Income Tax Appellate Tribunal - Cochin
Mehta Spices Co. vs Deputy Commissioner Of Income-Tax on 13 February, 1995
Equivalent citations: [1995]54ITD311(COCH)
ORDER
G. Santhanam, Accountant Member
1. This is an appeal by the assessee which is a registered firm with previous year ending on 31-3-1989, relevant to the assessment year 1989-90.
2. The assessee is a commission agent selling goods on behalf of its principals and derives commission at 1 % to 1 1/2% on the sales. In July 1987, Section 5(2A) was inserted in Kerala General Sales-tax Act with effect from 1-7-1987. It provided that all dealers having turnover in excess of Rs. 25 lakhs will have to pay turnover tax at the rate of 1/2% on the total turnover. Exemption was initially provided for the taxable turnover. The relevant section is reproduced below :
Notwithstanding anything contained in this Act or the Rules made thereunder, every dealer whose total turnover in a year exceeds rupees twenty five lakhs shall pay turnover tax at the rate of half percentage on the turnover of goods coming under the First or Fifth Schedule of this Act.
The Board also issued a notification No. 1341/87 which stated that all assessees in whose case the aggregate of the commission earned and expenses charged is less than 1 1/2%, there will not be liability for turnover tax. By notification No. 717/88, the liability to turnover tax was fixed at the penultimate point on the condition that any dealer who claims exemption shall produce a declaration in the prescribed form. This position prevailed from 1-7-1987 to 1-8-1991. It was the case of the assessee before the sales-tax authorities that it was not liable for turnover-tax on two grounds, viz
(a) since the commission earned is less than 1 1/2%, it is eligible for exemption as per notification No. 1341 /87; and
(b) as it is not having any purchase turnover, there is no turnover liable for turnover tax under Section 5(2A) in respect of spices like pepper and dry ginger sold by it on behalf of its principals.
Initially the Sales-tax Department did not accept any of the contentions. Subsequently, in respect of other assessees and also for the appellant for the assessment years 1989-90,1990-91 and 1991-92 (pages 36,38 &40 of the Paper Book) the Sales-tax Department accepted the stand of the assessee that as there was no purchase turnover there was no liability for turnover tax in respect of pepper and dry ginger. However, as the controversy arose on the introduction of Section 5(2A) to the K.G.S. Tax Act, the assessee entered into an understanding with its principals. The understanding was to the effect that the assessee will retain an amount equal to the turnover tax liability and in case the appellant was not held liable for turnover tax, the same would be refunded to them or in case the principals are asked to pay the same by the Sales-tax Department, on production of the prescribed declaration, the amount collected by the assessee from the principals would be refunded to them to the extent it was not paid to the Sales-tax Department by the assessee. The balance-sheet of the assessee as on 31-3-1989 showed a sum of Rs. 3,98,478 as liabilities towards rebate and claims payable. This included a sum of Rs. 3,40,000 set apart for turnover tax liability. The Assessing Officer made an addition of Rs. 3,40,000 in his order dated 10-2-1992. The assessment was set aside by the learned CIT (Appeals) as per order dated 30-12-1992 with a direction, that the existence of an understanding with the principals has to be verified and if there was an understanding with the principals as claimed by the assessee and the Sales-tax Department has accepted the plea that the appellant was not liable for turnover tax, the amount collected cannot be considered as the income of the appellant. As a consequence, the Assessing Officer examined two of the principals who vouchsafed for the understanding. The assessee had also filed copies of the agreements with the principals and also confirmation letters from these parties stating that there was an understanding that the amount collected by the appellant towards turnover tax shall be refunded to them in case the appellant was not found liable to pay the turnover tax. The Assessing Officer recorded statements from two principals, viz., Sri P.N. Krishnankutty and Sri V.P. Joseph. In the sworn statements the principals stated that although they generally agree that there was an understanding that in case the appellant was not liable to pay the amount to the Sales-tax Department, the amount has to be returned to them, they were unable to quantify as to how much they had paid to the appellant in each year on this account. Further, the Assessing Officer noticed that the amount was not collected as turnover tax but was collected as commission and incidental charges. These items were claimed as expenditure by the principals in their tax returns. It was also seen that part of the amount has been paid partly to the Sales-tax Department and partly to the principals. Therefore, he held that the provisions of Section 43B were applicable and since the amount was not paid within the previous year, the same was to be disallowed. The assessee carried the matter before the CIT (Appeals). The learned CIT (Appeals), after referring to the facts of the case and the enquiries made by the Assessing Officer, sustained the addition for substantially the same reason as adduced by the Assessing Officer. In addition, the learned CIT (Appeals) relied on the decision of the Supreme Court in the case of Jonnalla Narashimharao & Co. v. CIT [1993] 200 ITR 588 and thus dismissed the appeal of the assessee. The assessee is in further appeal.
