1. The question which has been referred to this court under s. 66(1) of the Indian I.T. Act, 1922, reads as follow :
'Whether, on the facts and in the circumstances of the case, the excess amounts of local fund cess earlier received by the assessee and later on refunded by him to the company under the court's decree constituted his income of the respective years under reference liable to tax ?'
2. The assessee, who is an ex-Talukdar of Shivrajpur Estate in the State of Gujarat, had granted a lease of mining manganese ore from the lands at Shivrajpur and Bhat, originally on December 11, 1947, and on the expiry of that lease, a new lease was granted for twelve years thereafter. It is not necessary to refer in detail to all the terms of the lease which have been extensively quoted in the decision in Chhatrasinhji Kesarisinhji Thakore v. CIT : 45ITR512(Bom) , which decision arose out of a dispute with regard to certain amounts received by the assessee during the assessment years 1952-53 and 1953-54 in terms of the said lease of 1947, 'the Syndicate'), was to pay annually a sum of Rs. 2,629-8-8 as rent and royalty at the rate of 8% of the sale value of manganese ore. Clause (i) of Part VII of the lease of 1947 read as follow :
'The lessee shall pay the rents and royalty reserved by this lease at the time and in the manner provided in Parts V and VI and shall also pay and discharge all taxes, rates, assessments and impositions whatsoever being in the nature of public demands which shall from time to time be charged, assessed of imposed upon of in respect of the mines or works of the lessee or any part thereof by authority of the Government of India or the government of Bombay or other wise except demands of land revenue.....'
3. Besides rents and royalty, the assessee received from the Syndicate several amounts during the assessment years 1954-55 to 1959-60 as local fund cess, the liability for which was, at all material times, said to be that of the Syndicate under cl. (i) of Pt. VII of the agreement. The amounts along with the cess and the royalty recovered by the assessee during the relevant years are as follow :
Assessment year Cess RoyaltyRs. Rs.1954-55 1,05,532 5,21,2481955-56 85,084 4,20,2641956-57 81,335 3,86,1581957-58 91,152 4,86,1411958-59 1,12,924 6,02,2731959-60 1,02,411 5,46,193
4. It is at this stage convenient to refer to the assessment proceedings in respect of the assessment years 1952-53 and 1953-54 because in respect of the assessment years 1954-55 to 1959-60, the assessment has proceeded on the position of law as determined in respect of the assessment years 1952-53 and 1953-54 during which period the assessee had recovered two sums of Rs. 16,309 and Rs. 39,515 calculated at the rate of three annas per rupee on the amounts of rents and royalties, describing the payments as being in respect of local fund cess. In respect of those assessment years, the Tribunal had found that a local fund cess leviable under the Bombay Local Boards Act in respect of the village lease was only Rs. 270 per year and the question was whether the sums of Rs. 16,309 and Rs. 39,515 received from the lessee were income of this assessee. In the reference which came to the High Court and the decision of which is reported in Chhatrasinhji Kesarisinhji Thakore v. CIT : 45ITR512(Bom) , it was held that the amounts received by the assessee were liable to be taxed as income of the assessee except to the extent of the local fund cess that was in fact payable by the assessee in respect of the village leased. While setting our the legal position, the High Court, pointed out that of there is a legal liability imposed upon the assessee to pay to the local board in respect of local cess these two amounts, then these two amounts cannot and do not represent income. But the liability of the assessee is in respect of only part of this amount, then to the extent of the surplus, even though the lessee might have paid it for payment of tax or cess, the excess would be income in the hands of the assessee and the question whether the local board collected the amounts or the assessee paid the amounts to the board was irrelevant. The decision in the reference, therefore, held that the assessee had recovered more amounts than what he was entitled to from the Syndicate.
5. The assessee had carried the matter to the Supreme Court and the decision of the Supreme court, a detailed reference to which will be made later, is Chhatrasinhji Kesarisinhji Thakore v. CIT : 59ITR562(SC) . For the present it will suffice to say that the view taken by the High Court was confirmed and the appeals filed by the assessee came to be dismissed.
