Law:

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JUDGMENT Balasubrahmanyan, J.-This is an income-tax reference where we have to deal a little with sales-tax as well. In our country, sales tax is a commercial tax on the turnover of dealers. There is, however, no ban on the shifting of the incidence of the sales tax by the dealers to their customers. In many jurisdictions, collection of sales tax is regarded as part of the sale price, and it required a specific Explanation 1A in s. 2(r) of the Tamil Nadu General Sales Tax Act, 1959, to keep the collection of sales tax outside the concept of price or turnover. Whatever be the position under the sales tax enactments, accountants as well as commercial people generally regard sales tax collected as part of the dealer's trading receipts in his trading account. But since it is at once paid over by the dealer to the sales tax department or intended to be so paid over, it becomes a charge against profits, either in his trading account or in the profit and loss account. Thus, the net result from the arithmetic of the accounts is precisely the same as in a case where sales tax collections and the sales tax payments do not go to the credit side or the debit side, as the case may be, of the assessee's trading and profit and loss account. In this case, the assessee is a firm dealing in jaggery, having dealings outside the State as well. Jaggery is exempt from local sales tax under a G.O. of the State Government. But, for a long time, it was a moot question whether jaggery is also an exempt item for the purpose of Central sales tax. This was the position until this court gave its decision in a batch of writ petitions in M. Ishwarlal & Co. v. State of Madras [1973] 32 STC 377 (Mad). The nebulous state of the law till then was a very inconvenient factor for dealers in jaggery, like the assessee herein. The assessee could not very well collect sales tax from the customers if jaggery really was not a taxable item. On the other hand, if the assessee did not collect any amount towards sales tax and if ultimately it turned out that jaggery was not an exempt item, the assessee would have to shell out the tax from its own pocket and since there is always a time-lag between the…

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