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Commissioner Of Income-Tax v. Leader Engineering Works
Factual and Procedural Background
This appeal under section 260A of the Income-tax Act, 1961 was filed by the Revenue seeking determination of two questions of law concerning the treatment of Central sales tax collections and the meaning of the phrase "actually pays" in prior Supreme Court authority.
The respondent is a partnership firm (partners: D.D. Sehgal, K.K. Sehgal and J.K. Beri with shares 12/32, 7/32 and 13/32 respectively). For the assessment year 1978-79 the respondent declared total income of Rs. 16,01,330. The Assessing Officer made an assessment under section 143(3) fixing total income at Rs. 16,29,870. The Commissioner of Income-tax (Appeals) (CIT(A)) modified that assessment and fixed income at Rs. 15,14,551, an order which was upheld by the Income-tax Appellate Tribunal.
Subsequently the Assessing Officer issued notices under sections 147(a) and 148 of the Act proposing to add Rs. 1,59,807, being Central sales tax collected. The Assessing Officer made that addition by order dated 26 September 1990. On appeal the CIT(A) deleted the addition by order dated 15 October 1992, observing that sales tax collected belongs to the Government and, following precedents, the liability to pay arises on collection and is allowable as a deduction where the assessee follows the mercantile system of accounting. The CIT(A) relied on earlier tribunal and High Court decisions (including a Division Bench decision in Sirsa Industries v. CIT) and noted that an earlier single-judge decision relied upon by the Assessing Officer had been reversed.
The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s deletion of the addition. The Revenue filed this appeal under section 260A raising two specified questions of law.
Legal Issues Presented
- Whether the Tribunal was justified in law in dismissing the Revenue's appeal thereby sustaining the findings of the CIT(A) to the effect that Central sales tax payable amounting to Rs. 1,59,807 as on December 31, 1977, though being a revenue receipt, was simultaneously allowable as a deduction for the assessment year 1978-79 itself because the assessee followed the mercantile system of accountancy?
- Whether the Tribunal was justified in holding that the term "actually pays" as used by the Supreme Court in Chowringhee Sales Bureau (P) Ltd. v. CIT, West Bengal, [1973] 87 ITR 542 meant "payable" in the case of an assessee following the mercantile system of accountancy?
Arguments of the Parties
Appellant's Arguments
- Shri R.P. Sawhney (for the appellant/Revenue) argued that the Division Bench decision in Sirsa Industries v. CIT, [1989] 178 ITR 437 (P&H) was based on a misreading of the Supreme Court's decision in Chowringhee Sales Bureau (P) Ltd. v. CIT, West Bengal, [1973] 87 ITR 542. On that basis he contended that the orders of the CIT(A) and the Tribunal (which relied on Sirsa) should be set aside.
The opinion does not contain a detailed account of the respondent's separate legal arguments in reply beyond the factual account that the respondent followed the mercantile system of accounting and the procedural history recited above.
