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AMICUS AI
Citation Codes
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citation codes
Case Number
Judges
  • G. Ramanujam
  • V. Ramaswami, JJ.
Acts
  • Madras General Sales Tax Act.
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Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • G. Ramanujam
  • V. Ramaswami, JJ.
Acts
  • Madras General Sales Tax Act.
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Smart Summary

Court Opinion Summary — Ramanujam, J.

Factual and Procedural Background

The assessee was engaged in the manufacture and sale of fireworks and maintained separate accounts for collections and payments made towards Central sales tax and for collections and payments under the Madras General Sales Tax Act. For the previous year ending 16 January 1962 (assessment year 1962-63) the Central sales tax account showed collections of Rs. 10,539 and payments of Rs. 4,520 (an excess of Rs. 6,019). The Madras general sales tax account showed an excess collection of Rs. 324.

The Income-tax Officer (ITO) proposed to treat these excess collections as the assessee's income. The assessee objected, contending that sales tax collected was not part of the sale price, that it was collected as an agent of the Government, and that any excess must be paid over to the Government. The ITO assessed the two sums as income, taking the view that sales tax collections formed part of turnover.

On appeal the Appellate Assistant Commissioner agreed that sales tax collections were part of turnover but held that accrued liability to pay sales tax should be taken into account in calculating excess collections and, if not quantified by sales tax authorities, the ITO must estimate such liability. The department appealed to the Tribunal, which relied on Sundaram Motors (P.) Ltd. and held sales tax collected could not be included in taxable turnover, treated collections as a trust fund to be handed to Government, and upheld the assessee's accounting method. The revenue referred the following question to the High Court:

“Whether, on the facts and in the circumstances of the case, the two sums of Rs. 6,019 and Rs. 324 were not includible as the assessee's income for the assessment year 1962-63?”

Legal Issues Presented

  1. Whether the excess sales tax collections of Rs. 6,019 (Central) and Rs. 324 (Madras General) were not includible as the assessee's income for the assessment year 1962-63.
  2. Whether sales tax collections made by a dealer are trading receipts that should be included in turnover (subject to deduction for liability), or whether such collections constitute a trust fund not available to the dealer.
  3. If sales tax collections are trading receipts, whether the correct measure of the dealer's income is (a) the amount of excess as shown by separate cash-basis accounts (collections minus actual payments), or (b) collections minus the accrued liability to sales tax (on a mercantile/accrual basis) even if that liability has not been entered in the separate cash account.

Arguments of the Parties

Revenue's Arguments

  • The sales tax collected by the assessee was part of his turnover and thus trading receipts.
  • The liability to sales tax is primarily that of the assessee and it is open to him to collect it or not from customers; unless the assessee has provided for accrued liability in his accounts, only actual payments towards the liability should be considered in determining excess collections.
  • It is not open to the assessee to segregate sales tax collections and treat them separately from turnover.
  • Reliance was placed on the Supreme Court decision in Chowringhee Sales Bureau (P) Ltd. v. CIT, West Bengal to support that sales tax collections are trading receipts and payments to discharge the liability should be deducted when paid (in the context of the accounting method used).

Assessee's Arguments

  • The sales tax collected did not form part of the sale price and was collected only as an agent of the Government; excess had to be paid over to the Government and therefore should not be treated as income.
  • Even if collections are treated as trading receipts, the sales tax liability incurred (accrued liability) should be taken into account when calculating the excess; where sales tax assessments for the relevant periods had been completed and the liability quantified, the ITO should have given credit to that liability.
  • Reliance was placed on Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax (Supreme Court) and Commissioner of Income-tax v. Hira Lal Mittal & Sons to support the proposition that a liability which accrues by operation of law is deductible even if not recorded in the books, particularly where the assessee follows the mercantile system of accounting.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Sundaram Motors (P.) Ltd. v. First Commercial Tax Officer [1965] 16 STC 644 (Mad) The Tribunal relied on this decision to hold that sales tax collected could not be included in the dealer's taxable turnover (i.e., sales tax collections treated as not forming part of turnover). The High Court rejected the Tribunal's reliance on this decision for the proposition that excess collections are not trading receipts. The Court held it could not agree with the Tribunal that excess collections were not trading receipts.
Chowringhee Sales Bureau (P) Ltd. v. CIT, West Bengal (Supreme Court decision referenced) The decision was cited as supporting the view that sales tax collections should be taken to be trading receipts and that amounts paid to discharge sales tax liability should be deducted (contextual to accounting method employed). The High Court held that this decision "fully supports" the revenue's stand and attracted the principle that where the assessee has maintained separate accounts on a cash basis for sales tax collections, the collections are trading receipts and deduction for sales tax is available only when actual payment is made.
Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax [1971] 82 ITR 363 (SC) Holds that the obligation to pay sales tax arises on making purchases or sales subject to sales tax; liability is independent of assessment; under mercantile accounting an assessee is entitled to deduct such liability even if the assessment/demand is pending or entries are absent in books. The Court acknowledged and recorded this authority as supporting the assessee's contention that accrued liability may be deductible even if not entered in separate accounts, but found that the question in the present case depended on the method of accounting actually adopted (cash basis for sales tax accounts), which led to a different result on the facts.
Commissioner of Income-tax v. Hira Lal Mittal & Sons Holds that where a liability arises by operation of law, its deduction cannot be denied merely because it has not been entered in the assessee's accounts. The Court cited this authority in support of the proposition that non-entry in books does not necessarily bar deduction; however, on the facts the Court emphasized the assessee's chosen method of accounting (cash basis for sales tax collections) and applied the Chowringhee principle accordingly.

