THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 23.07.2013
+ ITR NO. 58/1997
DALMIA CEMENT (BHARAT) LTD. ... Petitioner
versus
COMMISSIONER OF INCOME TAX ... Respondent
Advocates who appeared in this case:
For the Petitioner : Mr Ravi Mehta, Advocate
For the Respondent : Mr Sanjeev Sabharwal, Advocate
CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED, ACTING
CHIEF JUSTICE
HON'BLE MR JUSTICE V.K. JAIN
JUDGMENT
BADAR DURREZ AHMED, ACJ
1. This income tax reference under Section 256(1) of the Income Tax
Act, 1961 (hereinafter referred to as `the said Act') raises the following
five questions:
"(1) Whether on the facts and in the circumstances of
the case, the Tribunal was correct in law in holding that
the payment of additional cess and cess surcharge was
not a tax or duty and as such the same was not covered
within the provisions of section 43B of the Income Tax
Act, 1961?
(2) Whether on the facts and in the circumstances of
the case, the Tribunal is justified in holding that the
ITR 58/1997 Page 1 of 41
deposits of Rs.26,10,483/- obtained by the assessee from
its non-governmental buyers of cement cannot be treated
as a trading receipt and, therefore, is not subject matter of
disallowance u/s 43B of the Income Tax Act?
(3) Whether on the facts and in the circumstances of
the case, the Tribunal was correct in law in holding that
the income treated by the Assessing Officer on account
of unclaimed balances/wages/bonus which were written
off by the assessee and credited to its Profit and Loss
Account cannot be treated as the income of the assessee
company?
(4) Whether on the facts and in the circumstances of
the case, the Tribunal was correct in law in holding that
the assessee company was entitled for deduction on
account of Extra Shift Allowance relating to
transformers?
(5) Whether on the facts and in the circumstances of
the case, the Tribunal was correct in law in deleting the
charge of interest u/s 216 amounting to Rs.6,11,667/- by
observing that the estimates of advance tax filed by the
assessee were reasonable and bona fide.
2. Question Nos. 3 and 4 were not pressed before us by Mr
Sabharwal, appearing on behalf of the revenue on account of the small
amounts involved therein. In question No.3, the amount involved is
roughly around Rs.13,000/- and in question No.4, the amount is
approximately Rs.8,600/-. Consequently, insofar as question Nos. 3 and
4 are concerned, we return the same unanswered. We are, therefore, left
to examine question Nos. 1, 2 and 5.
ITR 58/1997 Page 2 of 41
Re: Question No.1
3. The facts necessary for examining this question are that the
assessee (respondent herein) claimed expenditure of Rs.1,45,29,207/- in
respect of assessment year 1985-86 as accrued liability to pay cess and
cess surcharge under Section 115 and 116 respectively of the Tamil Nadu
Panchayats Act, 1958. The assessing officer disallowed the said claim by
invoking the provisions of Section 43B of the said Act on the ground that
the cess and cess surcharge under the Tamil Nadu Panchayats Act, 1958
had not actually been paid by the respondent during the previous year
relating to the assessment year 1985-86. The respondent was aggrieved
by this inasmuch as according to the respondent, no disallowance could
be made under Section 43B(a) of the said Act as the said cess and cess
surcharge was neither a tax nor duty. However, the Commissioner of
Income-tax (Appeals) confirmed the disallowance made by the assessing
officer. In a further appeal before the Income Tax Appellate Tribunal
being ITA No. 2916/Del/90, the said tribunal agreed with the contentions
of the respondent/assessee and deleted the disallowance by virtue of an
order dated 25.03.1994. The tribunal followed its earlier year's order in
respect of assessment year 1984-85 wherein the tribunal had held that
although cess was a tax for the purposes of the Constitution of India, it
was not a tax within the meaning of Section 43B of the said Act as it
stood at the relevant time. The decision of the tribunal in respect of
assessment year 1984-85 became the subject matter of an income tax
reference under Section 256(1) of the said Act at the instance of the
revenue and was part of a batch of references being ITR Nos. 385-
ITR 58/1997 Page 3 of 41
388/1992 which were before this Court. During the pendency of the
reference in respect of assessment year 1984-85, the revenue, being
aggrieved by the tribunal's order in respect of assessment year 1985-86,
filed a reference application being RA 462/Del/94 for a reference to the
High Court. By an order dated 01.03.1997, the tribunal referred the five
questions mentioned earlier to this court, which reference has become
ITR No. 58/1997 (i.e., the present reference). During the pendency of the
present reference, ITR Nos. 385-388/1992 which included the reference
in respect of assessment year 1984-85 was returned unanswered by a
Division Bench of this Court on 05.09.2007 inasmuch as the revenue had
not filed the paper books although the matter had been pending for 15
years. Therefore, we do not have the benefit of any decision of this Court
on this question as the reference in respect of the earlier assessment year
(assessment year 1984-85) had been returned unanswered in the
circumstances mentioned above.
4. Section 43B of the said Act as it stood in relation to the assessment
year 1985-86 reads as under:-
"43B. Certain deductions to be only on actual payment. -
Notwithstanding anything contained in any other
provision of this Act, a deduction otherwise allowable
under this Act in respect of
(a) any sum payable by the assessee by way of tax or
duty under any law for the time being in force, or
(b) 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 employee,
ITR 58/1997 Page 4 of 41
shall be allowed (irrespective of the previous year in
which the liability to pay such sum was incurred by the
assessee according to the method of accounting regularly
employed by him) only in computing the income referred
to in section 28 of that previous year in which sum is
actually paid by him.
Explanation: For the removal of doubts, it is hereby
declared that where a deduction in respect of any sum
referred to in clause (a) or clause (b) of this section is
allowed in computing the income referred to in section
28 of the previous year (being a previous year relevant to
the assessment year commencing on the 1st day of April,
1983 or any earlier assessment year) in which the liability
to pay such sum was incurred by the assessee, the
assessee shall not be entitled to any deduction under this
section in respect of such sum in computing the income
of the previous year in which the sum is actually paid by
him."
5. The said section 43B and, in particular, clause (a) thereof was
amended by virtue of the Finance Act, 1988 which came into effect from
01.04.1989. The said section, after amendment, to the extent relevant for
our purposes, reads as under:-
"43B. Certain deductions to be only on actual payment. -
Notwithstanding anything contained in any other
provision of this Act, a deduction otherwise allowable
under this Act in respect of
(a) Any sum payable by the assessee by way of tax,
duty, cess or fee, by whatever name called, under any
law for the time being in force, or
(b) xxxxx xxxxx xxxxx xxxxx
ITR 58/1997 Page 5 of 41
(c) xxxxx xxxxx xxxxx xxxxx
(d) xxxxx xxxxx xxxxx xxxxx
shall be allowed (irrespective of the previous year in
which the liability to pay such sum was incurred by the
assessee according to the method of accounting regularly
employed by him) only in computing the income referred
to in section 28 of that previous year in which sum is
actually paid by him."
(emphasis added)
6. It will be immediately clear that while Section 43B(a) as it stood
prior to the amendment introduced by the Finance Act, 1988 specifically
referred to only "tax or duty", after the amendment, the said clause (a) of
Section 43B also had specific reference to "cess or fee, by whatever name
called" in addition to tax and duty.
