Allahabad H.C : Whether there was material justifying the Tribunal’s finding that there was a corresponding liability in respect of accretion in the contingency account No. II amounting to Rs. 43,095?

High Court Of Allahabad

CIT vs. Motor & General Sales (P) Ltd.

Sections 2(24), 28(i)

M. Katju & Umeshwar Pandey, JJ.

IT Ref. No. 91 of 1981

18th November, 2003

JUDGMENT

M. KATJU, J. :

These three income-tax references are being disposed of by a common judgment.

2. Heard learned counsel for the parties. We treat IT Ref. No. 91 of 1981 as the leading case. In this case, the questions of law referred to us for our opinion are as follows :

“1. Whether there was material justifying the Tribunal’s finding that there was a corresponding liability in respect of accretion in the contingency account No. II amounting to Rs. 43,095?

2. Whether the Tribunal was in law justified in holding that the accretion in the contingency account No. II could not be brought to tax as trading receipt in spite of the fact that the actual sales- tax liability in respect of completed transactions had been duly provided for by transfer from the aforesaid accounts?”

3. The assessee is a company registered under the Indian Companies Act which does the business of hire-purchase of motor vehicles. It maintains its accounts on mercantile basis. When the assessee enters into an agreement with a hire purchaser it collects the entire sales-tax on the vehicle at the time of financing the transaction. In other words, the entire sales-tax on the vehicle is realised by the assessee from its customer at the very beginning of the deal. These amounts collected by the assessee are credited to a contingency account No. II in its books. When the transaction is completed (i.e., when the last instalment is paid) the sales-tax liability on the depreciated amount of the vehicle is calculated, which is obviously much less than the sales-tax realised by the assessee from the customer. This sales-tax liability on the depreciated value of the vehicle is then transferred from the contingency account No. II to the sales-tax account. The difference between the total amount of sales-tax calculated by the assessee and credited to the assessee account No. II, and the amount of sales-tax payable on the depreciated value of the vehicle, is then transferred to the contingency account No. III. The assessee does not dispute its liability to be taxed on the amounts in the contingency account No. III. However, the dispute is about the taxability of the amount credited in the contingency account No. II. The ITO decided against the assessee and held that these amounts are taxable but the AAC and the Tribunal held in favour of the assessee. Hence this reference on behalf of the Department.

4. From the facts of the case it is evident that at the time of the hire purchase agreement, the assessee realised the entire amount of sales-tax due on the full purchase price of the truck from the hirer and credited it to the contingency account No. II. Thereafter, on completion of the hire purchase or at the time of payment of the last instalment, the sales-tax due on the depreciated value of the vehicle was paid by the assessee to the Government, which was much less than the amount realised and credited to the contingency account No. II. The ITO added the amounts in contingency account No. II as the assessee’s income but the AAC and the Tribunal have held that since the assessee maintains its account books on mercantile basis hence the liability to sales-tax should also be allowed as a deduction in the years in which the sales were made.

5. We regret we cannot agree with the view of the Tribunal. In this connection, we have first to understand the nature of sales-tax receipts. In Chowringhee Sales Bureau (P) Ltd. vs. CIT 1973 CTR (SC) 44 : (1973) 87 ITR 542 (SC), which was followed in Sinclair Murray & Co. (P) Ltd. vs. CIT 1974 CTR (SC) 283 : (1974) 97 ITR 615 (SC), it was held by the Supreme Court that the amount of sales-tax realised by a trader is its trading or business receipts. It was further observed therein : “It is the true nature and quality of the receipt and not the head under which it is entered in the account books that would prove decisive. If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as trading receipt.”

6. In the present case, the amount of sales-tax realised by the assessee from the hire purchaser was much more than the sales-tax paid by it on completion of the hire purchase. Moreover, in fact what was collected by the assessee was really not sales-tax at all because the sales-tax liability arises when there is a sale.