Court's Reasoning and Analysis

The Court proceeded in a stepwise manner grounded in the facts and the accounting method employed:

  1. Characterisation of sales tax collections: The Court held that sales tax collections could not be treated as a trust fund in which the assessee had no interest. The primary liability to pay sales tax rests on the assessee independently of whether he collects it from customers; the statutory power to collect enables dealers to pass on that liability to buyers, but if collections exceed the assessee's actual liability for the period, the excess benefits the assessee. Accordingly, the Court disagreed with the Tribunal's view that excess collections were not trading receipts.
  2. Identification of the operative accounting question: Having concluded that excess collections are potentially trading receipts, the Court identified the narrow accounting question — whether the excess shown in the assessee's separate accounts (which were maintained on a cash basis) should be treated as trading receipts, or whether collections minus accrued liability (on a mercantile/accrual basis) should be treated as the actual trading receipts.
  3. Precedent analysis: The Court examined competing authorities. It found the Chowringhee Sales Bureau decision supportive of the revenue's position that sales tax collections are trading receipts and that amounts paid to discharge liability should be deducted when paid, particularly where the accounting method warrants that approach. The Court also considered Kedarnath Jute and Hira Lal Mittal & Sons, which support the proposition that liabilities arising by operation of law (and liabilities under the mercantile system) can be deducted even if not entered in the books; these authorities demonstrated that entitlement to a deduction depends on whether the liability had in fact arisen and on the method of accounting.
  4. Application to the facts: The Court examined the assessee's practice: the separate sales-tax accounts were maintained on a cash basis — collections were credited and actual payments debited; these separate accounts did not feed into the general business accounts because the assessee had consistently treated the collections as monies held on behalf of the Government. The Court recognized that an assessee may lawfully employ different accounting methods for different parts of the business provided they are used regularly and consistently and result in a proper determination of true profits.
  5. Conclusion from accounting method: Because the assessee had in fact adopted the cash basis for his sales-tax accounts, the principle in Chowringhee applied. Under that method, the assessee could claim deduction for sales tax only when actual payments were made to discharge the liability. The mere existence of an accrued liability (or its subsequent quantification by sales-tax authorities) did not change the effect of the cash-basis accounting regularly employed by the assessee in these particular accounts.

Holding and Implications

Holding: The question referred is answered against the assessee — the sums of Rs. 6,019 and Rs. 324 are to be treated in accordance with the assessee's cash-basis accounting and, consequently, cannot be excluded from the assessee's income simply because the sales-tax liability had accrued; deduction is allowable only when actual payment is made under the accounting method adopted.

Implications and direct effects:

  • The excess collections in question cannot be excluded from the assessable receipts on the footing that they are a trust fund not belonging to the assessee; the Court held that excess collections are trading receipts in principle.
  • Because the assessee maintained separate sales-tax accounts on a cash basis (collections credited when received and payments debited when paid) and consistently followed that method, the assessee can claim deduction for sales tax only when actual payments are made to discharge the liability — accrual alone (absent the accounting treatment) did not alter that outcome on these facts.
  • The Court applied the Chowringhee principle to the facts and, while it acknowledged authorities that support accrual/mercantile deductions (Kedarnath Jute; Hira Lal Mittal), the decisive factor was the assessee's chosen and consistently applied method of accounting for these collections.
  • Practical outcome: The assessment treating the excess collections as income stands in the circumstances of this case; the revenue succeeds and will have its costs. The Court ordered costs and taxed counsel's fee at Rs. 250.
  • This opinion resolves the referred question on the facts and accounting method before the Court; it does not purport to lay down novel principles beyond applying cited authorities to the particular accounting position adopted by the assessee.

