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Commissioner Of Income-Tax v. Southern Explosives Co.
Structured Summary of the Opinion
Factual and Procedural Background
The assessee is a dealer in explosive detonators and safety fuses. For the assessment years 1979-80 and 1980-81 the assessee collected four per cent on the price of goods as sales tax and paid that amount to the Government. The assessee also collected an additional four per cent on the price of the goods described by it as a "deposit against the sales tax and surcharge." The assessee had contended before the sales tax authority that the goods were not chemicals and so should attract a lower rate of sales tax; notwithstanding that dispute, it collected from customers the higher amounts that would be payable if the goods were treated as chemicals.
Part of the amounts collected as deposits was paid over to the Government and part was retained and apparently used in the assessee's business (there is nothing in the record to show the monies were kept in a separate fixed deposit or not used for business purposes). The assessee did not include the amounts labelled as "deposit against sales tax and surcharge" in its returns of income for the years in question. The Income-tax Officer accepted the return, but the Commissioner of Income-tax, exercising powers under section 263, directed the Income-tax Officer to re-do the assessment and include the additional amounts collected and retained by the assessee.
The assessee appealed to the Appellate Tribunal, which set aside the Commissioner's order. The Revenue sought a reference under which the Court was asked to decide whether the Appellate Tribunal was right in law in holding that the collection of deposits against sales tax four per cent would not form part of the assessee's income and in cancelling the Commissioner's order under section 263.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the collection of deposits against sales tax four per cent would not form part of the assessee's income and in cancelling the order of the Commissioner of Income-tax under section 263?
Arguments of the Parties
Revenue's Arguments
- The amounts collected by the assessee were collected to meet its statutory liability to pay sales tax; sales tax is a statutory levy and the amounts collected to meet it partake of the character of trading receipts.
- The manner in which the assessee maintained its accounts or labelled the amounts (for example as a "deposit") is not decisive of the character of the receipt; the courts have held that accounting treatment cannot alter the true character of a receipt.
- While the amounts actually paid over to the State Government can be claimed as a deduction, any amount collected and retained by the assessee cannot be claimed as a deduction until paid over.
- Reliance was placed on prior decisions (Chowringhee Sales Bureau, Sinclair Murray, CIT v. Assam Roller and Flour Mills) that, according to counsel, establish that amounts collected as sales tax form part of the trading receipt despite accounting labels.
Assessee's Arguments
- The assessee relied on authorities (CIT v. Tollygunge Club Ltd. and CIT v. Bijli Cotton Mills (P.) Ltd.) which hold that where a receipt is burdened by an obligation (for example, monies collected for charity) the amounts received for a specific purpose and subject to a trust obligation are not trading receipts.
- The assessee and its counsel also relied on cases involving commission agents (CIT v. M.P. State Agro Industries Development Corporation and Commissioner of Income-Tax v. M.L. Bhapkar) which held that amounts collected that did not belong to the agent (or were received as agent/trustee) were not trading receipts of the agent.
