Patna High Court
Commissioner Of Income-Tax vs Pareck Brothers on 20 March, 1987
JUDGMENT Ashwini Kumar Sinha, J.
1. These three references are under Section 256(2) of the Income-tax Act, 1961. The assessment years in question are 1972-73, 1975-74 and 1974-75.
2. This court, by its separate orders dated January 19, 1979, directed the Income-tax Appellate Tribunal, "A" Bench, Patna, to state the case and refer the following questions of law for the opinion of this court:
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in dismissing the Department's appeal without dealing with the points on merits, on the basis of the order passed in the assessee's appeal, when they were not being heard together ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the gross profit rate should be applied to gross turnover, including the amount of sales tax ?"
3. Under the directions of this court, the Tribunal stated a consolidated case for the assessment years in question.
4. As the questions are common for the assessment years in question, the present three references have been heard together and are being disposed of by a common judgment.
5. As it appears from the statement of case as also from the orders of the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal, the assessee is a firm dealing in hosiery goods and readymade garments and derives income therefrom. The assessee has not maintained any day to day stock account. He has not furnished any distinctive number either of purchases or sales and hence the average margin of profit earned by the assessee was not possible to be checked. The assessee debited the sales tax payment in the profit and loss account. Sales tax received from the customers was included in the sales price.
6. The assessee declared the total turnover of Rs. 11,43,939, Rs. 9,65,647 and Rs. 10,68,682 for the assessment years 1972-73, 1973-74 and 1974-75, respectively, for which gross profits were declared at Rs. 1,72,680, Rs. 1,65,969 and Rs. 1,91,949, which worked out to 15%, 17.2% and 17.9% respectively.
7. The Income-tax Officer adjusted the gross profit and found that the gross profit shown by the assessee in these years was low. He also found that the other dealers have declared better (margin of) profit on sale of ready made garments. He further found that the sales tax received from the customers was included in the sale price, but the sales tax paid was not debited in the trading account. He, therefore, considered that the sales tax paid by the assessee should be debited to the trading account instead of to profit and loss account. As the accounts of the assessee were not amenable to check in the absence of day to day stock register and distinctive number of purchases and sales, the Income-tax Officer held that the provisions of the proviso to Section 145(1) of the Act were applicable in the instant case. The Income-tax Officer accordingly estimated the profit at 16% on net sales in each year and took the additional profit of Rs. 78,033, Rs. 43,493 and Rs. 48,200 respectively.
8. The orders of the Income-tax Officer have been marked annexure-A to A-3 to the statement of case.
9. Being aggrieved by the orders of the Income-tax Officer, the assessee went in appeal before the Appellate Assistant Commissioner. The assessee disputed not only the additions made by the Income-tax Officer in the assessment years in question but also disputed the application of the proviso to Section 145(1) of the Income-tax Act (hereinafter referred to as "the Act").
10. The Appellate Assistant Commissioner, after considering the case of the assessee for the assessment year 1971-72 and the margin of profit declared in the assessment years in question, by a consolidated order held that the proviso to Section 145(1) of the Act was applicable. However, the Appellate Assistant Commissioner reduced the adoption of gross profit to 18% for the assessment year 1972-73, but adopted a gross profit rate of 20% for the assessment years 1973-74 and 1974-75. He, accordingly, allowed a relief of Rs. 44,804, Rs. 27,160 and Rs. 22,188 respectively.
11. The consolidated order of the Appellate Assistant Commissioner has been marked as annexure-B to the statement of case.
12. Aggrieved by the order of the Appellate Assistant Commissioner, the assessee as well as the Department both filed appeals before the Tribunal.
13. It appears that the appeal of the assessee was disposed of first by the Tribunal. It further appears that the assessee's appeal for the previous assessment year 1971-72 was also pending before the Tribunal and the Tribunal disposed of the assessee's appeal first covering the assessment years 1971-72 to 1974-75. The Tribunal in the assessee's appeal held that the profit for the assessment year 1972-73 should be worked out by applying the rate of 16%, whereas the profit for the assessment years 1973-74 and 1974-75 should be worked out by adopting the rate of 19%.
14. This was against the rate of 18% applied by the Appellate Assistant Commissioner for the year 1972-73 and 20% in the years 1973-74 and 1974-75.
15. The order of the Tribunal, disposing of the assessee's appeal has been marked as annexure-D to the statement of the case.
16. The Department, in its appeals, objected to the Appellate Assistant Commissioner's orders not sustaining the entire additions of Rs. 78,033, Rs. 43,493 and Rs. 48,200 made by the Income-tax Officer in the assessment years in question.