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 (SC) | Held that amounts collected by a trader on account of sales tax form part of trading/business receipts; in the context of an auctioneer the Court held an auctioneer could be a dealer within the State Act. The decision did not directly address whether deduction is allowed on accrual where mercantile accounts are kept; it contained a sentence that the party would be entitled to claim deduction "as and when it passes it on to the State Government." | The court treated the sentence suggesting deduction only on actual payment as surplusage for purposes of the present controversy and noted that Chowringhee dealt with a different precise point (liability of an auctioneer as a dealer) and therefore did not conflict with decisions allowing accrual deductions under mercantile accounting. |
| Kedar Nath Jute Manufacturing Co. Ltd. v. CIT, [1971] 82 ITR 363 (SC) | Recognised that the amount of sales tax payable by the assessee is allowable as a liability; permitted deduction on accrual even where the assessee had not made entries or denied liability, in the context of mercantile accounting. | The court treated Kedar Nath as authority supporting allowance of deduction on accrual where the mercantile system of accounting is followed and concluded Chowringhee did not negate Kedar Nath's principle. |
| Sirsa Industries v. CIT, [1989] 178 ITR 437 (P&H Division Bench) | Division Bench reversed an earlier single-judge view and held that where the assessee maintains mercantile accounts, the liability to pay sales tax arises on accrual and deduction is allowable in the relevant year; further held that notices under sections 147/148 and 154/155 could be illegal where original assessments were rightly framed. | The court regarded this Division Bench decision as directly answering the questions raised by the Revenue and followed it; reliance on Sirsa by the CIT(A) and Tribunal justified deletion of the addition. The present court held that Sirsa could not be ignored and thus no substantial question of law arose. |
| Sirsa Industries v. CIT, [1984] 147 ITR 238 (single judge) | Earlier single-judge view that was relied upon by the Assessing Officer but was later reversed by the Division Bench in 1989. | The CIT(A) observed that the Assessing Officer's reliance on this single-judge decision was misplaced because it had been reversed by the Division Bench; the present court accepted that reversal and relied on the Division Bench decision instead. |
| Chowringhee Sales Bureau P. Ltd. v. CIT, [1977] 110 ITR 385 (Calcutta High Court) | For later assessment years involving the same assessee, held that the liability to pay sales tax arises the moment a sale is effected and that an assessee maintaining mercantile accounts is entitled to deduction of estimated liability even though it was not paid to tax authorities. | The court referred to this decision as further explaining that where mercantile accounting is followed, deduction on accrual is appropriate; it was used to show that the point of accrual had been considered and decided in favour of accrual in later High Court authority. |
| Calcutta High Court decision (earlier, [1969] 71 ITR 131) | Earlier Calcutta High Court decision had declared a provision making an auctioneer liable to sales tax as ultra vires. | The Supreme Court in Chowringhee disagreed with that earlier Calcutta High Court decision; the present opinion cites this history to explain the limited scope of Chowringhee's holding (i.e., that the Supreme Court held the State could include an auctioneer within the definition of "dealer"). |
| Income-tax Appellate Tribunal, Delhi Bench B (combined order for the years) | Combined tribunal view deleting additions in respect of sales tax collections for the relevant years. | The CIT(A) and thereafter the Tribunal followed that combined order; the present court noted that the CIT(A) was "respectfully following" that tribunal view when deleting the addition of Rs. 1,59,807. |
Court's Reasoning and Analysis
The court first framed the procedural posture: the Revenue sought to raise substantial questions of law in an appeal under section 260A. The court examined whether those questions were substantial having regard to precedent, particularly the Division Bench decision in Sirsa Industries.
The court analysed the relationship between the Supreme Court decisions in Kedar Nath (1971) and Chowringhee (1973). It observed that Kedar Nath permits allowance of sales tax as a liability on accrual where the assessee maintains mercantile accounts. By contrast, Chowringhee concerned whether an auctioneer could be a "dealer" under sales tax law and held that sales tax collected forms part of trading receipts; the precise question whether deduction must await actual payment did not directly arise in the Supreme Court's Chowringhee decision.
The court noted that a sentence in Chowringhee suggesting deduction when the amount is passed on to the State Government was surplusage and should not be read as overruling or conflicting with Kedar Nath. The court relied on subsequent High Court consideration of the same assessee (Chowringhee) in 1977, where the Calcutta High Court allowed deduction on accrual for an assessee maintaining mercantile accounts.
The Division Bench decision in Sirsa Industries (P&H), which reversed an earlier single-judge view, closely examined both Kedar Nath and Chowringhee and held there was no conflict: Kedarnath's rule permitting accrual deductions remained applicable. The Division Bench applied these principles to hold that the original assessments were rightly framed and that reopening under sections 147/148 (and related provisions) was not permissible; therefore the notices were illegal and additions should be deleted.
On that basis the present court concluded the Revenue's contention that Sirsa misread Chowringhee was without merit. Because the Division Bench in Sirsa had already considered and answered the point (distinguishing Chowringhee and affirming Kedar Nath where mercantile accounting was followed), the questions raised in the present appeal were not substantial questions of law requiring this court's determination.
Holding and Implications
APPEAL DISMISSED.