6. Resuming the course of assessment proceedings for the assessment years in question, the ITO, relying upon the decision of the Income-tax Appellate Tribunal in respect of the earlier years, held that the rents and royalties as well as the local fund cess received by the assessee constituted this income. The AAC confirmed the order or the ITO.
7. The matter was taken in appeal by the assessee to the Appellate Tribunal. At this stage, it is necessary to refer to the fact that in view of the decision of the High Court in the reference for the assessment years 1952-53 and 1953-54 that the assessee had recovered more than what he was entitled, the Syndicate filed a Special Civil Suit No. 9 of 1961 in the Court of the Civil Judge, Senior Division, Godhra, on September 20, 1961, for a declaration that the assessee was not entitled to collect and recover from it any amount by way of local fund cess at the rate of 3 annas per rupees by royalty and for a permanent injunction restraining him from collecting the same. A claim for refund of a sum of Rs. 7,04,501.91 received by the assessee for the period from December 1, 1949, to December 31, 1958, was also made in the suit. The suit was decreed against the assessee and the Civil Court held that the assessee was not entitled to recover any sum by way of local fund cess beyond Rs. 204-7-3 which was the actual amount payable by him every year as local fund cess to the State Government. A decree for Rs. 7,02,664.85 arrived at after deducting Rs. 1,840.06 being the actual amount of local fund cess for nine years of the rate of Rs. 204-7-3 from the total amount paid, i.e. Rs. 7,04,504.91 was passed against the assessee. The decree in Suit No. 9 of 1961 as a part of the statement of facts is annex.'C'.
8. The assessee preferred an appeal against this decree before the Gujarat High Court. On the date on which the appeal was disposed of the Tribunal, the appeal before the High Court of Gujarat had not been disposed of. That appeal was disposed of later on September 17, 1970, and the appeal field by the assessee was dismissed with costs. By consent, the judgment of the Gujarat High Court in First Appeal No. 359 of 1963 is not made a part of the record of the case as annex.'F' We are informed by the learned counsel for the assessee that the assessee had not further challenged the decision of the Gujarat High Court. It is convenient to refer to the material finding recorded by the trial court in the civil suit filed by the Syndicate. The suit for refund, declaration and injunction was filed by the Syndicate on the ground that the payments made to the assessee as local fund cess at the rate of 3 annas in a rupee on rent and royalty was paid under a mistake which was discovered only when the judgment in the reference in Chhatrasinhji Kesarisinhji Thakore v. CIT : 45ITR512(Bom) was delivered by this court on August 22, 1958. The mistake, according to the Syndicate, consisted in their not knowing that the defendant was not entitled to recover the cess on royalty at the rate of three annas per rupee.
9. It is convenient to refer at this stage to the decision in First Appeal No. 369 of 1963 decided by the Gujarat High Court. This was an appeal against the judgment of the trial court in Special Civil Suit No. 9 of 1961. Before type Gujarat High Court it was contend on behalf of the present assessee that is the ex-Talukdar he was entitled to recover local fund cess on the rent and royalty and, therefore if was a public demand and the requirement of cl. (i) of Pt. VII of the lease was satisfied. The Gujarat High Court referred extensively to the decision of this court in Chhatrasinhji Kesarisinhji Thakore v. CIT : 45ITR512(Bom) and held that from the finding recorded by the High Court, it was clear that the liability of the lessee was only to pay the public demands which were imposed upon or in respect of the lands or works of the lessee and it was not shown that the local fund cess was such, a public demand. The High Court found that the assessee had no right to recover by way of local fund cess an yearly sum in excess of Rs. 204-7-3 and it was observed that the local fund cess paid on the surplus rent and royalty at the rate of 3 annas per every rupee of rents and royalties paid would be recoverable, if at all, under s. 93 of the Bombay Local Boards Act was applied or adopted in Shivrajpur Estate before the talukdar tenure was abolished by the Bombay ACT LXII of 1949. The Gujarat High Court pointed out that it was the case of the assessee in the trial court that the defendant had an absolute right to collect the local fund cess on rents and royalties from the Syndicate it respective of any consideration as to whether he, in his turn, is liable to pay such cess or not or whether he paid over the said amount to the Government or to any other party. The Gujarat High Court referred to the observations of the Bombay High Court in : 45ITR512(Bom) Chhatrasinhji Kesarisinhji Thakore v. CIT. with which the learned judges observed that they agreed, that the liability of the lessor was to pay and discharge all taxes, rates, assessments and impositions, whatsoever, in the nature of public demands, which shall from time to time be changed, assessed or imposed upon or in respect of the mines or works of the lessee or any part thereof by the authority of the Govt. Of India, or the Govt. Of Bombay or otherwise and there must be a charge upon the lessor in respect of his lands or mines and some demand being made by a public authority before the lessee can become liable to pay anything to the lessor under cl. (i) of Pr. VII of the lease. The Gujarat High Court recorded a finding tha : the defendant (assessee) must be held not to have any right to recover the amount as payable on account of local fund cess'. The Gujarat High Court further observe :'.... On a proper consideration of the relevant clause and the facts and the circumstances of the case, (they) finds that the defendant was not entitled to recover the local fund cess on the rents and royalties as and by way of a public demand, save to the extend the defendant has been found to have paid the local fund cess, that is Rs. 204-7-3 per year. 'Accordingly, the Syndicate was held entitled to claim a refund of Rs. 7,02,664.85.
