(Appeal by certificate from the judgment and order, dated November 22, 1982, of the Madras High Court in T.C. No. 1324 of 1977).

Income-tax---

----Income---Remission of liability---Assessee collecting amounts from purchasers towards possible liability to sales tax---Amounts collected deposited with Government ---Assessee allowed deduction---Provisions relating to liability to sales tax struck down by High Court-- -Assessee obtaining refund from Government of sales tax paid---Such refund is income liable to tax ---Assessee would be entitled to claim deduction of amount of refund received from Government as and when same is refunded to purchasers---Indian Income Tax Act, 1961, S.41---[CIT v. Thirumlaiswamy Naidu and Sons (1984) 147 ITR 657 reversed].

The assessee in the course of sale of its products collected amounts towards possible liability to sales tax from the purchasers. The amounts collected as sales tax were deposited by the assessee with the Government and the assessee was allowed deduction of the same. The provisions relating to sales tax were under challenge and ultimately the provisions were struck down by the High Court. Consequently, the assessee obtained refund of the amount of sales tax deposited with the Government. The Income-tax Officer held that the refund received by the assessee was taxable trading profit for the relevant year by reason of section 41(1) of the Income Tax Act, 1961. The Tribunal, however, held that the said refund amount could not be subjected to tax as section 41(1) would not apply to the case. On a reference, the High Court held that the refund received was not taxable income of the assessee under section 41(1). On appeal to the Supreme Court:

Held, reversing the decision of the High Court, that the sales tax collected by the assessee had to be treated as its income and any payment of sales tax made by the assessee was equally liable to be deducted from its profits. If any deduction was given from the assessee's income, and later the same was refunded to the assessee, the refund would have the character of a revenue receipt. The amount of sales tax refunded to the assessee by the Government was a revenue receipt liable to tax under the express provisions of section-410) of the Act. However, the assessee would be entitled to claim deduction of the amount of refund of sales tax received from the Government as and when the same was refunded to the purchasers.

CIT v. Thirumlaiswamy Naidu and Sons (1984) 147 ITR 657 reversed.

Chowringhee Sales Bureau P. Ltd. v. CIT (1973) 87 ITR 542: (1973) 31 STC 254 (SC) ref.

K.N. Shukla, Senior Advocate (T.C. Sharma, B.K. Prasad and C. Radhakrishnan, Advocates with him) for Appellant.

Mrs. Janaki Ramachandran, Advocate for Respondent.

JUDGMENT

The question referred in this case is as under see (1984) 147 ITR 657 (page 663):

"Whether, on the facts and to the circumstances of the case, the Tribunal was justified in deleting the sum of Rs.1,37,379 from the taxable trading receipt of the assessee for 1974-75?"

The assessee in the course of sale of its products collected sales tax from the purchasers. The assessee, in its turn, was assessed under the Central Sales Tax Act, and paid the tax The sales tax collected by the assessee has to be treated as its income. according to the ruling of this Court in the case of Chowringhee Sales Bureau (Pvt.), Ltd., v. CIT (1973) 87 ITR 542. Any payment of sales tax made by the assessee was equally liable to be deducted from the profits made by the assessee. In this case, the assessee had actually made the payment of sales tax under the provisions of the Central Sates Tax Act. Those provisions were under challenge and ultimately were struck down by the Madras High Court. The assessee got back an amount of Rs.1,37,379 as refund. The entire amount of sales turnover of the assessee inclusive of the amount of the tax collected was clearly includible in the assessee's taxable income. If any deduction was given from that income and later the same was refunded back to the assessee, the refund will have the character of revenue receipt. It has to be treated as a receipt on the revenue account and has to be assessed as such. The positi6n has been placed beyond doubt by the express provisions of section 41(1) of the Income Tax Act.

The next question is if the assessee returns any portion of the amount to its customers, will it still be liable to pay tax on the entire amount. Admittedly, the assessee had not refunded any part of this amount of Rs.1,37,379 to any one of its customers in the year of account. As and when such refund is made, the assessee will be entitled to claim deduction.

We are of the view that the Tribunal was in error in deleting the amount from the trading receipt of the assessee from the assessment year 1974-75. The question is, therefore, answered in the negative and in favour of the Revenue.

The appeal is allowed. There will be no order as to costs.

M.B.A./1824/FCAppeal allowed.