1. This appeal filed by the assessee is against the order of the Commissioner (Appeals) dated 9-12-1985 for the assessment year 1984-85, for which the previous year ended on 16-8-1983.
2. The assessee-firm is a wholesale dealer in rice, sugar, provisions, etc. The ITO noticed that the assessee's balance sheet as on 16-8-1983 showed an amount of Rs. 1,35,502 on the liabilities side under the head 'Sundry creditors-for sales tax'. The assessee explained that this represented sales tax collections made during July and part of August 1983 which were due for payment in August and September. When the ITO pointed out that according to the provisions of Section 43B of the Income-tax Act, 1961 ('the Act'), only tax paid becomes eligible for deduction in computing the total income, the assessee objected to it on the following grounds : (1) The sales tax collected during the month of July was due to be paid to the State Government only on the 20th of August and as the accounts were closed before this date, this sum was shown as payable. Similarly the sales tax collected during the first half of August was also shown as payable as it becomes due for payment only on the 20th of September.
(2) Assessee has not claimed any deduction of sales tax in computing the income liable to tax.
(3) Assessee is merely holding the sales tax collections on behalf of the State Government and that it does not belong to the firm on any account as it is collected on behalf of the State Government.
The ITO countered the objections of the assessee in the following manner : (1) With effect from 1-4-1984 as per Section 43B any tax or duty payable to the Government will be allowed as a deduction only on actual payment. Hence, if the assessee has made the payment in the subsequent year, it will certainly be given as a deduction during the subsequent assessment year ; (2) It is not correct to say that the assessee has not claimed any deduction of sales tax in computing the income chargeable to tax.
According to the decision of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 sales tax collections are part of the trading receipts. The assessee should have shown the entire amount of sales tax collections in the trading account. Since the assessee had not credited the entire sales tax collections to the trading account, it certainly meant that he has made a deduction from the gross trading receipts. It is not necessary that the assessee should have made a deduction of tax in the profit and loss account for disallowing the same under Section 43B ; (3) In the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 the Supreme Court has held that the liability for payment of excise duty, though paid by the purchaser to meet the liability of the assessee, was a part of the consideration for sale and was includible in the turnover of the assessee. Thus, the liability to pay sales tax is on the assessee-trader and not on the buyer of the goods. No doubt the trader is entitled to collect the sales tax from the buyer of the goods but this does not take away his liability to pay sales tax.
In the above manner, the ITO overruled the assessee's objections and treated Rs. 1,35,502 as part of the income of the assessee for the year under consideration. However, he observed that the said amount would be allowed as a deduction as and when it was paid. S. Aggrieved by the order of the ITO the assessee preferred an appeal to the Commissioner (Appeals). Before the Commissioner (Appeals) the assessee contended that the ITO had misinterpreted the provisions of Section 43B, that his case can never fall under that section since he never sought a deduction of this amount under the Act, that the collections bear the character of a liability to be discharged by the assessee to the State Government for whom the payment was due and that the assessee was a constructive agent of the State Government till the discharge of the liability. In making these submissions the assessee derived support from the decision of the Supreme Court in CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60. The Commissioner (Appeals) confirmed the action of the ITO observing as under : I am one with the representative when he argues that the plain provisions of Section 43B are inapplicable to the facts of his client's case ; however, where the ITO treats the collections as part of the sale proceeds, which he should in terms of 87 ITR 542, there can be no objections. Since the present inclusion is strengthened by reference to that decision and not under Section 43B, I will confirm the action of the Income-tax Officer.
Against the order of the Commissioner (Appeals) the assessee has preferred the present appeal.