- Implicit in these arguments was the position that labelling the receipts as "deposits" for a specific purpose could mean the assessee held the sums as trustee/agent and therefore they should not be treated as part of its trading receipts.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Chowringhee Sales Bureau (P) Ltd. v. CIT, West Bengal, [1973] 87 ITR 542 | That the manner in which the books were maintained by the assessee cannot be regarded as decisive of the character of the receipt; amounts collected as sales tax form part of trading receipts. | The court recorded Revenue's reliance on this authority to support the proposition that accounting labels do not alter the true character of tax collections; the principle supported treating the collections as trading receipts. |
| Sinclair Murray and Co. P. Ltd. v. CIT, [1974] 97 ITR 615 | Same proposition: collection of tax from customers, if retained, cannot be treated as outside trading receipts merely because credited under a separate head in books. | The court noted this authority as reinforcing the Revenue's position that the assessee's method of accounting could not determine the substantive character of the receipts. |
| CIT v. Assam Roller and Flour Mills, [1994] 209 ITR 835 (Raj) | Cited alongside other authorities for the principle that sales tax collected from customers, if not remitted, remains trading receipt of the collector. | Included by Revenue's counsel to show consistent judicial treatment that collections labelled separately still form part of trading receipts; the court treated it as supportive of the Revenue's argument. |
| CIT v. Tollygunge Club Ltd., [1977] 107 ITR 776 | Where receipts are burdened by an obligation (e.g., amounts collected for charity) and are subjected to a trust at the time of collection, such amounts do not form part of trading receipts. | The court recognised this authority as the principal precedent relied upon by the assessee but distinguished it on the facts because the amounts in the present case were collected to meet a statutory tax liability rather than for a charitable purpose under a trust obligation. |
| CIT v. Bijli Cotton Mills (P.) Ltd., [1979] 116 ITR 60 | Similar to Tollygunge Club: amounts collected for a specific burdened purpose (charity) are not part of trading receipts when subject to trust-like obligations. | The court acknowledged the principle but held it inapplicable to the present facts for the same reasons it distinguished Tollygunge Club — the collections here were for a statutory tax liability. |
| CIT v. M.P. State Agro Industries Development Corporation, [1983] 139 ITR 312 (M.P. HC) | Where a commission agent collected amounts in excess of the provisional sale price for tractors, the excess did not belong to the agent and thus was not part of the agent's trading receipt. | The court recorded this as an authority relied upon by the assessee but treated it as distinguishable because the excess there arose from agency/commission facts, whereas here the collections were to meet a statutory tax liability. |
| Commissioner of Income-Tax v. M.L. Bhapkar, [1994] 207 ITR 464 (Bombay HC) | Where an octroi/agent who was entitled only to commission paid octroi and later received a refund, the refund was held to be received as agent/trustee and not part of trading receipts. | The court noted this decision relied on by the assessee for the proposition that certain receipts/refunds may be agent/trustee receipts and not trading receipts; the court distinguished it on the ground that the present collections were for meeting a statutory liability and were not received in the character of an agent or trustee for the customers. |
Court's Reasoning and Analysis
The court began by observing that the amounts collected by the assessee were collected to meet a statutory liability (sales tax) and that sales tax is a statutory levy the assessee was bound to pay. As a general proposition the court noted that amounts collected towards sales tax form part of the assessee's turnover and trading receipts; any sum actually paid to the State Government could be claimed as a deduction.
The central issue was whether labelling part of the amount collected as a "deposit towards sales tax" altered its character so that it would not be treated as a trading receipt. The court considered the authorities relied upon by both parties. It accepted the Revenue's foundation from earlier decisions that accounting treatment or labels are not decisive and that sums collected as sales tax constitute trading receipts unless they are genuinely held for a distinct purpose under an obligation or trust.
The court analysed the assessee's reliance on cases where receipts were held not to be trading receipts because they were burdened by an obligation (for example, monies collected for charity) or were received by an agent/trustee in respect of third-party dues. The court found those cases distinguishable on the facts: in the cited charity cases the amounts were subjected to a trust at the time of collection; in the agency cases the agent did not own the amounts collected and acted as trustee/agent for others.
Applying those principles to the facts before it, the court concluded that the amounts in question were collected to meet a statutory tax liability and that the mere act of calling those amounts "deposits" did not convert them into trust funds or change their true character. The fact that the assessee retained and used the monies in its business disentitled it from claiming a deduction for those amounts until such time as the payment was actually made to the Government (or until a refund was effected and paid back to customers). The court emphasised that purchasers had not benefited from the label "deposit" because they paid the sums and the assessee retained and used them in its business.
The court thus determined that the Appellate Tribunal erred in holding otherwise and upheld the Commissioner's direction that the assessment be revised to include the amounts collected and retained by the assessee.
Holding and Implications
HOLDING: The Court answered the referred question in favour of the Revenue and against the assessee; the Appellate Tribunal was in error in holding that the collections described as deposits did not form part of the assessee's income.
Implications:
- Direct effect on the parties: The assessee cannot avoid treating the amounts collected to meet sales tax liability as trading receipts merely by labelling them "deposits." The Commissioner's direction to re-do the assessment and include such amounts was justified.
- Tax treatment consequence: Amounts collected to meet a statutory tax liability constitute trading receipts; deduction is available only to the extent the tax is actually paid to the State Government (or if a refund is later effected and passed on, deduction may be claimed in the year the refund is effected).
