V. Rajagopalan, Judicial Member -
(1.) THESE appeals are preferred by the revenue against the assessments made for 1973-74 to 1976-77.
(2.) For all the above years the common contention that is raised is that the
Commissioner (Appeals) has erred in deleting the following amounts from the assessments of the respective years :
The assessee, a private limited company, had a credit balance of the above amounts in the respective assessment years in the account styled as 'deposit sales tax account'. They were shown as liability under current liabilities. The ITO noticed that the assessee had effected collections under 'deposit sales-tax' in the sale bills in respect of sales made by it on permits to various parties nominated by the Government. The assessee had explained before the ITO that the above amounts collected from the customers were, according to them, not liable to income-tax, that in case the sales were held to sales tax the above amounts would be paid to the Government and in the alternative, if the sales were held to be exempt, the amounts collected would be refunded to the various customers. It was claimed that the collections did not form part of the trading receipts of the assessee. The ITO negatived the contention that the above amounts did not form a part of the trading receipts. He observed that if and when the assessee paid the amount collected to the State Government or refunded any part of the amount to the customer the assessee would be entitled to claim deduction of the same. On the ground that the assessee did not pay any part of the amount collected to the State Government during the respective years of account, following the ruling of the Supreme Court in the case of Sinclair Murray & Co. (P.) Ltd. v. CIT  97 ITR 615, the ITO added the aforesaid sums in the respective assessments. Before the Commissioner (Appeals) the assessee had explained the circumstances under which the above amounts happened to be collected. It would be necessary to set out the explanation as found in para 3 of the Commissioner (Appeals) for 1973-74 as under :
It is explained that the company manufactures wheat products like maida, ravva, atta and bran and sells them. Under the Andhra Pradesh General Sales-tax Act, sales tax is payable on maida, atta and bran at multiple points while the sales tax is payable on ravva by the first seller in the State. It appears that, during the assessment year 1965-66, the company contended that the sales of wheat products were made on permits issued by the Government and, therefore, they did not constitute sales under the Sale of Goods Act. In support certain decisions of the Supreme Court seem to have been relied on. But the department did not agree as far as the sale of ravva was concerned as sales tax was to be levied at the point of first sale by the manufacturer. The company appears to have gone on appeal to the Assistant Commissioner (Commercial Taxes) who allowed the appeal and set aside the assessment. But the Deputy Commissioner (Commercial Taxes) revised the orders of the Assistant Commissioner restoring the original assessments. Against this, the company went on appeal to the Sales tax Appellate Tribunal which by its order dated 29-12-1971 agreed with the appellant and set aside the orders of the Deputy Commissioner. Thus, the question of assessing the sales of ravva made on Government permits had become a point of dispute for several years. Meanwhile, the company had collected sales tax from their dealers in the bills and credited the receipts to an account styled 'deposit sales tax account'. It appears that originally the income-tax department did not tax the said receipts of sales tax collected and credited to the deposit sales tax account, but the assessments were reopened for 1965-66 to 1971-72 assessment years and the said receipts were assessed in the course of the reassessment proceedings relying on the decision of the Supreme Court in the case of Sinclair Murray & Co. (P.) Ltd. v. CIR 97 ITR 615.
It was further contended before the Commissioner (Appeals) that the assessee was maintaining the accounts on mercantile basis and that, therefore, the decision of the Supreme Court relied on by the ITO in Sinclair Murray (supra) would not be applicable. It was pointed out that the assessee's case fell squarely within the ratio of the ruling of the Andhra Pradesh High Court in the- case of Addl. CIT v. T. Nagireddy & Co.  105 ITR 669 and in the case of Buddala China Venkata Rao & Co. v. CIT  112 ITR 58. It was further submitted that for the accounting year relevant to the assessment years 1973-74 and 1974-75 large collections towards sales tax were made by the company and credited to the deposit sales tax account, but the company was contesting the assessability of the above under the Andhra Pradesh General Sales tax Act end the matter was pending before the Andhra Pradesh High Court who granted stay of collection of the taxes on payment of Rs. 2 lakhs after a bank guarantee was furnished, and that in relation to the assessment year 1975-76 onwards, whatever was collected by the company on this account was paid to the sales tax department in the subsequent year and that thus the collections were treated as a liability to the sales tax department. The Commissioner (Appeals), after referring to the rulings of the Calcutta High Court in the cases of Chowringhee Sales Bureau (P.) Ltd. v. CIR  110 ITR 385, CIT v. Ashoka Cement Ltd.  117 ITR 709 and CIT v. Rajeshwari Distributors (P.) Ltd.  125 ITR 618, of the Andhra Pradesh High Court in the case of Nagi Reddy & Co. (supra) and of the Supreme Court in the cases of Kedarnath Jute Mfg. Co. Ltd. v. CIR [l978] 82 ITR 363, and Sinclair Murray (supra) agreed with the assessee that the amounts in question could not be included as income in the assessee's hands till adjudication over the liability to pay sales tax was finally disposed of. The Commissioner (Appeals) took note of the fact that the ITO himself stated that the assessee was under an obligation to refund those collections to the clients in case it was finally held that the transactions in question were not liable to sales tax because the assessee had treated these collections only as in the nature of a deposit by the clients. The Commissioner (Appeals) further pointed out that if that were so, side by side with the extinguishment of the liability to sales tax, would arise a liability to refund the amount to the clients and consequently, in accordance with the mercantile system of accounting, the liability to an external source in respect of that amount was there. The Commissioner (Appeals) further observed that the treatment of the collections as trading receipts would be justified on the principles of the Supreme Court decisions referred to earlier. Deduction of an equal amount on the ground of liability has to be allowed in the method of accountancy adopted by the assessee as explained by the Calcutta High Court in Chowringhee Sales Bureau (supra). In the end the Commissioner (Appeals) held that the ITO was justified in holding that the above sums formed part of the assessee's trading receipts but he was not justified in making a net addition of this amount while computing the total income of the assessee for the assessment years 1973-74 to 1975-76. Against these orders of the Commissioner (Appeals) the revenue has come up in appeal before us.
