Commissioner of Income Tax vs Agricultural Farms Ltd.

N.V. Balasubramanian , J.—The question of law referred for the opinion of this court at the instance of the Revenue relating to the

assessment of the income of the assessee for its assessment year 1976-77 is as hereunder :

Whether, the finding of the Appellate Tribunal that admittedly the assessee was maintaining the account, viz., the sales tax account, on mercantile

basis, is sustainable in law in view of the corrigendum issued by the Appellate Tribunal ?

Though the question of law framed at the instance of the Revenue seems to suggest that the finding of the Appellate Tribunal that the assessee

was maintaining the sales tax account on mercantile basis is not sustainable in law in view of the corrigendum issued by it, the real issue that arises

for consideration is, whether the assessee is entitled to get deduction of certain, amount of the sales tax liability.

The assessee was following the mercantile system of accounting. But, according to the Income Tax Officer, the assessee has not adopted the

mercantile system of accounting in the matter of receipt and payment of sales tax alone. According to the Income Tax Officer, as and when the

assessee collected sales tax, it credited the same in a separate ledger folio and the payments of sales tax were being debited in the same ledger

folio, as and when they were actually paid. The Income Tax Officer, therefore, held that the sales tax receipts have to be taken as part of trading

receipts, but rejected the claim of the assessee to deduct the entire sales tax liability that had accrued during the relevant accounting year on the

ground that the assessee was maintaining accounts on cash basis for the purpose of sales tax over the payments should be treated as part of the

taxable receipts. Accordingly, he brought to tax a sum of Rs. 26,192 as part of the excess collection of sales tax over the payment.

The assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals), who held that liability to pay sales tax amounting

to Rs. 46,169 for the month of March had accrued and the assessee was entitled to deduction of sales tax liability, whether he was deducting the

amount or not. He, therefore, deleted the addition made by the Income Tax Officer and allowed the appeal preferred by the assessee.

The Revenue filed an appeal before the Income Tax Appellate Tribunal against the order of the Commissioner of Income Tax (Appeals). The

Appellate Tribunal recorded the following findings as regards the method of accounts followed by the assessee :

In the present case though a separate ledger was maintained for the collections and payment, the sales tax liabilities on accrual basis was brought

into the trading account under ''sundry creditors'' while also taking into account the sales tax collections as part of trading receipts. Therefore, on

the facts, the only question that can arise is whether the liability for sales tax should be limited to the actual payment instead of the accrued liability

provided in the trading account.

On the basis of the above finding, the Appellate Tribunal came to the conclusion that liability towards sales tax accrued at the time of sales and

was deductible on accrual basis even if the payment was postponed. The Tribunal has arrived at the above conclusion following the decision of the

Supreme Court in the case of The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, . In this view of the

matter, the Appellate Tribunal dismissed the appeal preferred by the Revenue.

The Appellate Tribunal subsequently issued a corrigendum on April 30, 1982, to its earlier order wherein it passed the following order :

In para. 4 (page 2) in the sentence ''in the present case though a separate ledger was maintained for the collections and payments, the sales tax

liabilities on accrual basis was brought into the trading account under ''sundry creditors'' while also taking into account the sales tax collections as

part of trading receipts as well as in the next sentence starting ''therefore, on the facts . . . .'' the word ''trading'' shall be omitted.

When the corrigendum was issued by the Appellate Tribunal, the Revenue has challenged the order of the Appellate Tribunal on the ground that

the Appellate Tribunal was not correct in holding that the assessee was maintaining its accounts on mercantile basis and the Appellate Tribunal was

not correct in allowing the entire liability of sales tax, though not paid.

Mr. C. V. Rajan, learned counsel for the Revenue, submitted that it is clear from the corrigendum issued by the Appellate Tribunal that sales tax

liability was not provided in the trading account of the assessee and, therefore, on the basis of the decision of this court in the case of

Commissioner of Income Tax Vs. E.A.E.T. Sundararaj, , the assessee would be entitled to deduction of its liability towards sales tax when the

assessee actually paid the same to the Government.

Mr. P. P. S. Janarthana Raja, learned counsel for the assessee, on the other hand, submitted that the Tribunal has distinguished the earlier

decision of this court in the case of Commissioner of Income Tax Vs. E.A.E.T. Sundararaj, , and the system of accounting adopted by the

assessee is different and, therefore, the said decision is not applicable to the facts of this case.

We have carefully considered the rival submissions of learned counsel on either side. Before considering the decision of this court in

Commissioner of Income Tax Vs. E.A.E.T. Sundararaj, , it is necessary to notice that the assessee, though was maintaining a separate ledger for

collection and payment of sales tax, according to the finding of the Appellate Tribunal, it had taken into account the sales tax collection as part of

its receipts. Though the assessee debited the sales tax as and when the amounts were paid, the liability to sales tax would accrue at the time of sale.

The assessee, in the instant case, has admitted that the entire sales tax collections were taken as part of its total receipts including the business

receipts and once it is found that the entire sales tax collections form part of its total receipts, the assessee would be entitled to deduction of the

liability to pay the sales tax as the liability to pay sales tax had accrued at the time of sale.

The decision in Commissioner of Income Tax Vs. E.A.E.T. Sundararaj, , is distinguishable as in that case it was found that the assessee was

maintaining the cash system and the sales tax collections have been credited, collected and debited when the actual sales tax payments were made.

In other words, the relevant entries were made on the respective dates of collection and payment and the entries have been recorded in a separate

account and they were not brought into his trading account as the assessee was maintaining cash system of accounting. But, in the instant case, the

finding of the Appellate Tribunal was that sales tax collections have been taken as part of the total receipts and further the Appellate Tribunal even

after the issue of corrigendum of its order, has not disturbed its finding that the assessee was maintaining its accounts on the mercantile basis and

there is no finding that the assessee was maintaining the cash system of accounting. It is also not possible to hold that the system of accounting

maintained by the assessee was cash system from the peculiar way in which the assessee had debited its accounts. Therefore, on the basis of the

decision of the Supreme Court in the case of The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, , the

assessee would be entitled to deduction of the sales tax liability as the statutory liability had accrued at the time of sales. We are, therefore, of the

opinion that the Tribunal was right in holding that the sales tax liability accruing during the year of account was liable to be deducted on accrual

basis though the payments of sales tax were made later to the Government and the decision of this court in Commissioner of Income Tax Vs.

E.A.E.T. Sundararaj, , is not applicable to the facts of this case. We, therefore, hold that the view of the Tribunal that the assessee is entitled to the

deduction of sales tax liability that had accrued during the course of accounting year is justifiable in law.

Accordingly, we answer the question of law referred to us in the affirmative and against the Revenue. However, in the circumstances of the

case, there will be no order as to costs.