Holding: The court held that no substantial question of law arises in this appeal. It found no merit in the Revenue's contention that the Division Bench in Sirsa had misread the Supreme Court's Chowringhee decision, and it upheld the approach that Kedar Nath and later High Court authority permit allowance of sales tax liability on accrual where the assessee keeps mercantile accounts.
Direct implications: The orders of the Commissioner of Income-tax (Appeals) and of the Income-tax Appellate Tribunal (which deleted the addition of Rs. 1,59,807 of Central sales tax) stand upheld. The Revenue's attempt to reopen that question by raising the present appeal fails.
Broader implications: The court stated that the Division Bench decision in Sirsa Industries is dispositive of the issue and therefore there is no new precedent created by this decision; the present ruling affirms the existing line of authority that, when mercantile accounting is followed, sales tax liability may be allowable on accrual and that Chowringhee does not negate that principle where the precise point was not under consideration in the Supreme Court decision.
G.S Singhvi, J.:— In this appeal filed under section 260A of the Income-tax Act, 1961 (for short “the Act”), the appellant has sought determination of the following questions of law:
“1. Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in law in dismissing the appeal of the Revenue whereby sustaining the findings of the learned Commissioner of Income-tax (Appeals) to the effect of the Central sales tax payable amounting to Rs. 1,59,807 as on December 31, 1977, though being a revenue receipt was also simultaneously allowable as a deduction for the assessment year 1978-79 itself because of the mercantile system of accountancy being followed by the assessee?
2. Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in holding that the term ‘actually pays’ as used by their Lordships of the hon'ble Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. v. Cit, West Bengal, [1973] 87 ITR 542 meant as ‘payable’ in the case of the assessee following the mercantile system of accountancy?”
2. For the’ purpose of deciding whether the questions of which determination has been sought by the appellant are substantial questions of law, it will be useful to notice the relevant facts.
3. The respondent-assessee is a partnership concern comprising S/Shri D.D Sehgal, K.K Sehgal and J.K Beri as partners having 12/32, 7/32 and 13/32 shares, respectively. For the assessment year 1978-79, the respondent filed a return declaring total income as Rs. 16,01,330. Vide order dated March 19, 1981, the Assessing Officer—Income-tax Officer, Special Circle, Jalandhar, made assessment under section 143(3) of the Act on a total income of Rs. 16,29,870. The order of the Assessing Officer was modified by the Commissioner of Income-tax (Appeals), Jalandhar (for short, “the CIT (Appeals)”), who passed order dated September 16, 1982, and determined the income of the respondent at Rs. 15,14,551.
4. That order was upheld by the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar (for short “the Tribunal”). Subsequently, the Assessing Officer issued a notice under section 147(a) read with section 148 of the Act and called upon the respondent to show cause against the proposed addition of Rs. 1,59,807 collected in the form of Central sales tax. After hearing the representative of the respondent, the Assessing Officer passed order dated September 26, 1990, vide which he made addition of Rs. 1,59,807. On appeal, the Commissioner of Income-tax (Appeals) passed order dated October 15, 1992 for deleting the said addition by recording the following observations:
“I have given careful consideration to the entire matter and I have also gone through the combined order for all these years passed by the Income-tax Appellate Tribunal, Delhi Bench B. The additions made on account of sales tax have been deleted for all these years and the main discussion had been recorded in para. 9 and para. 13. The relevant extract is reproduced below:
‘Any amount collected by an assessee towards sales tax does not belong to it. It belongs to the Government and has to be paid under the relevant sales tax legislation. Therefore, as soon as a trader collects sales tax from a customer, a corresponding liability arises for paying that amount to the Government. It was for this reason that in Kedarnath Jute Manufacturing Co. Ltd. v. CIT, [1971] 82 ITR 363, the hon'ble Supreme Court held that although the assessee was denying its liability to pay the amount of sales tax to the Government and had made no entries in the books, yet the assessee was entitled to a deduction in respect of the sales tax paid. The authorities below have observed that this judgment of the hon'ble Supreme Court cannot be applied because in Chowringhee Sales Bureau (P) Ltd. v. Cit, West Bengal, [1973] 87 ITR 542, the hon'ble Supreme Court has held that sales tax collected from buyers is a trading receipt. They have pointed out that this is a judgment by three judges of the hon'ble Supreme Court while the judgment in the case of Kedarnath Jute Manufacturing Co., [1971] 82 ITR 363 (SC) was rendered by two judges. The way in which the authorities below have looked at these rulings was patently mistaken. The two rulings deal with different aspects of the same transaction. According to Chowringhee Sales Bureau, an amount collected by a trader on account of sales tax is a trading receipt. Therefore, the authorities were right only to the extent that the collections made by the assessee have to be included in the trading receipts. Kedarnath Jute, on the other hand, says that the amount of sales tax payable by the assessee is allowable as a liability. Therefore, it is wrong to say that Chowringhee Sales Bureau affects the validity of Kedarnath Jute in any manner whatsoever. In these years, the Assessing Officer has brought to tax the difference between the collection and payment of tax. For the reasons discussed above, this was, in our view, not permissible and we, therefore, delete the additions made by the Assessing Officer in the reassessments on account of the sales tax….’
