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Sirsa Industries v. Commissioner Of Income-Tax And Another.
Summary of the Opinion (Sukhdev Singh Kang, J.)
Factual and Procedural Background
Two firms — Messrs. Sirsa Industries, Sirsa (petitioner No. 1), a cotton ginning and pressing business, and M/s Haryana Cotton Corporation, Sirsa (petitioner No. 2), a cotton commission business — collected Central sales tax (CST) from their constituents in respect of sales of bales of cotton for the accounting years in dispute. Both firms followed the mercantile system of accounting, credited the amounts realised as Central sales tax to a separate "Central sales tax account" in their books, and showed that account in their balance-sheets which were attached to their income-tax returns.
The Assessing Officer (ITO, "A" Ward, Sirsa) treated those CST amounts as payable to the State Government and therefore did not add them to the petitioners' total income when completing the assessments for the years in question. The ITO subsequently issued:
- Three notices under sections 154 and 155 of the Income-tax Act to M/s Sirsa Industries relating to assessment orders dated 24 Feb 1972, 14 Mar 1972 and 22 Nov 1972 — challenged as Civil Writ Petition No. 883 of 1976.
- Notices under sections 147 and 148 of the Income-tax Act to M/s Sirsa Industries for assessment years 1971–72, 1972–73 and 1973–74 — challenged as Civil Writ Petition No. 2196 of 1976.
- Two notices under sections 147 and 148 to M/s Haryana Cotton Corporation regarding the years 1972–73, 1973–74 and 1974–75 — challenged as Civil Writ Petitions Nos. 2367 and 2376 of 1976.
The central factual-legal question put before the court in this cluster of writ petitions was whether amounts of Central sales tax that were received (in the sense of being collected and credited under the mercantile system) but not actually paid to the State Government in the relevant accounting year could be added to the assessee's total income by the ITO for that accounting year.
Legal Issues Presented
- Whether amounts of Central sales tax collected by an assessee and credited to a separate account under the mercantile system of accounting, but not actually paid to the State Government in the accounting year, can be treated by the ITO as part of the assessee’s total income for that accounting year.
- Whether the ITO was justified in issuing notices under section 154 (rectification) and sections 147/148 (reopening assessments) of the Income-tax Act in the circumstances of these cases, having regard to the relevant judicial authorities and the limitation/ time-bar considerations invoked by the petitioners.
Arguments of the Parties
Petitioners' Arguments (as advanced by Mr. P. S. Jain)
- The mercantile system of accounting (as explained in Indermani Jatia) recognises profits and liabilities on an accrual basis: income is credited when it accrues and expenditure is debited when legal liability is incurred, regardless of actual receipt or payment.
- On completion of a sale, the petitioners' liability to pay Central sales tax legally accrued under the Central Sales Tax Act; that liability does not depend on whether the petitioners actually paid the tax in the accounting year.
- Accordingly, amounts collected as sales tax and credited to a separate Central Sales Tax account should be excluded from the petitioners' income for those years. Reliance was placed on decisions including Indermani Jatia, Morvi Industries Ltd., and particularly Kedarnath Jute Mfg. Co. Ltd. which was cited for the proposition that an assessee on mercantile accounts can claim a deduction for sales tax liabilities credited but unpaid.
- With regard to the notices, the petitioners contended that some of the notices impugned were beyond the time limit under section 147 (i.e. time-barred), although within the limitation for proceedings under section 154.
Revenue's Arguments (as advanced by Shri Ashok Bhan)
- The amounts collected by the petitioners as Central sales tax were shown in the balance-sheets on the liabilities side, but they were mixed with other trading liabilities and were being utilised by the petitioners for business operations.
- These amounts therefore formed part of trading or business receipts and were rightly treated as taxable unless actually paid to the State Government.
- The recent larger bench decision in Chowringhee Sales Bureau (P) Ltd. v. CIT (1973) took a contrary view to Kedarnath and, being of a larger bench, had preference; in view of that decision the ITO was justified in issuing the impugned notices and could examine the matter accordingly.