- The court distinguished the authorities relied on by the assessee (charity and agent/trustee cases) on the specific factual ground that in those cases sums were subject to trust or belonged to third parties, whereas here the sums were collected to meet a statutory liability and were retained and used by the assessee.
- The opinion does not purport to lay down a novel legal principle beyond applying existing authorities to the facts; its immediate effect is to reverse the Tribunal's position and uphold the Commissioner's direction in this case.
R. Jayasimha Babu, J.:— The question referred to us at the instance of the Revenue is as under:
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the collection of deposits against sales tax four per cent, would not form part of the assessee's income and cancelling the order of the Commissioner of Income-tax under section 263?”
2. The assessee is a dealer in explosive detonators and safety fuses. It had collected four per cent, on the price of the goods as sales tax and paid the same to the Government. It collected a further four per cent, on the price of the goods as deposit against the sales tax and surcharge for the assessment years 1979-80 and 1980-81. The assessee contended before the sales tax authority that the explosive detonators, and safety fuses sold by it were not chemicals and they were therefore to be subjected to lower rate of sales tax. Nevertheless, it proceeded to collect from the customers the entire amount which would have been payable by the assessee to the Government as sales tax if those explosive detonators and safety fuses were to be treated as chemicals. The amounts so collected were in part paid over to the Government and the part not paid over to the Government remained with the assessee and presumably used by it in its business, as there is nothing to show that the monies were kept in any separate fixed deposit and had not been in any way used by the assessee for its business purposes. The assessee did not for the assessment years 1979-80 and 1980-81 include in its return of income, the amounts which it had chosen to describe as deposit against sales tax and surcharge. The return so filed was accepted by the Income-tax Officer but the Commissioner of Income-tax by exercising his power under section 263 directed the Income-tax Officer to re-do the assessment and include the additional amount collected and retained by the assessee.
3. The assessee having appealed to the Tribunal the Tribunal set aside the order of the Commissioner. The Revenue is now before us seeking an answer to the question which has already been set out. It is necessary to note at the outset that the amounts collected by the assessee were the amounts collected by it to meet its liability for the payment of sales tax and that sales tax is a statutory levy which it was bound to pay. The amounts collected towards sales tax clearly form part of the turnover of the assessee and constitute a part of its trading receipt. To the extent tax is paid to the State Government, the amounts so paid can be claimed by the assessee as deduction. Had the assessee collected the entire amount received by it from its customers as the amounts paid towards sales tax, there can be no doubt that the entire amount would be treated as part of its trading receipt and deduction allowed only to the extent of the amount paid by it as sales tax to the State Government.
4. The question for our consideration is as to whether by characterising a part of the amount collected by the assessee from its customers as deposit towards sales tax, the assessee could avoid treating that receipt as part of its trading receipt.
5. Learned senior counsel for the Revenue, Mr. S.V Subramaniam, relied on the decisions of the Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. v. Cit, West Bengal, [1973] 87 ITR 542; Sinclair Murray and Co. P. Ltd. v. CIT, [1974] 97 ITR 615 and CIT v. Assam Roller and Flour Mills, [1994] 209 ITR 835 (Raj), and submitted that the manner in which the assessee chose to maintain its accounts was not relevant for the purpose of deciding as to whether the amounts collected by it towards sales tax are to be treated as forming part of its trading receipt. In all those cases, it was found that the assessee who had collected sales tax from the customers, had failed to remit the amounts to the State Government concerned on the ground that they were not liable to pay tax and had credited the amounts under a separate head in their books. The apex court held that the manner in which the books were maintained by the assessee could not be regarded as decisive of the character of the receipt. It was held that the amounts collected as sales tax would form part of the trading receipt of the assessee.
6. Counsel for the Revenue submitted that the sales tax being a statutory levy and the assessee having collected the amounts from its customers for the purpose of meeting its liability towards sales tax, the amounts so collected partake of the character of trading receipts and so long as the amount collected remains with the assessee, that amount could not be claimed by the assessee as a deduction. However, to the extent of the payment made to the State Government, it was open to the assessee to claim deduction.
