant Commissioner's order.

The references relate to whether that sum is taxable income for assessment year 1969-70 and whether it is allowable as a deduction as sales tax payable under the Andhra Pradesh General Sales Tax Act, 1957 as amended (Act 9 of 1970).

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 51,220 collected by the assessee towards "rusum" on commission sales of jaggery constitutes income liable to tax for the assessment year 1969-70?
  2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 51,220 is allowable as an admissible deduction as sales tax payable by the assessee under the Andhra Pradesh General Sales Tax Act, 1957, as amended by Act 9 of 1970, for the assessment year 1969-70?

Arguments of the Parties

Assessee's Arguments (represented by Shri Sastry)

  • The Rs. 51,220 collected as "rusum" is not a trading receipt and is an amount to be paid to the sales tax authorities; therefore it should not be treated as the assessee's income.
  • The liability to pay the rusum (sales tax) is statutory under Section 11 of the Sales Tax Act; treating the amount as income is incorrect.
  • The assessee maintains books on the mercantile system: amounts legally due are credited when the right arises and liabilities are debited when incurred, before payment. On that basis the Rs. 51,220 cannot be treated as income for the financial year in question.
  • Even allowing for the retrospective effect of the amending Act 9 of 1970, the mercantile accounting treatment precludes treating the sum as income for that year.

Revenue's Arguments (represented by Sri Rama Rao)

  • The amount collected by the commission agent is, in substance, the income of the assessee, relying on precedents such as Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax, Sinclair Murray & Co. P. Ltd. v. Commissioner of Income-tax (1974) 97 ITR 615, and Punjab Distilling Industries Ltd. v. Commissioner of Income-tax.
  • Because the amount was credited in the assessee's books and treated as a trade receipt, and because the assessee did not pay the amount to the exchequer nor refund it to the principal, the revenue contends it should be taxed as the agent's income.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court in this Opinion
Irri Veera Raju v. Commercial Tax Officer [1967] 20 STC 501 (AP) Commission agents successfully challenged the practice of making assessments on combined turnovers irrespective of principals' turnovers. Used in the legislative and factual history to explain why amendments to the Sales Tax Act were enacted and challenged by commission agents.
K. Venkata Ramana v. State of Andhra Pradesh [1969] 24 STC 367 (AP) Commission agents successfully challenged amended provisions as discriminatory. Noted as part of the sequence of litigation that led to further amendment (Act 9 of 1970).
Jonnala Narasimharao & Co. v. State of Andhra Pradesh [1971] 28 STC 262 Upheld the validity of the retrospective amendments (Act 9 of 1970) to the Sales Tax Act. Cited to record that the later amendments to the Sales Tax Act were held valid by the Supreme Court.
Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax Where an auctioneer received amounts described as sales tax, the taxing authorities found the amount to be in reality a portion of the sale price and treated it as assessee's income. Relied upon by the revenue to support treatment of collected amounts as the agent's income; the court considered it but distinguished it as not analogous to the facts before it.
Sinclair Murray & Co. P. Ltd. v. Commissioner of Income-tax [1974] 97 ITR 615 Applied the test that certain collected sums could be trade receipts and therefore taxable as such. Relied on by the revenue; the court noted the reliance but held the case was not analogous to the instant facts.
Punjab Distilling Industries Ltd. v. Commissioner of Income-tax Applied a similar test to Chowringhee to treat collected amounts as assessee's income. Cited by the revenue; the court concluded it did not afford a proper analogy with the present facts.
Commissioner Of Income Tax, Madras v. A. Gajapathy Naidu, Madras Considered treatment, under mercantile accounting, of amounts received after the financial year; Supreme Court held the amount constituted income in the year when the right to receive it arose. The court treated the ratio as bearing significantly on whether the rusum constituted income, given the assessee's mercantile accounting system.
Income-tax Officer v. Bombay Dyeing & Manufacturing Company Ltd. Considered effect of retrospective legislation and held that a glaring mistake of law apparent on the record can be rectified under the relevant provisions; action of the Income-tax Officer was justified. Used to discuss the effect of retrospective amendments and the rectification of assessment orders in light of legislative change.
Commissioner of Income-tax v. Banarsi Dass & Sons [1966] 61 ITR 414 (Punj) Expressed similar dicta regarding rectification and retrospective effect. Referred to as supporting authority on the issue of rectification in the context of retrospective legislation.
Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax Stated that under sales tax laws the obligation to pay tax arises when taxable purchases or sales are made; mercantile accounting allows deduction for liabilities accrued during the accounting period. Cited to support the proposition that liability to sales tax accrues at the time of sale and is deductible under mercantile accounting even if payable later.
Additional Commissioner of Income-tax v. T. Nagireddy & Co. (R.C. No. 35/74, decided 15 Dec 1975) An earlier opinion on identical questions (reference decision). The court expressed respectful agreement with this earlier opinion and relied on it in preferring the view favourable to the assessee.
P. Krishna Rao v. Commissioner of Income-tax (R.C. Nos. 1, 2, 3 and 49 of 1975, dated 18 June 1976) An opinion taking a view contrary to the present court's conclusion on identical questions. The court declined to follow that contrary opinion because it had not referred to R.C. No. 35/74; the present court did not adopt the view in P. Krishna Rao.