17. As the Tribunal reduced the additions maintained by the Appellate Assistant Commissioner, the Tribunal dismissed the departmental appeals.
18. The order of the Tribunal dismissing the departmental appeals has been marked as annexure-C to the statement of the case.
19. Thereafter, the department moved the Tribunal for reference under Section 256(1) of the Act for the assessment years in question.
20. The applications under Section 256(1) of the Act have been marked as annexures F/l to F/3 to the statement of the case.
21. The Tribunal, by a consolidated order, rejected the Department's applications filed under Section 256(1) of the Act.
22. The order of the Tribunal refusing reference has been marked as as annexure-E to the statement of the case.
23. Thereafter, the Department moved this court under Section 256(2) of the Act for the assessment years in question and, as already stated above, this court directed the Tribunal to state the case to this court for its opinion on the questions referred to above.
24. The learned senior standing counsel for the Department contended that the amount realised as sales tax by the assessee forms part of its trading or business receipts and further contended that the gross profit was not cost + profit + sales tax but cost + profit alone.
25. Learned counsel for the Department submitted that in order to find out the real gross profit, sales tax amount has to be deducted before the submission of return (sic) and that the sales tax amount has to be excluded in order to find out the real gross profit.
26. On the other hand, learned counsel for the assessee submitted that the assessee committed no illegality in debiting the sales tax amount in the profit and loss account. The learned counsel further submitted that the assessee having not collected the sales tax amount separately from the customers on sales, the entire amount (inclusive of the sales tax amount) must be taken as the gross profit.
27. The learned senior standing counsel for the Department, in order to support his submission, relied upon a Supreme Court case in the case of Sinclair Murray & Co. (P) Ltd. v. CIT [1974] 97 ITR 615, and another Supreme Court case in the case of Chowringhee Sales Bureau (P) Ltd. v. CIT [1973] 87 ITR 542.
28. In the case of Sinclair Murry & Co. (P.) Ltd. v. CIT [1974] 97 ITR 615 (SC), the ratio decided in the earlier Supreme Court case in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC) was accepted/followed.
29. In the case of Chowringhee Sales Bureau (P.) Ltd v. CIT [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 amount was credited separately in its account books 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, nor refund it to the persons from whom it had been collected. It took the position that the statutory provision creating that liability upon it was not valid. In the cash memos issued by the appellant to the purchasers in the auction sales, the appellant was shown as the seller.
30. The Income-tax Officer held that the sum of Rs. 32,986 realised as sales tax by the appellant was part of the appellant's income of the same nature as was the commission received by it on the auction sales and the amount was added to the appellant's income. The appellant went in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner decided the case in favour of the appellant. The Department thereafter went before the Tribunal and the Tribunal affirmed the Appellate Assistant Commissioner's order. However, the Tribunal referred the following question to the High Court for its opinion :
" Whether, on the facts and in the circumstances of the case, the sum of Rs. 32,986 had been validly excluded from the assessee's business income for the relevant assessment year ? "
31. The High Court answered the question against the assessee-appellant.
32. Thereafter, special leave was granted and the matter went to the Supreme Court. The Supreme Court held that the sum of Rs. 32,986 realised as sales tax by the appellant in its character as an auctioneer formed part of its trading or business receipts. The Supreme Court further held that the fact that the appellant credited the amount received as sales tax under the head " sales tax collection account " did not make any material difference, and it was further observed that it was the true nature and quality of the receipt and not the head under which it was entered in the account books that would prove decisive. The Supreme Court further held that if a receipt was a trading receipt, the fact that it was not so shown In the account books of the assessee would not prevent the assessing authority from treating it as trading receipt.
33. In my opinion, the facts of this case are on par with the facts of the instant case. In the instant case, as already stated above, the assessee did not maintain any day to day stock account. He did not furnish any distinctive number either of purchases or sales and debited the sales tax payment in the profit and loss account and the sales tax received from the customers was included in the sales.
34. Thus, on the ratio decided in the case of Chowringhee Sales Bureau (P.) Ltd. [1973] 87 ITR 542 (SC), the amount realised as sales tax by the assessee in the present case, in its character, formed part of trading or business reciept. I hold that this Supreme Court case fully supports the submission advanced by the learned senior standing counsel for Department.
