If Assessee has collected the amounts from its customers as a contingent liability towards tax, it would partake of the character of trading receipts even if described as deposit.

 2,429 total views

If Assessee has collected the amounts from its customers as a contingent liability towards tax, it would partake of the character of trading receipts even if described as deposit.

Here is an interesting case on section 43B wherein Assessee collected four per cent on price of goods as sales-tax and paid the same to Government and also collected another four per cent as deposit apprehending further liability.

Question emerged whether receipt was a trading receipt and did not lose its true character by labeling it as a deposit? Fact that assessee did not pay over those amounts to state Government only dis entitles the assessee from claiming the deduction? If and when the amounts are refunded to the persons from whom it was collected assessee can claim deduction? By calling a portion of the amount as deposit, it cannot be said that the assessee had constituted itself as a trustee, and, therefore, the amounts were not part of its trading receipt?

It was held that

1.   The amounts collected by the assessee were amounts which were meant to be utilised by the assessee for meeting its tax liability. Even if the assessee had paid over the entire amount received by it as deposit towards sales tax to the State Government, it would still have been open to the assessee to seek refund if the assessee wished to claim such refund on the ground that the tax had been levied at a higher rate than the rate permissible.

2.  In the event of such claim being upheld, it would have been open to the assessee, to receive a refund and thereafter pay those amounts to the persons from whom the amounts had been collected.

3.   The fact that the assessee had chosen to adopt the device of labelling a part of the amounts collected towards its sales tax liability as deposit cannot make a difference.

4.  The amounts were received for the purpose of meeting the tax liability.

5.  The fact that the assessee did not pay over those amounts to the State Government only dis entitles the assessee from claiming the deduction to the extent it could have had the amounts been paid over in full to the State.

6.  The purchasers from the assessee did not derive any benefit from the device adopted as the purchasers were made to pay the amounts and the amounts were merely retained by the assessee and in the meanwhile, used by it in the normal course of its business. The receipt which was in its true character a trading receipt, cannot be rendered otherwise by the assessee labeling the receipt as a deposit. It would certainly be wholly unjust if the assessee were to be permitted to collect the amount from the customers as amounts payable towards sales-tax and still claim that it is not a trading receipt.

7.   If and when the amounts collected are refunded to the persons from whom collection had been made the assessee can claim deduction in the year in which such refund is effected. That is what the CIT had directed. The Tribunal was in error in holding otherwise.

8.  The true character of the receipt must be judged with reference to the reasons for the collection and the liability for meeting which the collection was made.

9.   When the liability is a statutory liability, which the assessee was required to meet and for meeting which it was by the statutes or authorities permitted to collect the amount required from its customers, the true character of the collection is a trading receipt.

10.  By calling a portion of the amount as deposit, it cannot be said that the assessee had constituted itself as a trustee, and therefore, the amounts received were not required to be regarded as part of its trading receipt.

11. Had the assessee been unsuccessful in its claim that his goods were not to be treated as chemicals there is no doubt that the amounts though collected as deposit, would have been paid over to the State Government as the amounts had been collected for payment to the State Government as sales-tax in the event of the goods being treated as chemicals.

12. Assessee having collected the amounts from its customers for the purpose of meeting its liability towards sales-tax, the amounts so collected partake of the character of trading receipts even if described as deposit.

The High court has discussed various judgments including the following: –

Chowringhee Sales Bureau (P) Ltd. vs. CIT 1973 CTR (SC) 44 : (1973) 87 ITR 542 (SC)

CIT vs. Assam Roller & Flour Mills (1994) 122 CTR 18 (Raj) 393 : (1994) 209 ITR 835 (Raj) : TC 13RPs.45

CIT vs. Bhapkar (M.L.) (1993) 112 CTR (Bom) 105 : (1994) 207 ITR 464 (Bom)

CIT vs. Bijli Cotton Mills (P) Ltd. (1979) 8 CTR (SC) : (1979) 116 ITR 60 (SC) : TC 13R.297, 68R.187.

CIT vs. M.P. State Agro Industries Development Corporation (1983) 139 ITR 312 (MP) : TC 13R.509.

CIT vs. Tollygunge Club Ltd. 1977 CTR (SC) 195 : (1977) 107 ITR 776 (SC) : TC 38R.506

Sinclair Murray & Co. (P) Ltd. vs. CIT (1974) 97 ITR 615 (SC) : TC 13R.331

The copy of the Judgment is as under:

COMMISSIONER OF INCOME TAX vs. SOUTHERN EXPLOSIVES CO.