This summary is limited to and strictly based on the information contained in the provided opinion.

Show full summary ...

    Commissioner Of Income-Tax, Madras-I v. E.A.E.T Sundararaj.

    Ramanujam, J.:— The assessee in this case carried on business in the manufacture and sale of fireworks. He maintained a separate account for collections and payments made towards Central sales tax. Similarly, a separate account was maintained for the sales tax collections and payments under the Madras General Sales Tax Act. These two accounts showed that in the previous year ending January 16, 1962, relevant to the assessment year 1962-63, the assessee had collected Rs. 10,539 by way of Central sales tax from his customers and paid a sum of Rs. 4,520 to the sales tax department leaving an excess collection of Rs. 6,019. Similarly, there was an excess collection in respect of the Madras general sales tax amounting to Rs. 324.

    2. The Income-tax Officer proposed to treat the excess collections in the two accounts as the assessee's income. The assessee objected to the same on the ground that the sales tax collected did not form part of the sale price for which the goods had been sold, that he has collected the sales tax only as an agent of the Government, and that in any case the excess had to be paid over to the Government. The Income-tax Officer, however, took the view that the sales tax collected formed part of the turnover and, therefore, the excess collections should be taken to be trading receipts and that it is not open to the assessee to segregate the sales tax collections from his turnover. In that view he assessed the above two sums as part of the assessee's income.

    3. On appeal by the assessee, the Appellate Assistant Commissioner agreed with the Income-tax Officer to the limited extent of holding that sales tax collections formed part of the turnover of the assessee. He, however, held that though the excess collections could be treated as part of the assessee's turnover the assessee's liability to pay sales tax in respect of the sales effected by him during the year should be taken into account in calculating the excess, and that even if the assessee's sales tax liability for the relevant period has not been quantified by the authorities under the relevant Sales Tax Acts, the Income-tax Officer has to make a proper estimate of such accrued liability for purpose of calculating the excess collection.

    4. The department appealed to the Appellate Tribunal contending that the sales tax collected by the assessee was part of his turnover, that the liability to sales tax was primarily the assessee's, that it might be open to him to collect it or not from the customers, that unless the assessee has provided for the accrued liability towards sales tax in his account, the actual payment towards that liability alone should be taken into consideration in determining the excess collections. It was also contended that in any event the assessee cannot segregate the sales tax collections and treat them separately from the turnover. The Tribunal, however, held that in view of the decision in Sundaram Motors (P.) Ltd. v. First Commercial Tax Officer [1965] 16 STC 644 Mad. the sales tax collected by the assessee could not be included in his taxable turnover, that even otherwise, the sales tax collections made by the assessee was a sort of trust fund to be handed over to the Government and that it is not open to him to appropriate it as his own money. The Tribunal also stated that in the circumstances the only proper method of accounting is the one adopted by the assessee and that such a method had been adopted in the earlier period and accepted by the department. At the instance of the revenue the following question has been referred to this court for its opinion:

    “Whether, on the facts and in the circumstances of the case, the two sums of Rs. 6,019 and Rs. 324 were not includible as the assessee's income for the assessment year 1962-63?”

    5. Before us the learned counsel for the revenue contends that the view taken by the Tribunal that the entire sales tax collections is a trust fund to be paid over to the Government and that the assessee has no right to appropriate it as his own money cannot at all be sustained. The learned counsel for the assessee, does not, in fact, support the said view taken by the Tribunal. Even otherwise we are of the view that the sales tax collections cannot be taken to be a trust fund in which the assessee has no interest. As a matter of fact the primary liability to pay sales tax on sales effected by the assessee is independent of the fact whether he collects sales tax from his buyers or not. The statute enables the dealers to collect sales tax with a view to pass on their liability to their buyers. Therefore, if the sales tax collected by the assessee from his buyers during the year of account is in excess of his actual liability towards sales tax for that period such excess would go only for his benefit. We cannot, therefore, agree with the Tribunal that the excess collections are not trading receipts of the assessee.