- The Revenue invited the petitioners to raise their points before the ITO and emphasised that the ITO had not finally decided the matter but had acted in light of the then-declared position of law.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Indermani Jatia v. Commissioner Of Income Tax, U.P., [1959] 35 ITR 298 (SC) | Illustration of the mercantile system as distinct from the cash system (accrual basis recognition of income and liabilities). | Relied on by petitioners to argue that sales tax liability accrues on sale and thus amounts credited should not be taxed; court noted the reliance but found the later Chowringhee decision controlling. |
| Morvi Industries Ltd. v. Commissioner Of Income Tax (Central) Calcutta, [1971] 82 ITR 835 (SC) | Supportive authority cited by petitioners for the mercantile-accrual approach in tax treatment. | Cited by petitioners for support; court recorded the reliance but did not treat it as dispositive in face of Chowringhee. |
| Kedarnath Jute Mfg. Co. Ltd. v. CIT, [1971] 82 ITR 363 (SC) | Held that an assessee on mercantile accounts could claim deduction for unpaid sales tax liabilities that had accrued and were credited. | Was the principal authority relied upon by petitioners; court observed that Kedarnath supported their position but was subsequently contradicted by a larger bench in Chowringhee. |
| Chowringhee Sales Bureau (P) Ltd. v. CIT, West Bengal, [1973] 87 ITR 542 (SC) | Held that amounts collected as sales tax and not paid to Government form part of trading/business receipts and deduction is allowable only when payment is made to Government. | Accepted by the court as the controlling authority (larger bench). The court applied Chowringhee to conclude that the assessments allowing deductions for the sales tax were prima facie against law and that the ITO was justified in taking corrective action. |
| M.K. Venkatachalam, ITO v. Bombay Dyeing & Mfg. Co. Ltd., [1958] 34 ITR 143 (SC) | Authority cited for the proposition that a mistake of law, if glaring and obvious, can be rectified under section 154 (rectification). | Invoked by the court to support the proposition that rectification under section 154 may be permissible for mistakes of law apparent on the record. |
| Maharaj Kumar Kamal Singh v. CIT, [1959] 35 ITR 1 (SC) | Authority relating to the concept that a decision of the final court regarding statutory construction can amount to "information" under section 147 (reopening). | One of the authorities cited by the court to support the view that when a final-court decision comes to the notice of the ITO, it can constitute information for s.147 purposes. |
| CWT v. Imperial Tobacco Co. of India Ltd., [1966] 61 ITR 461 (SC) | Authority on the circumstances in which information can justify reopening under section 147. | Relied upon by the court as one of the cases supporting that a final-court decision may amount to information under s.147. |
| V. Jaganmohan Rao v. CIT, [1970] 75 ITR 373 (SC) | Authority on reopening assessments and the concept of "information" under section 147. | Cited by the court together with the other authorities to justify reopening under s.147 when a controlling final-court decision comes to light. |
Court's Reasoning and Analysis
The court proceeded by examining the petitioners' contentions, the Revenue's opposing submissions, and the relevant authorities. The principal threads of the court's analysis were:
- Treatment of CST under the mercantile system: The petitioners argued (relying on Indermani Jatia, Morvi and Kedarnath) that under mercantile accounting the liability to pay sales tax arises on accrual and therefore amounts collected and credited to a Central Sales Tax account should be excluded from income even if not paid to the State in that year.
- Contradictory precedent and binding authority: The court noted that although Kedarnath supported petitioners' position, a later decision of a larger Bench in Chowringhee Sales Bureau (1973) took a contrary view. Chowringhee held that sales tax collected (even if shown in a separate account) is in substance trading or business receipt and cannot be deducted unless and until it is actually paid to the Government. The court emphasised that a larger Bench decision takes precedence over the earlier two-Judge decision.