HIGH COURT OF MADRAS

R. Jayasimha Babu & Mrs. A. Subbulakshmy, JJ.

Tax Cases Nos. 1007 & 1008 of 1988

17th March, 1999

(1999) 67 CCH 0156 ChenHC

(2000) 242 ITR 0107 : (2002) 123 TAXMAN 1010

Legislation Referred to

Section 28(i),

Case pertains to

Asst. Year 1979-80, 1980-81

Decision in favour of:

Revenue

Counsel appeared:

S.V. Subramaniam, for C.V. Rajan, for the Revenue : P.B. Sampath Kumar, for the Assessee

R. JAYASIMHA BABU, J.

Judgment

The question referred to us at the instance of the Revenue is as under :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the collection of deposits against sales tax four per cent would not form part of the assessee’s income and cancelling the order of the CIT under s. 263 ?”

2. The assessee is a dealer in explosive detonators and safety fuses. It had collected four per cent on the price of the goods as sales tax and paid the same to the Government. It collected a further four per cent on the price of the goods as deposit against the sales tax and surcharge for the asst. yrs. 1979-80 and 1980-81. The assessee contended before the sales tax authority that the explosive detonators, and safety fuses sold by it were not chemicals and they were therefore to be subject to lower rate of sales tax. Nevertheless, it proceeded to collect from the customers the entire amount which would have been payable by the assessee to the Government as sales tax if those explosive detonators and safety fuses were to be treated as chemicals. The amounts so collected were in part paid over to the Government and the part not paid over to the Government remained with the assessee and presumably used by it in its business, as there is nothing to show that the monies were kept in any separate fixed deposit and had not been in any way used by the assessee for its business purposes. The assessee did not for the asst. yrs. 1979-80 and 1980-81 include in its return of income, the amounts which it had chosen to describe as deposit against sales tax and surcharge. The return so filed was accepted by the ITO but the CIT by exercising his power under s. 263 directed the ITO to re-do the assessment and include the additional amount collected and retained by the assessee.

3. The assessee having appealed to the Tribunal the Tribunal set aside the order of the CIT. The Revenue is now before us seeking an answer to the question which has already been set out.

4. It is necessary to note at the outset that the amounts collected by the assessee were the amounts collected by it to meet its liability for the payment of sales-tax and that sales tax is a statutory levy which it was bound to pay. The amount collected towards sales tax clearly form part of the turnover of the assessee and constitute a part of its trading receipt. To the extent tax is paid to the State Government, the amounts so paid can be claimed by the assessee as deduction. Had the assessee collected the entire, amount received by it from its customers as the amounts paid towards sales tax, there can be no doubt that the entire amount would be treated as part of its trading receipt and deduction allowed only to the extent of the amount paid by it as sales tax to the State Government.

The question for our consideration is as to whether by characterising a part of the amount collected by the assessee from its customers as deposit towards sales tax, the assessee would avoid treating that receipt as part of its trading receipt.

5. Learned senior counsel for the Revenue, Mr. S.V. Subramaniam, relied on the decision of the Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. vs. CIT 1973 CTR (SC) 44 : (1973) 87 ITR 542 (SC) : TC 13R.326, Sinclair Murray & Co. (P) Ltd. vs. CIT 1974 CTR (SC) 285 : (1974) 97 ITR 615 (SC) : TC 13R.331 and CIT vs. Assam Roller and Flour Mills (1994) 122 CTR (Raj) 393 : (1994) 209 ITR 835 (Raj) : TC 13Ps.45, and submitted that the manner in which the assessee chose to maintain its accounts was not relevant for the purpose of deciding as to whether the amounts collected by it towards sales tax are to be treated as forming part of its trading receipt. In all those cases, it was found that the assessee who had collected sales tax from the customers, had failed to remit the amounts to the State Government concerned on the ground that they were not liable to pay tax and had credited the amounts under a separate head in their books. The apex Court held that the manner in which the books were maintained by the assessee could not be regarded as decisive of the character of the receipt. It was held that the amounts collected as sales tax would form part of the trading receipt of the assessee.

Counsel for the Revenue submitted that the sales tax being a statutory levy and the assessee having collected the amounts from its customers for the purpose of meeting its liability towards sales-tax, the amounts so collected partake of the character of trading receipts and so long as the amount collected remains with the assessee, that amount could not be claimed by the assessee as a deduction. However, to the extent of the payment made to the State Government, it was open to the assessee to claim deduction.

