1. The appeals are by the revenue. The assessee-firm was selling cotton to Chunilal Pranjivandas & Co., Hubli, who had their head office at Bombay. The sales tax liability on these sales had not been settled. An agreement was entered into between the assessee-firm and Chunilal Pranjivandas & Co. in September 1968. The business transaction between the two concerns had been arranged in such a way that the second party was paying to the assessee not the full sale price but something less to provide for sales tax. The Mysore High Court had held that Chunilal Pranjivandas & Co. would not be liable to sales tax. Hence, Chunilal Pranjivandas & Co. had, therefore, to refund to the assessee that part of the sale/purchase price, which had earlier been retained by them.
The assessee and Chunilal Pranjivandas & Co. agreed that the amount should be kept as a deposit with the latter at current bank rate of interest. If as a result of any change of law Chunilal Pranjivandas & Co. was made liable to pay sales tax, the assessee was to pay equivalent amounts to Chunilal Pranjivandas & Co. out of the deposit standing to the credit of the assessee with Chunilal Pranjivandas & Co.
Chunilal Pranjivandas & Co. also agreed to indemnify the assessee against payment of any tax which could not be recovered from such deposits. In other words, it appears that the assessee was not to be paid the full sale proceeds in respect of cotton sold by it to Chunilal Pranjivandas & Co. The purchaser was to retain a part of the price in deposit to the credit of the assessee. Sales tax dues, if any, were to be adjusted out of such moneys retained by Chunilal Pranjivandas & Co.
The conditions were recorded in writing in September 1968 as follows : (i) The party of the first part agrees to keep the amount detained by the party of the second part on account of sale or purchase tax, interest or penalty in respect of goods purchased by the party of the second part from Samvat year 2018 till this agreement is in operation and payable to the party of the first part as a result of recent decision of the Mysore High Court, as a deposit with the party of the second part, with interest at the current bank rate till the party of the second part is satisfied that there will be no legal liability on them to make payment of such tax, interest or penalty as a result of any law, change in law, rules or by issue of any Ordinance or Notification. It is further agreed that, out of the deposit amount, the party of the second part will refund to the party of the first part such amount relating to each accounting year after completion of 5 years from the accounting year, i.e., the amount of deposit relating to Samvat year 2020 will be refunded after Kartak Sud 1, Samvat year 2025 and that for Samvat year 2021, will be refunded after Kartak Sud 1, Samvat year 2026 and so on.
(ii) The party of the first part authorises the party of the second part to make payment of any such tax, interest or penalty, which they might be asked to pay as a result of any change in law, rules or issue of any Ordinance or Notification, from the deposit lying with them, as provided in Clause (1) or any other amount that may otherwise be due from the party of the second part to the party of the first part.
If for any reason whatsoever the party of the second part cannot recover the amount of tax, interest or penalty that they might be asked to pay, the party of the first part jointly and severally undertakes to indemnify and pay to the party of the second part such amount.
On 5-11-1972, Chunilal Pranjivandas & Co. gave a credit note to the assessee for Rs. 3,24,065.35. This was taxed by the ITO as income of the assessee for the assessment year 1973-74. The addition was deleted by the Commissioner (Appeals). The revenue went in second appeal to the Tribunal. The Tribunal held that the amount could not be taxedunder Section 41(1) of the Income-tax Act, 1961 ('the Act'), as an equivalent deduction had not been claimed and allowed to the assessee in any of the earlier assessment years, it further observed in its order in IT Appeal No. 318 (Bang.) of 1979, dated 20-3-1981, that the amount retained by Chunilal Pranjivandas & Co. can be treated as part of the sale price and in that case the amount refunded by that party to the assessee can be brought to tax as a trading receipt only in the year in which the sale has taken place and not in the assessment year 1973-74 when the credit note was received.
2. For the assessment years in appeal before us now, the assessee claimed deduction of Rs. 20,518, Rs. 46,755 and Rs. 1,33,853, respectively. The ITO disallowed the claim on the ground that the payments were made to meet the sales tax liability of Chunilal Pranjivandas & Co. This was not a liability of the assessee. Any agreement made by the assessee for meeting the sales tax liability of Chunilal Pranjivandas & Co. cannot have retrospective effect, as there was no agreement prior to sales that the assessee would pay their sales tax. The Commissioner (Appeals) found that for the assessment year 1975-76, a sum of Rs. 2,061 related to the assesee's own liability. For the year 1976-77, the assessee's own liability was Rs. 3,913. The allowability of the rest, viz., Rs. 18,457 for 1975-76, Rs. 42,842 for 1976-77 and Rs. 1,33,853 for 1977-78 was considered by the Commissioner (Appeals). The relevant extracts from his order for 1975-76 are given below : As regards the balance of Rs. 18,457, the facts of the case are that there was refunds of sales tax for the assessment years 1959-60 to 1962 and the same was demanded back by the Commercial Tax Officer, in view of the Amendment Act 28 of 1969. The appellant paid these amounts to the sales tax department during the years 1974 to 1977.
