SALES TAX/VAT AND PENALTY UNDER SECTION 271(1)(c )

[DEV KUMAR KOTHARI]

Judgment of Bombay High Court in CIT Vs. Bassein Metals Pvt. Ltd. (2004) 139 Taxman 48  - a cause of serious concern.

Summary

Registered dealers collect Sales Tax/ VAT and issue tax invoice. The dealer is burdened, inter alia  with an obligation to deposit the tax collected with the concerned authority. Sales  tax  / VAT  is charged at rates applicable  according to the category of the purchaser. Thus, practically sales tax is a levy on purchasers but its collection is through the seller - a case of over riding title. Therefore, undisputed sales tax collection cannot be regarded as income as per accounting practice. Also sales tax collected is shown as a liability and is usually deposited with the revenue. Only in the case when sales tax collected is ultimately found not paid / payable to the Government and or refundable to the purchasers then only such excess collection can be considered as income of the dealer.  Bombay High Court has confirmed penalty for concealment of income in respect of sales tax collected but not credited in P&L Account. The matter was not represented by the assessee, full facts are also not recorded in the findings of the Tribunal and the High Court considered only judgments relating to Section 43B as pointed out by the Counsel for the Revenue. As a result the author feels that there has been a miscarriage of justice and therefore there is a fit case for suo motu review by the honorable High Court to avoid unnecessary litigation and hardship to even petty dealers.

Earlier article - sales tax and section 43B:

1. In the article entitled " Sales-Tax vis-à-vis section 43B of Income-tax Act, 1961" (1996) 85 Taxamn 159 (Mag.) the author Shri Dev Kumar Kothari made detailed discussions regarding true nature of sales tax being tax on purchaser, circumstances and manner in which sales tax is collected and deposited with the government, sales tax though a trading receipt is not income of the collecting dealer, the circumstances when un-paid, undisputedly retained sales tax can be considered as income of the collecting dealer, and various  adjustments required under section 43B were discussed.   

In this regard reference may be made to various provisions discussed along with judgment of Supreme Court and high courts holding that sales tax is a trading receipt. However, in view of obligations to pay sales tax it was concluded that sales tax collected with an obligation to pay cannot be treated as income though it may be regarded as trading receipt.

The present article is aimed towards discussion of applicability of penalty provisions in case sales tax is not credited in the profit and Loss account or is not included in the income separately. As per author, the sales tax cannot generally be included in income and therefore, penalty cannot be levied. However, the Bombay high court has confirmed penalty under section 271(1) (c) for the assessee's failure to include sales tax collected in income.  

In view of the detailed discussion in the earlier article and this article, the author feels that the judgment of Bombay High Court confirming penalty for sales tax not credited in P&L Account requires to be reconsidered.

Sales Tax:

2. Sales Tax/ VAT is collected by seller of goods from the purchasers. The collection is as per the rates prescribed under the Sales Tax laws. The rate is depended upon the category of the purchaser. The rate may vary for purchasers who is a registered dealer and purchases goods for resale, a registered dealer who may purchase goods for use in manufacture of other goods, an individual who purchases goods for his own consumption, sale within the state and sale out side the state, sale in course of export out of India etc. Different rates are prescribed for different type of purchasers. Therefore, the so-called sales tax is in fact in nature of a tax on purchases paid by the purchaser to the dealer (seller) for onward payment to the Government.

For example The Delhi Value Added Tax Act, 2004 provides as follows:

Section 40.

Collection of tax only by registered dealers.-

(1) No person who is not a registered dealer shall collect in respect of any sale of goods by him in Delhi any amount by way of tax under this Act and no registered dealer shall make any such collection except in accordance with this Act and the rules made thereunder and at the rates specified under this Act.

(2) Tax collected by a person who is not a registered dealer shall not be refunded and shall stand forfeited.

Therefore, we find that only a registered dealer is entitled to collect VAT. In case an unregistered dealer collect VAT, such VAT will not be refundable and shall stands forfeited.

Sales Tax vis-a- Vis Purchase Tax 

3. In many states the provision has been made requiring a registered dealer to pay tax called as purchase tax in respect of goods purchased by him from unregistered dealer. This category of tax levied under the Sales Tax laws also establishes the reality that sales tax is in nature of tax on purchases and levied according to the category of the purchaser.

Sales Tax is diverted at source 

4. A registered dealer can collect sale tax. The registered dealer has to maintain some security deposits, guarantees, and indemnity bonds etc. to ensure deposit of sales tax with the sales tax department. Sales Tax collected by the dealer is collected with an obligation to deposit the same with the concerned authorities. In case the dealer does not deposit sales tax within the prescribed time limit, he may be liable for payment of interest, penalty, fine, etc. This shows that sales tax collected is diverted before accrual and it is not income of the dealer who collects it. In some cases law provide that sales tax once collected has to be deposited with the government, and in case it is found excess, then the purchaser can only get a refund.