Court's Reasoning and Analysis

The court proceeded by applying the parties' accounts of the facts to established principle and precedent, with particular emphasis on the assessee's mercantile method of accounting and on authorities concerning (a) when a liability to sales tax arises and (b) how receipts recorded in accounts are to be characterised for income-tax purposes.

Key analytical steps recorded in the opinion:

  1. Account of statutory and legislative background: the opinion sets out the amendments to the Andhra Pradesh General Sales Tax Act (Acts of 1963, 1967 and 1970) and related litigation affecting commission agents, noting that the amendments operated retrospectively and that their validity was sustained by the Supreme Court.
  2. Examination of the parties' positions: the assessee argued the rusum was a statutory liability payable to the sales tax authorities and not a trading receipt; the revenue invoked cases where collected sums were held to be in substance part of the agent's income when treated as sale price or trade receipt in the agent's accounts.
  3. Application of authorities on mercantile accounting and accrual: the court relied on the ratio in Commissioner of Income Tax, Madras v. A. Gajapathy Naidu and on the principle in Kedarnath Jute Mfg. Co. Ltd. that liabilities to pay sales tax arise on the transactions themselves and, under mercantile accounting, are deductible in the year in which they accrue even if paid later.
  4. Consideration of retrospective legislation and rectification: the court discussed the Supreme Court's approach in Income-tax Officer v. Bombay Dyeing & Mfg. Co. Ltd. regarding the effect of retrospective amendments and the capacity to rectify assessment records in light of a "glaring and obvious" mistake of law, acknowledging how retrospective amendments had figured in the factual matrix.
  5. Distinguishing adverse precedents: the court analysed the revenue's reliance on decisions such as Chowringhee Sales Bureau, Sinclair Murray and Punjab Distilling Industries, observing that those decisions turned on findings that the sums in question were in reality part of the sale price or trade receipts. The court concluded those cases were not analogous to the facts before it.
  6. Conclusion from application of principles: having regard to the facts, the assessee's mercantile accounting method, and the authorities on accrual and the character of collected sums, the court concluded that the rusum of Rs. 51,220 was not the assessee's income but was payable to the sales tax authorities and thus admissible as a deduction.
  7. On conflicting earlier opinions, the court expressly identified an earlier opinion (R.C. No. 35/74) with which it agreed and declined to follow a contrary later opinion (P. Krishna Rao) that had failed to refer to that earlier decision.

Holding and Implications

HOLDING: The court answered the two reference questions in favour of the assessee. Specifically, the court held that the sum of Rs. 51,220 collected as "rusum" on commission sales of jaggery is not the income of the assessee and is allowable as a deduction as an amount payable by the assessee to the sales tax authorities under the relevant provisions of the Andhra Pradesh General Sales Tax Act.

Direct consequences and orders recorded in the opinion:

  • The references (including R.C. Nos. 10 and 44 of 1975, which were stated to be identical) were answered in the same manner as R.C. No. 4/75.
  • The costs of the references were directed to be paid by the Commissioner of Income-tax in each reference; an advocate's fee of Rs. 250 was ordered.

The opinion states the court's reasoning and its reliance on and distinction from earlier authorities; it records agreement with an earlier reference opinion (R.C. No. 35/74) and refusal to follow a later, conflicting opinion (P. Krishna Rao v. Commissioner of Income-tax) for the reasons given in the text.

Show all summary ...

1. In R. C. No. 4/75 the following two questions are referred for our opinion :

(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 51,220 collected by the assessee towards 'rusum' on commis-sion sales of jaggery constitutes an income liable to tax for the assessment year 1969-70? And (2) Whether, on the facts and in the circumstances of the case, the sum of Rs. 51,220 is allowable as admissible deduction as sales tax payable by the assessee under the Andhra Pradesh General Sales Tax Act, 1957, as amended by the act 9 of 1970 for the assessment year 1969-70 ?

