ORDER
R.P. Garg, Accountant Member
1. These two appeals are by the assessee one against an order of the CIT(A) for assessment year 1984-85 and the other against an order of the CIT under Section 263 for the assessment year 1985-86. Since there is common dispute they are disposed of by this common order for the sake of convenience.
2. The first common issue is against the disallowance of sales tax outstanding by applying provisions of Section 43B. The assessee’s case is that it was acting only as a distributor/commission agent for a fixed rate of commission and has not claimed the sales tax as a deduction. Therefore, there was no question of disallowing the same. The ITO did not accept the assessee’s contention and applying the ratio of the Supreme Court decision in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 treated the sales tax collected as part of assessee’s trading receipts and held that whatever was paid during the year form part of profit and loss on trading account and whatever surplus was left was required to be taxed in the hands of the bearer. In this case he observed that the assessee was a commission agent and therefore responsibility of the sales tax so collected lay with the assessee till the payment was made to the Government and because of special provision of Section 43B the sales tax collected but not paid was required to be added back. According to him it was an obligation on the part of the assessee in view of the aforesaid Supreme Court decision to show the sales tax as part of trading receipts and also the payments as part of trading or profit and loss account. He accordingly added a sum of Rs. 2,40,251 in assessment year 1984-85. The addition was justified by the CIT(A) by placing reliance on the following cases:–
1. George Oakes (P.) Ltd. v. State of Madras [1961] 12 STC 476 (SC)
2. Chowringee Soles Bureau (P.) Ltd.’s case (supra)
3. Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC)
4. Mysore Kirloskar Ltd. v. Union of India [1986] 160 ITR 50 (Kar.)
5. Lakhanpal National Ltd. v. ITO [1986] 162 ITR 240 (Guj.)
In the second year the ITO had made no such disallowance but the Commissioner exercising his powers under Section 263 directed him to disallow a sum of Rs. 3,74,801.
3. The assessee’s main contention is that it is a commission agent. Therefore, as held by the Ahmedabad Bench of the Tribunal in the case of ITO v. Thakersi Babubhai & Co. [1986] 18 ITD 593 no disallowance could be made as the amount of sales tax collected paid or credited and debited respectively to a separate account and the assessee had not claimed the same as a business expenditure. The assessee also relies upon the decision of Bombay Bench of the Tribunal in the case of J. Maheshkumar Petro Chemicals (P.) Ltd. v. Dy. CIT [1991] 37 ITD 235 and the Andhra Pradesh High Court decision in the case of CIT v. Devatha Chandraiah & Sons [1985] 154 ITR 893 and contends that when sales are made on behalf of the principal and not on assessee’s own account the sales tax collected thereon could never form part of assessee’s trading receipts. He referred to in this connection various provisions of Gujarat Sales Tax Act, 1969 and the Central Sales Tax Act, 1956 dealing with sales by agents and/or principal. Alternatively he contended that the outstanding payment was paid before the prescribed date for furnishing the return under Section 139(1) and therefore the same by First proviso to Section 43B which provision was inserted by Finance Act 1987 merely as a declaration and therefore having a retrospective effect in view of the Ahmedabad Bench decision of the Tribunal in the case of Lokhandwala and the three decisions of Patna High Court, Calcutta High Court and Orissa High Court.
4. The learned D.R. on the other hand submitted that sales tax paid by the assessee the name of the principal was not intimated to the sales tax authority and therefore the liability to sales tax was that of the assessee under the Gujarat Sales Tax Act and the assessee was liable to account for the receipts thereon as its trading receipts in view of the Supreme Court decision in the case of KedarnathJute Mfg. Co. Ltd. (supra), Sinclair Murray & Co. (P.)Ltd. v. CIT [1974] 97 ITR 615, 43 ITR 452 (sic) and P. Krishna Rao v. CIT [1978] 112 ITR 26 (AP). He further submitted that it was the assessee who sold the goods to the customers and the principal nowhere came into picture for making the sales to the customers. The sales have in fact been incorporated as part of the trading receipts of the assessee in Profit & Loss account and therefore the assessee is not justified in putting up a claim and state that the sales were not on his account but for and on behalf of the principal. He, therefore, pressed for upholding the order of the CIT(A) and the CIT respectively. On the alternative contention of the assessee the learned D.R. submitted that provisions of Section 43B are clear and provides for deduction of tax only on actual payment basis. The first proviso to Section 43 was inserted by Finance Act 1987 and was made applicable specifically with effect from 1-4-1988 and not from 1-4-1987 a normal date for application of any provisions by the Finance Act, 1987, the Legislative mandate is that it was not retrospective but only prospective. He relied upon the decision of Delhi High Court in the case of Sanghi Motors v. Union of India [1991] 187 ITR 703 in this behalf.