- Application of Chowringhee to the facts: The court observed that in Chowringhee the assessee had credited sales tax to a separate "Sales tax collection account" over many years (indicating mercantile accounting) but the Supreme Court nonetheless treated the amount as part of trading receipts and allowed deduction only upon payment. On that basis the court concluded that it could not be said that the ITO acted illegally or in excess of jurisdiction by treating the credited but unpaid CST as taxable.
- Validity of proceedings under sections 154 and 147: The court set out established principles — rectification under section 154 is available only for error apparent on the face of the order, and proceedings under section 147 arise when the ITO receives information about escapement of income. The court concluded that both conditions were satisfied here because, viewed in light of the controlling Chowringhee decision, the assessments granting deductions for CST were prima facie against law.
- Mistake of law and rectification: Relying on M.K. Venkatachalam v. Bombay Dyeing, the court held there is no reason why a glaring and obvious mistake of law apparent on the record cannot be rectified under section 154.
- Reopening on account of judicial development: The court relied on authorities (Maharaj Kumar Kamal Singh, Imperial Tobacco, V. Jaganmohan Rao) for the proposition that when a final-court decision regarding statutory construction comes to the notice of the ITO, it may constitute "information" within the meaning of section 147, justifying reopening.
- On the petitioners' contention regarding time limits: The petitioners argued some notices were beyond the time for action under section 147 but within time for section 154. The court held that if the same set of facts can give rise to action under two separate provisions, it is for the competent authority to decide under which section to proceed — and the fact that the ITO proceeded under section 154 after section 147 would have become time-barred did not show mala fides.
On the combined application of these principles and authorities, the court found merit in the Revenue's stance and rejected the petitioners' submissions that the ITO's action was illegal.
Holding and Implications
Holding: The writ petitions (Nos. 883, 2196, 2367 and 2376 of 1976) were dismissed with costs.
Implications (direct effect on the parties):
- The court upheld the ITO's position that assessments which allowed deductions in respect of Central sales tax amounts credited but not paid were prima facie contrary to law in view of the Supreme Court decision in Chowringhee Sales Bureau (P) Ltd. v. CIT (1973).
- The ITO was therefore justified in issuing the impugned notices — both under section 154 (rectification of an apparent error) and under section 147/148 (reopening on information of escapement) — and such action could not be characterised as mala fide simply because one route (section 147) might be time-barred while another (section 154) remained available.
The opinion applied existing Supreme Court authority (in particular Chowringhee) to the facts and did not purport to lay down a new principle of law; it dismissed the petitions and validated the ITO's corrective proceedings in the circumstances presented.
Sukhdev Singh Kang, J.:— Whether the amount of money received as Central sales tax on his taxable turnover by an assessee under the I.T Act in a particular accounting year, who follows the mercantile system of accounting and which amount has separately been credited to the Central Sales Tax account, though not actually paid to the State Government in that accounting year, can be added to the total income of the assessee for the accounting year by the ITO, is, inter alia, the significant question to be determined in this bunch of four writ petitions (Nos. 883, 2196, 2367 and 2376 of 1976).