7. Learned counsel for the assessee, on the other hand, relied upon the decisions of the Supreme Court in the case of CIT v. Tollygunge Club Ltd., [1977] 107 ITR 776 and CIT v. Bijli Cotton Mills (P.) Ltd., [1979] 116 ITR 60 and submitted that where the receipt is burdened by an obligation, the amounts so received by the assessee cannot be regarded as forming part of the assessee's trading receipt. In the cases relied on by counsel, the apex court held that the amounts collected by the assessee towards charity were amounts collected for a specific purpose and that even at the time of collection, the amounts were subjected to a trust, the assessee being burdened with the obligation to apply those monies for charity only. Those amounts were held by the apex court to be amounts which did not form part of trading receipts.
8. Learned counsel also relied on the decision of the Madhya Pradesh High Court in the case of CIT v. M.P State Agro Industries Development Corporation, [1983] 139 ITR 312, wherein the court held that the assessee which derived income by way of commission on sale of tractors purchased by it from HMT and had collected amounts in excess of the provisional sale price shown by the HMT from the buyers who bought the tractors from the commission agent, could not be regarded as having received that excess amount as part of its trading receipt, as the amount so collected in excess did not belong to the assessee, the assessee being only entitled to a commission on the sale.
9. Counsel relied upon the decision of the Bombay High Court in the case of Commissioner Of Income-Tax v. M.L Bhapkar.), [1994] 207 ITR 464, which again concerns a commission agent. In that case, the octroi agent who was only entitled to commission at the rate of 11/2 per cent, and had paid octroi subsequently, after instituting a suit, received refund of the amount paid as octroi. It was held that he could not be regarded as having received that amount which had been paid as octroi as part of his trading receipts. The High Court affirmed the view of the Tribunal that the assessee therein had received the refund of octroi merely as an agent or trustee of persons on whose behalf he had acted as an agent, and that there was no element of trading receipt involved in the receipt of that amount on the part of the assessee.
10. In the instant case, the amounts collected by the assessee were amounts which were meant to be utilised by the assessee for meeting its tax liability. Even if the assessee had paid over the entire amount received by it as deposit towards sales tax to the State Government, it would still have been open to the assessee to seek refund if the assessee wished to claim such refund on the ground that the tax had been levied at a higher rate than the rate permissible. In the event of such claim being upheld, it would have been open to the assessee, to receive a refund and thereafter pay those amounts to the persons from whom the amounts had been collected.
11. The fact that the assessee had chosen to adopt the device of labelling a part of the amounts collected towards its sales tax liability as deposit cannot make a difference. The amounts were received for the purpose of meeting the tax liability. The fact that the assessee did not pay over those amounts to the State Government only disentitles the assessee from claiming the deduction to the extent it could have had the amounts been paid over in full to the State. The purchasers from the assessee did not derive any benefit from the device adopted as the purchasers were made to pay the amounts and the amounts were merely retained by the assessee and in the meanwhile, used by it in the normal course of its business. The receipt which was in its true character a trading receipt, cannot be rendered otherwise by the assessee labelling the receipt as a deposit.
12. It would certainly be wholly unjust if the assessee were to be permitted to collect the amount from the customers as amounts payable towards sales tax and still claim that it is not a trading receipt. If and when the amounts collected are refunded to the persons from whom collection had been made the assessee can claim deduction in the year in which such refund is effected. That is what the Commissioner had directed. The Tribunal was in error in holding otherwise. The true character of the receipt must be judged with reference to the reasons for the collection and the liability for meeting which the collection was made. When the liability is a statutory liability, which the assessee was required to meet and for meeting which it was by the statutes or authorities permitted to collect the amount required from its customers, the true character of the collection is a trading receipt. By calling a portion of the amount as deposit, it cannot be said that the assessee had constituted itself as a trustee, and therefore, the amounts received were not required to be regarded as part of its trading receipt. Had the assessee been unsuccessful in its claim that his goods were not to be treated as chemicals there is no doubt that the amounts though collected as deposit, would have been paid over to the State Government as the amounts had been collected for payment to the State Government as sales tax in the event of the goods being treated as chemicals.
13. We, therefore, answer the question referred to us in favour of the Revenue and against the assessee.
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