7. Mr Sabharwal appearing on behalf of the revenue made a two-fold
submission. He, first of all, submitted that the amendment introduced by
the Finance Act, 1988 was clarificatory in nature and, therefore, the
provisions of Section 43B(a) as introduced by the said Finance Act, 1988
would be retrospective in operation and would also apply to the
assessment year 1985-86. Therefore, according to Mr Sabharwal, unless
and until the cess and cess surcharge under the Tamil Nadu Panchayats
Act, 1958 had actually been paid in the relevant year, the respondent
would not have been entitled to claim a deduction in respect of an
accrued liability to pay such cess and cess surcharge. The second
argument of Mr Sabharwal was that in any event, a cess was a tax and
de hors the amendment introduced by the Finance Act, 1988, the
ITR 58/1997 Page 6 of 41
provisions of Section 43B(a) which were clearly applicable insofar as a
tax was concerned would also apply to a cess. Mr Sabharwal placed
reliance on the Budget Speech of the Finance Minister (1983-84).
Section 43B was introduced into the said Act for the first time by virtue
of the Finance Act, 1983 with effect from 01.04.1984. In the said Budget
Speech of the Finance Minister, the following reason had been given
behind the introduction of Section 43B:-
"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, for long period of
time. For the purpose of their income-tax assessments,
they nonetheless claim the liability as deduction even as
they take resort to legal action, thus depriving the
Government of its dues while enjoying the benefit of
non-payment. To curb such practices I propose to
provide that irrespective of the method of accounting
followed by the taxpayer, a statutory liability will be
allowed as a deduction in computing the taxable profits
only in the year and to the extent it is actually paid."
8. It can be seen from the above extract that the Finance Minister had
specifically referred to statutory liabilities such as excise duty,
employer's contribution to provident fund and employees' state insurance
scheme. Reflecting this sentiment, section 43B(a) referred to the statutory
liability of a tax or duty, while Section 43B(b) referred to the 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 the employees. It was the contention of Mr Sabharwal
that the purpose behind introduction of Section 43B was to curb the
ITR 58/1997 Page 7 of 41
mischief whereby an assessee could claim a deduction in respect of an
accrued statutory liability and yet not clear the same, thereby depriving
the Government of its dues while enjoying the benefit of non-payment.
9. Mr Sabharwal then referred to the memorandum explaining the
provisions in the Finance Bill, 1988 whereupon the amendment was
brought about in Section 43B(a) so as to include `cess' and `fee'
specifically. Paragraph 35 of the said memorandum reads as under (to
the extent relevant):
"Modification of the provisions relating to deduction in
respect of certain liabilities
35. Under the existing provisions of section 43B of the
Income-tax Act, deduction for any amount payable by the
assessee by way of tax or duty under any law or any sum
payable as an employer by way of contribution to any
provident fund or superannuation fund is allowed as a
deduction in computing the income of that person in the
year in which such sum is actually paid by him. The
objective behind these provisions is to provide for a tax
disincentive by denying deduction in respect of statutory
liability or fund money etc. which is not paid in time.
The benefit of deduction is thus available only to those
persons who do not use Government money for their own
purposes.
There has been a legal controversy whether the words
`tax' and `duty' cover within their fold certain statutory
levies like cess, fees, etc. It has been held by some
appellate authorities that such amounts could not be
covered under the expressions "tax" or "duty". Such
interpretations are against the legislative intent.
Therefore, as a matter of clarification, the Bill provides
that cess or fees by whatever name called, which have
ITR 58/1997 Page 8 of 41
been imposed by any statutory authority, including a
local authority, will also be allowed as a deduction only
if these are actually paid."
xxxxx xxxxx xxxxx xxxxx
"The above amendment will take effect from 1st April,
1989, and will, accordingly, apply to assessment year
1989-90 and subsequent years."
10. Placing reliance on the above extract, Mr Sabharwal submitted that
the memorandum itself indicated that "as a matter of clarification", the
Finance Bill, 1988 made provision for the fact that cess or fee by
whatever name called which had been imposed by any statutory
authority, including a local authority, would also be allowed as a
deduction "only if" these were actually paid. It was therefore contended
that the legislative intent behind Section 43B was always to include cess
and fee within the fold of tax and duty and this has been clarified by the
amendment brought about in Section 43B(a) by virtue of the Finance Act,
1988. Since the amendment is clarificatory, according to Mr Sabharwal,
the same would apply with retrospective effect and would have to be
regarded as if the post amendment position was always the case since the
inception when Section 43B was introduced by virtue of the Finance Act,
1983. For this proposition, Mr Sabharwal had placed reliance on a
Calcutta High Court decision in the case of Commissioner of Income
Tax v. Orient Paper and Industries Ltd.: 214 ITR 473 (Cal). In that
case, the Calcutta High Court held that the amendment to Section 43B(a)
whereby the expression, "cess or fee, by whatever name called" was
ITR 58/1997 Page 9 of 41
added, was clarificatory and would have retrospective operation and
would even apply to the assessment year 1984-85.
11. Mr Sabharwal then referred to the Supreme Court decision in India
Cement Ltd. v. State of Tamil Nadu: 188 ITR 690 (SC), in an attempt to
demonstrate that cess is equivalent to tax and therefore even though cess
had not been specified in Section 43B(a) prior to its amendment with
effect from 1.4.1989, it would always have been a part of tax and as such,
section 43B as it originally stood would also have reference to cess
inasmuch cess was included in tax.
12. Mr Sabharwal next referred to the Supreme Court decision in
H.R.S. Murthy v. Collector of Chittoor & Anr.: AIR 1965 SC 177 and
submitted that in that case, the Supreme Court had concluded that land
cess was nothing else but a tax on land. Therefore, according to Mr
Sabharwal, cess and tax meant the same thing. The learned counsel for
the revenue then referred to the Supreme Court decision in Om Prakash
Agarwal v. Giri Raj Kishori: 164 ITR 376W (SC). He referred to the
said decision to point out that there were three principle characteristics of
a tax:-
(i) It is a compulsory exaction under a statutory power;
(ii) The imposition is for public purposes without reference to any
special benefit to be conferred on the tax payer; and
(iii) It is part of a common burden and the quantum of imposition is
generally dependent upon the capacity to pay of the tax payer.
ITR 58/1997 Page 10 of 41
According to Mr Sabharwal, the cess in question satisfies all the above
three conditions and therefore it has to be regarded as a tax.
13. Finally, Mr Sabharwal referred to the Supreme Court decision in
Allied Motors (P) Ltd. v. Commissioner of Income Tax: 224 ITR 677
(SC). He submitted that in that decision the Supreme Court examined
Section 43B of the said Act in the context of the introduction of the first
proviso thereof by virtue of the Finance Act of 1987. The Supreme Court
held the proviso to be of a remedial nature which had been inserted to
remedy unintended consequences. In this backdrop, the Supreme Court
held that although the proviso had been inserted by virtue of the Finance
Act, 1987, it was required to be treated as retrospective in operation, so
that a reasonable interpretation could be given to the section as a whole.
Seeking to draw an analogy therefrom, Mr Sabharwal submitted that the
amendment introduced in Section 43B(a) by virtue of the Finance Act,
1988, also ought to be treated as having retrospective operation.
14. In response to the arguments submitted on behalf of the revenue,
Mr Ravi Mehta appearing on behalf of the respondent/assessee submitted
that insofar as Section 43B was concerned, the said provision as it stood
in respect of the assessment year 1985-86 did not include cess or fee (by
whatever name called) and that provision was limited to tax or duty.
Secondly, he submitted that while cess may be included in the expression
of tax used in a generic and general sense as a part of overall taxation, it
is not to be construed as a tax at least for the purpose of Section 43B as it
stood at the relevant time. He submitted that it is not at all necessary that
ITR 58/1997 Page 11 of 41
a cess should be regarded as a tax. He placed reliance on a Supreme
Court decision in the case of Dewan Chand Builders and Contractors v.
