JAWAHAR LAL GUPTA,J. - (1.) ON a direction by the Court, the Tribunal has referred the following question : "Whether, on the facts and in the circumstances of the case the Tribunal is right in law in holding that the sum of Rs. 90,279 cannot be assessed to income tax during the asst. year 1970 71 under s. 41(1) of the IT Act, 1961 ?"
(2.) FIRST the facts. The respondent assessee was supplying cotton to various mills. It charged sales tax from the customers @ 2 per cent during the assessment year from 1964 65 to 1967 68. The amount was shown separately in the bills. It was credited in the books. It was credited in the books of accounts under a separate head 'general sales tax account'. The amount deposited with the Government was "debited to this account and the unpaid amount was retained in the books of accounts". It was "not shown in the P&L a/c of the respective years". The assessee had claimed that the Government was not entitled to charge sales tax on "coming waste". Its claim was ultimately accepted. After the receipt of the sales tax assessment order during the period ending 12th Sept., 1969, relevant to the asst. year 1970 71, the assessee "transferred the unpaid amount of sales tax" amounting to Rs. 90,279 to its P&L a/c. While deciding the assessee's case for the asst. year 1970 71, the IT included the amount of Rs. 90,279 in the total income of the assessee. The assessee objected. It was claimed that the amount was not a trading receipt. The amount "separately realised by the assessee by way of sales tax and credited to the sales tax account was by way of deposit from the customers and the assessee was holding these amounts only as deposit. It was further submitted that the "conduct of the assessee in transferring the unpaid amount of sales tax to its P&L a/c would not change the character of the receipt as a trading receipt, since initial character of the receipt was in the nature of a trading liability and not a trading receipt". The assessee submitted that the sales tax had been realised. However, it was ultimately not found payable to the Government. It was still refundable to the customers and did not become the income of the assessee merely by transfer of the said amount to its P&L a/c. The assessee's contention was not accepted by the ITO. It was held that "the sales tax collected by the assessee in the ordinary course of its business was a trading receipt and hence was liable to be charged to income tax when the assessee transferred the said amount to its P&L a/c". It was observed that "the sales tax paid to the Government would constitute a trade expenditure and the ultimate refund of such sales tax would amount to remission of liability or expenditure and would fall within the purview of S. 41(1) of the Indian IT Act, 1961". Thus, the amount of Rs. 90,279 was treated as assessee's income chargeable to tax in the asst. year 1970 71. The appeal was dismissed by the AAC inter alia with the finding that "the sales tax realised along with the sale price is thus nothing but a trading receipt and the posting of the same in the ledger in different accounts would not make any difference so far as the original character of the receipt was concerned. The ITO was, therefore, right in saying that the sales tax paid constituted a trading expenditure and the ultimate refund of sales tax amounting to remission of liability or expenditure". The assessee filed a second appeal before the Tribunal. After consideration of the matter, the Tribunal accepted the claim of the assessee. Its decision as mentioned in para 5 of the statement of the case may be noticed. It is as under : ".....the amount of sales tax realised by the assessee initially was in the nature of trading receipt and hence was liable to be taxed in the various years in which realisations were made.... the amount in question i.e. Rs. 90,279 was not liable to be assessed during the asst. year 1970 71 when the said amount was credited by the assessee in its P&L a/c as a result of the assessment orders passed by the ST authorities, but was liable to be taxed during the years in which the sales tax was actually received or realised by the assessee". The Tribunal also took the view that the provisions of S. 41(1) of the IT Act were not attracted in this case as the assessee had not claimed the amount of sales tax paid as a deduction by way of trading expenditure in the earlier years nor it was allowed as such by the Department. Thus, the ultimate non payment of sales tax of Rs. 90,279 did not amount to the remission of liability or expenditure within the meaning of S. 41(1) of the Act. Aggrieved by the order of the Tribunal, the Revenue claimed that the case be referred to the High Court for its opinion. This claim having been accepted by the Court vide judgment dt. 9th May, 1985 in IT case No. 110 of 1977, the question as noticed at the outset has been referred to this Court for its opinion. Mr. R.P. Sawhney, counsel for the Revenue contended that the view taken by the Tribunal is contrary to the decision of this Court in CIT vs. Saraswati Industrial Syndicate Ltd. (1973) 91 ITR 501 (P&H) : TC 13R.343. He further submitted that it was the assessee's own case that it had charged the amount from its customers. The refund was not given to the "mills as these were not claimed by them. The amounts represent unclaimed balances which the assessee appropriated as income during the period from 26th Aug., 1968, to 12th Sept., 1969". He further pointed out that before the AO, the assessee had specifically pleaded that the amounts were not initially taxable. They could not be subsequently taxed "despite the magnitude of the accumulation and despite its appropriation by the assessee to his own credit". This being the factual position, Mr. Sawhney contended that the Tribunal had erred in accepting the claim of the assessee and in holding that the amount of Rs. 90,279 was not income chargeable to tax in the asst. year 1970 71. He also submitted that the Tribunal had erred in holding that S. 41(1) was not applicable. Counsel referred to certain decisions which shall be noticed at the appropriate stage.
(3.) ON the other hand, Mr. Sanjay Bansal, submitted that the assessee was following the mercantile system of accounting. The tax realised by the assessee being a trading receipt on the Department's own showing, it could be taxed in the years of its collection and not subsequently when the assessee adjusted it in its P&L a/c. He further submitted that the provisions of S. 41(1) are not applicable to the facts of the present case. Thus, he submitted that the question posed by the Tribunal should be answered in favour of the assessee.;