Income Tax Appellate Tribunal - Delhi
Income-Tax Officer vs Ram Kishore Ram Gopal on 24 October, 1985
Equivalent citations: [1985]14ITD355(DELHI)
ORDER
K.C. Srivastava, Accountant Member
1. This departmental appeal is directed against the order of the Commissioner (Appeals) relating to the assessment year 1974-75. The grounds raised by the department relate to the treatment of balance in the purchase tax account and such questions have been raising between the department and the assessee in large number of cases. The circumstances in which the problem has arisen are as under :
2. The assessee-firm is a commission agent of foodgrains and does its own trading also. The ITO found that in various accounts pertaining to purchase tax there were total credits to the extent of Rs. 1,88,912. After certain adjustments the net credit was shown at Rs. 1,84,335. There is no dispute about this figure. The ITO further found that after considering the payments made relating to the current year's liability in the accounting period as after the close of the year, there was a surplus of Rs. 74,180 in the purchase tax account. According to the ITO, this surplus was to be included as the assessee's income.
3. The assessee explained that the firm was following mercantile system of accounting and it was debiting the party's account and crediting the purchase tax account for each transaction. According to the assessee, it had no interest in this amount of purchase tax as it was to be paid to the Sales Tax Department under the provisions of law. It was also submitted that in certain cases the amount was not payable to the Sales Tax Department but was to be paid back to the parties concerned. This was so when the parties concerned produced certificates from the Sales Tax Department that they have paid tax directly on the relevant transaction. The assessee had relied on certain case laws for the proposition that the balance in the account represented the assessee's liability to the Sales Tax Department under the sales tax law.
4. The ITO was of the view that the assessee could not be treated as discharging the liability of somebody else and the collections of purchase tax was as law requires the assessee to collect it and the responsibility of payment to the Government was on the assessee. According to the ITO, the purchase tax collected was the trading receipt in the hands of an assessee and whatever had not been paid to the Government had remained as a trading receipt and was, therefore, taxable in the hands of the assessee. The assessee had relied on the decision of the Allahabad High Court in the case of CIT v. Poonam Chand Trilok Chand [1916] 105 ITR 618 but the ITO distinguished the facts of the case on the ground that sales tax assessment stood completed before the income-tax assessments were taken. The ITO also considered the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT[1971] 82 ITR 363 but according to him, the facts of that case were different. This case was considered in the light of the assessee's contention that the balance represented an accrued liability in the hands of the assessee. According to the ITO, the determination of the purchase tax liability can only be at the time of the sales tax assessment and at that time the assessee can claim the deduction. Thus, the ITO came to the conclusion that the purchase tax realised insofar it exceeded the purchase tax paid was taxable in the hands of the assessee. He relied on the decision of the Supreme Court in the case of Sinclair Murray & Co. (P.) Ltd. v. CIT [1974] 97 ITR 615. He, therefore, held that Rs. 74,180 was taxable in the hands of the assessee.
5. When the matter came before the Commissioner (Appeals), he found that the ITO had considered the payment of current liability in the year as well as after the close of the year. However, the assessment had been made on 22-1-1977 and certain payments were made after this date and before the matter was heard by the Commissioner (Appeals). Considering all the payments made at the time when the appeal was heard, the Commissioner (Appeals) found that out of total credit of Rs. 1,84,335 the assessee had paid a total amount of Rs. 1,59,200 at various times starting from the year itself up to 1979. Only an amount of Rs. 25,135 remained to be accounted for. It was explained by the assessee that this amount was also to be refunded to the parties or to be paid to the Sales Tax Department according to the provisions of the Sales Tax Act. It was contended on behalf of the assessee before the Commissioner (Appeals) that the liability for paying the purchase tax accrued and arose at the time of purchase either made on the assessee's own account or on account of other parties. It was, therefore, contended that even if there was a surplus in the purchase tax account the assessee was treating it as its liability to be paid to the Sales Tax Department in view of the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra). Reliance was also placed on the decision of the Allahabad High Court in CIT v. Poonam Chand Trilok Chand (supra).
