TMI Blog1983 (4) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... not able to prove that the sales made by it were not on behalf of the agriculturist principals. However, if it proved that it was acting on behalf of the agriculturist principals, then such goods will be exempted from tax. The assessee, at the point, when it was dealing on behalf of the agriculturists, was not in a position to know as to how the transaction would be viewed by the sales tax authorities at the time of assessment. The assessee admitted the method adopted by it as follows : When the goods were sold on behalf of the agriculturist principals to various purchasers, it issued what are known as " Tak Patties " (somewhat akin to account sales) showing therein the name of the agriculturist principal, the name of the purchaser, the commodity, the quantity of the commodity sold, the rate and the sale proceeds. It also collected sales tax from the purchasers. From the gross proceeds which included the sales tax collected, it deducted its expenses, like commission, interest and " Hamali " as well as sales tax. On that basis, the sales tax has to be paid to the Government on assessment. This deduction of sales tax has been clearly shown in the " Tak Patties " and the balance arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is court in Addl. CIT v. Nagi Reddy and Co. [1976] 105 ITR 669, Buddala China Venkata Rao Co. v. CIT [1978] 112 ITR 58 and the decisions of the Supreme Court in CIT v. Mir Mohammad Ali [1964] 53 ITR 165 (SC) (sic) and in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), held that the assessee created the liability by opening separate accounts for each of the agriculturist principals. The creation of the liability under the system of accounting adopted by the assessee amounted to a legal liability which has to be deducted in computing the income. Even on the authority of those Supreme Court decisions, since a liability to pay the amounts has been created legally, the amounts, though trading receipts, must be allowed as a deduction, in which case, nothing will remain for addition. It further held that " since the assessee in his case followed the mercantile system of accounting and as soon as the assessments of sales tax were over, transferred the sales tax refundable on exempted turnover to the agriculturist principals to their personal accounts and even refunded, whether in a big way or small way, to the principals, that amount constituted a liability in the hands of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s tax, would amount to trading receipt, and so must be included in the income of the assessee, so long as it remains unpaid to the agriculturist principals. Since in this case, though certain amounts have been disbursed, but in so far as those amounts that have not been disbursed during the assessment years in question, will have to be added to their income. Reliance was placed on the decisions of the Supreme Court reported in Sinclair Murray Co. Pvt. Ltd. v. CIT [1974] 97 ITR 615 (SC), and Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542 (SC). The counter-contention of Sri Y. V. Anjaneyulu, the learned counsel for the assessee, is that the receipt is not a trading receipt; that no mercantile system of accounting is adopted in this case, that the liability has been created in favour of the agriculturist principals, that the amount which has been refunded after due assessment under the A.P. Sales Tax Act by the Government was paid earlier by the assessee and the assessee is subjected to that liability which has to be refunded to the agriculturist principals and, therefore, it cannot be added to the income of the assessee. In any event, it cannot be treated as income at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n its total income; (iii) that if and when the appellant paid the amount collected to the State Government or refunded any part thereof to the purchaser, the appellant would be entitled to claim deduction of the sum so paid or refunded. In Chowringhee's case [1973] 87 ITR 542 (SC), the appellant, a private company, dealing in furniture, also acted as an auctioneer. In respect of the sales effected by it as auctioneer, the appellant realised during the relevant period, in addition to the commission, Rs. 32,986 as sales tax. This was credited separately in its account book under the head " Sales tax collection account." The appellant did not pay the amount of sales tax to the actual owner of the goods nor did it deposit the amount realised by it as sales tax in the State Exchequer, because it took the position that the statutory provision creating that liability upon it was not valid, or refunded it to the persons from whom it had been collected. In the cash memos issued by the appellant to the purchasers in the auction sales, the appellant was shown as the seller. The Supreme Court held that, (i) that the sum of Rs. 32,986 realised as sales tax by the appellant in its character as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e might take of his Tights ; nor can the existence or absence of entries in his books be decisive or conclusive in the matter. This court also while placing reliance on the aforesaid Supreme Court decisions held in Addl. CIT v. Nagi Reddy Co. [1976] 105 ITR 669, that the assessee, a firm dealing in jaggery, had collected sales tax amounting to Rs. 17,710 and got refund from the Department in a Sam of Rs. 8,228. They were not accounted for as trading receipts and it was maintained by the assessee before the ITO that the sales tax account in its entirety is recorded as a liability since it had to be paid. This court held in Nagi Reddy Co.'s case [1976] 105 ITR 669 (AP), that (p. 672) : " So far as the principle goes, as stated by the Supreme Court, in Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax [1973] 87 ITR 542 (SC) and in Sinclair Murray Co. P. Ltd. v. Commissioner of Income-tax [1974] 97 ITR 615 (SC), it is final. But it has to be noted that the Supreme Court was not considering in the above two cases what would be the effect if those sales tax collections are entered in a separate account maintained under the mercantile system. An income accrues or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken proceedings before the higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail." In Addl. CIT v. Nagireddy Co. [1976] 105 ITR 669 (AP), it was further held that (p. 673): " The facts and the enunciation of the principle relating to mercantile system of accountancy as stated by the Supreme Court in the above case apply on all fours to the present case." This court reiterated the same principle in Buddala China Venkata Rao Co. v. CIT[1978] 112 ITR 58 (AP), wherein it was held (headnote): " An assessee, who maintains his books of account on mercantile basis, is entitled to deduct from the profits and gains of the business any liability which had accrued during the period for which the profits and gains were being computed. Where the liability to pay sales tax accrued daring the year of assessment, even though date, it has to be deducted from the profits and cannot be held to be the income of the assessee." Before answering, we may as well advert to the argument of Sri Y. V. Anjaneyulu, the learned counsel for the assessee, for which he invited our adjudication on the point as to whether the receipt by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed was that moneys which were not, when received, income and as to this there was no question could never later become income." In CIT v. Karam Chand Thapar Bros. (Coal Sales) Ltd. [1979] 117 ITR 621 (Cal), the assessee was the del credere agent of collieries and also the agent of the consumers. It collected from the consignees only the sale price of the coal which was despatched by the collieries to the consumers, the freight being paid by the consumers to the railways. As the freight was not charged on the actual weight of the coal despatched but on the carrying capacity of the wagon, the assessee claimed from the colliery the extra freight incurred where the freight was charged on a weight more than that of the coal actually despatched. The assessee collected the under-loading charges from the colliery, independent and irrespective of any demand from the consignees. There were cases where the consignees demanded the under-charges and the assessee passed on the amounts received by it. But there were also cases where the amounts were not demanded. The collieries had to pay these under-loading charges only out of the price of coal supplied by them as there was no way of their m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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