10. When the decision of the Supreme Court was relied upon before the Tribunal, the Tribunal observed that the Supreme Court was not made aware of the fact that the civil judge had already refunded the amount. The Tribunal thus found that the Supreme Court did not deal with the question whether the amounts was or was not the income of the assessee in view of the subsequent refund thereof by the assessee. The Tribunal referred to the decision of the Supreme court in CIT v. Shoorji Vallabhdas and Co. : 46ITR144(SC) , in which the Supreme Court had pointed out that when the income had in fact been received and subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. It was also pointed out in that case that where the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. On the facts of the present case, the Tribunal took the view that the temporary receipts of the disputed amounts by the assessee under a mistaken belief did not constitute his real income and it was immaterial that the parties were temporarily under the illusion that the amount was contractually payable. Holding that the amounts received by the assessee did not have the quality of income, the Tribunal came to the conclusion that the disputed amounts have to be excluded from the assessments of the respective years. Out of this order the question reproduced above has been referred to this court.
11. The crucial question, on the decision of which the answer to the question referred depends, is what is the effect of the decision of the Godhra Civil Court and the Gujarat High court on the determination of the nature of the amounts received by the assessee at the rate of 3 annas per rupee of rents and royalties. Mr. Joshi, appearing on behalf of the revenue has vehemently argued that when the assessee received several amounts in question, they were clearly received as income of the assessee and that no subsequent refund would change the nature of the receipt of amounts, as income. Naturally, learned counsel for the revenue has heavily relief on the decision of the Supreme Court in the case of the assessee for the assessment years 1952-53 and 1953-54 and it is contended that inasmuch as the Supreme Court has in the earlier years positively held that the amounts received by the assessee in excess of what he was otherwise entitled to receive was income, for the same reasons the amounts in question has also to be treated as income. The learned counsel has referred us to the decision of the Court of Appeal in Morley (Inspector of Taxes) v. Tattersall : 7ITR316(Cal) . On the other hands, Mr. Mehta, appearing for the assessee, has contended that there is now a final adjudication as between the parties to the contract of lease that the assessee was not entitled to receive the amounts in question and the said amounts were paid under a mistaken belief that the Syndicate was liable to pay this amount and the assessee was not entitled to receive this amount. It is urged, that there is already a decree for the refund of the said amount and a refund of the amount would not stand on the same footing as giving up any portion of the income because, according to the learned counsel, since the finding is that the amounts have been wrongly received by the assessee, these amounted could not be treated as the income of the assessee.