6. Learned counsel for the assessee, on the other hand, relied upon the decisions of the Supreme Court in the case of CIT vs. Tollygunge Club Ltd. 1977 CTR (SC) 195 : (1977) 107 ITR 776 (SC) : TC 38R.506 and CIT vs. Bijli Cotton Mills (P) Ltd. (1979) 8 CTR (SC) 1 : (1979) 116 ITR 60 (SC) : TC 13R.297, 68R.187 and submitted that where the receipt is burdened by an obligation, the amounts so received by the assessee cannot be regarded as forming part of the assessee’s trading receipt. In the cases relied on by counsel, the apex Court held that the amounts collected by the assessee towards charity were amounts collected for a specific purpose and that even at the time of collection, the amounts were subjected to a trust, the assessee being burdened with the obligation to apply those monies for charity only. Those amounts were held by the apex Court to be amounts which did not from part of trading receipts.

7. Learned counsel also relied on the decision of the Madras Pradesh High Court in the case of CIT vs. M.P. State Agro Industries Development Corporation (1983) 139 ITR 312 (MP) : TC 13R.509, wherein the Court held that the assessee which derived income by way of commission on sale of tractors purchased by it from HMT and had collected amounts in excess of the provisional sale price shown by the HMT from the buyers who bought the tractors from the commission agent, could not be regarded as having received that excess amount as part of its trading receipt, as the amount so collected in excess did not belong to the assessee, the assessee being only entitled to a commission on the sale.

8. Counsel relied upon the decision of the Bombay High Court in the case of CIT vs. M.L. Bhapkar (1993) 112 CTR (Bom) 165 : (1994) 207 ITR 464 (Bom), which again concerns a commission agent. In that case, the octroi agent who was only entitled to commission at the rate of 1-1/2 per cent and had paid octroi subsequently, after instituting a suit, received refund of the amount paid as octroi. It was held that he could not be regarded as having received that amount which had been paid as octroi as part of his trading receipts. The High Court affirmed the view of the Tribunal that the assessee therein had received the refund of octroi merely as an agent or trustee of persons on whose behalf he had acted as an agent, and that there was no element of trading receipt involved in the receipt of that amount on the part of the assessee.

9. In the instant case, the amounts collected by the assessee were amounts which were meant to be utilised by the assessee for meeting its tax liability. Even if the assessee had paid over the entire amount received by it as deposit towards sales tax to the State Government, it would still have been open to the assessee to seek refund if the assessee wished to claim such refund on the ground that the tax had been levied at a higher rate than the rate permissible. In the event of such claim being upheld, it would have been open to the assessee, to receive a refund and thereafter pay those amounts to the persons from whom the amounts had been collected.

The fact that the assessee had chosen to adopt the device of labeling a part of the amounts collected towards its sales tax liability as deposit cannot make a difference. The amounts were received for the purpose of meeting the tax liability. The fact that the assessee did not pay over those amounts to the State Government only dis entitles the assessee from claiming the deduction to the extent it could have had the amounts been paid over in full to the State. The purchasers from the assessee did not derive any benefit from the device adopted as the purchasers were made to pay the amounts and the amounts were merely retained by the assessee and in the meanwhile, used by it in the normal course of its business. The receipt which was in its true character a trading receipt, cannot be rendered otherwise by the assessee labelling the receipt as a deposit.

It would certainly be wholly unjust if the assessee were to be permitted to collect the amount from the customers as amounts payable towards sales-tax and still claim that it is not a trading receipt. If and when the amounts collected are refunded to the persons from whom collection had been made the assessee can claim deduction in the year in which such refund is effected. That is what the CIT had directed. The Tribunal was in error in holding otherwise.

The true character of the receipt must be judged with reference to the reasons for the collection and the liability for meeting which the collection was made. When the liability is a statutory liability, which the assessee was required to meet and for meeting which it was by the statutes or authorities permitted to collect the amount required from its customers, the true character of the collection is a trading receipt. By calling a portion of the amount as deposit, it cannot be said that the assessee had constituted itself as a trustee, and therefore, the amounts received were not required to be regarded as part of its trading receipt. Had the assessee been unsuccessful in its claim that his goods were not to be treated as chemicals there is no doubt that the amounts though collected as deposit, would have been paid over to the State Government as the amounts had been collected for payment to the State Government as sales-tax in the event of the goods being treated as chemicals.

We, therefore, answer the question referred to us in favour of the Revenue and against the assessee.

Leave a Comment

Your email address will not be published.

the taxtalk

online portal for tax news, update, judgment, article, circular, income tax, gst, notification Simplifying the tax and tax laws is the main motto of the team tax talk, solving