S.R.V.G. Press Co. vs Commissioner of Excess Profits Tax

Viswanatha Sastri, J.—The question referred for decision is as follows: I Whether there are materials for the Tribunal |hold that the aforesaid sales tax payments of Rs. 21/- were unreasonable and unnecessary having regard to the requirements of the business and consequently deductible under Rule 12 of Sch. I Excess Profits Tax Act.

The Assessee is a registered firm carrying on ness in the manufacture and sale of groundnut the groundnuts and kernels are bought and heed into oil and the oil is then sold. The Assessee assessed to sales tax on the purchase of ground-I and kernel used for the manufacture of oil and on the sales of oil. The Assessee is entitled to a fate of the sales tax paid on groundnuts and repurchased and used for the manufacture of oil meshing the necessary particulars to the assess Fauthority.

The Assessee adopted a system of paying sales provisionally, calculated on the turnover of the oust accounting year and having the liability ail- at the end of the accounting year on the basis he actual turnover in the accounting year after taking into, account the rebate allowable the value of groundnuts and kernel crushed into the final adjustment after the end of the account- r resulted either in the Assessee''s liability to in excess of the provisional payment or a refund of the excess tax provisionally paid. For the official year ending 31-3-1945, there provisional demand of sales tax and a pay Rs. 47,276/-. The final assessment to sales the year resulted in a refund of Rs. 27,239/-, Assessee. Similarly, for the official year ending 46, there was a provisional demand and pay- Rs. 45,315/- as sales tax. The final assess for that year resulted in a refund of Rs. The refunds of Rs. 27,239/- and of were received on and shown in the books Basses see under dates 18-4-1946 and 12-11- respectively.

The Assessee maintained its books according to the Dewali year. Purchases and sales of goods on credit were duly accounted for in the books. In respect of sales tax, die actual cash payments made less recoveries by way of refunds or bout and were claimed as an expense annually without regard to any outstanding liability or refunds duo pending adjustment at the final assessment to sales tax. This practice was consistently adopted by the Assessee and accepted for the Assessee''s Income Tax assessments throughout.

The sum of Rs. 47,276/- paid in respect of the provisional demand for the year ending 31-3-1945 was allowed as an expense in full for die assessment of Income Tax for the assessment year 1946-47. Till the chargeable accounting period ended 17-10-1944, the assessments to excess profits tax were also made on the same basis as Income Tax. However, for the chargeable accounting period 18-10-1944 to 4-11-1945 the Excess Profits Tax Officer allowed only Rs. 17,055/- instead of Rs. 47,276/- the provisional payment for sales tax made by the Assessee.

The sum of Rs. 17,055/- allowed by the Excess Profits Tax Officer represented the actual liability for sales tax apportioned on time basis, for the turnover of the chargeable accounting period in question on the basis of the final assessments whose figures are given supra. Proceeding on this basis, the Excess Profits Tax Officer added Rs. 30,221/- in the computation of profits for the purpose of excess profits tax for the chargeable accounting period 18-10-1944 to 4-11-1945, though for purposes of Income Tax, the entire sum of Rs. 47,276/- paid as sales tax on provisional assessments had been allowed as a deduction in favour of the Assessee.

The Excess Profits Tax Officer purported to apply the provisions of Rule 12 of Sch. I of the Excess Profits Tax Act and disallowed the claim of the Assessee to Rs. 30,221/- paid for sales tax under the provisional assessment, on the ground diet the said payment was in excess of the amount reasonable and necessary having due regard to all the requirements of the Assessee''s business. The Appellate Tribunal to which an appeal was taken under 11. 12 confirmed the order of the Excess Profits Tax Officer and differentiated the assessment for Income Tax purposes from the assessment for purposes of excess profits tax in this manner:

Excess pro/its tax, however, has ended with the profits up to 31-3-1946 and receipts or income relating to periods covered by the levy, and known of the recoverable on 31-3-1946, clearly require to be assessed in one or the other of the various chargeable accounting periods.

