P. Krishna Rao And Others v. Commissioner Of Income-Tax, A.P

1. These referred cases are being disposed of by this common judgment as the question of law involved in them are similar.

2. In R.C. No. 1/75 the Income-tax Appellate Tribunal formulated the following two questions :

"1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 32,846 collected by the assessee towards rusum on commission sales of jaggery constitutes income liable to tax for the assessment year 1968-69?

2. Whether, on the facts and in the circumstances of the case, a sum of Rs. 32,846 is allowable as an admissible deduction as sales tax payable by the assessee under the Andhra Pradesh General Sales Tax Act for the assessment year 1968-69?"

3. Similar questions have been posed in three other references.

4. The assessee in all these referred cases are merchants carrying on business in jaggery as commission agents. The assessment years for which they were assessed are 1968-69 and 1969-70. They had collected sales tax from the purchasers but had neither deposited the sales tax with the sales tax authorities nor had paid the amounts so collected to their principals. The assessee claimed that the amounts of sales tax so collected do not constitute income of the assessee and as such not liable to be taxed in their hands. The Income-tax Officer rejected the contention of the assessees and treated the said amounts as trading receipts and levied income-tax thereon. The Appellate Assistant Commissioner also rejected their appeals. The Income-tax Appellate Tribunal also did not agree with the contentions advanced by the asssssees. The revenue was of the opinion that since Sections 2, 5, 9 and 11 of the Andhra Pradesh General Sales Tax (Amendment) Act, 1970, hereinafter referred to as the Act of 1970, having been passed in that year the collection of sales tax by the assessees during the relevant period was illegal, and as such should be treated as trading receipts. Therefore, for the assessment years 1968-69 and 1969-70, since the liability of the assessees to pay sales tax was not certain, the amounts so collected in both the said years were liable to be taxed as trading receipts. The Income-tax Appellate Tribunal was also of the opinion that the sales tax collected by the assessees forms part of the sale price and, as such, it was also a trading receipt. Aggrieved by the orders of the department, the assessees filed petitions before the Income-tax Appellate Tribunal to draw up a statement of case for the years under reference for consideration of this court. The Income-tax Appellate Tribunal has formulated the points mentioned above.

5. Mr. D. V. Sastry, the learned advocate appearing on behalf of the assessees, contends that the department was incorrect in not giving retrospective effect to Sections 5 and 11 of the Act of 1970. According to him, it might be correct that there was no liability on the assessees to pay sales tax for the relevant assessment years in view of the judgment of the High Court, but the Act of 1970 had placed the liability on the assessees to pay sales tax for the relevant years. Although the amended Act was passed in 1970, it was to take effect from April 1, 1963. He submits that in these circumstances the sales tax collected by the assessee during the relevant period cannot be treated as trading receipts as the assessees are bound to pay sales tax so collected to the sales tax authorities. In support of his contention, he has cited the following decisions, viz., State of U.P. v. Raja Syed Mohammad Sadat Ali Khan , Commissioner of Income-tax v. Straw Products Ltd. , Commissioner of Sales Tax v. Bijli Cotton Mills , Venkatachalam, ITO v. Bombay Dyeing and Mfg. Co. Ltd. , M. S. Narayanacharlu v. Assistant Controller of E.D. , Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax and Jonnala Narasimharao & Co. v. State of A.P. .

6. On the other hand, Mr. P. Rama Rao, the learned counsel for the revenue, contends that in spite of the fact that the assessees were not liable to pay sales tax during the relevant period, nevertheless they had collected the amounts in the garb of sales tax from the purchasers and, therefore, the amounts so collected should be treated as trading receipts. He also contends that it is now well settled that sales tax forms part of the price of the commodity and, therefore, it should be treated as trading receipt. If and when the assessees are made to pay sales tax to the authorities they would be at liberty to claim refund of the income-tax so paid on the sales tax amount. In support of his contentions, Mr. Rama Rao relied upon Chowringhee Sales Bureau (P.) Ltd. v. Commissioner of Income-tax , Sinclair Murray & Co. P. Ltd. v. Commissioner of Income-tax and Badri Narayan Balakishan v. Commissioner of Income-tax [1965] 57 ITR 752 (AP).

7. In order to appreciate the contentions of the respective advocates, it is necessary to state the relevant provision of the sales tax law as they stood during the assessment years, and the subsequent amendments passed by the State Legislature. Under Section 11(1) of the Andhra Pradesh General Sales Tax Act, 1957, the position was that the commission agents who took out licence and conformed to its conditions were not liable to pay sales tax. But in 1963, Act XVI of 1963, was passed substituting Section 11(1) of the 1957 Act as it stood hitherto, and provided that an agent of a resident principal should be assessed to tax or penalty for the transaction of sale or purchase effected by him as an agent on behalf of the resident principal, where such principal would be otherwise liable to pay such tax. However, in case the agent paid the sales tax, he was permitted to recover the tax from his principal. The assessing authority was given the option to recover the tax from the principal. It would thus be seen that the licensed agents who were exempted from the payment of sales tax under the Act of 1957 were subjected to the payment of sales tax under the Amending Act of 1963. Consequently, the legality of the substituted provisions were challenged in the High Court in Irri Veera Raju v. Commercial Tax Officer [1967] 20 STC 501 (AP) and this court held that assessment made by the sales tax authorities on the basis of the substituted provisions of section 11 were illegal. In view of the above decision of this court, another Act, being Amendment Act V of 1968, was passed again substituting Section 11 of the 1963 Act, and giving it a retrospective effect from 1st August, 1963. This new Section was also challenged, and this court in K. Venkata Ramana and Budha Appa Rao v. State of A.P. [1969] 24 STC 367 held that the new Section 11 was violative of Article 14 of the Constitution. Consequently, Section 11 was again amended by Act IX of 1970. This amendment also was given retrospective effect from 1st August, 1963. In Jonnala Narasimharao & Co. v. State of A.P. (unreported) the new amendment was again challenged but the High Court upheld the amendment and that judgment was confirmed by the Supreme Court in appeal in Jonnala Narasimharao & Co. v. State of A.P. [1971] 28 STC 262. Therefore, the position of law as it stands now is that if a commission agent who is a dealer under Section 2(e) of the Sales Tax Act of 1957, had already collected the sales tax, though at first illegally, it had become legal by virtue of the Amendment Act of 1970, and as a dealer he was liable to pay that amount to the sales tax authorities in respect of the assessments made. This is what was held by the Supreme Court in Jonnala Narasimharao's case [1971] 28 STC 262. Hence, in the instant cases, the sales tax which was collected illegally by the asses-sees during the relevant period became legal by the Amendment Act of 1970. It is now to be seen as to from what date the collection of sales tax by the assessees should be considered to be legal. According to Section 1(2) of the Amendment Act of 1970, the amending provisions were deemed to have come into force on August 1, 1963. Now it is well settled by a series of decisions of the Supreme Court that if during the pendency of proceeding or even appeal the legislature passes an Act amending the provisions existing at the time and giving them retrospective effect, it would be the duty of the court to dispose of those proceedings or appeal in the light of the amended provisions. Even in Jonnala Narasimharao's case [1971] 28 STC 262 the Supreme Court observed at page 279 :