6. The Commissioner (Appeals) was of the view that the surplus in the account represented liability which had arisen and as the assessee was maintaining accounts on mercantile basis, the assessee could claim it as a deduction. The Commissioner (Appeals) also found support from the decision of the Allahabad High Court in the case of CIT v. Poonam Chand Trilok Chand (supra). The Commissioner (Appeals) held that the payment by the assessee in different years after the close of the accounting year was not important and as the assessee was following mercantile basis, the purchase tax was a liability which arose at the time of purchase itself and this had to be considered against the surplus in the purchase tax account. According to the learned Commissioner (Appeals), the decision of the Supreme Court in the case of Sinclair Murray & Co. (P.) Ltd. (supra) was not relevant to the issue under consideration and he held that the addition of Rs. 74,180 was not justified.
7. We have heard the departmental representative, who has strongly relied on the decision of the Supreme Court in the case of Sinclair Murray & Co. (P.) Ltd. (supra). He also submitted that once the purchase tax was collected, it was a revenue receipt in the hands of the assessee and till the asses-see pays to the Sales Tax Department or to any other person, it will represent a revenue receipt in his hands and has to be assessed as such. He further contended that the Commissioner (Appeals) should have at least taxed Rs. 25,135 which was the balance even according to him in the purchase tax account. The learned counsel for the assessee relied on the decision in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) as well as the decisions of the Allahabad High Court in the case of CIT v. Poonam Chand Trilok Chand (supra) as well as in Poonam Chand Trilok Chand v. CIT (supra).
8. There cannot be a. dispute now that sales tax or purchase tax collected by a person under the provisions of the Sales Tax Act is a revenue receipt in the hands of that person and has to be treated like that. That is the decision in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542, which was relied upon by the Supreme Court in the case of Sinclair Murray & Co. (P.) Ltd. (supra). The question for consideration in the present case is, however, different. The question is whether in view of the assessee's claim the surplus in this account should be allowed as a deduction as it represented a liability in the hands of the assessee, who was following mercantile system of accounting. Thus, the decision of the Supreme Court in the case of Sinclair Murray & Co. (P.) Ltd. (supra) has to be read along with the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra).
9. The liability in the present case arises under Section 3 of the UP Sales Tax Act, 1948 read with Section 3D of that Act. According to these provisions, the tax is levied on the turnover to be determined in the prescribed manner of purchases of certain notified goods. The liability arises as soon as the purchase as contemplated in that section are made. The quantification of the actual liability comes later on but the charge is created by the section itself. Our attention was also drawn to the provisions of Section 29A of that Act under which any amount realised by a dealer as realisation of tax the dealer had to deposit the entire amount into the Government treasury within the prescribed period notwithstanding that the dealer may not be liable to pay such amount as tax or that only a part of it was due from him as tax under this Act. Any amount deposited by any dealer shall to the extent to which it is not due as tax can be held by the dealer in trust for the person from whom it was realised by the dealer. There are provisions for the refund of such amount to those persons from whom it is originally realised. Thus, the law contemplates a charge on the purchases and also provides for the deposit of tax collection with the Government in all cases.
10. We are dealing with a case of Uttar Pradesh and we have got the decisions of the Allahabad High Court in similar cases which have been relied upon by the assessee as well as by the Commissioner (Appeals). In the case of CIT v. Poonam Chand Trilok Chand (supra), the High Court was dealing with a case of an assessee who was a commission agent like the present assessee. In the previous year the assessee had collected purchase tax and had credited it to an account styled as reserve for purchase tax. A part of this tax was paid and the balance of Rs. 31,631 was treated as the assessee's income by the ITO. The Tribunal, however, held that this amount represented the assessee's liability which had arisen and, therefore, the amount could not be added as the assessee's income. The High Court held that the assessee, who followed the mercantile system of accounting was entitled to claim a deduction even though the expenditure was not actually incurred and it was not entered in the books of account. According to the High Court, the fact that the assessee did not pay the amount to the Government in the relevant accounting year, did not alter the position. The Court further held that the entries in the books of account are not, in any way, determinative of an item of income or expenditure. The Court had further observed that if the assessee gets any refund as a result of appeal action could be taken under Section 41 of the UP Sales Tax Act. The High Court had decided this case after considering the ratio of the decision in the case of Kedarnath Jute Mfg. Co. Ltd. (supra).