Union of India: (2012) 1 SCC 101 where the Supreme Court recognized
the clear distinction between a cess and a tax. Therefore, according to Mr
Mehta, use of the word `tax' in Section 43B(a) does not, ipso facto,
include a cess. There is no doubt that `cess' was introduced by virtue of
the Finance Act, 1988 with effect from 01.04.1989, but that introduction
was only prospective from assessment year 1989-90 onwards and not
retrospective. He referred to the Finance Bill, 1988 as also the Board
Circular No. 528 dated 16.12.1988 explaining the amendments
introduced by the Finance Act, 1988. Mr Mehta submitted that the
decision in Allied Motors (P) Ltd. (supra) cannot be applied in the
present case because in that case, the introduction of the proviso was
remedial in nature, to remedy an unintended consequence and was for the
benefit of the assessees. It is in those special circumstances that the said
proviso was construed as having retrospective effect. Here, the
retrospectivity would work against the assessee and, in any event, the
circumstances which existed in Allied Motors (P) Ltd. (supra) do not
exist in the present case. As regards the decision of the Calcutta High
Court in Orient Paper and Industries Ltd. (supra), Mr Mehta submitted
that while that decision is in line with the arguments submitted by the
learned counsel for the revenue inasmuch as the Calcutta High Court held
that the amendment to Section 43B(a) was retrospective, being
clarificatory, the said decision does not bind this Court. Furthermore,
several other High Courts have decided to the contrary. For example, the
ITR 58/1997 Page 12 of 41
Andhra Pradesh High Court in Phoolchand Lalith Kumar and Company
v. Income Tax Officer: 196 ITR 302 held that cess was not covered in
Section 43B at the relevant time, i.e., 1984-85 and 1985-86. Similarly in
Commissioner of Income Tax v. Mansukhlal Prahjibhai and Company:
227 ITR 429 (MP), the High Court of Madhya Pradesh held that "fee",
which was introduced in Section 43B, would operate only prospectively
from the date of the amendment. A similar view was taken by the said
High Court of Madhya Pradesh in Commissioner of Income Tax v.
Dinesh Kumar Gordhanlal: 226 ITR 826 (MP). The High Court of
Rajasthan also, in the case of Commissioner of Income Tax v. Udaipur
Distillary Co. Ltd. (No.1): 268 ITR 305 (RAJ), took the view that since
"fee", as distinct from tax or duty, had not been subjected to the
provisions of Section 43B prior to 01.04.1989, the liability incurred on
account of bottling fee during the accounting period relating to the
assessment year in question would not be subjected to Section 43B of the
said Act even if it be assumed that "fee" in its technical sense was a
specie of taxation. The Rajasthan High Court also placed reliance on the
Andhra Pradesh decision in Srikakollu Subba Rao and Co. v. Union of
India: 173 ITR 708 (AP) wherein the Andhra Pradesh High Court held
that market cess was not a tax and that the provisions of Section 43B had
no application to market cess. The said decision of the Rajasthan High
Court was taken in appeal by the revenue before the Supreme Court. The
decision of the Supreme Court is reported as Commissioner of Income
Tax v. McDowell and Company Ltd. (No.1): 314 ITR 167 (SC) which
affirmed the view taken by the Rajasthan High Court. It would however
ITR 58/1997 Page 13 of 41
be pertinent to mention that the revenue had not agitated the issue of
retrospectivity before the Supreme Court and therefore the Supreme
Court had not considered the same in Mc Dowell and Company Ltd.
(No.1) (supra).
15. Mr Mehta submitted that the decision of the Supreme Court in
India Cement Ltd. (supra) was not applicable to the present case.
According to him, the question in India Cement Ltd. (supra) was not
whether cess was a tax or not, but whether the levy of cess on royalty was
within the competence of the State Legislature. Therefore, according to
Mr Mehta, the decision of the Supreme Court in India Cement Ltd.
(supra) was clearly on an entirely different context and would not come
to the aid of the revenue in the present case.
16. Mr Mehta also drew our attention to the provisions of the Tamil
Nadu Panchayats Act, 1958 and, in particular, to sections 63, 64, 115,
116, 135 and 138 thereof to submit that the cess and cess surcharge under
Sections 115 and 116 of that Act were clearly not in the nature of a tax
keeping in mind the principle characteristics of a tax as mentioned in Om
Prakash (supra).
17. We shall first examine the issue as to whether the amendment
introduced by the Finance Act, 1988 in Section 43B(a) of the said Act
was clarificatory in nature or not. We have already noticed the argument
of the learned counsel for the revenue based on the Budget Speech of the
Finance Minister (1983-84) to indicate the purpose behind the
ITR 58/1997 Page 14 of 41
introduction of Section 43B by virtue of the Finance Act, 1983. We have
also set out the relevant portion of the memorandum explaining the
provisions in the Finance Bill, 1988. There is no doubt that in that
memorandum the expression used is that "as a matter of clarification" the
Bill provides that cess or fee by whatever name called, which have been
imposed by any statutory authority including a local authority, would also
be allowed as a deduction only if they were actually paid. This would
tend to give an impression that the amendment, whereby cess and fees
were specifically included in Section 43B(a), was clarificatory in nature.
However, that is put to rest by the concluding portion of paragraph 35 of
the said memorandum which makes it clear that the amendment would
take effect from 01.04.1989 and would accordingly apply to assessment
year 1989-90 and subsequent years. Clearly, the intent was not to make
the amendment retrospective. If we examine the `Notes on Clauses'
accompanying the Finance Bill, 1988, we find, inter alia, the following
notes with regard to clause 12 of the said Finance Bill, 1988 which sought
to amend Section 43B of the said Act:-
"Clause 12 seeks to amend section 43B of the Income-tax
Act relating to allow-ability of certain sums only on
actual payment.
Sub-clause (i) seeks to substitute existing clause (a) by a
new clause so as to extend the scope of the section to
cover any cess or fee, by whatever name called, payable
by the assessee under any law for the time being in
force."
(underlining added)
ITR 58/1997 Page 15 of 41
18. On going through the above extract, we find that it contains three
very important words "substitute", "new" and "extend". These words
indicate that the intention was to substitute the existing clause (a) of
Section 43B by a "new" clause with the object of "extending" the scope
of the section so as to cover any cess or fee by whatever name called.
From this, it can be deduced that the amendment was by way of
substitution and in order to extend the scope of the original section which,
as it originally stood, did not cover cess or fee. Therefore, this is also an
indication, that the amendment introduced in Section 43B(a) so as to
extend its application to cess or fee, by whatever name called, was not
clarificatory as suggested by the learned counsel for the revenue. The
Notes on Clauses also indicated that the amendments would take effect
from 01.04.1989 and would accordingly apply in relation to the
assessment year 1989-90 and subsequent years. We may also refer to the
Board Circular No.528 dated 16.12.1988 which was issued by the Central
Board of Direct Taxes explaining the substance of the provisions relating
to direct taxes in the Finance Act, 1988. Here, too, in paragraph 21.4,
there is clear indication that the amendments would come into force with
effect from 01.04.1989 and would apply in relation to assessment year
1989-90 and subsequent years. The said paragraph 21.4 reads as under:
"21.4 These amendments will come into force with
effect from 1st April, 1989, and will, accordingly, apply
in relation to assessment year 1989-90 and subsequent
years."