The Tribunal further held that while accepting the Assessee''s system of accounting, it was open to the Excess Profits Tax Officer to scrutinise each head of expenditure in the computation of profits made from the Assessee''s books and that the impugned amount represented one such head of expenditure.

According to the Tribunal, Rule 12 of Sch. I of the Excess Profits Tax Act that the facts of the case truly and squarely .... and has -been properly invoked to correct the anomaly created by allowing the entire sales tax payments in the corresponding Income Tax assessment, even though the payments in question are only advances, not properly ascertained till 31-3-1946.

The Tribunal further observed that if the Excess Profits Tax Officer had been so minded, he could have disallowed the whole amount of Rs. 47,276/- instead of Rs. 30,221/- and that ho took a compassionate view of the case.

Now sales tax is levied on sales or purchases of goods by traders and not upon the profits or gains made by them from the business. Sales tax is payable irrespective of any profits being earned and without such payment, the business of buying and selling cannot be carried on. It is therefore deductible as a business expense before arriving at the taxable profits. The sales tax was paid by the Assessee according to the rules framed under the Madras General Sales Tax Act which allowed a provisional assessment to be made subject to adjustment at the time of the final assessment at the end of the year.

In accordance with its regular mediod of accounting, the Assessee firm debited actual payments of sales tax made by it under the provisional assessments and credited rebates or refunds as and when �they were received from the Assessing authority. In the books of the Assessee, the payments of sales tax were entered in the year in which they were actually made and the refunds or rebates were entered as the receipts of the year in which they were actually received.

This method of accounting has been consistently followed by the Assessee and accepted by (lie department both for Income Tax and excess profits tax assessments till the chargeable accounting period 18-10-1944 to 4-11-1945. Even for this period tho Income Tax assessment was made after allowing the whole of the disbursements shown in tho Assessee''s books by way of payment of sales tax during the year.

It is difficult to anticipate the actual turnover of the year or the rebates likely to be granted to the Assessee till the end of the year and it often happens that final assessments to sales tax are delayed for some months after the end of the year and the grant of refunds or rebates is delayed for more than a year after the end of the assessment year. The present case is an instance of a refund which was due in respect of the official year ended 31-3-1945, being actually made on 18-4-1946.

The excess payments made by the Assessee under the provisional assessments to sales tax were not due to any manipulation or subterfuge adopted by the Assessee. Nor was die delay in getting a refund or rebate due to the inaction or indifference of the Assessee, who was pressing his claim on the assessing authority. When the provisional payments of sales tax were made in 1944-45, the Assessee could not have expected the termination of the war or the expiry of the life of the Excess Profits Tax Act with 31-3-1946.

In these circumstances, there is no justification for upsetting the basis of accountancy followed by the Assessee consistently, irrespective of results which might at times prove favorable but at other times work out at a disadvantage, particularly when the department has accepted and acted upon the accounts consistently for Income Tax assessments even during the chargeable accounting period.

Section 21, Excess Profits Tax Act enamels that) Section 13, Income Tax Act shall apply to assessments under the Excess Profits Tax Act as if S. 13 had been incorporated therein. Under S. 13, Income Tax Act the Assessee is there to choose a proper method of no counting and the profits and gains have lo be com. putted in accordance with the method of accountant regularly employed by die Assessee.; The assessing authority is bound by the Assessee''s choice of a; method of accounting regularly employed by hint unless the income, profits and gains cannot properly'' be deduced there from.

As pointed out by the Judicial Committee in - Its and that (1938) 6 ITR 36 (Privy Council) f It is no don AIR 1938 1 (Privy Council) at pp. 2-3) (A) Section 13 relates to more stringent method of accounting regularly employed by to I0(2)(xv), Inc Assessee for his own purpose and does not relate the expel a method of making up the statutory return (at lessee in was assessment to Income Tax. The section clearly vamp fed that the such a method of accounting a compulsory basis and as computation unless in the opinion of the Income-out was any Officer the income, profits and gains cannot proper compels'' be deducted there from.

