Income – In determining whether a receipt is liable to be taxed, the taxing authorities cannot ignore the legal character of the transaction which is the source of the receipt – Amounts collected from customers towards disputed Sales Tax liability were not kept in a separate bank account and hence formed part of business turnover and thus constituted income.

The assessee, a non-banking financial company, was engaged in the business of the hire purchase financing, equipment leasing and allied activities.

The assessee had filed its return of income for the assessment year 1998-99 for a total income of Rs.50,38,16,950.

The assessee had been collecting certain sums as “contingent deposit” from the leasing/hire purchase customers with a view to protect themselves from sales tax liability. These amounts were collected on ad hoc basis.The assessee did not offer such sums to tax as income on the ground that such sums were collected as contingent deposits.

The case of the assessee before the Supreme Court was that the said collection was in anticipation of sales tax liability, which was disputed. According to the assessee, in order to safeguard itself against, inter alia, the said sales tax liabilities, the assessee received Rs.36,47,585 as contingent deposits from its customers which were “refundable”, if the assessee was to succeed in its challenge to the levy of the said sales tax. According to the assessee, the sum of Rs.36,47,585 was, therefore, an imprest with a liability to refund, that the said sum had the character of “deposits” and hence, were not taxable in the year of receipt, but would be taxable only in the year in which the liability to refund the sales tax ceased [in case the assessee failed in the pending sales tax appeals).

The Supreme Court observed that it is well settled that in determining whether a receipt is liable to be taxed, the taxing authorities cannot ignore the legal character of the transaction which is the source of the receipt. The taxing authorities are bound to determine the true legal character of the transaction. In the present case, the assessee had received Rs.36,47,585 in the assessment year 1998-99. As per the statement made by learned counsel for the assessee in court, the said sum of Rs.36,47,585 was not kept in a separate interest bearing bank account but it formed part of the business turnover. In view of the said statement, the Supreme Court was of the view that there was no reason to interfere with the impugned judgment of the High Court. Applying the substance over form test, the Supreme Court was satisfied that in the present case the said sum of Rs.36,47,585 constituted income. The said amount was collected from the customers. The said amount was collected towards sales tax liability. The said amount formed part of the turnover.