ITR 58/1997 Page 16 of 41
19. We have also taken note of the fact that the High Courts of Andhra
Pradesh, Madhya Pradesh and Rajasthan have all taken the view that the
amendment introduced in Section 43B(a) by virtue of the Finance Act,
1988 would be prospective in operation and would not apply to
assessment years prior to the assessment year 1989-90. Those decisions
have been rendered in Phoolchand Lalith Kumar and Co. (supra)
Mansukhlal Prahjibhai and Co. (supra), Dinesh Kumar Gordhanlal
(supra) and Udaipur Distillery Co. Ltd. (supra). In this backdrop, we
respectfully disagree with the view taken by the Calcutta High Court in
Orient Paper and Industries Ltd. (supra) to the effect that the said
amendment was clarificatory and was, therefore, retrospective in
operation.
20. We also make it clear that we agree with the submissions made by
Mr Mehta with regard to the Supreme Court decision in Allied Motors
(P) Ltd. (supra). That decision was rendered in entirely different
circumstances where the introduction of the proviso was regarded as a
remedial measure in aid of the assessees. This is certainly not the case
here and therefore the revenue would not be able to derive any benefit
from the ratio of the decision in Allied Motors (P) Ltd. (supra).
21. This takes us to the consideration of the issue as to whether cess is
the same thing as a tax and that even though the word "cess" was not
used in Section 43B(a) as it originally stood, it always included cess
inasmuch as tax was covered in the said provision. We find ourselves in
agreement with the submission made by Mr Mehta that the decision of
the Supreme Court in India Cement Ltd. (supra) would not be of any
ITR 58/1997 Page 17 of 41
help to the revenue inasmuch as the issue there was entirely different.
The focus in that decision was not on whether a cess was a tax or not but
whether levy of cess on royalty was within the competence of the State
Legislature. We also feel that the considerations with regard to cess in
that case were in the context of legislative competence of the State
Legislature to levy the cess on royalty which, by virtue of an explanation
to Section 115 of the Tamil Nadu Panchayats Act, 1958, were said to be
included in the meaning of land revenue. In that case, it was not in
dispute that the cess which the Madras Village Panchayat Act proposes to
levy was nothing but an "additional tax" and originally it was levied only
on land revenue, and that apparently land revenue would fall within the
scope of Entry 49 of List II in Schedule VII to the Constitution. The
Supreme Court however held that it could not be doubted that royalty
which was a levy or tax on the extracted mineral was not a tax or levy on
land alone and that if cess was charged on the royalty, it could not be said
to be a levy or tax on land and therefore, it could not be upheld as
imposed in exercise of jurisdiction under Entry 49 List II by the State
Legislature. The Court held that the legislature went beyond its
jurisdiction under Entry 49 List II and therefore the levy was clearly
without the authority of law.
22. These observations whereby there is some indication that cess has
been equated with tax have been sought to be relied upon by Mr
Sabharwal. However, we reiterate that the Supreme Court was not
exactly concerned with the question of whether a cess was a tax or not, in
ITR 58/1997 Page 18 of 41
all cases. It was generally concerned with the concept of cess as a part of
taxation. We must also keep in mind that the Supreme Court was
interpreting the Constitution as distinct from interpreting a provision of a
statute. That there is a different approach in interpreting the Constitution
and while interpreting a provision of an Act, is recognized by the
Supreme Court in India Cement Ltd. (supra) itself. The Supreme Court
made the following observations in this context:
"Courts of law are enjoined to gather the meaning of the
Constitution from the language used and although one
should interpret the words of the Constitution on the
same principles of interpretation as one applies to
ordinary law, these very principles of interpretation
compel one to take into account the nature and scope of
the Act which requires interpretation. It has to be
remembered that it is a constitution that requires
interpretation. Constitution is the mechanism under
which laws are to be made and not merely an Act which
declares what the law is to be. See the observations of
Justice Higgins in Attorney-General for the State of New
South Wales v. Brewery Employees Union of New South
Wales [1908] 6 CLR 469 at 611-12).
In In re Central Provincess and Berar Sales of Motor
Spirit and Lubricants Taxation Act, 1938 [1939] FCR 18,
Chief Justice Gwyer of the Federal Court of India relied
on the observations of Lord Wright in James v.
Commonwealth of Australia [1936] AC 578 and observed
that a Constitution must not be construed in any narrow
or pedantic sense, and that construction most beneficial
to the widest possible amplitude of its powers, must be
adopted. The learned Chief Justice emphasised that a
broad and liberal spirit should inspire those whose duty it
is to interpret the Constitution, but they are not free to
stretch or pervert the language of the enactment in the
ITR 58/1997 Page 19 of 41
interest of any legal or constitutional theory, or even for
the purposes of supplying omissions or correcting
supposed errors. A Federal Court will not strengthen, but
only derogate from, its position, if it seeks to do anything
but declare the law, but it may rightly reflect that a
Constitution of a country is a living and organic thing,
which, of all instruments, has the greatest claim to be
construed - 'it is better than it should live rather than that
it should perish'.
23. So, even if in a particular case, while interpreting the Constitution,
the Supreme Court may have regarded cess to be generally a part of
taxation, it does not mean that cess would be part of a tax when the said
word i.e., `tax' is used in an Act such as the Income Tax Act which needs
to be construed strictly. For this reason also, we feel that the Supreme
Court decision in India Cement Ltd. (supra) would not be of any use to
the revenue.
24. In Dewan Chand Builders and Contractors (supra), the Supreme
Court considered the concepts of cess, tax and fee in the backdrop of the
provisions of the Building and Other Construction Workers' Welfare
Cess Act, 1996. The Supreme Court was considering the core issue as to
whether the cess levied under the scheme of the said Cess Act was a fee
or a tax. In that context, the Supreme Court examined the concept of a
tax and fee in the following manner:
"25. The question whether a particular statutory impost is
a "tax" or "fee" has arisen as a challenge in several cases
before this Court, which in turn necessitated the
demarcation between the concepts of "cess", "tax" and
"fee". The characteristics of a fee, as distinct from tax,
ITR 58/1997 Page 20 of 41
were explained as early as in Commr., Hindu Religious
Endowments v. Sri Lakshmindra Thirtha Swamiar of Sri
Shirur Mutt [AIR 1954 SC 282] (generally referred to as
"Shirur Mutt case"). The ratio of this decision has been
consistently followed as a locus classicus in subsequent
decisions dealing with the concept of "fee" and "tax".
26. The Constitution Bench of this Court in Hingir
Rampur Coal Co. Ltd. v. State of Orissa [AIR 1961 SC
459 : (1961) 2 SCR 537] was faced with the challenge to
the constitutional validity of the Orissa Mining Areas
Development Fund Act, 1952, levying cess on the
petitioner's colliery. The Bench explained different
features of a "tax", a "fee" and "cess" in the following
passage: (Hingir Rampur case [AIR 1961 SC 459 :
(1961) 2 SCR 537] , AIR p. 464, para 9)
"9. ... The neat and terse definition of `tax' which has
been given by Latham, C.J., in Matthews v. Chicory
Mktg. Board [ (1938) 60 CLR 263 (Aust)] is often
cited as a classic on this subject. `A tax', said Latham,
C.J., `is a compulsory exaction of money by public
authority for public purposes enforceable by law, and
is not payment for services rendered'. In bringing out
the essential features of a tax this definition also
assists in distinguishing a tax from a fee. It is true that
between a tax and a fee there is no generic difference.