7. As regards a hire purchase agreement, the Supreme Court in The Instalment Supply Ltd. vs. STO 1974 CTR (SC) 230 : (1974) 4 SCC 739 recognised the difference between two types of such agreements, first where the hirer is not obliged to buy the goods at the end of the contract, but it is his option to buy it or not, and the second where the hirer is under obligation to buy. The Supreme Court observed that in both these kinds of hire purchase agreement, the property in the goods remains with the financier, and the ownership passes only when the hirer exercises his option in the case of first kind of agreement, or when all the instalments are paid, in the second kind of agreement. Thus in both kinds of agreements the property in the goods remains with the financier till an eventuality occurs subsequently. The decision of the Supreme Court in Jay Bharat Credit & Investment Co. Ltd. vs. CST (2000) 7 SCC 165 is distinguishable because there the Supreme Court was considering the definition of sale in the Bengal Finance (Sales-tax) Act as amended. By the 1959 amendment even transfer of goods on hire purchase was included with the definition of sale, and in these circumstances the Supreme Court held that the point of sale in such hire purchase is the time of transfer of goods (i.e., transfer of possession of the goods) and not the time of transfer of property therein (i.e., sale). In Marikar Motors Ltd. vs. STO (1996) 3 SCC 263, the Supreme Court observed that a hire purchase agreement comprises two elements, (1) element of bailment, and (2) element of sale. On the facts of that particular case, the Supreme Court held that under the hire purchase agreement in that particular case, the sale took place when the hirer exercised the option to purchase after fully paying the agreed amount.

In Charanjit Singh Chadha vs. Sudhir Mehra (2001) 7 SCC 417, the Supreme Court considered several of its earlier decisions and observed that ordinarily, a contract of hire purchase confers no title on the hirer, but a mere option to purchase on fulfilment of certain conditions. But a contract of hire purchase may also provide for the agreement to purchase the thing hired by deferred payments subject to the condition that title to the thing shall not pass until all the instalments have been paid.

In Kedarnath Jute Manufacturing Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC), the Supreme Court observed that the moment a dealer made either purchases or sales, the obligation to pay the tax arose. Although the liability could not be enforced till the quantification was effected by assessment proceedings, the liability for payment of tax was independent of the assessment.

It is true that the assessee has been maintaining its accounts on mercantile basis but even on that basis the tax liability arises when the sale takes place. As already observed above, in a case of a hire purchase agreement it will depend on the terms of the agreement as to when the sale takes place. However, when the petitioner collected amounts in the name of sales-tax from its hire purchaser what it actually collected was not sales-tax at all but an amount in anticipation of its sales-tax liability.

The word “income” as defined in s. 2(24) of the IT Act has been held to include almost every kind of receipt or gain vide Bhola Nath Kesari vs. Director of State Lotteries (1974) 95 ITR 171 (All). In Navinchandra Mafatlal vs. CIT (1954) 26 ITR 758 (SC), the Supreme Court observed that the wide scope of the expression “income” should not be restricted to the technical concept of income in contradistinction to capital. In Bhagwan Dass Jain vs. Union of India (1981) 21 CTR (SC) 339 : (1981) 128 ITR 315 (SC), the Supreme Court held that the word “income” includes even notional income. In Dooars Tea Co. Ltd. vs. Commr. of Agrl. IT (1962) 44 ITR 6 (SC), the Supreme Court held that the word “income” is a word of wide scope and of elastic import and its extent and sweep are not controlled or limited by the use of words “profit and gains”. The definition of income in s. 2(24) is inclusive and not exhaustive vide Addl. CIT vs. Uma Devi Budhia (1985) 48 CTR (Pat) 294 : (1986) 157 ITR 478 (Pat).

10. In CIT vs. G.R. Karthikeyan (1993) 112 CTR (SC) 302 : (1993) 201 ITR 866 (SC), the Supreme Court held that the purpose of the inclusive definition is not to limit the ordinary meaning of the word “income” but to widen its net, and the several clauses therein are not exhaustive of the meaning of the word “income”. Hence even if a receipt did not fall within the ambit of any of the sub-clauses in s. 2(24) it might still be income if it partakes of the nature of income. In Emil Webber vs. CIT (1993) 110 CTR (SC) 257 : (1993) 200 ITR 483 (SC), the Supreme Court held that though the inclusive definition adds several artificial categories to the concept of income but, on that account, the expression “income” does not lose its natural meaning. Anything which can be properly described as income is taxable under the Act unless it is exempted by any other provision of the Act. Hence, we are certainly of the opinion that the amount in question is income in the hands of the assessee. CIT vs. Thirumalaiswamy Naidu & Sons (1998) 146 CTR (SC) 529 : (1998) 230 ITR 534 (SC) and K.C.P. Ltd. vs. CIT (2000) 162 CTR (SC) 320 : (2000) 245 ITR 421 (SC), it was observed by the Supreme Court : “The excess amount realised and retained by the assessee in a separate account would not make any difference, if the same is actually a trading receipt realised by him as a trading receipt and the excess amount which was neither paid to the Government nor refunded to the customers from whom the same has been charged will be taxed in the assessee’s hands as his income irrespective of the fact as to whether the assessee is following cash system or mercantile system of accounting.”