3. We have heard rival submissions and perused the records. The assessee has filed a paper book consisting of the following :
SL No. Particulars Page No.
1. Argument notes 1 to 20
2. Copy of the order of the CIT(A)
dated 30-12-1992. 21 to 25
3. Copy of the order of the Sales-tax
Appellate Tribunal dated 1-6-1992
in the case of M/s. Metro Trading
Syndicate
4. Copy of the order of the CIT(A)
for 1990-91 dated 28-7-1994 26 to 31
5. Copies of Sales-tax assessment orders
for 87-88, 88-89, 89-90 & 90-91 32
6. Copy of order of the Dy. CIT(A) on
K.G.S.T. Appeal for 1987-88 33 to 41
7. Copy of the Sales-tax assessment order
in the case of M/s. Pulickal Traders. 42 to 45
8. Copy of Notification No. 1341/87 under
K.G.S.T. Act 46 & 47
9. Copy of Notification No. 717/88 under
K.G.S.T. Act 49 & 50
10. Copy of Notification No. 1008/91 under
K.G.S.T. Act 51
11. Copies of Income-tax assessment orders
for 1990-91 and 1991-92 52 to 55
12. Copy of the order of the Kerala High
Court in the case of M/s. Abad Fisheries 56 to 60
13. Copy of the confirmation letters from
the principals 61 to 72
14. English translation of the confirmation
from the principals 73
15. Specimen of the agreement with
the principals 74
16. English translation of the specimen
agreement with the principals 75 & 76
17. Analysis of Rebate & Claims payable
account for the year ended 31 -3-1990
and 31-3-1991 77 & 78
18. Particulars of payments effected out of
Rebate and Claims payable account in
the subsequent years 79
19. Copy of debit notes 80 to 84
20. Copy of statement sent to the principals 85 to 91
21. Profit & Loss Account for the period
ended 31-3-1989 92
22. Balance Sheet as on 31-3-1989 93
We have perused the same. Pages 85 to 91 in the paper book give samples of bill particulars. The bill contains the following details :
(1) Name of the person to whom goods were sold.
(2) By the assessee - described as Commission Agent.
(3) On account of the principal - name specified.
(4) Description of the commodity.
(5) Quantity.
(6) Rate.
(7) Value.
The bill itself contains a statement of accounts for the Principal detailing : (a) commission, (b) expenses, (c) interest, and (d) incidental charges. The statement of account contains further columns showing the sale proceeds as per the bill and expenses, leaving the balance to the credit of the principal. We are concerned with items (c) and (d) which are collected in the name of interest and incidental charges which are equal to the turnover tax payable. By whom payable was in dispute before the Sales-tax Department - whether it was the assessee who is a commission agent or whether it was by the principal on whose behalf sales were effected by the assessee. In the circumstances, the sum total of interest and incidental charges were credited in the accounts. A matching provision was made in the accounts and shown as a liability. It is also seen that part of this amount has been paid to the Sales-tax Department under protest and part of the amount has been refunded to the principals. The particulars in respect of these amounts for and from the assessment year 1989-90 to 1992-93 have been set out at pages 79 of the paper book. One of the reasons for making the addition was that Sri V.P. Joseph, after referring to his own books of account, could not tell how much was deducted by the assessee towards turnover tax. In our considered view this cannot be a ground for making the addition because the assessee's bill issued to the purchaser with a copy to the seller contains a statement of account for the principal detailing the amount collected and it is from this statement of account, the accounts of the assessee were written up. It may be that the principals have claimed these deductions made by the assessee as their expenditure and, therefore, they could not tell off-hand as to how much was deducted, but that was no ground for rejecting the assessee's claim because the deductions that were made by the assessee from out of the amounts due to each of the principals had been made in the statement of account for the principal which is contained in the very bills issued. Another reason for which the addition was made was that the principals had claimed the payments as expenditure in their hands. So far as the assessee is concerned, it is immaterial whether the principals had claimed payments as expenditure in their accounts. The assessee has collected the amount, though in the name of interest and incidental charges, in an amount equal to the turnover tax because a dealer is prohibited from collection of turnover tax from any other person. There is force in the contention of Sri G. Sarangan, the learned counsel for the assessee that in case the appellant had collected the above sums as turnover tax and later on it was found that the appellant was not liable for turnover tax, the entire collections would have to be t eated as illegal collections to be forfeited. While, at the same time, the principal would be called upon to make the payment of turnover tax without adjusting the forfeited amount from the appellant. Another important point to be not lost sight of is that these collections in the garb of interest and incidental charges in a sum equal to the amount of turnover tax was made on a distinct understanding with the principals. The principals have vouchsafed for the understanding, the nature of which can be gathered from the English translation of the confirmation given, which is as follows :
