1983 (4) TMI 6 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sales tax collections made by the assessee are income of the assessee and liable to be assessed in their hands.
2. Whether the sales tax collections are liable to be deducted in computing the income.

Summary:

Issue 1: Sales Tax Collections as Income
The High Court of Andhra Pradesh addressed the issue of whether the sales tax collections made by the assessee, a commission agent for agriculturists, constitute income liable to be assessed. The assessee argued that the refunded sales tax amount should not be treated as trading receipt and should not be included in their income since it has to be made over to the agriculturist principals. The Income Tax Officer (ITO) included this amount in the assessee's income, but the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal (ITAT) provided relief to the assessee, holding that such collections were not to be treated as income liable to tax. The ITAT, relying on previous decisions, held that the creation of liability under the system of accounting adopted by the assessee amounted to a legal liability which has to be deducted in computing the income. The judicial Member concurred, stating that the sales tax collections were diverted to the agriculturist principals by overriding legal obligation and thus were not income of the assessee.

Issue 2: Deduction of Sales Tax Collections in Computing Income
The court examined whether the sales tax collections should be deducted in computing the income. The learned standing counsel for the Department contended that the sales tax collections should be included in the income of the assessee as trading receipts, relying on Supreme Court decisions in Sinclair Murray & Co. Pvt. Ltd. v. CIT and Chowringhee Sales Bureau P. Ltd. v. CIT. However, the court distinguished these cases, noting that the assessee in the present case followed the mercantile system of accounting, creating a liability to repay the sales tax to the agriculturist principals. The court held that the amounts collected as sales tax did not constitute trading receipts and, since the assessee followed the mercantile system, the liability to repay the sales tax created an obligation that should be deducted in computing the income.

Conclusion:
The court concluded that the sales tax collections did not constitute trading receipts and, in any event, since the assessee followed the mercantile system of accounting, the liability to repay the sales tax should be deducted in computing the income. The question was answered in the affirmative and in favor of the assessee.