35. In the case of Sinclair Murray & Co. (P.) Ltd. v. CIT [1974] 97 ITR 615 (SC), the appellant company, with its head office at Calcutta, during the assessment year in question, sold jute in Orissa to certain mills for being used in Andhra Pradesh and charged sales tax under a separate head in the bill as "Sales tax: Buyer's account......to be paid to the Orissa overnment". The sales tax was not paid to the Orissa Government on the ground that the sales were inter-State sales. The assessee contended before the Income-tax Officer that the sales tax realised from the purchaser did not form part of the sale price of the jute and as such did not constitute receipt in jute business. The Income-tax Officer rejected the assessee's contention and held that the sales tax formed part of the consideration for the sales and, therefore, the accumulation on that account represented the assessee's income. The Income-tax Officer accordingly added the sales tax amount to the assessee's total income. On appeal by the assessee, the Appellate Assistant Commissioner found that a part of the sales tax amount realised had been paid to the Orissa Government and reduced the assessee's total income. However, the contention of the assessee to the effect that the sales tax realised was not part of the taxable receipt of the assessee was rejected. The assessee then went before the Tribunal and submitted that the purchaser paid the sales tax and the price of goods to the assessee on the understanding that if ultimately no sales tax was exigible on those sales, the amount collected as sales tax would be refunded to the purchaser. The amount collected as sales tax, according to the assessee company, could not belong to it but belonged to the purchaser and as such could not be treated as income of the assessee. The Tribunal held that where a dealer collects sales tax under the provisions of Section 9B(3) of the Orissa Sales tax Act, the amount of the tax does not form part of the sale price and the dealer does not acquire any beneficial interest in that amount. Accordingly, the Tribunal held that if at the time of the collection, the amount was collected as sales tax, the subsequent failure of the assessee to deposit the amount in the Orissa Treasury could not transform the character of that amount. The Tribunal consequently came to the conclusion that the Appellate Assistant Commissioner had erred in treating Rs. 7,14,398 as part of the total income of the assessee.
36. However, the Tribunal referred the question for the High Court's opinion. The question referred was as follows :
"Whether, on the facts and in the circumstances of the case, the sum of Rs. 7,14,398 was liable to be included in the total income of the assessee under the Indian Income-tax Act, 1922 ?"
37. The High Court held that if tax, which is validly exigible, is realised by a trader from his customer, and is then utilised in his business, the tax so realised cannot but form part of the sale price. According to the High Court, the tax would be included in the trading receipt of the dealer and would become part of his income as th e money realised from the purchaser on account of tax was employed by the dealer for the purpose of making profit* and was not separated from the price simpliciter.
38. The High Court in this context referred to the fact that the assessee did not earmark the amount realised as sales tax and did not put it in a different account or deposit it with the Government. It was further found that the assessee had treated the amount of sales tax as his own money.
39. Certificate having been granted, the matter went before the Supreme Court. The Supreme Court, as already stated above, relied upon its earlier judgment in the case of Chowringhee Sales Bureau (P.) Ltd. [1973] 87 ITR 542 (SC) and held that the amount collected by the appellant as sales tax constituted its trading receipt and had to be included in its total income. It further held that the fact that the dealer was compelled to deposit the amount of sales tax in the State exchequer did not prevent the applicability of the principles laid down by the Supreme Court in its earlier case, in the case of Chowringhee Sales Bureau (P.) Ltd. [1973] 87 ITR 542 (SC).
40. In my opinion, the facts of this case also are at par with the facts of the instant case and I hold that the principles decided in this case by the Supreme Court also support the submission advanced by the learned senior standing counsel for the Department.
41. Learned counsel for the assessee, on the other hand, in support of his submission (mentioned in page 347 supra), relied upon a Supreme Court case in the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363. At the very outset I wish to note that the principle decided in this case supports the submission advanced by the learned senior standing counsel for the Department and is against the assessee. In this case, the assessee was a public limited company doing the business of jute and manufacturing of jute goods. The method of accounting followed by the assessee was the mercantile system. The assessee claimed a deduction of Rs. 1,49,776 on account of sales tax determined to be payable on the sales made by the assessee during the period in question.
42. A proceeding relating to assessment of sales tax was pending and before any final decision in that proceeding was taken, the Income-tax Officer completed the assessment. According to the Income-tax Officer, the assessee was not entitled to claim deduction of the aforesaid amount of sales tax inasmuch as it had denied its liability to pay that amount and had made no provision in its books with regard to the payment of that amount. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. The Tribunal also dismissed the appeal of the assessee. However, the Tribunal referred the following question of law for the opinion of the High Court:
" Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,49,776, which was claimed by the assessee as a deduction on account of sales tax was deductible as business expenses ?"