Respectfully following the view taken by the hon'ble Income-tax Appellate Tribunal, it is held that there was no justification for making disallowance of sales tax to the tune of Rs. 1,59,807. The reliance placed by the Assessing Officer on the decision of the Punjab and Haryana High Court in the case of Sirsa Industries v. CIT, [1984] 147 ITR 238 (single judge) has since been reversed by the hon'ble Punjab and Haryana High Court while reconsidering the matter in the case of Sirsa Industries v. CIT vide decision reported at [1989] 178 ITR 437. In view of the foregoing discussion, the addition made to the tune of Rs. 1,59,807 is deleted.”
5. The Tribunal dismissed the appeal of the department and upheld the order of the Commissioner of Income-tax (Appeals).
6. Shri R.P Sawhney argued that the view taken by the Division Bench of this court in Sirsa Industries v. CIT, [1989] 178 ITR 437 is based on a misreading of the decision of the Supreme Court in Chowringhee Sales Bureau (P) Ltd. v. Cit, West Bengal, [1973] 87 ITR 542 and, therefore, the orders passed by the Commissioner of Income-tax (Appeals) and the Tribunal may be set aside.
7. In our opinion, there is no merit in the argument of Shri Sawhney and the questions sought to be raised by the appellant cannot be treated as substantial questions of law requiring determination by this court because the same stand answered by the Division Bench in the case of Sirsa Industries, [1989] 178 ITR 437 (P&H). In that case, the Division Bench considered the correctness of the view taken by the learned single judge in the context of the apparent conflict between the decisions of the Supreme Court in Kedar Nath Jute Mfg. Co. Ltd. v. CIT, [1971] 82 ITR 363 and Chowringhee Sales Bureau (P.) Ltd.'s case, [1973] 87 ITR 542. The Division Bench reversed the view taken by the learned single judge and held as under (page 441):
“We have closely read both the decisions of the Supreme Court and are of the opinion that while in Kedar Nath's case, [1971] 82 ITR 363, the manner of keeping mercantile system of accounting and claim of deduction of sales tax from the profits without making actual payments, was allowed, such a point did not directly arise in Chowringhee Sales Bureau's case, [1973] 87 ITR 542. In Chowringhee Sales Bureau's case, [1973] 87 ITR 542, the sole point for consideration was whether an auctioneer would be a dealer within the meaning of the Bengal Finance (Sales Tax) Act, 1941. In the Sale of Goods Act, 1930, an auctioneer is neither the seller nor the buyer and is merely a commission agent. In an earlier decision (see [1969] 71 ITR 131), the Calcutta High Court had declared the provision whereby an auctioneer was made liable to sales tax as ultra vires, and, therefore, the precise question before the Supreme Court was whether the decision of the Calcutta High Court declaring the provision to be ultra vires was right or wrong and it did not agree with the Calcutta High Court and held that it was within the competence of the State Legislature to include within the definition of the word ‘dealer’ an auctioneer who carries on the business of selling goods and who has, in the customary course of business, authority to sell goods belonging to the principal and, therefore, concluded that in law he was liable to pay sales tax and the sales tax received by him formed part of the trading or business receipts. The point whether the assessee was right in claiming deduction in the year in which liability to pay tax accrued or whether he was entitled to claim deduction in the year in which the amount was actually paid on the basis of its manner of maintaining accounts, did not directly arise. In spite of the point not having directly arisen, the following sentence was added.