"What follows from the above is that the legislature have power to impose tax retrospectively. It is in exercise of such power that the impugned Act gives the material provision retrospective effect. It seeks to remove the defects on which the High Court had earlier struck down the material provisions. In the circumstances, it seems to us that the retrospective effect given to the material provision does not alter the character of the tax. It is a tax which operates both ways. It is reasonable and proper in its retrospective operation. It is within the competence of the legislature and certainly not a pretext or device to levy anything but tax under entry 54 of the State List."

8. In State of U.P. v. Raja Syed Mohammad Sadat Ali Khan [1961] 41 ITR 737, it was held by the Supreme Court that a court of appeal in an appeal properly before it must give effect to the law as it stood, if the law has at some stage anterior to the hearing of the appeal been amended retrospectively. In Commissioner of Sales Tax v. Bijli Cotton Mills , it was observed by the Supreme Court as follows:

"The legislature has, however, amended the Act and has declared that notwithstanding the option exercised by the assessee the tax would have to be computed in the light of the rates prevailing in 1948-49 as if they were projected upon the turnover of the previous year. The legislature has expressly stated that this rule will prevail as if it were in force during the assessment year and all assessments will be made in the light of this amended rule. In answering the question which was submitted by the Judge (Revisions) Sales Tax, therefore, the law enacted by the legislature is the law found incorporated in Section 31 by Amending Act III of 1963. This court, in giving its opinion on the question in the light of the Amending Act, is seeking to apply a legislative provision which was, by express enactment, in force at the time when the liability arose, for Section 31 enacted by Act III of 1963, is to be deemed to have been in operation at all material times in supersession of the previous rule declared by this court."

9. We do not consider it necessary to load this judgment by citing several other rulings. We are, therefore, of the opinion that in the light of the provisions of the Amendment Act of 1970, the sales tax illegally collected by the commission agents on the sale of jaggery during the relevant period had become legal by the Amendment Act of 1970. The department was treating the amount of sales tax collected by the assessees as business receipts on the ground that the collection of sales tax was illegal and continued to be illegal until 1970. In view of what is stated above, the reasoning of the department is not correct. But that would not deter us from holding that the amount of sales tax collected by the assessees during the relevant period should be considered as business receipts, and, therefore, liable to be taxed. The amounts collected by the assessees as sales tax are also not allowable as admissible deduction. In case the assessees have paid the sales tax to the concerned authorities, they would be at liberty to claim deductions of the amounts as and when they pay to the sales tax authorities. The reason for coming to the above conclusion is that it is now well settled that the collection of sales tax on a transaction of sale is part of the price, because the liability to pay sales tax is on the dealer and the dealer can pass on his tax burden to his purchaser by adding sales tax to the price of the goods sold. When such is the case, the price of the goods sold including the tax payable becomes valuable consideration and, therefore, the sales tax collected by the dealer becomes part of the sale price. Once this position is accepted, then the sales tax collected by the dealer and not paid by him to the sales tax authorities has to be treated as business receipts. We are supported in this view by a decision of the Supreme Court in Delhi Cloth & General Mills Co. Ltd. v. Commissioner of Sales Tax [1971] 28 STC 331. In Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax , the appellant was a dealer in furniture as well as an auctioneer. In respect of sales effected as auctioneer, the appellant realised a sum of Rs. 32,986 as sales tax and credited the same separately in its account books. The appellant did neither pay the amount of sales tax to the actual owner nor deposited it in the State exchequer as sales tax. It also did not refund the amount to the persons from whom it had been collected. In these circumstances the Supreme Court held that the amount of sales tax realised by the appellant in its character as an auctioneer formed part of its trading receipts. The fact that the appellant credited the amount in his books separately as "Sales Tax Collection Account" did not make any material difference. Hence, we hold that the amounts of sales tax collected by the assessees during the relevant period have been legally collected by them in view of the provisions of Section II of the Amendment Act of 1970; since the amounts of sales tax so collected form part of the sale price they are trading receipts. It is only when they pay the sales tax to the sales tax authorities, they will be entitled to claim deduction of the amount in that year of payment.

10. The references are answered accordingly, in favour of the revenue. There will be no order as to costs. Advocate's fee Rs. 250 in each reference.