The claim for deduction should be allowed in this year as per the agreement of 1968 with Chunilal Pranjivandas & Co. ; the payment has been made during this year. The Income-tax Officer is, therefore, directed to allow the deduction of a sum of Rs. 20,518 from the total income assessed.
On the same basis, he allowed the relief for the subsequent years also.
The revenue is in appeal.
3. The learned departmental representative submitted that the sales tax liability was that of Chunilal Pranjivandas & Co. There was no question of the assessee meeting this liability. Therefore, he submitted that if the assessee has discharged the liability of some other concern, such a liability cannot be considered as the business expenditure of the assessee. He then drew our attention to our order in IT Appeal No. 318 (Bang.) of 1979. He submitted that in that order, the Tribunal had given a finding that the assessee was not liable for any sales tax as it was not the last purchaser in the State and only Chunilal Pranjivandas & Co. was liable to sales tax. According to the learned departmental representative, the conclusion already drawn by the Tribunal would hold good for these appeals also as there was no legal liability on the part of the assessee to pay Central sales tax. The deduction allowed in this behalf by the Commissioner (Appeals) was erroneous.
4. The learned counsel for the assessee, on the other hand, submitted that the assessee did not receive the full sale proceeds of cotton sold by it in the first instance. Part of the purchase price payable by Chunilal Pranji-vandas & Co. was retained by it, but as a deposit on behalf of the assessee subject to the discharge of any future sales tax liability that might arise. Such a contingency arose during the relevant years of account. The credit not received by the assessee was bifurcated into the amounts receivable towards sales effected in various years and were taxed as per the directions of the Tribunal in its order in IT Appeal No. 318 (Bang.) of 1979. The agreement between the assessee and Chunilal Pranjivandas & Co. stipulated that the liability was to be met out of the sum of Rs. 3,24,065. Therefore, the obligation on the part of the assessee to pay sales tax that would ultimately be payable by Chunilal Pranjivandas & Co. was co-extensive with its right to receive Rs. 3,24,065. The right to receive the above amount and the obligation to pay the liability arising subsequently, were secured by an agreement. That being the case, the assessee was bound to pay sales tax, as demanded by the sales tax authorities, in accordance with the contract between the parties concerned. He submitted that the deduction has rightly been allowed by the Commissioner (Appeals).
5. We have heard the rival submissions. Although in our order in IT Appeal No. 318 (Bang.) of 1979 (supra), there are some observations that the liability to pay sales tax was on Chunilal Pranjivandas & Co.
and not on the assessee, the point for decision there was quite different, viz., whether the sum of Rs. 3,24,065 for which the assessee received a credit note on 5-11-1972 could be assessedunder Section 41(1) in the assessment year 1973-74. The finding was that Section 41(1) was not applicable as the assessee had not claimed deduction of any liability in the earlier years and no such deduction had, in fact, been allowed by the ITO. It, however, gave a finding that the said sum was part and parcel of the sale proceeds and, therefore, they were to be taxed as trading receipts in the years in which the sales took place. In other words, the sum of Rs. 3,24,065 had to be analysed; the ITO had to determine how much of it relates to each of the years over which the transactions have taken place and then tax them in the respective years. But the question here is the liability which the assessee has now to discharge. Since Chunilal Pranjivandas & Co. had to pay sales tax, it would have deducted the corresponding amount from the amounts it had to pay to the assessee. At the time the agreement was entered into, there was no sales tax liability. Therefore, part of the sale proceeds of the assessee was treated as a deposit in favour of the assessee and retained by the purchaser. In case of any liability arising in future, that had to be adjusted against the deposits held.In other words, the assessee would, ultimately, receive the amount held in deposit less the tax liabilities that might arise in future. The fact is that such a liability did arise in view of the amendment to Section 28 of the Karnataka Sales Tax Act. It is that liability which the assessee has claimed as a deduction. Although the liability was that of Chunilal Pranjivandas & Co., the arrangement for payment of tax was secured by an agreement between the concerned parties. There was, therefore, a contractual agreement between the assessee and Chunilal Pranjivandas & Co. to discharge the liability of the latter when it arose. Hence, the assessee's right to receive Rs. 3,24,065 from Chunilal Pranjivandas & Co. cannot be divorced from its liability to pay the corresponding taxes. The agreement is enforceable and void for any reason. Therefore, the contractual liability discharged by the assessee in the relevant years is a proper deduction from its income.
We, accordingly, do not find an infirmity in the order of the Commissioner (Appeals).
7. The cross-objections filed by the assessee, being merely in support of the Commissioner (Appeals)'s order, are dismissed as infructuous.