11. The same assessee's case came before the High Court and had been considered in Poonam Chand Trilok Chand v. CIT (supra). In this case it was held that even where the assessee was disputing its liability to purchase tax to the State Government and had not made any debit entry in his books of account, the assessee could claim a liability as it had accrued at the time of purchase. The facts in that year also were similar whereafter collecting the purchase tax the amount was not paid to the Government and yet the assessee claimed that the balance represented an accrued liability under the provisions of law. In view of these decisions of the Allahabad High Court, which are binding in the case of the present asseesee, we hold that the Commissioner (Appeals) was justified in deleting the addition made by the ITO.
12. The appeal is dismissed.
S.S. Mehra, Judicial Member
1. I have the benefit of going through the order prepared by my learned brother Shri K.C. Srivastava. However, regret my inability to agree with the conclusion arrived at. The facts have in detail been discussed in the said order.
2. There was a clear surplus of Rs. 74,180 in the purchase tax account. In fact, the total receipt amounted to Rs. 1,88,912. Before arriving at the surplus, all the purchase tax liabilities had been satisfied. No liability in respect of year under consideration was outstanding. There was no demand pending. The surplus of Rs. 74,180 was clear of all clogs. May be the assessee collected more money by way of purchase tax then was required to deposit in the State Treasury. Such surplus had got no outstanding and conceivable liability. It was, therefore, a clear receipt includible in the income. The learned Commissioner (Appeals) was, therefore, not justified to delete the inclusion of Rs. 74,180. The factual position is absolutely against the assessee. The deletion was, therefore, not justified on facts, the ruling to the contrary notwithstanding. In my considered view, the addition made by the learned ITO should have not been deleted by the learned Commissioner (Appeals). It is, therefore, difficult to support such a finding, and I quash the same.
3. In the result, the revenue's appeal succeeds.
ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 We have difference of opinion in the above case and, therefore, proceed to state the point of difference as follows :
Whether, on the facts and in the circumstances of the case, Rs. 74,180 representing the unpaid balance in the purchase tax account could be brought to tax in the hands of the assessee ?
2. We refer the above matter to the President of the Tribunal so that the matter could be decided by referring to one or more other Members of the Tribunal.
THIRD MEMBER ORDER G. Krishnamurthy, Senior Vice President
1. In this appeal filed by the department relating to the assessment made on Ram Kishore Ram Gopal, Hathras in relation to the assessment year 1974-75, there was a difference of opinion between my learned brothers, who heard the matter on the question whether the purchase balance in the purchase tax account could be brought to tax as income of the assessee.
2. The assessee is a registered firm carrying on the business of acting as commission agents. There was in the books of account a purchase tax account where a total credit balance of Rs. 1,88,912 was shown and it was made up as under :
Rs.