    6. But the question arises as to whether the excess as found in the accounts of the assessee could be taken as his trading receipts or whether the total sales tax collections minus the actual accrued liability should be taken to be the actual trading receipts. On behalf of the revenue it is contended that the assessee having maintained a separate account in relation to sales tax collections and payments during the years, the collections during the year minus the disbursements will have to be taken as trading receipts and that that is the way in which the assessee himself has kept his accounts. Reliance is placed on the decision of the Supreme Court in Chowringhee Sales Bureau (P) Ltd. v. Cit, West Bengal. We are of the view that the above decision fully supports the stand taken by the revenue that the sales tax collections should be taken to be trading receipts and as and when the amounts are paid to discharge the sales tax liability, such amounts will have to be deducted.

    7. The learned counsel for the assessee would, however, contend that even if the sales tax collections are to be taken as trading receipts, they cannot be divorced from the assessee's sales tax liability and, therefore, the sales tax collections made during the year minus the sales tax liability incurred should alone be taken as the income of the assessee. The learned counsel points out that at the time when the income-tax assessment in this case came to be made the sales tax assessments for the years 1961-62 and 1962-63 have been completed and the actual sales tax liability has been quantified and that the Income-tax Officer should have, therefore, given credit to that liability. The learned counsel also points out that the assessee has incurred the liability towards sales tax as and when he has effected the sales and the accrual of his liability is not postponed until after the close of the assessment year and, therefore, the assessee's accrued liability towards sales tax cannot be ignored and the entire excess collections in this case treated as the assessee's income. He refers to the decision in Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax [1971] 82 ITR 363 SC. in support of his contention. In that case the assessee, following the mercantile system of accounting, incurred a liability of Rs. 1,49,776 on account of sales tax determined to be payable by the sales tax authorities on the sales effected by it during the calendar year 1954, relevant to the assessment year 1955-56. The sales tax demand was raised pending the income-tax assessment for that year. The Income-tax Officer rejected the assessee's claim for deduction on the ground: (1) that the assessee had contested the sales tax liability in appeals, and (2) that it had made no provision in its books with regard to the payment of that amount. The appeals to the higher authorities or courts taken by the assessee contesting its liability to pay the sales tax utlimately failed. On the question as to whether the assessee is entitled to claim deduction in relation to that liability during the assessment year 1955-56, the Supreme Court held that the moment a dealer made either purchases or sales which were subject to sales tax, the obligation to pay the tax arose, that although that liability could not be enforced till quantification was effected by assessment proceedings, the liability for payment of tax was independent of the assessment, that the assessee having followed the mercantile system of accounting it was entitled to deduct from the profits and gains of its business the liability to sales tax which arose admittedly during the relevant previous year, and that the fact that the assessee has failed to debit the liability in his books of account did not debar him from claiming the same as a deduction either under section 10(1) or under section 10(2)(xv). The court also held in that case that whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter. Relying on the said decision, the learned counsel points out that the mere fact that in the separate accounts kept for sales tax collections the liability incurred has not been entered will not debar the assessee from claiming the benefit or deduction from the actual receipts. Commissioner of Income-tax v. Hira Lal Mittal & Sons is also relied on in support of that proposition. In that case it was held that where a liability arises by operation of law, its deduction cannot be denied merely because it has not been entered in the accounts of the assessee. The question, therefore, turns on the method of accounting adopted by the assessee.

    8. In this case so far as the separate accounts maintained by the assessee are concerned, they have been kept only on cash basis, that is, the sales tax collections made had been credited and the actual sales tax payments have been debited on the respective dates of collection and payment. Neither the sales tax collections nor the payments made by the assessee which have been recorded in the separate accounts have gone into the general accounts maintained by the assessee for his business, as the assessee has always been contending that he had been making collections as an agent of the Government and even the excess collections will have ultimately to be paid to the Government. In these separate accounts as and when the amounts have been paid to the sales tax authorities, they have been debited. An assessee may employ one method of accounting for one part of his business or one class of customers, and a different method for another part of his business or another class of customers. He may also keep accounts in respect of different parts of the same business on different basis. If such different methods are employed regularly and consistently the profits have to be computed in accordance with the respective methods, provided it results in a proper determination of the true profits. The assessee should, therefore, be taken to have adopted the cash basis so far as the sales tax collections are concerned and, therefore, the principle of the decision in Chowringhee Sales Bureau (P) Ltd. v. Cit, West Bengal will stand attracted. We have to, therefore, hold that in this case the assessee has maintained his accounts in relation to the sales tax collections only on cash basis and, therefore, only when he pays out the amount for discharging his sales tax liability he can claim deduction. We, therefore, answer the question against the assessee. The revenue will have its costs. Counsel's fee, Rs. 250.

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    Commissioner Of Income-Tax, Madras-I v. E.A.E.T Sundararaj.
    (Sep 27, 1973)