2004 (12) TMI 27 - HC - Income Tax

Whether Tribunal was right in law in holding that the proceedings for reassessment were validly initiated by AO u/s 147 of the Income-tax Act 1961 for both the years under consideration and whether the Tribunal was further right in law in holding that the excess amount of sales tax collected by the assessee without there being corresponding liability was the income liable to tax in the hands of the assessee in the years in which the excess amount was so collected by the assessee? - The reference is accordingly answered against the assessee and in favour of the Revenue

Summary

Issues Involved:
1. Validity of reassessment proceedings initiated under Section 147 of the Income-tax Act, 1961.
2. Taxability of excess sales tax collected by the assessee.

Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 147:

The Tribunal referred the question of law regarding the validity of reassessment proceedings initiated by the Assessing Officer (AO) under Section 147 of the Income-tax Act, 1961, for the assessment years 1978-79 and 1979-80. The AO reopened the assessment on the grounds that the assessee had collected sales tax and Central sales tax on the sale price of vanaspati, including excise duty, but had not paid the same to the State Government. This led to the inclusion of Rs. 1,08,580 as income in the assessee's hands.

The Commissioner of Income-tax (Appeals) dismissed the assessee's appeal, and the Tribunal upheld the reassessment proceedings. The Judicial Member and the Third Member agreed that the reassessment was valid due to non-disclosure of true facts regarding sales tax liability.

The court analyzed Section 147, which allows reopening of assessments if income chargeable to tax has escaped assessment due to the assessee's omission or failure to fully and truly disclose material facts. The Supreme Court in Phool Chand Bajrang Lal v. ITO and the Bombay High Court in Citibank N. A. v. S.K. Ojha emphasized that mere production of evidence is insufficient; full and true disclosure is required.

The court found that the assessee did not make a true disclosure regarding the payment of sales tax liability, as evidenced by misleading information provided in response to specific queries by the AO. The sales tax assessment for the year 1977-78 had already been finalized, and no further liability existed, yet the assessee claimed the demand was payable as and when raised.

Thus, the court held that the reassessment proceedings under Section 147 were validly initiated for both years under consideration.

2. Taxability of Excess Sales Tax Collected:

The second issue was whether the excess sales tax collected by the assessee constituted income liable to tax. The assessee argued that, following the mercantile system of accounting, the excess sales tax should not be considered income for the years in question. The assessee cited Kedarnath Jute Mfg. Co. Ltd. v. CIT and other cases to support this argument.

The court referred to Kedarnath's case, where it was held that the obligation to pay sales tax arises when sales are made, and the liability can be deducted from profits even if not paid. However, the court noted that the excess sales tax collected was part of the trading receipt and should be treated as income in the year it was collected.

The court found that the assessee collected sales tax on a sale price including excise duty, which exceeded the government-fixed price. The taxable turnover reported to the Sales Tax Department matched the assessed amount, indicating the assessee's awareness of the excess collection. Therefore, the excess sales tax collected, amounting to Rs. 1,08,580, was rightly included as income for the assessment year 1978-79.

The court also noted that the excess sales tax was taxed in the assessment year 1981-82 under Section 263 of the Act when transferred to a suspense account. However, the court held that the amount should form part of the income for the assessment year 1978-79, as there were no claims or refunds from customers for the excess collection.

Conclusion:

The court answered the reference against the assessee and in favor of the Revenue, upholding the validity of reassessment proceedings under Section 147 and the inclusion of excess sales tax collected as taxable income.