43. The High Court opined that unpaid and disputed sales tax liability could not form the basis of claim for deduction for the purposes of income-tax. It held that for the purpose of claiming a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922, mere legal liability was not enough. There had to be an expenditure in the first place and it must be laid out or expended wholly and exclusively for the purpose of such business. The High Court further held that unpaid and disputed sales tax could not be validly deducted in the computation of business income even under Section 10(1) of the Act.
44. By way of special leave, the matter went before the Supreme Court and the Supreme Court held (headnote) (page 363 of 82 ITR):
" That the moment a dealer made either purchases or sales which were subject to sales tax, the obligation to pay the tax arose. Although that liability could not be enforced till quantification was effected by assessment proceedings, the liability for the payment of tax was independent of the assessment. The assessee which followed the mercantile system of accounting was entitled to deduct from the profits and gains of its business liability to sales tax which arose on sales made by it during the relevant previous year. The assessee was entitled to the deduction of the sum of Rs. 1,49,776 being the amount of sales tax which it was liable under the law to pay during the relevant accounting year. That liability did not cease to be a liability because the assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail. Further, the fact that the assessee had failed to debit the liability in its books of account did not debar it from claiming the sum as a deduction either under Section 10(1) or under Section 10(2)(xv).
Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not the view which the assessee might take of his rights ; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter."
45. Thus, it would appear that this case instead of supporting the submission advanced by the learned counsel for the assessse, fully supports the submission advanced on behalf of the Department.
46. There is no element of profit on the amount of sales tax and hence the application of gross profit (rate) on the amount of sales tax does not arise; rather the surplus or deficit of the sales tax collection and sales tax paid should be taken as income or expenditure separately. The sales tax paid or collected cannot form part of the gross profit, as the same is collected as the agent of the Government.
47. There is no justification, in law, for exclusion of the sales tax amount as part of the profit of the business. As would appear from the facts of the instant case, the gross profits in the trading account were artificially inflated by debiting the Central or State sales tax in the profit and loss account. Hence, to find out the real gross profit, the actual amount of Central or State sales tax debited in the profit and loss account both from the turnover as well as gross profit shown has to be deducted. The application of gross profit on the amount of sales tax collections or the sales tax paid, in law, is not correct and the same should be taken as income or expenditure.
48. I, on the principle laid down by the Supreme Court in the case of Sinclair Murray & Co. (P.) Ltd. [1974] 97 ITR 615 and in the case of Chowringhee Sales Bureau (P.) Ltd. [1973] 87 ITR 542, hold that the sales tax amount realised by the assessee formed part of its trading or business receipts.
49. I further hold that, in law, the rate of net sales should be after excluding the amount of sales tax and there is no justification, in law, for exclusion of the sales tax amount as part of the profits of the business. I further hold that the gross profit, in law, is not cost plus profit plus sales tax but cost plus profit alone.
50. As I have held above that the gross profit was not cost plus profit plus sales tax but cost plus profit alone, I hold that the sales tax amount has to be excluded in order to find out the real gross profit. In the instant case, the sales tax received from the customers was included in the sale price ; hence to find out the real gross profit, the sales tax amount has to be deducted and then what remains as the balance is the gross profit.
51. Consequently, it is also held that in order to show the real gross profit, the sales tax amount has to be deducted before the submission of the return (sic).
52. It would be relevant to quote Section 145(1) and its proviso of the Act :
"145(1). Income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall be computed in accordance with the method of accounting regularly employed by the assessee :
Provided that in any case where the accounts are correct and complete to the satisfaction of the Income-tax Officer but the method employed is such that in the opinion of the Income-tax Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine."
53. On the facts and in the circumstances of the case (as detailed above), I further hold that the proviso to Section 145(1) of the Act was applicable in the instant case and the Income-tax Officer and the Appellate Assistant Commissioner both correctly applied the proviso to Section 145(1) of the Act in the instant case."
54. For the aforesaid reasons, question No. 2 is answered in favour of the Revenue and against the assessee. Thus I hold that, on the facts and in the circumstances of the case, the Tribunal was not justified in holding that the gross profit rate should be applied to gross turnover including the amount of sales tax.
55. As the Department's case and the assessee's case have been dealt with on merits while answering question No, 2, question No. 1 loses its significance and need not be answered.
56. Parties shall bear their own costs.
57. Let a copy of this judgment be transmitted to the Assistant Registrar, Income-tax Appellate Tribunal, Patna, in terms of Section 260 of the Income-tax Act, 1961.
Uday Sinha, J.
58. I agree.