4. At the time of hearing the assessee's counsel, Shri L. Rangamani, Chartered Accountant, filed a paper book containing copy of sales tax account from 17-8-1982 to 16-8-1983, copy of sales tax account from 17-8-1983 to 19-9-1983, copy of profit and loss account for the year ended 16-8-1983 and copy of balance sheet as on 16-8-1983. His arguments were to the following effect : The assessee, when he collected the sales tax from the purchasers, acted only as a trustee on behalf of the State Government. The sales tax collections did not belong to him as a trader. They were to be made over to the State Government in the prescribed manner as per Section 22 of the Kerala General Sales Tax Act, 1963. The prescribed date for payment of the sales tax collections is 20th of the succeeding month as per Rule 21(7) of the Kerala General Sales Tax Rules, 1963. If there is any failure on the part of the trader in making over the sales tax collections to the State Government he will be liable for a penalty at the rate of 2 per cent per month. The case of Chowringhee Sales Bureau (P.) Ltd. (supra) is distinguishable. In that case the assessee disputed his liability to pay the sales tax and did not pay the amount of sales tax to the State Government. In those circumstances the sales tax collections made by the assessee were treated as trading receipts of the assessee. But in the instant case, the assessee has not disputed his liability to pay the sales tax but promptly paid it by 20-8-1983 and 20-9-1983. In fact, the Commissioner (Appeals) in his order dated 11-4-1986 in the case of U. Shahul Hameed & Bros. and R. Kosavan Pillai, Quilon, following the decision of the Supreme Court in Bijli Cotton Mills (P.) Ltd.'s case (supra), held that the statutory liability that had been created even at the point of collection to make over the same to the Government diverted the sales tax collections from the coffers of the assessee-firm to that of the Government and hence cannot be treated as the trading receipt of the assessee. The CBDT in its Circular No. 372, dated 8-12-1983-[1984] 146 ITR (St.) 9 explained the scope and effect of the new Section 43B, introduced with effect from 1-4-1984 by the Finance Act, 1983. According to the said circular the deduction, for any sum payable by the assessee by way of tax under any law be allowed only in computing the income of that previous year in which such sum is actually paid by the assessee. In this case, the assessee is following the mercantile system of accounting. The liability to pay sales tax has to be allowed as per the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363. According to the said decision, the liability has to be allowed in the year in which it has arisen. Further, according to the decision of the Allahabad High Court in the case of CIT v. Brijmohan Das Laxman Das [1979] 117 ITR 121, the sales tax liability of one year cannot be allowed as a deduction in a subsequent year. The assessee has not claimed any amount towards sales tax either in the trading account or in the profit and loss account. Further, the due date for the payment of sales tax collected in the month of July and up to 16-8-1983, i.e., the end of the accounting year, is only 20-8-1983 and 20-9-1983. As on 16-8-1983, i.e., the last day of the accounting year, the amount of Rs. 1,35,502 has not become due and payable to the State Government. Hence, the question of applying Section 43B does not arise.
In case the Tribunal were to hold against the assessee, the entire amount of Rs. 1,35,502 standing on the liabilities side of the balance sheet of the assessee cannot ae taken as the income of the assessee.
The actual sales tax collections in the year of account amounted to only Rs. 7,66,009. The actual payments made by the assessee in the year of account were Rs. 7,40,169. Only the difference, i.e., Rs. 25,840 has to be treated as the assessee's income for the year under consideration.
5. The arguments of the departmental representative were to the following effect : According to Section 5 of the Kerala General Sales Tax Act, the liability to pay sales tax is on the assessee-dealer. It is not correct on the part of the assessee to say that the assessee-dealer acts as a trustee on behalf of the State Government for the sales tax collections made by it. The liability is not on the purchaser of the goods from the assessee. Section 22 is only an enabling provision allowing the assessee to collect the sales tax from its customers. Sales tax collections form part of the trading receipts of the assessee as per the decisions of the Supreme Court in the cases of Chowringhee Sales Bureau (P.) Ltd. (supra), Sinclair Murray & Co.