2. Messrs. Sirsa Industries, Sirsa, the petitioner-firm, is engaged in the business of cotton ginning and pressing factory at Sirsa, whereas the second petitioner-firm, M/s. Haryana Cotton Corporation, Sirsa, is doing business in cotton on commission basis. Both the firms are liable to pay Central sales tax on the sales of cotton. They have been collecting Central sales tax from their constituents on the sales of bales of cotton in the accounting years in dispute, but did not pay the same to the State Government. Both the petitioner-firms follow and have previously been following the mercantile system of accounts. The amounts realised as Central sales tax were credited to the Central sales tax account. This account along with other accounts was shown in the balance-sheets for all these years. The balance-sheets used to be attached with the income-tax returns for all these years. The ITO treated these amounts of Central sales tax as payable to the State Government and for that reason these amounts were not added to the total income of the petitioner-firms and assessments were completed for the years, in dispute, on that basis. The ITO, “A” Ward, Sirsa, issued three notices under ss. 154 and 155 of the I.T Act (for short “the Act”) to M/s. Sirsa Industries, Sirsa, petitioner-firm (hereinafter called “petitioner No. 1” for brevity sake) intimating that he intended to rectify mistakes in the assessment orders passed on 24th February, 1972, 14th March, 1972, and 22nd November, 1972, relating to the assessment years 1968-69, 1969-70 and 1970-71, respectively. These notices are the subject-matter of Civil Writ Petition No. 883 of 1976. Similarly, the ITO issued notices to this firm under ss. 147 and 1.48 of the Act, with regard to the assessment years 1971-72, 1972-73 and 1973-74, requiring petitioner No. 1 to deliver returns of income within 13 days as he had reasons to believe that income had escaped assessment within the meaning of s. 147 of the Act. These notices have been challenged in Civil Writ Petition No. 2196 of 1976. Similarly, two notices under ss. 147 and 148 of the Act regarding the years 1972-73, 1973-74 and 1974-75 were issued to M/s. Haryana Corporation, Sirsa (hereinafter called “petitioner No. 2.”). It has filed Civil Writ Petitions Nos. 2367 and 2376 of 1976 for quashing these notices.
3. On the authority of the decision of the final court in Indermani Jatia v. Commissioner Of Income Tax, U.P , [1959] 35 ITR 298 (SC), Mr. P.S Jain, the learned counsel for the petitioners, has contended that the mercantile system of accounting is substantially different from the cash system of book-keeping. Under the former system, profits and gains are credited whenever they accrue even if they are not actually received. Similarly expenditure items for which legal liability has been incurred is debitable, even though these items may not be actually disbursed. In the case of the cash system, however, it is only actual cash receipts and actual payments that are regarded as credits and debits. As soon as a transaction of sale is completed, the petitioners' (1 and 2) liability to pay Central sales tax legally accrued under the Central Sales Tax Act. It does not depend on whether the petitioners Nos. 1 and 2 have actually received the tax. They became liable to pay tax on accrual basis. As and when the sale was completed the liability to pay tax arose. So, it is not relevant whether the tax was actually paid or not in that accounting year. The petitioners Nos. 1 and 2 were entitled to the exclusion of the amount of Central sales tax from their income. Support for this submission was sought from the decision of the Supreme Court in Morvi Industries Ltd. v. Commissioner Of Income Tax (Central) Calcutta, [1971] 82 ITR 835 (SC).
4. Mr. Jain further contended that an assessee maintaining accounts on mercantile system is entitled to claim deductions of the unpaid amount of sales tax, which he was liable under the law to pay during the relevant accounting year, which he realized from his constituents and which he was liable to pay during the relevant accounting year, even though he has not paid the same to the State. He cited Kedarnath Jute Mfg. Co. Ltd. v. CIT, [1971] 82 ITR 363 (SC).
5. On the other hand, Shri Ashok Bhan, senior advocate, the learned counsel for the Revenue, argued that it is evident from a perusal of the balance-sheets submitted by the petitioners Nos. 1 and 2 that the amounts collected by them on account of Central sales tax were shown on the liabilities side for each year like any other trading liability towards the creditors of petitioners Nos. 1 and 2. The money was thus inextricably mixed up with the other amounts of the petitioners Nos. 1 and 2 and was thus being utilized by the assessee in their trading and business. The Central sales tax was part of the trading receipt which entirely went into the business of petitioners Nos. 1 and 2, who have realized Central sales tax from their constituents. However, they have not paid this tax to the State Government. These amounts have been mixed up with the other trading receipts and utilized for their business.