Both are compulsory exactions of money by public
authorities; but whereas a tax is imposed for public
purposes and is not, and need not, be supported by
any consideration of service rendered in return, a fee
is levied essentially for services rendered and as such
there is an element of quid pro quo between the
person who pays the fee and the public authority
which imposes it. If specific services are rendered to a
specific area or to a specific class of persons or trade
or business in any local area, and as a condition
precedent for the said services or in return for them
ITR 58/1997 Page 21 of 41
cess is levied against the said area or the said class of
persons or trade or business the cess is distinguishable
from a tax and is described as a fee. Tax recovered by
public authority invariably goes into the consolidated
fund which ultimately is utilised for all public
purposes, whereas a cess levied by way of fee is not
intended to be, and does not become, a part of the
consolidated fund. It is earmarked and set apart for the
purpose of services for which it is levied."
27. It was further held that: (Hingir Rampur case [AIR
1961 SC 459: (1961) 2 SCR 537], AIR pp. 465-66, para
13)
"13. ... It is true that when the legislature levies a fee
for rendering specific services to a specified area or to
a specified class of persons or trade or business, in the
last analysis such services may indirectly form part of
services to the public in general. If the special service
rendered is distinctly and primarily meant for the
benefit of a specified class or area the fact that in
benefiting the specified class or area the State as a
whole may ultimately and indirectly be benefited
would not detract from the character of the levy as a
fee. Where, however, the specific service is
indistinguishable from public service, and in essence
is directly a part of it, different considerations may
arise. In such a case it is necessary to enquire what is
the primary object of the levy and the essential
purpose which it is intended to achieve. Its primary
object and the essential purpose must be distinguished
from its ultimate or incidental results or
consequences. That is the true test in determining the
character of the levy."
28. On the basis of the above considerations, this Court
in Hingir Rampur case[AIR 1961 SC 459 : (1961) 2 SCR
537] , examined the scheme of the Act impugned in that
ITR 58/1997 Page 22 of 41
case in depth and opined that the primary and the
principal object of the Act was to develop the mineral
areas in the State and to assist in providing more efficient
and extended exploitation of its mineral wealth. The cess
levied did not become a part of the consolidated fund and
was not subject to an appropriation in that behalf. It went
into a special fund earmarked for carrying out the
purpose of the Act and thus, its existence established a
correlation between the cess and the purpose for which it
was levied, satisfying the element of quid pro quo in the
scheme. These features of the Act impressed upon the
levy the character of a "fee" as distinct from a "tax".
29. Recently in State of W.B. v. Kesoram Industries
Ltd. [(2004) 10 SCC 201] the Constitution Bench of this
Court was faced with a challenge to the constitutional
validity of the levy of cesses on coal-bearing lands, tea
plantation lands and on removal of brick earth. Relying
on the decision in Hingir Rampur Coal Co. Ltd. [AIR
1961 SC 459 : (1961) 2 SCR 537] , speaking for the
majority, R.C. Lahoti, J. (as His Lordship then was),
explained the distinction between the terms "tax" and
"fee" in the following words: (Kesoram Industries
case [(2004) 10 SCC 201] , SCC p. 332, para 146)
"146. ... The term cess is commonly employed to
connote a tax with a purpose or a tax allocated to a
particular thing. However, it also means an
assessment or levy. Depending on the context and
purpose of levy, cess may not be a tax; it may be a fee
or fee as well. It is not necessary that the services
rendered from out of the fee collected should be
directly in proportion with the amount of fee
collected. It is equally not necessary that the services
rendered by the fee collected should remain confined
to the person from whom the fee has been collected.
Availability of indirect benefit and a general nexus
ITR 58/1997 Page 23 of 41
between the persons bearing the burden of levy of fee
and the services rendered out of the fee collected is
enough to uphold the validity of the fee charged."
30. In the light of the tests laid down in Hingir
Rampur [AIR 1961 SC 459 : (1961) 2 SCR 537] and
followed in Kesoram Industries [(2004) 10 SCC 201] , it
is manifest that the true test to determine the character of
a levy, delineating "tax" from "fee" is the primary object
of the levy and the essential purpose intended to be
achieved."
xxxxx xxxxx xxxxx xxxxx
"35. Viewed from this perspective, the inevitable
conclusion is that in the instant case there does exist a
reasonable nexus between the payer of the cess and the
services rendered for that industry and therefore, the said
levy cannot be assailed on the ground that being in the
nature of a "tax", it was beyond the legislative
competence of Parliament."
25. We must also keep in mind the decision of the Supreme Court in
Om Prakash Agarwal (supra) where the three principle characteristics of
tax, as recognized in Commissioner, Hindu Religious Endowments v.
Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt: AIR 1954 SC
282 have been set out in the following manner:
"(i) that it is imposed under statutory power without the
taxpayer's consent and the payment is enforced by law;
(ii) that it is an imposition made for public purposes
without reference to any special benefit to be conferred
on the payer of the tax; and
ITR 58/1997 Page 24 of 41
(iii) that it is a part of the common burden, the quantum
of imposition upon the taxpayer depending generally
upon the capacity of the taxpayer to pay."
26. The Supreme Court in Om Prakash Agarwal (supra) held that the
cess under Section 3 of the Haryana Rural Development Fund Act, 1983
fell within the description of a tax because it fulfilled those
characteristics. In this context, the Supreme Court observed as under:
"As mentioned earlier, a cess collected under section 3 of
the Act is no doubt required to be credited to the Fund
constituted under section 4(1)of the Act. The Fund,
however, vests in the State Government and not in the
municipality or a marketing committee or any other local
authority having limited functions specified in the
enactment under which it is constituted. The State
Government is entitled under sub-section (5) of section 4
of the Act to spend the cess credited to the Fund in the
rural areas, in connection with the development of roads,
hospitals, means of communication, water supply,
sanitation facilities and for the welfare of agricultural
labour or for any other scheme approved by the State
Government for the development of the rural areas. This
sub-section authorises the State Government to spend the
money credited to the Fund virtually on any object which
the State Government considers to be the development of
rural areas. The definition of the expression " rural area "
in section 2(h) of the Act which is extracted above is as
vague as it can be. It means an area the population of
which does not exceed 20,000 persons. It need not
necessarily be a local area as it is ordinarily understood.
Ordinarily, a local area means a municipal corporation, a
town municipality, a panchayat, a notified area, a sanitary
board, etc. Any geographical area the population of
which does not exceed 20,000 persons can be
ITR 58/1997 Page 25 of 41
conveniently brought within the scope of section 2(h) of
the Act. If it is understood that way, even urban areas can
be divided into areas with population not exceeding
20,000 and labelled as rural areas. Even if we exclude
from the scope of the expression " rural area ",a town or a
city having a population exceeding 20,000 persons, the
area in which the amount credited to the Fund can be
spent is almost 90 percent. of the total area of the State of
Haryana. The amount may be spent on any purpose
which the State Government considers to be a purpose
intended for the development of the rural areas. There is
no specification in the Act that the amount or a
substantial part of the amount collected by way of cess
under section 3 of the Act will be spent on any public
purpose within the market area where the dealer is
carrying on his business. The purposes over which the
Fund can be spent are the same purposes on which any
amount collected by way of tax is spent by any State and
there is nothing which is done specially to benefit the
dealer. When any amount is spent from the Fund, the
interest of the dealers is not at all kept in view even
generally. There is no other restriction imposed on the
manner in which the Fund can be spent. The cess,
therefore, partakes of the character of a part of the
common burden which has to be levied and collected
only as a tax. A dealer who pays the cess under the Act
may as one of the members of the general public derive
some benefit from the expenditure of the Fund incurred
by the State Government. The benefit so derived by him
is merely incidental to the fact that he happens to be a
person residing in the State of Haryana. It is not the
same as the benefit which a dealer in a market area would
derive by the expenditure of its funds by a marketing
committee or as the benefit which a person living in a
town or a city would derive by the expenditure incurred
by the municipality concerned. The fact that the Fund is
created under the Act is a mere cloak to cover the true
ITR 58/1997 Page 26 of 41
character of the levy in question. There is practically no
difference between the Consolidated Fund which vests in
the State and the Fund which also vests in the State.