(P.) Ltd. v. CIT [1974] 97 ITR 615 (SC) and McDowell & Co. Ltd. (supra) and the decisions of the High Courts in CIT v. Motipur Sugar Factory (P.) Ltd. [1985] 154 ITR 259 (Pat.) and CIT v. Spunpipe & Construction Co. (Baroda)(P.) Ltd. [1983] 141 ITR 246 (Guj.). The case of Bijli Cotton Mills (P.) Ltd. (supra) relied on by the Commissioner (Appeals) in his order in the cases of U. Shahul Hameed & Bros. and R. Kosavan Pillai, Quilon relates to charity collections and not to sales tax collections and, hence, distinguishable. Section 43B and the circular of the CBDT dated 8-12-1983 are clear on the point and so the action of the ITO in bringing the impugned amount as the assessee's income is well founded.
6. We have considered the rival submissions. As already stated, the assessee is a wholesale dealer in rice, sugar, etc. As per Section 5 the assessee-dealer is liable to pay sales tax on the sales of these goods effected by it to its customers. The assessee-dealer passed on the tax to its customers and collected the same in addition to the price of the goods. In similar circumstances the Supreme Court, in the case of George Oakes (P.) Ltd. v. State of Madras [1961] 12 STC 476 [quoted by the Supreme Court in the case of Sinclair Murray & Co. (P.) Ltd. (supra) at page 620], held that when the seller passes on the tax and the buyer agrees to pay sales tax in addition to the price, the tax is really part of the entire consideration and the distinction between the two amounts-tax and price-loses all significance. Following the decisions of the Supreme Court in George Oakes (P.) Ltd.'s case (supra), Chowringhee Sales Bureau (P.) Ltd.'s case (supra) and Sinclair Murray Co. (P.) Ltd.'s case (supra) we held that the sales tax collections of the assessee constituted his trading receipts. It is an admitted fact that the assessee is following the mercantile system of accounting. As per the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) in the case of a dealer who is following the mercantile system of accounting, the obligation to pay the sales tax arises the moment such a dealer makes sales which were subjected to sales tax. So, this assessee is entitled to claim the liability to pay sales tax that had accrued due in the year of account as a deduction from its income but for the apparent difficulty posed by the newly introduced Section 43B. So, we have to examine the implications of Section 43B. The CBDT in its Circular No. 372 dated 8-12-1983, published in [1984] 146 ITR (St.) 9, explained the provisions of Section 43B and its implications as under : 35.1 Under Section 145 of the Income-tax Act, profits and gains of business or profession are computed in accordance with the method of accounting regularly employed by the assessee. Broadly stated, under the mercantile system of accounting, income and expenditure are accounted for on the basis of accrual and not on the basis of actual receipts or disbursements. For the purposes of computation of profits and gains of business or profession, Section 43(2) of the Income-tax Act defines the word 'paid' to mean 'actually paid or incurred' according to the method of accounting on the basis of which the profits or gains are computed.
35.2 Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to provident fund, Employees' State Insurance Scheme, etc., for long periods of time, extending sometimes to several years. For the purpose of their income-tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand, they dispute the liability and do not discharge the same. For some reason or the other, undisputed liabilities also are not paid.
35.3 To curb this practice, the Finance Act has inserted a new Section 43B to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force or any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees shall irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which such sum is actually paid by the assessee.
From an analysis of Section 43B, it is seen that with effect from the assessment year 1984-85, deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force will be allowed only in computing the income of that previous year in which such sum is actually paid irrespective of the method of accounting employed by the assessee. Section 43B comes into play only when the tax has accrued and became due for payment in the accounting year and the assessee has not paid the same within the accounting year. It will not have any application in cases where the time for the discharge of the tax is not over by the end of the accounting year. In the instant case, the sales tax collections made by the assessee in the month of July 1983 and up to 16-8-1983 has to be paid to the Government of Kerala by 20-8-1983 and 20-9-1983 as per Section 22. The accounting year of the assessee, relevant for the assessment year 1984-85, ended on 16-8-1983, well before the said due dates. Thus, it will be noticed that time for the payment of tax was not over by the closing date of the accounting year. In the circumstances, we hold that Section 43B cannot be applied in the assessee's case and that the impugned amount of Rs. 1,35,502 cannot be brought to tax in the hands of the assessee for the assessment year under consideration.