TO WHOM IT MAY CONCERN We used to send regularly goods like ginger, pepper etc. to M/s. Mehta Spices Company, Cochin for sale on Commission basis. The traders and the authorities had no doubt about the person who is liable to pay the turnover tax, which is a single point levy in force from 1-8-1987. Under these circumstances we had agreed to M/s. Mehta Spices Co., retaining an amount equivalent to the turnover tax. This we agreed on the definite understanding that in case they are finally held not liable for turnover tax, the amount would be returned to us. Alternatively if circumstances arise when we are required to remit turnover tax, either the amount should be returned to us on furnishing the specified declaration after remitting the tax or they should issue declaration to us after remitting the tax.
Sd/- Principals Therefore, we hold that even though the assessee has described the collections as interest and incidental charges, it cannot constitute its trading receipts in view of the specific understanding, under which the impugned amounts were collected. In effect, it only represents the amount withheld by the assessee from being paid to the principals and such withholding arose out of definite understanding with the principals. In other words, the assessee has retained a part of the sale proceeds for payment to the principals or the Sales Tax Department, as the case may be, depending upon the exigencies of the circumstances of the case and the same carried an obligation with it. Having understood the nature of the collection, the purpose for which it was collected and read with the understanding entered into with the principals, it has to be examined whether these collections in the garb of interest and incidental charges would partake of the nature of tax collections to be disallowed under Section 43B of the Income-tax Act, 1961. The learned CIT (Appeals) relied on the decision of the Supreme Court in the case of Jonnalla Narashimha-rao & Co. (supra). In that case, the assessee was a commission agent in jaggery. He had collected certain amounts by way of sales-tax during the accounting year relevant to the assessment year 1968-69. But, in as much as, he was disputing the very levy of sales-tax during that year, he collected it under the name "rusum". He was questioning his liability in various proceedings. Be that as it may, all doubts in that behalf were set at rest by the amendment effected in 1970 to the Andhra Pradesh General Sales Tax Act which was upheld by the High Court and the Supreme Court. By virtue of this amendment Sections 5 and 11 of the Act were amended with retrospective effect from June 1,1963. As a result of the said amendment, the assessee became liable to pay sales-tax on the sales/purchases effected by him during the relevant accounting year. It was an admitted fact that the assessee did not remit the tax during the assessment year 1968-69. He did it later. The questions raised in the appeals were whether the collection of the said amount in the name of "rusum" constituted the assessee's receipt and secondly whether it was a deductible expenditure for the assessment year 1968-69 notwithstanding the fact that the assessee did not actually remit the tax during that assessment year. So far as the first question was concerned, the Supreme Court held that there could hardly be any doubt. It constituted the assessee's business receipt though collected under the name "rusum" Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC). According to the Supreme Court the only question was whether it was deductible in the assessment year 1968-69 though it was not actually remitted. It was not disputed that the assessee maintained his accounts on mercantile basis. Section 43B was not there during the relevant assessment year; it came into force much later. In the circumstances, the Supreme Court held that it cannot be disputed, in view of its earlier decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) that it was a deductible expenditure. Accordingly, the first question was answered by the Supreme Court in the affirmative, that is, in favour of the Revenue and against the assessee and the second question was answered in the affirmative, that is, in favour of the assessee and against the Revenue. The facts of the case before us are different from the facts of the case before the Apex Court in very important aspects. Firstly, in the case decided by the Apex Court there was no understanding with the purchasers to refund the "rusum" collected. The assessee in that case had just collected the tax in the guise of "rusum" and did not make it over to the Government. However, in the case before us, the collections are not from the purchasers. The collections represented part of the amount due to the principals on the sales effected by the assessee in its capacity as a commission agent on the distinct understanding that in case the assessee is found not liable to pay tax, the same is to be refunded to the principals. Thus, the collections made by the assessee cannot be described as tax collections; nor as trading receipts. It is only money retained by the assessee to be refunded to the principals in case the assessee is found not liable to pay turnover tax. In case the principal is found liable to pay tax, the amount collected by the assessee should be either refunded to the principal or the assessee should pay tax on behalf of the principal. Secondly, in the former case, there was retrospective amendment validating the levy of tax on the commission agent. In the case before us there is no such validating Act; on the contrary, the commission agent was not held liable to tax in terms of subsequent notifications and clarifications. Hence, from the nature and manner of the collections that have been made and the obligation carried with it as a result of the distinct understanding with the principals, we hold that the assessee was only having a fiduciary relationship in so far as these collections are concerned, and, in as much as, these collections were not in the nature of tax, they cannot be disallowed under Section 43B either. Further there was liability to refund the same. For all these reasons, we delete the addition.