It may be that the account maintained by the regatta Assessee is neither purely on a cash basis nor purely The direct on a mercantile basis, but is a mixture of the having the methods, one method being adopted in respect of OM of goes for class of transactions and the other in respect of I me is incurred different category. If the Assessee employs different methods regularly, and consistently, the quoin under the fits would have to be computed in accordance with geniture is un the respective methods, provided a proper detonnt (per deduction nation of the true profits could be arrived at threes of pure; DHAKESHWAR PRASAD NARAIN SINGH Vs. COMMISSIONER OF Income Tax, BIHAR AND ORISSA., (B); - Commissioner of Income Tax Vs. Shrimati Shingari Bai, at pp. 103-104) (C); - (1945) 13 ITR 198 at p. 202 (N) (D); - ''Commissioner of Income Tax v. M. A. Chettiar Fir 1935 3 ITR 193: (AIR 1935 171 (SB) (E).

As pointed out by the Judicial Committee, name by which a method of accounting is called, not so important; nor is it important whether system of accounting adopted by the assesseo forms to the requirements of a known method of counting so long as the profits of die business fairly and properly be determined from the counts. - AIR 1933 198 (Privy Council) .

In the present case, the payments of sales under the provisional assessments were entered the year in which they were made and the or rebates were also entered in the year JUI they were got and the refunds or rebates were fact to tax in the year of receipt. Consequently Revenue authority accepted this method of regularly employed by -the Assessee.

It is not open to the Revenue authority to overboard the method of accounting regularly played by the Assessee and till then accepted by 4 department, for the chargeable accounting pa merely because the life of the Excess Profits Tax expires on 31-3-1946 and it would be advantage to the revenue to disregard the payments of provisional sales tax made during to the was ending 31-3-1945 by bringing into the accost year the rebates or refunds granted on 18-4-1946 entered in the Assessee''s books under that date.

The further contention urged on behalf of Commissioner of Income Tax is that under Rule 12 I of the Excess Profits Tax illus, in compute the profits of any chargeable accounting period, ''deduction would be allowed in respect of ex-les in excess of the amount which the Excess its Tax Officer considers reasonable and uecesliaving regard to the requirements of the bust-and that tire Excess Profits Tax Officer acted for that rule in the present instance.

It is no doubt true that the language of Rule 12 fore stringent than the corresponding language of Rule (2)(xv), Income Tax Act. It cannot be disputed the expenditure in question was incurred by the his character as a trader. It cannot be that the payment of sales tax was made value-and on grounds of commercial expediency but any actual necessity for such payment. Sales a compulsory levy under the sanction of the filature and there is no discretion left to there as rests the extent of the payment.

The direct purpose for which the money is laid is not the benefit of the business and the pay-t goes for tire benefit of die State. The expense is incurred during the year and the payments as tax are made in conformity with the rules under the Madras General Sales Tax Act. The mixture is unremunerative but is not the less a deduction, for without such expenditure the ness of purchasing and selling could not be ear-on. It does not require the presence of a receipt credit side to justify a deduction of such.

The payment of sales tax has no doubt the of diminishing the Assessee''s taxable income such payment is necessary if the Assessee is to on business at all and this is not a case where sessile having a discretion to lay out money purpose of earning profits in a business, unnecessarily large amount during thimble accounting period. other the Assessee nor the Excess Profits Tax has a discretion in the matter of determining out payable by way of sales tax and Rule 12 of Excess Profits Tax Illus'' does not erne Excess Profits Tax Officer to cut down parade by the Assessee by way of sales tax un Stovisional assessments. The levy is statutory it a voluntary payment which might or might made at the discretion of the Assessee.

For these reasons, we are of the opinion the question referred to us must be answered negative and in favour of the Assessee. The missioner of Income Tax will pay the Assessee''s elusive of Rs. 250/- as Advocate''s fee.