Amounts credited to the Consolidated Fund and the
amounts credited to the Fund can both be spent
practically on any public purpose almost throughout the
State. In such a situation, it is difficult to hold that there
exists any correlation between the amount paid by way of
cess under the Act and the services rendered to the
person from whom it is collected. The impost in these
cases lacks the essential qualification of a fee, namely,"
that it is absolutely necessary that the levy of fees should,
on the face of the legislative provision, be correlated to
the expenses incurred by Government in rendering
services." (Sri Shirur Mutt's case [1954] SCR1005, AIR
1954 SC 282). In fact, there is no correlation at all."
27. But, in the present case, the cess and cess surcharge do not fall
within the characteristics of a tax. As pointed out in Dewan Chand
Builders and Contractors (supra), in the case of a cess there exists a
reasonable nexus between the payer of a cess and the services rendered.
In Dewan Chand Builders and Contractors (supra), the Supreme Court
had relied on Hingir Rampur Coal Co. Ltd. v. State of Orissa: AIR 1961
SC 459 wherein it was recognized that there was really no generic
difference between a tax and a fee inasmuch as both are compulsory
exactions of money by public authority. However, where a tax was
imposed for public purposes and need not be supported by any
consideration of service rendered in return, a fee was levied essentially
for services rendered and as such there was an element of quid pro quo
between the person who pays the fee and the public authority which
imposes it. It was further observed in Hingir Rampur Coal Co. Ltd.
ITR 58/1997 Page 27 of 41
(supra) that if specific services are rendered to a specific area or to a
specific class of persons or trade or business in any local area and is a
condition precedent for the said services or in return for them, cess is
levied against the said area or the said class of persons or trade or
business, the cess is distinguishable from a tax and is described as a fee.
Furthermore, tax recovered by a public authority invariably goes into the
consolidated fund which is ultimately utilized for all public purposes
whereas a cess levied by way of a fee is not intended to be and does not
become a part of the consolidated fund. It is earmarked and set apart for
the purpose of services for which it is levied. It is important to notice that
in Dewan Chand Builders and Contractors (supra), the Supreme Court
relied upon the test laid down in Hingir Rampur Coal Co. Ltd. (supra)
which was followed in State of West Bengal v. Kesoram Industries Ltd.:
(2004) 10 SCC 201 wherein the Supreme Court observed that the term
"cess" was commonly employed to connote "a tax with a purpose" or "a
tax allocated to a particular thing". In that very decision, the Supreme
Court recognized the fact that depending on the context and purpose of
levy, a cess may not be a tax.
28. Keeping these tests in mind, if we examine the provisions of the
Tamil Nadu Panchayats Act, 1958, it will immediately become clear that
the cess under Section 115 of the Tamil Nadu Panchayats Act, 1958 and
the cess surcharge under Section 116 thereof cannot be regarded as a tax.
Section 63 spells out the duty of the Panchayat to provide for certain
matters. It stipulates that it shall be the duty of a Panchayat within the
ITR 58/1997 Page 28 of 41
limits of its funds, to make reasonable provision for carrying out the
requirement of the village or town in respect of the matters specified
therein. Section 64 enables the Panchayat to make provisions, as it thinks
fit, for carrying out the requirements of the village or town in respect of
the matters specified in that section. Under Section 115 of the Tamil
Nadu Panchayats Act, 1958, a local cess is to be levied in every
panchayat development block at the rate of 45 naye paise on every rupee
of land revenue payable to the Government in respect of any land for
every fasli. Sub-section (4) of Section 115 spells out the manner in which
the proceeds of the local cess so collected in every panchayat
development block are to be credited. The said sub-section (4) reads as
under:
"(4) (a) Out of the proceeds of the local cess so collected
in every panchayat development block, a sum
representing four-ninths of the proceeds shall be credited
to the Panchayat Union (Education) Fund.
(b) Out of the proceeds of the local cess collected in
every panchayat town in a panchayat development block,
a sum representing two-ninths of the said proceeds shall
be credited to the town panchayat fund.
(c) Out of the balance of the proceeds of the local cess
collected in the panchayat development block, such
percentage as the panchayat union council may fix shall
be credited to the village panchayat fund, and the
percentage shall be fixed so as to secure as nearly as may
be that the total income derived by all the village
panchayats in the panchayat union does not fall short of
an amount calculated at 20 naye Paisa for each individual
of the village population in the panchayat union.
ITR 58/1997 Page 29 of 41
(d) The balance of the proceeds of the local cess
collected in the panchayat development block shall be
credited to the funds of the panchayat union council."
29. From the above it is apparent that the proceeds of the local cess are
to be credited in distinct shares to the Panchayat Union (Education) Fund,
the Town Panchayat Fund, the Village Panchayat Fund and the Panchayat
Union Council Fund. It is apparent that the cess collected under the said
Tamil Nadu Panchayats Act, 1958 does not become part of the
consolidated fund but becomes part of the special funds under the Tamil
Nadu Panchayats Act, 1958. Thus, an essential feature of a tax is non-
existent in the case of a cess and cess surcharge under the Tamil Nadu
Panchayats Act, 1958.
30. Section 135 describes the Panchayat Union (General) Fund and it
stipulates that the said fund shall, inter alia, include such part of the local
cess collected in the panchayat development block as remains after
crediting to the Panchayat Union (Education) Fund, the Town Panchayat
Fund and the Village Panchayat Fund under Section 115. It also includes
the local cess surcharge collected in the panchayat development block
under Section 116. Similar provisions are made with regard to the
Panchayat Union (Education) Fund under Section 136 and of the Town
Panchayat and Village Panchayat Funds under Section 137 of the Tamil
Nadu Panchayats Act, 1958. The expenditure is governed, inter alia, by
Section 138 out of the monies received by the Panchayat Union Council,
the Village Panchayat or the Town Panchayat. The expenditure from the
ITR 58/1997 Page 30 of 41
Panchayat Fund and the Panchayat Union Fund is to be defrayed in the
manner indicated in Section 139 of the Tamil Nadu Panchayats Act,
1958. In other words, none of the trappings of a tax as explained in
Hingir Rampur Coal Co. Ltd. (supra), Kesoram Industries Ltd. (supra)
and Dewan Chand Builders and Contractors (supra) existed in the
present case. Therefore we are unable to agree with the submission of
learned counsel for the revenue that the cess under Section 115 and cess
surcharge under Section 116 of the Tamil Nadu Panchayats Act, 1958
could be regarded as a tax for the purposes of Section 43B. That being
the case, the claim of expenditure on the basis of accrued liability to pay
cess and cess surcharge under the Tamil Nadu Panchayats Act, 1958
could not be disallowed by the revenue authorities by invoking Section
43B of the said Act as it was applicable to the assessment year 1985-86.
Therefore, question No.1 is answered in the affirmative, in favour of the
respondent/assessee and against the revenue.