12. There cannot be any dispute now that the Supreme Court in respect of similar amounts receive for the earlier assessment years 1952-53 and 1953-54 had held that the amounts were received as income. At p. 567 (59 ITR) of the report, the Supreme Court has observed as follow :
'It is common ground that the rent and royalty under the mining lease are income taxable under the Act, and an amount which in paid under a convenient directly related to the payment of rent and royalty would in our judgment, also be taxable as income. The amounts paid have the quality which is, if not identical, closely similar to rents and royalty. It is immaterial that if the true position were appreciated, the syndicate may not have paid the amounts. The amounts have in fact been paid by the Syndicate, and have been received and appropriated by the appellant as if he was entitled to receive them. The difference, between the amounts which the appellant received and the amounts from which he could under the terms of the lease claim reimbursement, must, therefore, be regarded as income within the meaning of the Indian Income-tax Act, and unless specially exempted, liable to tax. The appellant did not purport to collect local fund cess on behalf of the State Government not did not syndicate pay the amount to him as an agent of the Government. The syndicate merely sought to discharge what it believed was its contractual obligation under the indenture of lease, and in doing so, it made payments which exceeded the local fund cess payable by the appellant.'
13. The crucial finding recorded by the Supreme Court, thereof, was that the amounts paid in excess of the liability under the contract lease had a quality which was closely similar to rents and royalties. It is, therefore, clear on the observation of the Supreme court quoted above that the ground for treating the excess amounts recovered by the assessee as income was that the character of these receipts was similar to rents and royalties which the assessee was rightfully entitled to claim from the Syndicate. Now, it is not doubt true that one of the arguments before the Supreme Court on behalf of the assessee was that the Syndicate may seeks to recover the excess amounts paid by it to the assessee and it appears from the judgment of the Supreme Court that the reference to the suit in the Godhra court was also made. The Supreme Court, however, took the view that the court was not concerned with the merits of the claim of the refund involved in the suit. The Supreme Court has observed on p. 568 of 59 IT :
'We were told at the Bar that after the proceedings for assessment in these appeals reached the High court, the Syndicate has filed a suit in the civil court against the appellant to recover the amounts paid by it. We are not in this case concerned with the merits of that claim.'
14. It is clear from the judgment that the fact that the suit was already decided on the date on which the Supreme Court decided the appeal does not seem to have been brought to the notice of the Supreme Court. As already pointed out, the suit was decided on April 25, 1963, i.e., more than two years prior to the decision of the Supreme Court. It is no doubt true that the Tribunal has noted the fact that the representative of the assessee has stated before the Tribunal that 'when the copy of the judgment of the civil judge was produced before the Supreme Court during the course of the hearing of the appeal, it has declined even to peruse the same'. The order of the Tribunal nowhere show that this statement was accepted by the Tribunal but apart from that, as to what was the contention before the Supreme Court and what the Supreme Court decided has to be ascertained only from the judgment of the Supreme Court. The judgment of the Supreme Court does not indicate that the fact that a decree for refund had already been passed against the assessee on the ground that he was not entitled to receive any amount in excess of Rs. 204-7-3 per year had not been considered not was the effect of such a decision on the nature of the receipt considered by the Supreme Court. It is no doubt true that since for the assessment years 1952-53 and 1953-54, excess amounts recovered by the assessee had been held to have a quality closely similar to rents and royalties, even for the subsequent years the receipts would have to be considered in the same manner. But that would be so only if no new circumstance entered into this determination. The fact that the rights and liabilities under the contract as between the Syndicate and the assessee have now been expressly determined by a competent civil court, cannot be overlooked or ignored while determination the legal nature of the receipt of the excess amounts in question. This findings of the trial court and of the Gujarat High Court, to which we have referred, clearly indicated that the assessee was not in law entitled to receive the amounts in question under agreement. Consequently, the payments received by the assessee from the Syndicated cannot be said to have been received under the agreement, though payment have been made under a mistaken belief that the Syndicate was liable to make these payments. Now, so far as the Syndicate is concerned, its only liability was under the agreement of lease and if only such receipts as are received by the assessee in pursuance of the agreement between the Syndicate and the assessee could be classified as income, the, obviously, the excess amounts would not be classified as income received by the assessee. The added circumstances that there is already a decree for refund passed against the assessee would, in our view, be determination of the fact that what was received by the assessee was not his income at all and that is why he is required to refund the amount as having been wrongly received by him. Now, though this determination by competent courts has taken place subsequently, the determination is with regard to the nature of the receipts at the time when it was received. This is not, therefore, a subsequent event. If at all it is merely a subsequent decision as to the exact nature of the receipt and will relate back to the time of the receipts. It will, therefor, be difficult to accept the agreement of the learned counsel for the revenue that in spite of the determination by the civil court about the exact nature of the receipt, since it was received as income at the material time, it must still be treated as income. This contention overlooks the fact that the decision rendered by the Godhra court and confirmed by the Gujarat High Court relates back to the period during which the relevant amounts have been received by the assessee.