Purchase tax 1,19,539
Surcharge 10,564
Purchase tax (til) 64,693
Purchase tax gains 22,764
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1,88,912 (sic)
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The accounts further showed that a total payment of Rs. 8,820 was made in the year out of which Rs. 60,834 related to the payments made to current year's liability and the balance of Rs. 24,986 related to payments made after the close of the year but relating to current liability. There was a further payment of Rs. 28,912 made in the accounting year but relating to the liability of the ^earlier years so that the total payment made was Rs. 1,14,732. Deducting this payment from the credit balance of Rs. 1,88,912, there was still credit balance of Rs. 74,180. The dispute was in regard to the treatment of this sum. The assessee contended that this credit balance though appears as a surplus in the accounts did not really represent its income because it was either payable to the Government of Uttar Pradesh on the assessments being finalised to sales tax and purchase tax or to be made over to the Government of as per the provisions of UP Sales Tax Act as amended from time to time or to be refunded to the parties concerned. It was further contended, with which we are more concerned in this matter, that the assessee was maintaining its accounts on mercantile basis and under that basis a liability to pay the amount to the Government simultaneously arose along with the collection of money and whether payment was made or not, that accrued liability should be allowed as a deduction and if it has allowed as a deduction, there would be nothing left by way of surplus. In other words, the contention was that a corresponding liability equal to the amount of Rs. 74,180 simultaneously sprung up. In this connection strong reliance was placed on the decisions of the Andhra Pradesh High Court in Addl. CIT v. T. Nagireddi & Co. [1976] 105 ITR 669 as, well as on the decision of the Allahabad High Court in CIT v. Poonam Chand Trilok Chand (supra). Substantiate a view that as soon as a dealer enters into a transaction the liability to pay sales tax arises although that liability could not be enforced till quantification was effected by assessment proceedings but the liability for payment of tax was independent of assessment. The ITO rejected these contentions and brought the sum of Rs. 74,180 to tax as income of the assessee. Then the matter went before the Commissioner (Appeals), Agra. He somehow could not agree with the conclusions reached by the ITO. He held that the decision of the Supreme Court in the case of Kedamath Jute Mfg. Co. Ltd. (supra) and the decision of the Allahabad High Court in the case of CIT v. Poonam Chand Trilok Chand (supra) directly applied and the ITO was in error in making an attempt to distinguish those direct cases. He also found as a matter of fact from a certificate issued by the STO, Hathras that in subsequent years the sales tax liability was completely cleared by the assessee. Even though the sales tax collection could be taken as income, since a corresponding liability was created for the payment of this sum as per the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra), the assessee's contention was correct and that the surplus could not be regarded as income liable to tax. Aggrieved by this decision of the Commissioner (Appeals), there was an appeal filed before the Tribunal by the revenue.
3. After hearing, both the Members could not agree on the conclusion and the following point of difference of opinion was made out by them, which was referred to the President who nominated me as a Third Member to express my opinion on the matter :
Whether, on the facts and in the circumstances of the case, Rs. 74,180 representing the unpaid balance in the purchase tax account could be brought to tax in the hands of the assessee ?
4. I have heard Shri R.N. Bara for the revenue and Shri Ram Lal for the assessee and perused the records and I am of the opinion that the view expressed by the learned Accountant Member is more in accord with the established principles of law and facts. The learned Accountant Member pointed out in his order that the decisions' of the Allahabad High Court in the cases of CIT v. Poonam Chand Trilok Chand (supra) and the latter on in Poonam Chand Trilok Chand v. CIT (supra) were directly on the issue and this case coming as it did from the Uttar Pradesh the decision of the Allahabad High Court was binding following which it must be held that the sum in question could not be regarded as income of the assessee. In both these cases the High Court held that corresponding liability to pay the tax arose as per the mercantile system of accounting adopted. In Poonam Chand Trilok Chand v. CIT (supra) the Allahabad High Court held whether an assessee is entitled to deduction of certain payments or not will depend upon the provision of law relating thereto and not on the view which the assessee might take of its liability nor can the existence or absence of entry in its books of account be decisive or conclusive of the matter. During the assessment years 1968-69, 1969-70 and 1971-72 the assessee, which follow the mercantile system of accounting, realised purchase tax from its customers for payment to the State Government. The assessee did not include these amounts in its profit and loss account for any of these years. At the time of assessments, the ITO included these amounts as trading receipts of the assessee. When