4. For another reason also we are not able to uphold the addition. In his order dated 30-12-1992, setting aside the original assessment, the learned CIT (Appeals) at para 4 of his order had given specific directions as follows:
On a consideration of the facts, I am of the opinion that the addition has to be set aside to be considered afresh by the officer. Before any conclusion can be arrived at in the matter, it is essential to verify the claim of the appellant regarding the understanding with the principals. Further, considering the fact that the sales-tax department appears to have changed its view in this matter, it is necessary to verify whether the appellant is really liable to pay the tax. If there was actually an understanding between the appellant and the principals in the matter and if the appellant is not really liable to pay the tax, then, the amounts collected cannot be considered as the income of the appellant as even at the point of collection, they were returnable to the principals. In view of these facts, I am of the opinion that the addition has to be set aside for fresh consideration by the officer.
In redoing the set aside assessment, the Assessing Officer had examined two of the five principals. The principals have vouchsafed for the understanding with the assessee as regards the payments. However, the Assessing Officer has drawn an adverse inference for the simple reason that the amounts collected by the assessee from the principals have been considered as expenditure in their respective accounts and that one of the principals was unable to quantify the amount of such collections. We have already held in para 3 above that these facts cannot go to disprove the understanding between the principals and the assessee. We have already held in para 3 that merely because the principals have treated the collections retained by the assessee as expenditure in their hands, it cannot be held that the impugned amount should be treated as income in the hands of the assessee. We are of the view that the assessee has established that there was a distinct and specific understanding between the assessee and its principals regarding the nature of the collections and the purpose for which it was to be utilised and the circumstances in which it was to be refunded. Thus, the primary purpose for which the case was restored to the file of the Assessing Officer has been fulfilled and found in favour of the assessee.
5. The learned CIT (Appeals) has also remarked in his order dated 30-12-1992 that the Sales-tax Department had changed its opinion or stand as regards the liability of the commission agents to turnover tax. In other words, initially it was holding that commission agents like the assessee were held liable to pay turnover tax; but subsequently it held that the principals are liable to pay turnover tax. This view of the learned CIT (Appeals) in his order is supported by the sales-tax assessment order in the case of M/s. Pulickal Traders, Rajakad, one of the principals of M/s. Mehta Spices Co., Cochin, the appellant before us. In the assessment of M/s. Pulickal Traders, the principals, in its order dated 3-9-1992, there are references to M/s. Mehta Spices Co., the appellant, which are relevant for our purpose:
As per the records and the accounts produced by the assessee, M/s. Mehta Spices Co., Cochin, is a commission agent. This fact has been fully accepted by the assessee. The accounts of the assessee very well expose the nature of transaction and relation between the assessee and M/s. Mehta Spices Co., Cochin. That is, M/s. Mehta Spices Co., Cochin, fully acted as a commission agent of the assessee. As per the accounts the assessee entrusted 30350 kgs. of dry ginger and 567650 kgs. of pepper with M/s. Spices Co., Cochin to effect sales to any parts on condition that for such sales M/s. Mehta Spices Co., Cochin will be paid commission by the assessee. The verification of the accounts clearly showed that on receipt of commission paid by the assessee, M/s. Mehta Spices Co., Cochin, sold 30350 kgs. of dry ginger and 567650 kgs. of pepper to different parties Thus the above explanation definitely shows the actual nature of transaction between the assessee and M/s. Mehta Spices Co., Cochin. The main point is that M/s. Mehta Spices Co., Cochin never purchased 30350 kgs. of dry ginger and 567650 kgs. of pepper. Likewise, the assessee has never sold so much quantity of goods to M/s. Mehta Spices Co.
