1983 (3) TMI 27 - HC - Income Tax

Summary

Issues Involved:
1. Whether the amount of sales tax liability should be excluded from the gross turnover to determine the gross profit disclosed in the trading account.
2. Whether the provisions of Section 68 of the Income-tax Act, 1961, are applicable for considering the cash credits appearing in the accounting years relevant to the assessment year 1961-62 and earlier years.

Issue-wise Detailed Analysis:

1. Sales Tax Liability and Gross Turnover:

The Tribunal had to determine if the amount of sales tax liability should be excluded from the gross turnover to ascertain the gross profit disclosed in the trading account. The Income Tax Officer (ITO) had previously reduced the gross profit by the amount of sales tax liability, arguing that the gross profit should be calculated after deducting the sales tax from the turnover. However, the Appellate Assistant Commissioner (AAC) and the Tribunal disagreed with this approach. They held that sales tax is a business liability that should be allowed as a deduction in the profit and loss account and should not reduce the trading results. The Tribunal upheld the AAC's order, stating that the gross profit shown by the assessee should not be reduced by the sales tax amount. The court supported this view, referencing the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), which established that sales tax liability is a business expenditure and should not be excluded from the gross turnover to arrive at the gross profit.

2. Applicability of Section 68 for Cash Credits:

The second issue was whether Section 68 of the Income-tax Act, 1961, applies to cash credits appearing in the accounting years relevant to the assessment year 1961-62 and earlier years. The ITO had added certain cash credits to the income, which the AAC later deleted, arguing that these credits pertained to years before the assessment year 1958-59 and should be assessed under the Indian I.T. Act, 1922. The Tribunal upheld the AAC's decision, stating that the provisions of the old Act should apply, and Section 68 of the new Act, which was introduced for the first time in the 1961 Act, could not be applied retrospectively. The Tribunal emphasized that Section 297(2)(d)(ii) of the Act refers only to procedural law and not to substantive provisions like Section 68. The court agreed with this interpretation, citing several cases, including Govinddas v. ITO [1976] 103 ITR 123 (SC), which held that the words "all the provisions of this Act shall apply accordingly" in Section 297(2)(d)(ii) refer only to the procedural aspects and not to substantive rights or liabilities.

Conclusion:

The court answered both questions in the affirmative, favoring the assessee and against the Revenue. It held that the amount of sales tax liability should not be excluded from the gross turnover to determine the gross profit disclosed in the trading account. Additionally, it affirmed that the provisions of Section 68 of the Income-tax Act, 1961, do not apply to cash credits appearing in the accounting years relevant to the assessment year 1961-62 and earlier years. The assessee was entitled to costs, with a hearing fee of Rs. 250.