Re: Question No.2
31. The respondent/assessee had in the previous year pertaining to the
assessment year 1985-86, collected a sum of Rs.26,10,483/- by way of
deposits from non-governmental buyers of cement towards possible levy
of sales tax on packing and freight charges. The assessing officer treated
the said amount of Rs.26,10,483/- as a trading receipt and held that no
deduction under Section 43B was allowable to the assessee inasmuch as
the said amount had not been paid to the Government as tax. The
assessing officer therefore added the said amount to the assessable
ITR 58/1997 Page 31 of 41
income of the respondent/assessee. The Commissioner of Income Tax
(Appeals) confirmed the assessing officer's order in treating the said sum
as a trading receipt at the hands of the respondent/assessee. The Income
Tax Appellate Tribunal however deleted the said addition by holding that
the said deposits amounting to Rs.26,10,483/- could not be treated as a
trading receipt and therefore could not have been included in the
assessable income of the respondent/assessee. The tribunal had placed
reliance on the decision of the Supreme Court in the case of State of
Mysore v. Mysore Spinning and Manufacturing Co. Ltd.: [1960] 11
STC 734 (SC) as also on the decision of a Single Judge of the Madras
High Court in the assessee's own case Dalmia Cement (Bharat) Ltd. v.
Deputy Commercial Tax Officer, Lalgudi & Anr.: [1989] 73 STC 167
(Mad). The tribunal distinguished the cases cited on behalf of the
revenue, namely, (i) Chowringhee Sales Bureau P. Ltd. v.
Commissioner of Income Tax: 87 ITR 542 (SC); and (ii) Sinclair
Murray and Co. Pvt. Ltd. v. Commissioner of Income Tax: 97 ITR 615
(SC).
32. The respondent manufactured and marketed cement under the
provisions of the Cement Control Order, 1982 under which prices were
fixed. A retention price for freight was permitted under the Order of
F.O.R. destination sales and the manufacturer was also permitted to
include packing charges, excise duty, etc. in the price. The impact of the
Cement Control Order, 1982 on the scheme of exclusion provided under
Rule 6(c) of the Tamil Nadu General Sales Tax Rules, 1959 had been a
ITR 58/1997 Page 32 of 41
matter of continuous controversy. The question whether sales tax could
be levied on packing charges and freight was pending decision of the
Supreme Court in the case of State of Tamil Nadu v. Ramco Cement
Distribution Company (P) Ltd.: (Civil Appeal Nos. 5306-5336/1985
and other connected matters). Since the question had not been
determined finally, the respondent informed its non-governmental buyers
that they were compelled to provide for sales tax liability on freight and
packing charges and thereby collected a deposit for this purpose from the
said buyers. During the relevant previous year, the respondent collected
security deposit of Rs.9,58,967/- and Rs.16,51,516/- towards possible
levy of sales tax on freight and packing charges respectively. These
amounts were included in the balance sheet of the company as security
deposits to cover the possible levy of sales tax on freight element and
packing charges in cement sale. It also needs to be pointed out that each
invoice of the respondent in respect of its cement sales carried the
following footnote:
"Security deposit towards possible levy of sales tax on
packing charges and freight refundable in the event of the
levy of sales tax on packing charges and freight being
ultimately held to be not justified."
33. The said contingency deposit collected on a refundable basis was
separately ledgerised in the buyers' accounts and the buyers were treated
as depositors. The understanding between the respondent/assessee and its
buyers was that in case the levy was upheld by the Supreme Court, the
deposits would be paid to the Government. On the other hand, if the levy
was not upheld by the Supreme Court, the respondent/assessee was under
ITR 58/1997 Page 33 of 41
the contractual liability to refund the same to the buyers/depositors. It
was therefore the case of the respondent/assessee that the deposits were
obtained bona fide with a view to cover the liability to sales tax on
packing charges and freight. Furthermore, such deposits could not be
considered to be trading receipts or collections by way of sales tax. But,
the assessing officer treated the same as a trading receipt and made the
addition. The Commissioner of Income Tax (Appeals), as mentioned
above, confirmed the addition made by the assessing officer by applying
the decisions of the Supreme Court in Chowringhee Sales Bureau P.
Ltd. (supra) and Sinclair Murray and Co. Pvt. Ltd. (supra). The
tribunal, as pointed out above, set aside the said decision of the
Commissioner of Income Tax (Appeals) and held that the deposits could
not be regarded as the trading receipts of the respondent/assessee. On
facts, the tribunal concluded that the contingency deposits were collected
on refundable basis and were also separately ledgerised in the
respondent's account and the buyers were treated as depositors.
Consequently, the tribunal held that when the amounts are credited in the
separate accounts of the buyers and held as deposits and the parties are
treated as depositors, the money was collected on the express
understanding of payment to Government or refund to the buyers in case
the levy was upheld or not upheld by the Supreme Court. The
respondent/assessee clearly held the said monies as a mere custodian. It
did not become part of the trading receipt of the respondent/assessee nor
could it be regarded as a collection by way of tax. The tribunal had
placed reliance on the assessee's own case decided by the Madras High
ITR 58/1997 Page 34 of 41
Court in Dalmia Cement (Bharat) Ltd. (supra). Reliance was also
placed on the Supreme Court decision in the case of Mysore Spinning
and Manufacturing Co. Ltd. (supra). The decision of the Supreme Court
in Chowringhee Sales Bureau P. Ltd. (supra) and Sinclair Murray and
Co. Pvt. Ltd. (supra) which had been referred to on behalf of the revenue
were held to be distinguishable on facts.
34. Before us, Mr Sabharwal appearing on behalf of the revenue once
again placed reliance on the decisions in Chowringhee Sales Bureau P.
Ltd. (supra) and Sinclair Murray and Co. Pvt. Ltd. (supra) as also on the
decision of the Kerala High Court in Commissioner of Income Tax v.
United Cardamom Auctioners: 295 ITR 574 (Ker). On the other hand,
Mr Ravi Mehta appearing on behalf of the respondent placed strong
reliance on the Constitution Bench decision of the Supreme Court in the
case of Mysore Spinning and Manufacturing Co. Ltd. (supra). He also
referred to Dalmia Cement (Bharat) Ltd. (supra) and Siddheshwar
Sahakari Sakhar Karkhana Ltd. v. Commissioner of Income Tax: 270
ITR 1 (SC).
35. In Chowringhee Sales Bureau P. Ltd. (supra), the appellant
company was a dealer in furniture and also acted as an auctioneer. In
respect of sales effected by the assessee as auctioneer, it realized a sum of
Rs.32,986/- as sales tax in the year in question. The said amount was
credited separately in its account books under the head "sales tax
collection account". The appellant company did not pay the amount of
sales tax to the actual owner of the goods nor did it deposit the amount so
realized by it as income tax in the State exchequer because it took the
ITR 58/1997 Page 35 of 41
position that the statutory provision creating that liability upon it was not
valid. The appellant also did not refund the amount to the persons from
whom it had been collected. Importantly, in the cash memos issued by
the appellant company to the purchasers in the auction sales, the appellant
company was shown as the seller. In this backdrop, the Supreme Court
held that the sum of Rs.32,986/- realized as "sales tax" by the appellant
company in its character as an auctioneer formed part of the trading or
business receipts. The Supreme Court further held that the fact that the
appellant credited the amount received "as sales tax" under the head
"sales tax collection account" did not make any material difference as the
Court observed that 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 a trading receipt. It was also held that the
appellant company would, however, be entitled to claim a deduction of
the amount as and when it paid it to the State Government. What is
important to note from the above decision is that the money that was
collected by Chowringhee Sales Bureau to the extent of Rs.32,986/- was
realized by it "as sales tax". It is in this backdrop that the Supreme Court
held that the said sum was part of the trading or business receipts of
Chowringhee Sales Bureau.