Sales Tax is not an income though may be a trading receipt 

5. Sales Tax is collected through the cash memos and bills by the seller of goods. Therefore, it is considered as a trading receipt - rece3ipt in the course of trade or business. However, every trading receipt is not an income as noted in earlier paragraph. Sales Tax is charged/collected with the obligation to pay the same to the concerned authorities. Therefore, the amount collected on account of sales tax is diverted at source and cannot be called income of the dealer in any real and practical manner.

Obligations to pay needs to be considered 

6. When Sales Tax is collected and the dealer is regularly paying and admitting to pay the same to the concerned authorities, such sales tax collection cannot be deemed income because there is an obligation to deposit the same. Failure to deposit sales tax attracts penal provisions under the sales tax laws and criminal laws.

Usual accounting practice and law of diversion: 

7. Though accounting entries are not conclusive as to treatment of any item as income but still entries are very much relevant. Mostly followed and generally accepted accounting policy is that sales tax is credited in a separate account. In fact sales tax collected from different types of purchasers attracting different rates are also accounted in different accounts for administrative convenience and follow up. For example, sales tax collected from registered dealers, registered manufacturer dealers, unregistered dealers and consumers may be credited in to separate accounts and special registers may be maintained to enable follow up with the purchasers to obtain declaration forms etc. Caution money or deposit in lieu of prescribed forms are also obtained from purchasers and refunded when they furnish relevant declaration forms. Thus, such collections are not considered as income and cannot be treated as income because the collection is for onward remittance to the concerned authorities, it is not money collected with a right to retain, just like the sale price of goods, which belongs to the dealer. For example Dealer sells same item for a price of Rs.100 to S who purchases for resale, charges sales tax of Re.1.00, the same item is sold to a consumer, and sales tax of Rs.10 is charged. In both cases only Rs. 100 belongs to the dealer and Re. 1.00 and Rs.10.00 being sales tax charged belongs to the sales tax department. This clearly shows that the dealer does not receive sales tax as income.

If sales tax collection is included in sales and taken as income. Immediately entry for sales tax payable will also have to be made because there is a liability to pay sales tax. Because the dealer is liable to pay sales tax. Thus in fact there will be no income. For example revised entries may be as follows:

Parties Account    Dr.   110

To sales (including sales tax)    110        

(Sales including sales tax of Rs. 10 accounted for as sales - income)

Sales tax expenses     DR.  10

To Sales Tax payable     10

(Sales tax payable accounted for as expenditure.)

On passing of the above entries there will be no effect on the amount of profit. By the first entry revenue by way of sale is increased by Rs.10/- and by the second entry expenses debited in accounts will be increased by the same amount.

Sales tax collection is not included in the definition of income u/s 2(24) like the collection from employees of contribution towards PF etc. Therefore, sales tax accounted for as a liability cannot be considered as income for taxation as well as for penalty provisions.

In view of the judgment of the Supreme Court in the case of Siddheswar Sahakari Sakhar Karkhana Ltd V CIT (2004) 270 ITR 1 (SC) on the point of trading receipts vis a vis receipts which are not income or which are  diverted  before accrual it can be said that sales tax collections with obligation to deposit  are diverted at source. They may assume nature of income in future, if it is found that sales tax earlier collected is neither payable to the government nor refundable to the purchasers.

One can also fruitfully apply the principle laid down in  CCIT V Kesaria Tea Co. Ltd (2002) 254 ITR 434 / 122 Taxman 91 (SC), that purchase tax liability unilaterally written back by the assessee cannot be treated as income (u/s 41(1), when the Sales- Tax Department was still pursuing claim. 

Sales Tax and case of concealment 

8. In the case before Bombay High Court - CIT Vs. Bassein Metals Pvt. Ltd., the assessee did not credit the amount of sales tax collected by him amounting to Rs. 9,90,953/- in the P&L Account. The assessee has maintained separate account for sales tax collected as a liability payable and therefore naturally the sum was not credited in the P&L Account. The Assessing Officer treated this treatment as concealment of income or furnishing of inaccurate particulars of income and therefore Assessing Officer levied penalty in respect of the same. The Tribunal while considering the issue, relied on Allied Motors Pvt. Ltd. Vs. CIT (1997) 224 ITR 677 (SC) and held that whether sales tax collected during a particular accounting period would be a trading receipt even though the assessee maintained a separate account for the same without crediting the same to the P&L Account was a disputed point and in the circumstances, it cannot be said that the assessee has concealed income or had furnished inaccurate particulars and therefore Tribunal set aside the penalty. The Revenue filed appeal under Section 260A of the Income Tax Act before the Bombay High Court.