5. We have heard the parties and considered the rival submissions. We have also gone through the terms of the agreement of the assessee with the principal, the final accounts of the assessee and various provisions of the Gujarat Sales Tax Act and Central Sales Tax Act.
6. For the purpose of levying tax the income of an assessee is computed in accordance with the method employed by it in maintaining its books of accounts. When, however, the accounts are such that no proper income could be deduced therefrom the ITO may reject the method employed by an assessee and compute the income by applying a proper method. The assessee in this case follows mercantile system of accounting wherein the entries of income and expenditures are accounted for on accrual basis irrespective of the fact and unlike cash system where entries are recorded on actual receipt of payment basis. Section 43B however makes an exception in this regard and provides w.e.f. 1-4-1984 that the statutory liability like tax and duty etc. are to be allowed only on cash basis in spite of the fact the assessee’s maintaining the books of accounts on mercantile basis. It was brought in statute to curb the practice of claiming tax liability on accrual basis and at the same time disputing the same and not paying under the relevant law. Relying the difficulties faced in genuine cases where payments have actually been made subsequently the Legislature inserted a proviso not to disallow such liabilities if they were paid before the date prescribed for filing the return under Section 139(1). This was brought in by Finance Act 1987 but with effect from 1-4-1988. The alternate claim of the assessee rests on this explanation which has been held to be clarificatory and therefore retrospective with effect from 1-4-1984 by Patna High Court, Calcutta High Court and Orissa High Court; Delhi High Court taking a contrary view. However, we need not enter in this controversy in this case as in our opinion the matter can be disposed of on the ground discussed hereinafter in this order.
7. The assessee was appointed by M/s. Orient General Industries Ltd. as a distributor by letter dated 4-3-1980 for the sale of Orient fans in the territories of Gujarat. As per Clause (1) of the agreement the goods are to be despatched to the assessee on consignment basis and the assessee was to sell the same at a price not exceeding the maximum selling price recommended by the principal from time to time. As per Clause (3) the property in the goods despatched to the assessee by the principal on consignment basis is provided to be always remained with the principal till the goods were sold and the assessee was prohibited to encumber or deal with the said goods in any other manner except selling the same acting as distributor of the principal. Clause (4) provides that the goods are to be stored in a godown suitable for the products and such part of the godown rent and other expenses as may be agreed upon from time to time are to be reimbursed by the principal to the assessee. The stored goods are required to be duly insured against all risks and as per the contention of the assessee such insurance charges were paid by the principal. As per Clause (7) of the agreement, the assessee was required to keep a security deposit for the due fulfilment of the assessee’s obligation as a distributor and a sum of Rs. 6 lakhs has been deposited by the assessee as is evident from the balance sheet. As per the agreement the assessee is allowed a commission at the rate of 4 1/2% on the sale of fans and components in the sale market and 6% of the sale of fans and components to the Government and quasi-Government department and institutions acceptable to the principal as Government Organisation. From the reading of this agreement it is clear that the sales made by the assessee are as distributor/ commission agent of the principal M/s. Orient General Industries, Calcutta. The property remains with them till the goods are sold by the assessee. In the circumstances the mere fact that the assessee had accounted for the purchase and sales in its final accounts would make no difference. The mere existence of accounting entries in the books of the assessee were not decisive of the fact thac the sales and purchases belong to the assessee in view of the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra). Even otherwise the amount of purchase and sales exactly tally in the debit and credit side of the profit and loss account which is a clear indication that neither the sales nor the purchase were on assessee’s account. The assessee has accounted for the receipt of commission separately. It is true that as held by their Lordships of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. (supra) and Sinclair Murray & Co. (P.) Ltd. (supra) the sales tax collected would be a part of trading receipt but such trading receipts in our opinion would be of that of the principal and not of the assessee distributor/ commission agent. We find support for this proposition from the decision of the Andhra Pradesh High Court in the case of Devatha Chandraiah & Sons (supra), wherein it was held that the assessee firm acted as commission agent on behalf of the agriculturists and sold their products. It collected sales tax from the purchasers and paid it to the Government and that the money representing the sales tax had been received by the assessee in a fiduciary capacity the money received towards sales tax by the assessee from the purchasers was received on behalf of the agriculturist principals and the same did not constitute trading receipts in the hands of the assessee and in this decision the Supreme Court decision in the case of Chowringhee Sales Bureau (P.) Ltd. (supra) and Sinclair Murray & Co. (P.) Ltd. (supra) have also been considered. The reliance on the Andhra Pradesh High Court decision by the learned departmental representative in the case of P. Krishna Rao (supra) is of no help in view of another decision of the Andhra Pradesh High Court in the case of Buddala China Venkata Rao & Co. v. CIT [1978] 112 ITR 58 wherein their Lordships have expressed their inability to follow the decision in the case of P. Krishna Rao (supra) as on identical question another decision of the Andhra Pradesh High Court in Addl CIT v. T. Nagireddy & Co. [1976] 105 ITR 669 was not referred to and also because their Lordships were in respectful agreement with the earlier decision. We also find supports from the decision of the Tribunal Bench of the Bombay in the case of J. Matieshkumar Petro Chemicals (P.) Ltd. (supra), wherein also on similar facts it was held that the sales tax collected by the agent is not the trading receipt of the assessee agent but of the principal and therefore the addition under Section 43B to the income of the assessee would not be made.