The Supreme Court further held that “in such a situation the assessee would be entitled to claim deduction of the sum when so paid or refunded.”

13. Learned counsel for the assessee has relied on the Division Bench decision in this Court in CIT vs. Auto Sales (2001) 165 CTR (All) 598 : (2000) 246 ITR 494 (All). We have carefully perused the aforesaid decision and are of the opinion that it is distinguishable. It may be noted that in that decision it was observed : “In the present case, there is no finding that the amount collected was received from the customers as sales-tax payable in respect of the transaction.”

14. In the present case, on the other hand, there is a clear finding by the Tribunal as well as by the authorities below that the amount of sales-tax was realised by the assessee from the hirers/customers on full purchase price of the vehicle. Thus, the decision of this Court in CIT vs. Auto Sales (supra) is clearly distinguishable.

15. The Tribunal in para 12 of its appellate order has stated that the credits in contingency account No. II represent collections from the customers on account of sales-tax made at the time of financing the transactions. When the transaction is completed the sales-tax liability on the completed contract is calculated and the amount of such liability is transferred from contingency account No. II to the sales-tax payable account. The difference between the total amount of sales-tax collected as credited to contingency account No. II and the amount transferred to the sale tax payable account is transferred to the contingency account No. III. On these facts, the Tribunal observed that the credits appearing in contingency account No. II do not represent any trading receipt of the assessee and cannot be brought to tax.

16. We do not agree. As already stated above, the amounts collected by the assessee from the hire purchasers as sales-tax were not really sales-tax at all because the sale at that time had not taken place. The sales-tax is payable when the sale takes place as observed in the case of Kedarnath Jute Manufacturing Co. Ltd. (supra). In the case of hire purchase, the sale takes place only at the time mentioned in the hire purchase agreement, or at the option of the hirer (if so provided in the agreement). Hence, there is no sales-tax liability on the assessee at all when he collected the amounts from the hire purchaser. Hence, the amounts in contingency account No. II have to be treated as income of the assessee in the assessment year in which it made the collection.

It may be mentioned that in the law of income-tax each assessment year is a self-contained assessment period, vide Joint Family of Udayan Chinubhai vs. CIT AIR 1967 SC 762 (vide para 12), and hence the transaction of collection of amounts (as sales-tax) in a particular financial year cannot be mixed up with the accrual or payment of sales-tax to the Government in a future financial year.

It may be that when all the instalments are paid a liability may accrue of paying sales-tax but that may accrue in some future assessment year and not in the assessment year when the collection of sales-tax were made by the assessee. It is only in such future assessment year that the assessee can claim a deduction (unless the property in the goods passed to the hire purchaser in the same financial year in which the amounts were collected).

In the present case, the hire purchase agreement is not before us, but whether it is the first kind of hire purchase agreement (i.e., giving an option to the hirer to purchase after paying all instalments) or the second kind of agreement (making it obligatory on the hirer to purchase after paying all instalments), in either case there was certainly no sale at the time when the amount were collected by the assessee in the name of sales-tax.

We may mention that the Hire Purchase Act, 1972, has not yet been enforced (although notifications were issued twice but subsequently they were rescinded). Hence, the hire purchase transaction will be governed by the ordinary law of contract and as interpreted by the aforesaid decisions of the Supreme Court.

In view of the above discussions, we answer the questions referred to us in the negative, that is in favour of the Department and against the assessee.

[Citation : 266 ITR 261]

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