Unfortunately before the High Court no one appeared on behalf of the assessee. The Learned Counsel for the Revenue only brought to the notice of the High Court the judgments in Allied Motors Pvt. Ltd. v. CIT (1997) 224 ITR 677/91 Taxman 205 (SC), Sanghi Motors V. Union of India (1991) 187 ITR 703/59 Taxman 161 (Delhi) and Escorts Ltd. V. Union of India (1991) 189 ITR 81/59 Taxman 160 (Delhi). All these judgments related with the provisions of Section 43B of the Act which deals with liability of certain sums including sales tax. The High Court noted that there was no question of disallowance. There was no question of applicability of Section 43B and section 271(1)(c) was applicable. Therefore, the High Court answered the question in negative i.e. in favour of the Department and against the assessee - and confirmed that by not crediting sales tax in to P & L account or by not including the same in income assessee concealed income or furnished inaccurate particulars.

Points missed by the High Court

9. As there was no representation by the assessee and the Learned Senior Counsel appearing for the Revenue only referred to the case laws related to section 43B. It seems that a gross miscarriage of justice has resulted from this judgment because the following aspects were not pointed out and considered by the High Court: -

a) The main aspect as to collection of sales tax on behalf of government, the true nature of levy being on purchasers diversion of sales tax in favour of State/Central government etc. ware not at all pointed out and thus were not considered by the High Court.

b) The generally accepted accounting method

c) Payments made and liability to pay balance, if any, of sales tax collected to the authorities.

d) Admittance or otherwise of liability by the assessee - whether there was a remission and the dealer was not required to pay sales tax.

e) The provisions of Sales Tax Act, which requires the dealers to keep security deposit, guarantee from the dealers, bonds, and also that sales tax collected has to be deposited even if there is excess collection from customers etc.

f) The liability of the dealer under the Sales Tax laws to file returns, and pay tax.

g) Some judgments of High Court which have held that Sales Tax not debited in the P&L Account is not subject to section 43B

A fit case for review

10. Due to non consideration of various aspects as discussed above, this is a fit case for review by the Bombay High Court itself for the reason that large number of cases of dealers will be affected. Due to non-consideration of true nature of sales tax and related aspects the judgment has been centered on only section 43B. Particularly because the assessee did not represent the same although he was served notice, there may be a failure of the assessee for good and sufficient reason or in any case the matter is relevant for large number of dealers in general. Therefore, this case needs to be reviewed.

Practical note for dealers

11. In view of the judgment of the Bombay High Court and to void controversy the dealers may nee to change the accounting treatment for sales tax. It is better to credit sales tax in the P&L Account by including the same as sales or separately as sales tax charged/ collected and to debit sales tax paid / payable as an expenditure in the P&L Account. Therefore, even by a clerical mistake no amount of sales tax collected / charged in bills will remain as undisclosed income.

Board's Circular is desirable

12. It is hoped that the Revenue is not interested in collecting penalty in respect of sales tax collection which are payable to the Government as income of dealers. There may be cases that sales tax was charged / collected and remains outstanding and therefore will be allowed on actual payment as per section 43Bor proviso thereto. However, if it is not credited in P&L Account and penalty is levied for that reason alone, such penalty will not be justified though it may be in accordance with the judgment of the Bombay High Court. Therefore to avoid unnecessary orders for levying penalty u/s 271(1)(c), and consequent litigation it is desirable that the Board may issue a circular directing the authorities not to impose penalty in respect of undisputed sales tax liability even if it is not credited in the P&L Account.

Other collections:

Similarly other collections like service tax, municipal tax, entertainment tax etc. which are collected as a dealer or service provider or house owner, with a corresponding obligation to deposit the same with concerned authorities are not income of the person who collects it. Such receipts can be considered as income only when it is finally found that the same is not to be deposited with the concerned authority and is also not refundable to the person from whom it was collected. Therefore, such sums cannot be considered as income. In case of service tax on commercial rent, the  CBDT in  circular no 4 dated 28.04.08 relating to TDS on rent u/s 194I  has recognized the truth that the owner of building merely collect service tax for onward deposit with the government and it is not his income, The same principal apply to similar other levies also. Therefore, such receipts cannot be considered as income. However, care is required to check correct application of section 43B, wherever it is applicable.