All too often, indirect taxes are levied on companies, which are collected from customers to be passed on to the government. At times, litigation may arise where the company challenges the validity of the tax. However, pending such litigation, the company may continue to collect the tax from its customers.
The question whether the tax so collected by the company could be treated as its income has been the subject matter of litigation. It is generally contended by the company concerned that the amount collected is in the nature of a deposit because it would be refundable to the customers if the company succeeds in its litigation.
This issue has been debated in several cases. In CIT v Hindustan Housing and Land Department Trust (161 ITR 524 (SC)), the assessee’s lands were acquired. The land acquisition officer awarded compensation. The assessee, dissatisfied with the quantum, preferred an appeal to the arbitrator. The compensation was enhanced. This amount was allowed to be withdrawn on the assessee furnishing security. The enhanced income was assessed to tax as business income. The High Court answered the question against the revenue. The Supreme Court held that this case was one where the right to receive the amount is in dispute and that the High Court was right.
CIT v Madurai Soft Drinks P Ltd (241 ITR 229) dealt with the question whether the deposits received by the assessee, a manufacturer of soft drinks, from its customers for the bottles, constituted its income. The court held that the deposits were not meant to be consideration for the sale, but as deposits only and, therefore, not taxable. In CIT v South India Sugars Ltd (248 ITR 92), the assessee, engaged in the manufacture of sugar, collected an excess amount from buyers on sale of levy sugar. The amounts were held in a suspense account by virtue of interim orders, which permitted the assessee to do so subject to certain conditions. The court held that it could not be characterised as a trading receipt.
The issue whether the collection of sales tax, which is kept in a contingency deposit has been decided in CIT v Southern Explosives Co (242 ITR 107). This decision is directly on the point of collection of sales tax, which is kept as a contingency deposit. Almost all the decisions that are on this point have been considered in this case. In Sundaram Finance Ltd v CIT (303 ITR 364), it has been held that this is no longer a debatable issue.
In Dalmia Cement (Bharat)Ltd v CTO (73 STC 167), it was held that there was no question of the deposits being paid over forthwith to the government. The money had been collected by way of deposit to meet a contingency where the transactions between the petitioners and the buyers were held to be liable to tax. The petitioners were answerable for the deposits only to the customers.
Therefore, neither withdrawal of enhanced compensation kept as a deposit subject to conditions ordered by a court, or deposits kept by soft drinks manufacturers for return of bottles are cases similar to collection of contingency deposit of what might be of a tax liability. The nature of this deposit is clearly different.
In the soft drink manufacturer’s case, it is clearly only a case of deposit and not intended to be anything else. In the case of the owner of the acquired lands, he did not get any right to what he withdrew since he gave security for withdrawal of the amount. Similarly, in the sale of levy sugar at an enhanced price hedged by conditions imposed by a court, cannot also be treated as a taxable receipt. Therefore, they stand on a different footing from cases where amounts representing sales tax liability are retained as contingency deposits regardless of whether they are refunded subsequently.
The latest decision on this point is of the Madras High Court in CIT v Pioneer Press P Ltd (308 ITR 154). The facts in this case were that the assessee was engaged in offset printing. It collected 5.4% on 70% of the works contracts in terms of section 3-B of the Tamil Nadu General Sales Tax Act, 1959, read with rules 6-A and 6-B of the Tamil Nadu General Sales Tax Rules, 1959.
There was an understanding between the parties that if the tax became payable, then it would be paid out of the contingency deposit, if not, the amount would be refunded. In the proceedings under the 1956 Act also, it was accepted that what was collected by the assessee was in the nature of a contingency deposit. According to the assessee, the contingency deposit collected during the year relevant to the assessment year was not a trading receipt but only a deposit.
The assistant commissioner held that whether it was shown as a contingency deposit account or a suspense account, it made no difference and the collections formed part of the trading receipt only. The commissioner (appeals) held that since the levy of tax was uncertain, this contingency deposit was collected subject to refund. The tribunal held that the amount in dispute was a contingency deposit and there was an associated liability to refund it. It also held that when the liability to refund exists, it should not be taken as income. Therefore, it was not a trading receipt.
On appeal, the court held that the amounts collected by the assessee were amounts, which were meant to be utilised for meeting its tax liability. The fact that at that time the relevant provision was under challenge did not make a difference in so far as the assessee was concerned.
In CIT v South India Sugars Ltd (248 ITR 92), the assessee was permitted by orders of the court to collect the excess amount, but this permission was hedged by conditions. Similarly, in CIT v Hindustan Housing and Land Development Trust (161 ITR 524 (S.C.)), the amount was deposited in court and the assessee was permitted to withdraw it on furnishing a bank guarantee.
However, in the case of Pioneer Press P Ltd, since the assessee had collected the amounts only to meet the tax liability, the amount formed part of the assessee’s income. If and when the amounts collected were refunded to the persons from whom the collection had been made, the assessee could claim deduction in the year in which such refund is granted.
The amount was collected towards meeting what the assessee thought at that time, was a statutory liability. It was shown as amounts due from sundry creditors. It was not collected pursuant to any order of a court. The aforesaid decision of the Madras High Court seemed to be in conformity with the preponderant judicial view. Hence, it is likely to be upheld by the Supreme Court.
The author is advocate, Supreme Court