the matter reached the High Court by way of reference, the High Court held that though during the relevant assessment years the assessee disputed the liability to pay the purchase tax to the State Government and had not made any debit entry in its books of account and lost the case finally and that though the payments were made in subsequent years, that fact would not make any difference because it was the accrual of the liability under the mercantile system of accounting which would decide the question of the deduction. The assessee, the High Court held, was entitled during the relevant assessment years to a deduction from the profits and gains of its business of the liability to pay purchase tax which arose on the purchase made by it during those years. The Allahabad High Court applied the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra). It was in this case that the Supreme Court held that when an assessee followed the mercantile system of accounting, it was entitled to a deduction from the profits and gains of its business of the .liability to pay the sales tax which arose on the sales made by it during the relevant previous year because the liability to pay the sales tax arose the moment the dealer made either purchase or sale. Although that liability could not be enforced till quantification is effected in assessment proceedings, the liability for payment of tax was independent of the assessment. The same was the decision reached by the High Court in CIT v. Poonam Chand Trilok Chand (supra) in the same assessee's case as in Poonam Chand Trilok Chand v. CIT (supra). The High Court was more categorical in this case when it pointed out that an assessee, who follows mercantile system of accounting is entitled to claim a deduction even though the expenditure was not actually incurred. It is enough if the liability for such expenditure accrues. The fact that the assessee did not pay the amount to the Government in the relevant accounting year did not alter the position. It was following these two decisions, the learned Accountant Member has observed above held that even if the surplus of Rs. 74,180 is to be regarded as income, since a corresponding liability to pay the amount to the Government arose, that amount should be allowed as a deduction with the result that no income results. The learned Accountant Member also noticed that under the UP Sales Tax Act if any amount is realised by a dealer purporting to be tax, such dealer shall deposit the entire amount so realised into the Government Treasury within such period as may be prescribed notwithstanding that the dealer is not liable to pay such amount as tax or only a part of it was due from him as tax. He pointed out relying upon this provision that the liability to deposit the same accrued and as a consequence the amount in question could not be regarded as income. But the learned Judicial Member pointed out in his order that (a) no liability in respect of year under consideration is outstanding, 1(b) there was no demand pending, (c) the surplus of Rs. 74,180 was cleared of all clogs, and (d) may be the assessee collected more money by way of purchase tax than was required to deposit in the State treasury and, therefore, a clear receipt includible in the income arose. It is pointed out in the course of the hearing that the learned Judicial Member had not correctly appreciated the facts. It is not a case where the assessee collected more money by way of purchase tax than was required to deposit because there was a clear finding recorded by the Commissioner (Appeals) that from a subsequent order issued by the STO, the entire liability was cleared. This could not, therefore, be that more money was collected without there being any liability to pay to the Government and secondly the provisions of Section 29D of the UP Sales Tax Act are not noticed by him because that section provided that any amount collected by a dealer purporting to be tax is to be deposited with the Government and the Government will hold it as entrust on behalf of the person from whom the money was collected. The liability to deposit the money with the Government made this collection a liability in the hands of the assessee and not as income. In any case the amount was paid by the assessee. I find that this submission was correct. Further, the learned Judicial Member on the basis of his earlier findings pointed out in the order that the factual position was absolutely against the assessee. This does not seem correct. Then the learned Judicial Member has pointed out in his order that even though there were rulings to the contrary by the Allahabad High Court, there was no justification for the deletion of this sum. The submission made on behalf of the assessee in this regard was that it is not open to the learned Judicial Member to it be that disregard the finding nature of the jurisdictional High Court (sic) unless there were distinguishing facts. Not having pointed out any distinguishing facts, the learned Judicial Member was bound to follow the decisions of the Allahabad High Court as was done by the learned Accountant Member. It is in view of the facts as stated above and in view of the binding nature of the Allahabad High Court decisions, I am persuaded that the view taken by the learned Accountant Member is correct both on law and in facts. I am, therefore, in agreement with that view.
5. Now the matter will go back to the regular Bench for deciding the appeal in accordance with the majority opinion.