8. The contentions of the learned D.R. that it was a liability of the assessee under the Gujarat Sales Tax Act to pay the tax and therefore it was liable to account for the sales tax collected as its trading receipt has also no force. It is true that liability under the Gujarat Sales Tax Act is on the assessee but that is not absolute. Section 22 of the Act provides that where commission agent sells any taxable goods on behalf of his principal, such commission agent and his principal shall both be jointly and severally liable to pay tax or taxes on the turnover of such sales under Section 6 of the Act. Sub-section (2) of Section 22 provides that if the principal on whose behalf the commission agent has sold goods, shows to the satisfaction of the Commissioner that the tax has been paid by his commission agent on such goods under Sub-section (1), the principal shall not be liable to pay tax again in respect of the same transaction. Therefore the liability under the Gujarat Sales tax Act is one that is on the sale of the goods. Merely because the liability to pay sales tax is on the agent does not convert the receipt of the sales tax collected as trading receipt of the assessee. It is only for the purposes of collection of tax under the Sales tax Act that the commission agent is made liable to pay sales tax jointly and severally along with the principal. As the transaction involves the crossing of territories of two states the provisions of Central Sales tax Act also do come in play. Section 6A of the Central Sales Tax Act provides that where a dealer has claimed that he is not liable to pay tax under Central Sales Tax Act in respect of any goods on the ground that the movement of such goods from one State to another State is occasioned by reason of transfer of such goods by him to any other place of his business or to the place of his agent as the case may be and not by reason of sale, the said dealer may furnish to the assessing authority, a declaration duly filled in and signed by this agent. The assessee in compliance to Section 6A of the Central Sales Tax Act made a declaration in Form F under Rule 12(5) of the Central Sales Tax (Registration & Turnover) Rules, 1957 to the Sales Tax Authority and claimed exemption disclosing the name of the assessee as well as the principal. This shows that the assessee had not purchased the goods but they were sent to it as a commission agent and not as a purchaser and if we read the terms of the contract between the principal and the assessee agent it would be clear that the purchases as well as sales were for and on behalf of the principal and not on assessee’s account. The property of the goods remained with the principal till they were sold. In these circumstances in our opinion though the assessee was jointly and severally liable under the Gujarat Sales Tax Act, the sales tax collected would not form part of the assessee’s trading receipts and consequently not even the expenditure. In fact the assessee had not claimed the expenditure in its profit and loss account and the receipts of the sales tax collection as well as the payments made therefrom are directly shown in the balance sheet under the head ‘Sales tax collection account’. We therefore allow the claim of the assessee and direct that no disallowance under Section 43B be made in the two years under consideration.
9. The second ground for charging interest under Section 139(8) in assessment year 1985-86 is consequential and does not require any discussion.
10. In the appeal for assessment year 1985-86 the assessee has also disputed the disallowance of Rs. 16,236 being land revenue disallowed on the ground that it pertained to the previous year. The assessee’s case is that the notice of demand has been received on 21-5-1984 a date which falls during the year under consideration and therefore the liability has arisen in the year under consideration should be allowed as such. We find force in this submission of the assessee and as the same is supported by the Supreme Court decision in the case of Kedarnath Jute Mfg. Co. Ltd. (supra), the ITO is directed to allow the same.
11. The other ground is against the disallowance of debit balance of Rs. 6,708 being the difference of the expenditure of Rs. 35,949 and the income of Rs. 29,241 pertaining to earlier years. As the above difference admittedly relates to the earlier years and the assessee following the mercantile system of accounting the same would not be allowed and therefore, in our opinion the CIT was justified in directing to disallow the same.
12. In the result both the appeals are partly allowed.