6. The decisions cited by Mr. Jain may be taken to be supporting the contentions made by him that the law has undergone a sea-change because of a decision of the apex court in Chowringhee Sales Bureau (P) Ltd. v. Cit, West Bengal, [1973] 87 ITR 542 (SC). The decision in Kedarnath's case, [1971] 82 ITR 363 (SC), was rendered by two Hon'ble Judges of the Supreme Court, whereas the decision in Chowringhee Sales Bureau's case has been given by a Bench consisting of three Hon'ble Judges. This will have preference over the earlier decision by two Hon'ble Judges. He has further argued that in view of the decision in Chowringhee Sales Bureau's case, the ITO was fully justified in issuing the impugned notices. The petitioners can urge all these points before the ITO. He has not finally decided the matter. He has only sought to examine the cases in the light of the latest position of law declared by the final court.
7. There is merit in the contentions of Mr. Ashok Bhan. No doubt, Kedarnath's case fully supports the contentions raised by Mr. Jain, but the latter case by a larger Bench has taken a contrary view. It has been observed therein that when an assessee liable to pay Central sales tax realized by him to the State Exchequer, does not do so, he cannot claim deduction of this amount, simply because he had credited the amount of sales tax to a separate account. The following observations made by their Lordships are instructive:
“that as the amount of sales tax was received by the assessee in its character as an auctioneer, the amount should be held to form part of its trading or business receipt and as such liable to be included in his business income. He could claim the deduction only when he paid it to the Government. It is the true nature and the quality of the receipt and not the head under which it is entered in the account books as would prove decisive. If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as trading receipt”
8. It is sought to be urged by Mr. Jain that the assessee in Chowringhee Sales Bureau's case, [1973] 87 ITR 542 (SC), did not follow the mercantile system of accounting. It has not been said in the body of the judgment. It is evident therefrom that the assessee used to credit the amounts received as sales tax in the books of account under the head “Sales tax collection account”. He was continuing this practice from the years 1946 to 1960. This in itself indicates that the assessee was not following the cash system of accounts. In view of Chowringhee Sales Bureau's case, it cannot be said that the ITO has acted illegally or in excess of jurisdiction.
9. There is no dispute with the proposition that the ITO can take recourse to proceedings under s. 154 of the Act only if there is an error on the face of the order. It is also well settled that the proceedings under s. 147 of the Act emanate when there is information received by the ITO regarding the escapement of income. Both these conditions are fulfilled in the present case. In view of the decision in Chowringhee Sales Bureau's case, the assessment framed by the ITO allowing deductions on the amount of Central sales tax will prima facie be against law. If a mistake of fact apparent on the record of the assessment order can be rectified under s. 154 of the Act, there is no reason why a mistake of law which is glaring and obvious, cannot be similarly rectified. (In this connection, see M.K Venkatachalam, ITO v. Bombay Dyeing and Mfg. Co. Ltd., [1958] 34 ITR 143 (SC)). Similarly when a decision of the final court regarding construction of a particular statutory provision comes to the notice of an ITO, it constitutes information as envisaged by s. 147 of the Act. In this connection, reference may be made to Maharaj Kumar Kamal Singh v. CIT, [1959] 35 ITR 1 (SC), CWT v. Imperial Tobacco Co. of India Ltd., [1966] 61 ITR 461 (SC) and V. Jaganmohan Rao v. CIT, [1970] 75 ITR 373 (SC). The last submission of Mr. Jain has simply to be stated to be rejected. If certain set of facts can form the subject-matter for action under two separate and different statutory provisions, it is for the competent authority to decide under which particular section he has to take action. It is the petitioners' (1 and 2) case that the notices which are the subject-matter of Civil Writ Petition No. 883 of 1976 were beyond time prescribed for taking action under s. 147 of the Act. They were, however, within limitation, prescribed for proceedings under s. 154 of the Act. So, the action of the ITO in proceedings under s. 154 of the Act, after the proceedings under S. 147 of the Act have become time barred, cannot be said to be mala fide.
10. For the foregoing reasons, I find no merit in these writ petitions (Nos. 883, 2196, 2367 and 2376 of 1976) and the same are dismissed with costs.
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