36. The decision in Chowringhee Sales Bureau P. Ltd. (supra) was
followed and applied in Sinclair Murray and Co. Pvt. Ltd. (supra). In
that case, during the relevant year, the appellant company had sold jute in
ITR 58/1997 Page 36 of 41
Orissa to certain mills for being used in Andhra Pradesh and "charged
sales tax" under a separate head in the bill as "sales tax: buyer's
account.....to be paid to the Orissa Government". The sales tax was
however not paid to the Orissa Government on the ground that the sales
were inter-state sales. The Income Tax Appellate Tribunal held that
where a dealer collected sales tax under Section 9B(3) of the Orissa Sales
Tax Act, 1947, as it then stood, the amount of tax did not form part of the
sale price and the dealer did not acquire any beneficial interest therein
and that the sum of Rs.7,14,398/- collected by the appellant did not form
part of its total income. However, the Calcutta High Court, on a
reference, held that the sales tax collected was part of the trading receipt
and was to be included in the appellant's total income. The Supreme
Court, in Sinclair Murray and Co. Pvt. Ltd. (supra), affirmed the
decision of the High Court and held that the amount collected by the
appellant company "as sales tax" constituted its trading receipt and had to
be included in its total income. It further held that if and when the
appellant company paid the amount collected to the State Government or
refunded any part thereof to the purchaser, the appellant would be entitled
to claim deduction of the sum so paid or refunded. In Sinclair Murray
and Co. Pvt. Ltd. (supra), the Supreme Court also referred to the
Constitution Bench decision in George Oakes (Private) Ltd. v. State of
Madras: [1961] 12 STC 476 (SC) and referred to the following
observations therein:
" We think that these observations are apposite even in
the context of the provisions of the Acts we are
considering now, and there is nothing in those provisions
ITR 58/1997 Page 37 of 41
which would indicate that when the dealer collects any
amount by way of tax, that cannot be part of the sale
price. So far as the purchaser is concerned, he pays for
the goods what the seller demands, viz., price even
though it may include tax. That is the whole
consideration for the sale and there is no reason why the
whole amount paid to the seller by the purchaser should
not be treated as the consideration for the sale and
included in the turnover. "
37. It is important, once again, to notice the expression used in the
above extract. It has specific reference to the dealer collecting any
amount "by way of tax". It is obvious that when a dealer collects an
amount by way of tax, it is part of the sale price. Therefore, that amount
would have to be included in the turnover.
38. But the facts of the present case are different. Here, the deposits
that were received by the respondent/assessee were neither collected "as
sales tax" nor were they collected "by way of tax". They were simple
deposits towards possible levy of sales tax on packing charges and
freight. The footnote of each invoice specifically mentioned that the
security deposit towards possible levy of sales tax on packing charges and
freight was refundable in the event of the levy of sales tax on packing
charges and freight being ultimately held to be not justified.
39. This takes us to consider the decision of a Constitution Bench of
the Supreme Court in Mysore Spinning and Manufacturing Co. Ltd.
(supra). In the context of the provisions of Section 11 of the Mysore
Sales Tax Act, 1948, the question arose whether amounts received from
purchasers by a registered dealer merely as deposits to be refunded to
ITR 58/1997 Page 38 of 41
purchasers if the sales were held not liable to tax could be regarded as
"collection by way of tax". In that case, the assessee, a registered dealer,
received certain amounts from its constituents merely by way of deposits
on the express understanding or undertaking that the monies would be
refunded to the constituents if the assessee was held not liable to include
the relevant sales in its taxable turnover. The assessee held the amounts
as a mere custodian. The Supreme Court held that the fact that fiscal
control of the said amounts passed from the depositors to the assessee did
not render the receipt a "collection by way of tax" of any amount in the
context of Section 11(2) of the Mysore Sales Tax Act, 1948. The
Supreme Court, inter alia, held as under:-
".....We have already set out the questions referred,
which would clearly indicate that the amounts were
received by the Cement Marketing Co. and by the
Mysore Spinning and Manufacturing Co. and the
Minerva Mills Ltd. only as "a deposit" to cover a possible
contingency of these companies being held liable to pay
the tax. That this was the real nature of the transaction
was never in dispute. Indeed even the Commissioner of
Sales Tax in making the reference in the three cases
made it clear that the amounts were received by the
companies on the definite understanding and condition
that they were to be held only "as deposits" to be
refunded when the company in question was held not
liable to include the relevant sales in its taxable turnover.
The construction on which the Sales Tax Authorities
proceeded was that the Act made no difference between
one type of receipt and another, and that any receipt of
money by a dealer from the purchaser was a "collection
by way of tax" within s. 11(2) of the Act, provided it had
some relation to sales tax, and that it mattered not that the
receipt was merely a deposit by the payer carried to
ITR 58/1997 Page 39 of 41
suspense account, the amount being received on the
express undertaking and definite condition that the same
would be refunded in the event of the dealer being held
not liable to sales tax on the transaction in regard to
which the "deposit" was made. We are unable to agree in
this construction of the expression "collection" occurring
in s. 11(2) of the Act. Where an amount is received
merely by way of deposit, on the express understanding
or undertaking as in these cases, the company held the
money as a mere custodian, and on the fulfilment of the
condition became a trustee for the depositor. It is
sufficient to state that when once the tax authorities
determined that the proceeds of the sales in question were
not within the taxable turnover of the company, the
beneficial ownership became vested in the depositors and
the company ceased to have any right to continue to hold
the moneys. The fact that the physical control of the
moneys passed from the "depositor" to the "dealer" did
not render the receipt a "collection" within s. 11(2) of the
Act."
40. From the above, it is apparent that a deposit of the kind in the
present case cannot be regarded as either a collection `by way of tax' or
`as sales tax'. That being the position, the said deposits, to the extent of
Rs.26,10,483/-, cannot be treated as trading receipts. The tribunal has
correctly held that the decision of the Supreme Court in Mysore Spinning
and Manufacturing Co. Ltd. (supra) would be applicable and those in
Chowringhee Sales Bureau P. Ltd. (supra) and Sinclair Murray and Co.
Pvt. Ltd. (supra) are distinguishable and not applicable to the facts of the
present case. Consequently, question No.2 is answered in the affirmative,
in favour of the assessee and against the revenue.
ITR 58/1997 Page 40 of 41
Re: Question No.5
41. Insofar as this question is concerned, we feel that, truly speaking,
no question of law as such arises for our consideration. The only issue
before the tribunal was whether the estimate of advance tax submitted by
the assessee was genuine and bona fide and whether the explanations
tendered by the assessee with regard to the estimate of advance tax were
reasonable or not. The tribunal has come to the conclusion that the
estimate furnished by the assessee was reasonable and bona fide and
therefore no interest under Section 216 could be charged. We are of the
views that the finding returned by the tribunal was one of fact and no
question of law, as such, arises for our consideration. Consequently, we
refrain from answering this question and return the same unanswered.
Conclusion
42. In view of the foregoing discussion, question Nos. 3, 4 and 5 are
returned unanswered. Question Nos. 1 and 2 are answered in the
affirmative in favour of the assessee and against the revenue. The
reference stands answered accordingly.
ACTING CHIEF JUSTICE
V.K. JAIN, J.
JULY 23, 2013
pk
ITR 58/1997 Page 41 of 41
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