The learned departmental representative at the outset submitted that the sales tax collected by the assessee on the sales was not brought to the profit and loss account but was separately credited to a separate account called 'deposit sales tax account'. The learned departmental representative referred to the ruling of the Andhra Pradesh High Court in the cases of T. Nagireddy (supra) and Buddala China (supra) and pointed out that in those cases the method of accounting followed by the assessee was mercantile and that, therefore, in that context, the High Court gave those rulings. He pointed out that in the instant case the system of accounting followed by the assessee does not appear to be mercantile so far as the payment of sales tax was concerned. He submitted that from the perusal of statement of account filed it was seen that the payment of sales tax was not claimed as expenditure and as such the receipt of sales tax was not shown as income. From this the learned departmental representative argued that it was only a cash system that the assessee followed for sales tax. He, therefore, urged that the Andhra Pradesh High Court ruling relied on by the authorities below cannot be applied to this case. On behalf of the assessee the learned counsel heavily relied on the orders of the Commissioner (Appeals). He pointed out that the ITO had proceeded on the footing that the assessee was following the mercantile system of accounting. At any rate he pointed out that the ITO had not stated that the assessee had followed a cash system in regard to the sales tax. The learned counsel pointed out that in respect of sales other than sales to Government-nominated parties the assessee had clearly followed the mercantile system of accounting. He further added that the assessee did not follow the cash system of accounting at all. Referring to the collections made towards the deposit sales tax he pointed out that it was a separate deposit. It was never taken into account in the profit and loss account and neither the payments were claimed as expenditure, nor receipts were shown as income. It is, therefore, not correct to say that a cash system was followed in respect of the above deposit account. In this connection he referred to the Supreme Court ruling in the case of Kedarnath Jute (supra) and pointed out that the existence or absence of entries in its books of account was not decisive of the matter and that the mere fact that the assessee failed to credit entries in the books of account would not debar it from claiming the same as deduction. He also referred to the ruling of the Bombay High Court in the case of CIT v. Central Provinces Manganese Ore Co. Ltd.  112 ITR 734 in support of his stand.
(3.) WE have considered the rival submissions. From the facts of the case it is clear that the assessee has been following the mercantile system of accounting in respect of its transactions, including the sales tax collections and payments, with reference to the transactions for which it had admitted its liability to pay sales tax. However, in respect of sales of wheat products made by the assessee on permits issued by the Government, the assessee was contesting its liability before the authorities. It appears that the matter is still pending before the Court. In regard to the above transactions the assessee had collected certain moneys from the parties concerned and had deposited them in a separate account called 'deposit sales-tax account'. It is common ground that the above collections were not taken to the profit and loss account. The assessee had contended before the ITO that the above collections would not represent trading receipts. But as rightly held by the Commissioner (Appeals) this claim of the assessee cannot be countenanced. The collections made by the assessee towards sales tax undoubtedly form the trading receipts. The assessee had been following the mercantile method of accounting. The Commissioner (Appeals) had also found it to be so. The learned departmental representative, however, urged before us that the assessee was following the cash system of accounting, in respect of sales tax payment. This contention is not supported by facts. Actually, as pointed out by the learned counsel, the assessee has followed the mercantile method of accounting in respect of sales tax collections with reference to transactions other than with parties nominated by the Government in respect of which the liability to sales tax is being contested. In respect of these transactions even according to the revenue the payments were not claimed as expenditure and receipts were not shown as income. The above position does not support the plea of the revenue that assessee was following the cash system of accounting for collection of sales fax. The case of the revenue before us is heavily stressed on the ground that the assessee was following the cash system of accounting when as a matter of fact the assessee was not following the cash system of accounting. There is no material to show that the assessee was following a cash system of accounting and we are unable to accept the department's contention. The Supreme Court in the case of Kedarnath Jute (supra) was dealing with a case where the assessee who followed the mercantile system of accounting had contested the sales tax liability in appeal and it had made no provision in its books with regard to the payment of that amount. In that case even the appeals to higher authorities or courts taken by the assessee contesting its liability to sales tax ultimately failed. Even so the Supreme Court held that the assessee was entitled to deduction of the amount of sales tax which it was liable under the law to pay during the relevant accounting year and that liability did not cease to be a liability because the assessee had taken proceedings before the higher authorities for getting it reduced or wiped out, so long as the contention of the assessee did not prevail. It was also held that the mere fact that the assessee failed to debit the liability in its books of account did not debar it from claiming the same as deduction. The Bombay High Court in the case of Central Provinces Manganese (supra) had referred to the ratio of the above ruling of the Supreme Court and following the same held on similar facts, as obtaining in this case, that the assessee would be entitled to claim as deduction in the year in which the liability arose. In this case, even if the above amounts collected by the assessee as sales tax deposits are liable to be included in the trading receipts of the assessee, yet, on the basis of the above rulings, the assessee would be entitled to the deduction of the above sums. WE, therefore, agree with the Commissioner (Appeals) that the additions made for these years by the ITO are not sustainable. The order of the Commissioner (Appeals) is, therefore, upheld on this point.
5 & 6. [These paras are not reproduced as they involve a minor issue.]
7. In the result, the appeals of the revenue fail and stand dismissed.;