1.18 Query:      

      Accounting treatment of sales tax concession.

1. A state government provides an incentive for setting up small scale unit by way of granting 50% sales tax concession. The querist has submitted a copy of the scheme in this regard. As per the scheme certain small scale industries which commence commercial production after 16.10.1981 could avail as sales tax concession at 50% of sales tax payable by other existing units. The amount of concession was available for the period of five years from the date of commencement of commercial production by that unit. However, there was a restriction on the amount of concession that a unit can avail during a year up to 10% of the value of plant and machinery as on the date of commencement of production. Thus, the total amount of concession over the five yeas would not exceed 50% of the value of plant and machinery existing at the time of commercial production. This benefit can be carried forward to the next year till the expiry of the period of five years, in case of short availment of concession.

2. The querist has explained the above scheme hereunder with an illustration: -

(i) Date of commencement of commercial production: 08.12.1984.

(ii) The value of plant and machinery: 11,00,000/-.

(iii) Normal sales tax rate: 10%.

The benefit period would be from 08.12.1984 to 07.12.1989. The maximum amount of concession that the unit could avail in a year would be Rs. 1,10,000/-. Thus, the total concession that unit can avail over a period of five years would be (1,10,000.00 x 5 = 5,50,000.00) being 50% of the value of plant and machinery.

3. A partnership concern has availed benefit of the above scheme since 08.12.1984. The firm has been collecting sales tax at the full rate and remitting 50% of the same to the commercial tax department. The balance 50% has been retained by the firm as per the decision of Honourable High Court in the case of Arpee Electricals Vs. Commissioner of Commercial Taxes in Writ Petition No. 15252 of 1983. The querist has submitted a copy of the judgement. According to the querist, the judgement has clearly brought out that the benefit was to be enjoyed by the entrepreneur and the entrepreneur has every right to retain the balance of 50% of sales tax for his own benefit. Thus, the amount of sales tax retained over a period of time is being accumulated in the sales tax account.

4.  The querist has raised the following issues for the opinion of the Expert Advisory Committee:

(i) Whether the amount retained as sales tax concession would be a capital receipt or a revenue receipt.

(ii) Based on above what would be the appropriate accounting treatment.

(iii) Whether the above receipt will be liable to income tax.

                                                                         Opinion                                         May 29, 1991

1. The Committee is of the view that merely because the maximum limit of the sales tax concession is computed as a percentage of the investment in plant and machinery, it does not acquire the nature of a capital receipt. The concession is in respect of an item of revenue nature, viz., sales tax, which is based on turnover. The Committee is therefore, of the view that the sales tax concession is a concession of revenue nature, and, accordingly, it should be recognised in the profit and loss account of the relevant year with appropriate disclosure.

2. The Committee notes that it has been established by various judgements* that sales tax receipt is a trading receipt for the purposes of computation of taxable income under the Income-tax Act, 1961. Thus, the entire amount of sales tax collected would be considered as revenue, whereas, the relevant deduction would be to the extent of 50%, i.e., the sales tax payable to the Government, subject to the provisions of section 43B of the Act.

3. On the basis of the above, the opinion of the Expert Advisory Committee, on the issues raised by the querist in para 4 of the query, is as below:

(i) The amount retained as sales tax concession is of revenue nature.

(ii) The said concession should be recognised in the profit and loss account of the relevant years with appropriate disclosure.

(iii) The tax treatment will be as per para 2 above.

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* Deccan Hides & Skins Co. v CIT (1983) 142 ITR 175 (Bom) Chowringhee Sales Bureau (P.) Ltd. v. CIT (1973) 87 ITR 542 (SC) Sinclair Murray & Co. (P.) Ltd. v. CIT (1974) 97 ITR 615 (SC) Deep Chand Shyam Sunder v. CIT (1980) 125 ITR (All) Nityananda Subudhi v. CIT (1987) 168 ITR 362 (Ori) P. Krishna Rao v. CIT (1978) 112 ITR 26 (AP)