2. M/s. Buddala China Venkata Rao & Co., Attili, the assessee, is a firm carrying on business in jaggery and chillies on commission basis. In the financial year 1968-69, the firm collected a sum of Rs. 51,220 as "rusum" (local equivalent of sales tax). This amount represented the sales tax payable on jaggery transactions of that year. In the case of rusum for chillies, the Income-tax Officer, in the assessment order for 1968-69, held that the "rusum" was payable to the sales tax department but the amount of Rs. 51,220 collected as rusum for jaggery was held as income of the assessee and added that if, ultimately, the assessee is found liable to pay the sales tax to the State Government, the amounts so paid would be allowed as deduction in the" year of payment. The Appellate Assistant Commissioner affirmed the view of the Income-tax Officer. The Income-tax Appellate Tribunal found that the facts in the case were identical with the facts in I. T. A. No. 2/Hyd/70-71 of M/s. Shri Veera Venkata Satyanarayana & Company, and following their decision in that case, upheld the order of the Appellate Assistant Commissioner.

3. As to how the jaggery commission agents came to collect the sales tax and have not paid the amounts to the exchequer has a brief history. The commission agents under the A. P. General Sales Tax Act (Act 6 of 1957) till 1963 were required to obtain licences and if they conformed to the conditions prescribed in the licences they were not subjected to sales tax. The principal Act was amended by act 16 of 1963, and in that Section 11 was substituted, which changed the structure of assessment. The agents were made liable for payment of sales tax. The liability of the agent was made co-extensive with that of the principal. The sales tax authorities were making assessments on the turnover of sales of jaggery of several principals irrespective of the fact whether the turnover of each principal was not up to Rs. 10,000. This method was challenged by the commission agents successfully and the case is reported in Irri Veera Raju v. Commercial Tax Officer [1967] 20 STC 501 (AP). To get over the effect of the decision of this court. Amendment Act 5 of 1967 was enacted. A new Section 11 was substituted with retrospective effect from 1st August, 1963, enabling the sales tax authorities to levy and collect the tax from the agents de hors the liability of the principals in respect of the turnover of the principal specified in Subsection (1) of Section 5 of the Act 6 of 1957. The commission agents again successfully challenged the amended provisions as discriminatory. The decision is K. Venkata Ramana v. State of Andhra Pradesh [1969] 24 STC 367 (AP). The principal Act was amended for the third time by the A. P. General Sales Tax (Amendment) Act (Act 9 of 1970). Sections 2, 5, 8 and 9 were amended. Section 11 was again substituted with retrospective effect from 1st August, 1963. These amendments were held valid. The decision of the Supreme Court is Jonnala Narasimharao & Co. v. State of Andhra Pradesh [1971] 28 STC 262.

4. Shri Sastry for the assessee in this reference contends that "rusum" of Rs. 51,220 is not a trading receipt. This amount has to be paid to the sales tax authorities. The liability of the principal is a statutory liability under Section 11 of the Sales Tax Act. Therefore, he submitted, the income-tax authorities were wrong to treat the amount of Rs. 51,220 as income of the assessee. He elaborated the argument stating that the assessee maintains his books of account in mercantile system which "brings into credit what is due immediately it became legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed". Therefore, notwithstanding the retrospective effect of the amending act 9 of 1970, the amount of Rs. 51,220, he contended, cannot be treated as "income" of the assessee in the respective financial year 1969-70.

5. Sri Rama Rao, for the department argued that the amount collected by the commission agent in substance is the income of the assessee as held by the Supreme Court in Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax and in Sinclair Murray & Co. P. Ltd. v.

Commissioner of Income-tax [1974] 97ITR 615. He contended that the amount in substance was a trade receipt. In the account books of the assessee the amount was credited and, it is argued, the assessee treated the amount as trade receipt, yet it did not pay the amount to the exchequer nor paid the amount to the purchaser (the principal). Therefore, it is argued, this decision of the revenue that the amount is the trade receipt of the commission agent is correct.

6. The method of accounting followed by the assessee is the mercantile system. The effect of the receipt of amounts subsequent to the financial year and as to how such amounts could be treated and for what year of assessment directly arose in the case of Commissioner Of Income Tax, Madras. v. A. Gajapathy Naidu, Madras. . The assesses in that case supplied bread to a hospital during the financial year April 1, 1948, to March 31, 1949. The assessee was maintaining accounts on mercantile basis. The assessment for that year was completed. In November, 1950, the Government paid Rs. 12,447 to compensate the loss sustained by the assessee for the bread supplied in the financial year 1948-49. The question arose whether Rs. 12,447 could be treated as income in the financial year 1948-49. The Supreme Court, while referring to the practice in the United Kingdom, which was followed by the State High Court, observed (page 117):

"While considering the case law it is necessary to bear in mind that the Indian Income-tax Act is not in pari materia with the British income-tax statutes, it is less elaborate in many ways, subject to fewer refinements and in arrangement and language it differs greatly from the provisions with which the courts in England have had to deal. Little help can, therefore, be gained by attempting to construe the Indian Income-tax Act in the light of decisions bearing upon the meaning of the income-tax legislation in England. But on analogous provisions, fundamental concepts and general principles unaffected by the specialities of the English income-tax statutes, English authorities may be useful guides."
The Supreme Court disagreed with the view of the Madras, High Court and held that the amount of Rs. 12,447 constitutes income in the assessment year 1951-52 when the right to receive the amount arose.

