Law:

Section:

Section 41 of the Income-tax Act, 1961 - Remission or cessation of trading liability - Assessment year 1971-72 - In hire purchase business of automobiles carried on by assessee company, sales tax was collected and credited to sales tax account - Neither receipts nor payments of it were figured in profit and loss account - For accounting years 1958-59 to 1964-65 - Assessee was assessed by sales tax department and consequently certain refund was received by assessee on account of such liability - Whether amount of refund was taxable under section 41(1) - Held, yes FACTS The assessee-company was a dealer in automobiles. Under the hire purchase system, the assessee entered into an agreement with the customer who made an initial deposit, and made payment of the balance consideration in instalments over a number of months. When all the instalments were paid off, the customer got an option for buying the vehicle. On his exercising that option the sale became completed and the property passes to him. Though the taxable event occurred only when the last instalment was paid and the sale was completed as aforesaid, in practice the assessee collected from the customer an amount equal to the sales tax liability on the entire price of the lorry as though the property passed to the customer even at the time when the agreement was entered into. During the accounting years 1958-59 to 1964-65 the sales-tax department had assessed the assessee on such transactions to sales-tax and against those assessments, the assessee had paid certain amount to the Government. The High Court, however, on challenge by the assessee in writ petitions, set aside those assessment orders, directing a fresh assessment to be made according to law consequently an amount of Rs. 8,52,686 was received by the assessee by way of refund during the period relevant for the assessment year 1971-72. The practice of the assessee during the material time was to credit the amount equal to the sales tax liability collected from the customers as aforesaid to an account called 'deposit against contingent liability' without it being credited to the profit and loss account. So also, the payment to the sales tax…

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