“The party would, of course, be entitled to claim deduction of the amount as and when it passes it on to the State Government”.
8. The aforesaid sentence was considered by the hon'ble single judge as if a Bench of three judges had taken a view contrary to the decision of the two judges in Kedar Nath's case, [1971] 82 ITR 363 (SC). The author who prepared the headnote of the Income-tax Reports has treated the aforesaid sentence as per curiam. We are of the view that the aforesaid sentence is a surplusage. In a later decision in Chowringhee Sales Bureau v. CIT, [1977] 110 ITR 385, by the Calcutta High Court, the precise question, which is before us, arose relating to the same assessee, namely, Chowringhee Sales Bureau P. Ltd., who was also before the Supreme Court in [1973] 87 ITR 542. In Chowringhee Sales Bureau P. Ltd.'s case, [1977] 110 ITR 385 for two later assessment years, Chowringhee Sales Bureau (P.) Ltd. collected certain amounts as sales tax and deduction was claimed on the basis of accrual of liability for maintaining the mercantile system of accounting although the amount had not been paid to the sales tax authorities. Up to the Tribunal, the assessee failed but succeeded before the Calcutta High Court. The relevant headnote of the Income-tax Reports is as follows:
“That the amounts collected by the assessee as sales tax formed part of its trading receipts. However, the liability to pay sales tax arises the moment a sale or purchase is effected and an assessee who maintains accounts on the mercantile system is entitled to deduction of his estimated liability to sales tax, even though they had not been paid to the sales tax authorities.’
In this judgment, the earlier decisions of the Supreme Court relating to the same assessee in [1973] 87 ITR 542 and in Kedarnath's case, [1971] 82 ITR 363 were noticed and in view of the fact that the assessee was maintaining the mercantile system of accounting, deduction was allowed on the basis of accrual of liability. This decision further explains that the point in [1973] 87 ITR 542 was different from the point which was decided in Kedarnath's case, [1971] 82 ITR 363 (SC), the cases referred to above relating to other High Courts and this court and the case before us.
In view of the aforesaid discussion, although it is held that Chowringhee Sales Bureau (P.) Ltd. was maintaining the mercantile system of accounting, yet there is no conflict between Kedarnath's case, [1971] 82 ITR 363 (SC) and Chowringhee Sales Bureau (P.) Ltd.'s case, [1973] 87 ITR 542 (SC), as in [1973] 87 ITR 542, the precise point was not under consideration. Accordingly, following Kedarnath's case, [1971] 82 ITR 363 (SC) the two decisions of this court and of other High Courts referred to above, it is held that the Income-tax Officer had rightly allowed the deduction in the original assessment framed by him. Once the assessment orders were rightly framed, no case for rectification or for reopening under section 147/148 and 154/155 of the Act arises and the notices are clearly illegal and without jurisdiction.”
9. In our opinion, the aforesaid decision cannot be ignored by accepting the specious argument of Shri Sawhney that the Division Bench had misread the judgment of the Supreme Court in Chowringhee Sales Bureau (P.) Ltd., [1973] 87 ITR 542 and the orders passed by the Commissioner of Income-tax (Appeals) and the Tribunal cannot be treated as vitiated by an error because for the purpose of deleting the addition made by the Assessing Officer by invoking section 147(a) read with section 148 of the Act, they relied on the decision of Sirsa Industries' case, [1989] 178 ITR 437 (P&H).
10. In the premise aforesaid, we hold that no substantial question of law arises in this appeal and the same is liable to be dismissed. Ordered accordingly.
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