7. The ratio of the decision in Commissioner Of Income Tax, Madras. v. A. Gajapathy Naidu, Madras. has a large bearing in the instant case in deciding whether the amount in question is the "income" of the assessee, for the amount represented sales tax payable to the Government as per the account books of the assessee.

8. The effect of retrospective legislation was considered by the Supreme Court in Venkatachalani, Income-tax Officer v. Bombay Dyeing & Manufacturing Company Ltd. . The assessee in that case was given credit of Rs. 50,063-15-0 on tax paid under Section 18A of the Indian Income-tax Act, 1922. There was an amendment to Section 18A by which a proviso was added. If the proviso covered the assessee's case, the assessee was entitled to a credit of Rs. 29,446-9-0. Therefore, under Section 29 for the excess credit of Rs. 29,446-9-0 the assessee was served with a notice to refund. On these facts the Supreme Court, differing from the view of the Bombay High Court, applied Section 35 of the Act of 1922 to the circumstances of the case. It was held, at page 150, that

"if a mistake of fact apparent from the record of the assessment order can be rectified under Section 35, we see no reason why a mistake of law which is glaring and obvious cannot be similarly rectified. Prima facie it may appear somewhat strange that an order which was good and valid when it was made should be treated as patently invalid and wrong by virtue of the retrospective operation of the Amendment Act....."
The action of the Income-tax Officer was held to be justified. To a like effect is the dicta laid down by the Judicial Committee in the case of Commissioner of Income-tax v. Banarsi Dass & Sons [ 1966] 61 ITR 414 (Punj).

9. The question when liability to pay sales tax arises was again considered by the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax . The observations are to the following effect :

"Now under all sales tax laws including the statute with which we are concerned, the moment a dealer makes either purchases or sales which are subject to taxation, the obligation to pay the tax arises and taxability is attracted..... It is not possible to comprehend how the liability would cease to be one because the assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail with regard to the quantum of liability, etc. An assessee who follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed. It can again not be disputed that the liability to payment of sales tax had accrued during the year of assessment even though it had to be discharged at a future date."

10. Therefore, applying the ratio of these cases and having regard to the fact that the assessee's method of accounting is mercantile, we are not in a position to agree with the counsel for the department that the "rusum" amount collected by the assessee was "income" of the assessee. The learned counsel for the department relied on the case of Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax . In that case, the assessee was an auctioneer and in the year ending with 31st March, received Rs. 32,986 as sales tax. This amount was not paid over to the exchequer nor was refunded to the person from whom it was collected. What is of significance is that the taxing authorities found that in reality the amount was a "portion of the sale price" and, therefore, held it as part of the assessee's income. In the case of Punjab Distilling Industries Ltd. v. Commissioner of Income-tax the amount was so treated applying a similar test. To the like effect are the observations in Sinclair Murray & Co. P. Ltd. v. Commissioner of Income-tax . All that is urged is that, in the instant case, the assessee had not paid the sales tax to the exchequer nor had paid it to his principal. The cases of Chowringhee Sales Bureau P. Ltd. , Sinclair Murray & Co. Ltd. and Punjab Distilling Industries Ltd. do not stand on any analogy to the facts of the case. Therefore, having regard to the circumstances of the case, we answer the two questions in favour of the assessee. The amount of Rs. 51,220 is not the income of the assessee and is admissible deduction as the amount is payable by the assessee to the sales tax authorities.

11. Sri Rama Rao brought to our notice the opinion of this court in R.C. Nos. 1, 2, 3 and 49 of 1975 dated June 18, 1976 [P. Krishna Rao v. Commissioner of Income-tax ] wherein on identical question a different view was taken by this court. We are unable to follow that decision for the reason that the earlier opinion in R.C. No. 35/74, decided on 15th December, 1975 (Additional Commissioner of Income-tax v. T. Nagireddy & Co. ) on identical questions, was not referred to in R.C. No. 1/75 & batch, and also because we are in respectful agreement with the view taken in R.C. No. 35/74.

12. The facts and the questions referred in R.C. Nos. 10 and 44 of 1975 are identical. Therefore, our answers are the same as in R.C. No. 4/75. The references are answered accordingly. The costs to be paid by the Commissioner of Income-tax in each. Advocate's fee Rs. 250.