In such a nature of transaction M/s. Mehta Spices Co., Cochin have got only the sales turnover of 30350 kgs. of dry ginger and 567650 kgs. of pepper. Since the dry ginger and the pepper are goods to be taxed at the last purchase point, its purchase turnover only is exigible to sales-tax and turnover tax. Hence, in this case, M/s. Mehta Spices Co., Cochin have got no purchase turnover being a commission agent. So, they cannot issue such a declaration as per SRO 717/88. So, considering the nature of transactions and the role of M/s. Mehta Spices Co., Cochin, as a commission agent the assessee undoubtedly stands out as the last but one purchaser of the goods.
The assessee raises the contention that M/s. Mehta Spices Co., Cochin is to be assumed as a purchaser of the goods from the assessee. In support of the contention the assessee filed Form 25 declaration from M/s. Mehta Spices Co., Cochin. This is baseless having no relevance. Actually, the issue of Form 25 declaration by M/s. Mehta Spices Co., Cochin and the production of them by the assessee at this stage warrant penal action because the actual dealer who purchased those goods have already issued the Form 25 declaration in order and they have been accepted.
In the circumstances, all the objections are overruled. The original assessment for 1989-90 as proposed is revised under Section 43 as under.
Further, in the case of M/s. Metro Trading Syndicate, Mattancherry, the Sales-tax Appellate Tribunal in its order dated 1-6-1992 for the sales-tax assessment year 1987-88 had dealt with the Notification issued by the Government in SRO No. 1341/87 in the following terms and held in favour of the assessee :
Another contention of the learned representative of the assessee is that as per notification SRO No. 1341/87 turnover tax is not to be levied, since the aggregate commission including all expenses charged or interest received by the appellant is less than 1 1/2of the turnover. Let us have a look at the notification SRO 1341/87, which is stated as follows:
In exercise of the powers conferred by Section 10 of the Kerala General Sales-tax Act, 1963 (15 of 1963), the Government of Kerala having considered it necessary in the public interest so to do, hereby make an exemption in respect of turnover tax payable under Sub-section (2A) of Section 5 of the Act, on the turnover of any goods which are bought or sold or supplied or distributed by any auctioneer, commission agent or any other mercantile agent subject to the condition that, in such sale, purchase of supply or distribution, the aggregate commission including all expenses charged or interest levied by such dealer shall not exceed one and a half per cent of such turnover of goods both from the purchasers and from the sellers.
7. It was argued by the learned representative of the appellant that the appellant is an agent purchasing and dispatching rubber to the principals. He further submitted that as per the financial statement, the commission earned is less than 1 1/2% of the turnover and that the inclusion of other charges towards expenses will not make the figure above 1 1/2%. In support of his claims he has produced before us the audited trading and profit and loss account for the year ended 31st March, 1988.
8. We do not find any reason to disbelieve the audited accounts. The assessing authority or the appellate authority has not disclosed the basis on which they came to the conclusion that the commission earned by the appellant is more than 1 1/2% of the turnover. No proof has been produced before us by the learned representative of the State that the aggregate commission including all expenses charged or interest received by the dealer exceed one and a half per cent of the turnover. Hence we hold that the appellant is not liable to pay turnover tax.
The above pronouncements supported the view of the learned CIT (Appeals) in his order dated 30-12-1992 that the Sales-tax Department was changing its stand in favour of the assessee and against the principals. Therefore, the only point that survived for consideration in the assessment that was set aside by the learned CIT (Appeals) was to find out whether there was an understanding between the assessee and the principals in regard to the collection of the amounts and if that understanding was proved as a fact, the amounts collected cannot be considered as the income of the assessee even at the point of collection. When the directions are so crystal clear, the Assessing Officer exceeded the directions by stating that the amounts were claimed as expenses by the principals etc. In an assessment that was set aside to be redone under specific directions, the authorities are bound only by the directions and they cannot travel beyond the directions specified in the appellate order. Facts or factors not germane to the directions contained in the appellate order cannot be invoked. For these reasons also we set aside the order of the learned CIT (Appeals).
9. In the result, the appeal is allowed.