15. We do not see how the principle laid down by the Court of Appeal in Tattersall's case : 7ITR316(Cal) will be attracted to the facts of the present case. In Tattersall's case, the assessee was a firm of auctioneers whose profits consisted of commission on the sale of horses. On of the conditions of sale was, 'no money paid, or remittance sent by post, without a written order'. Since several sellers of the horses failed to claim the balance of unclaimed balance existing on December 31 in the year of account were transferred to the credit of the partners in the proportion to which they were entitled in the year of account. Another clause in the articles of the partnership provided that notwithstanding the transfer of any such unclaimed balance all liability subsisting in reference to the balance should be continued to be borne by the partnership. The firm was assessed to income-tax in respect of the unclaimed balances transferred to the current account of the partnership in a particular year. The firm contended that the unclaimed balances did not at any time become profits or trading receipts, but were always to be considered as liabilities, for, the statute of the limitations did not apply to the case. It was held that the quality and nature of the receipt for income-tax purposes were fixed once and for all when the subject of the receipt was received; and, consequently, as the unclaimed balances, when first received, were obviously liabilities, no subsequent operation could turn then into trading receipts, and they were, therefore, not assessable to income-tax. It is difficult for us to see how this decision is of any assistance today. The questions in Tattersall's case : 7ITR316(Cal) turned on the question as to whether what was never an income of the assessee at the time when those amounts were received could be treated as an income. The argument on behalf of the revenue in Tattersall's case : 7ITR316(Cal) was that although the amounts received were not trading receipts at the moment of receipt, they had the potentiality of becoming trade receipts. This argument was rejected with the observations that the quality and nature of receipts for income-tax purposes is fixed once and for all when it is received. It was pointed out that when the partner decided among themselves that what was there on record as the liability of the firm, the would not, for practical reasons, regard as liability. This did not mean that at that moment they received something assert a quality different from what it has possessed before.
16. We have pointed out that in the present case, there is no dispute that the point of time with reference to which the question as to whether the receipt was income or not had to be determined was when the amounts were received in the respective assessment years. The mere fact that the assessee treated these amounts as his income will not make them, in law, his income, because he has been found to have wrongly received these sums and has therefore incurred a liability to refund them consequent upon a decree against him in respect of those amounts. This is not a case where the nature of the receipt is sought to be changed. What is sought to be done is the determination of the nature of the receipt in the light of the decisions of the Supreme court and the Gujarat High Court.
17. As we have already pointed out, in respect of the assessment year in question, the question as to the whether these receipts constituted income or not cannot be held to be concluded by the decision of the Supreme Court in Chhatrasinhji Kesarisinhji Thakore v. CIT : 59ITR562(SC) . The correct position of laws with regard to the nature of the receipt had to be determined with reference to the decision of the competent civil court and the High court to which both the Syndicate and the assessee were parties. The decision in : 59ITR562(SC) cannot, therefore, be held to have concluded the controversy in respect of the assessment year in question. We must, therefore, hold that the Tribunal was right in holding that the amounts in question could not be treated as the income of the assessee.
18. It is not doubt true that the Tribunal has considered the concept of real income and a grievance was made by the learned counsel for the revenue that there is no question of any real income arising in the present case. It is also contended before us by Mr. Joshi that the Tribunal has misconceived the observations of the Supreme Court in Shoorji Vallabhdas & Co.'s case : 46ITR144(SC) . It was pointed out that the Supreme court in that case had merely observed that when there is neither accrual nor receipt of income, income cannot be said to result at all merely on the making of entries in the books of account.
19. We have already pointed out that having regard to the decision of the civil court and the Gujarat High Court, the amounts received could not be treated as income at all, and we do not think it necessary for the purposes of the present case to go into the question as to whether the Tribunal was justified in invoking the concept of real income the facts of the present case.
20. In the view we have taken, the question referred must be answered in the negative and in favour of the assessee. Revenue to pay costs of this reference.