1. M/s. Steel & General Mills Co. Ltd. (hereinafter referred to as the assessed-company) carried on business of manufacturing and sale of steel goods at Mogulpura in Pakistan during the pre-partition period. After the partition, the officer of the company was shifted to Delhi while the steel mills were left behind in Pakistan. The assessed-company had taken a contract from the Government to supply towing attachments for military lorry bodies at a fixed rate. According to the terms of this contract, the Government had to supply steel melting scrap arid borings and turnings required for the purpose of the contract at the rate of Rs. 40 and Rs. 10 per ton respectively. After the passing of the Scrap Control Order, 1943, the Government demanded from the assessed-company payment of the freight charges also in respect of the melting scrap and borings and turnings supplied by the Government to the assessed-company. The assessed-company, however, disputed its liability to pay the freight charges. Since the Government did not accept the assessed-company's claim, the latter had to pay the freight charges also in respect of the goods supplied to it by the Government, but the assessed-company continued pressing its claim with the Government for refund of the amount recovered by the Government from it as price of the raw materials in excess of the terms of the contract and, ultimately, on December 27, 1954, i.e., during the previous year relevant to the assessment year 1956-57, the Government refunded to the assessed-company the sum of Rs. 21,107 which the assessed-company had paid to the Government by way of freight charges in excess of the contract rate of Rs. 40 and 10 per ton. As this amount was received during the previous year relevant to the assessment year 1956-57, the Income-tax Officer sought to include this amount in the assessed's income for this year. The assessed, however, contended that in the assessment year 1943-44, it had not debited the higher price actually charged and recovered by the Government and the amount had not been allowed by the department as an expenditure in that year. The Income-tax Officer did not accept this contention and included this amount in the income of the assessed-company for the assessment year 1956-57. The assessed preferred an appeal before the Appellate Assistant Commissioner and in this appeal, the Appellate Assistant Commissioner held that as the receipt of Rs. 21,107 represented only reimbursement of expenses which at no earlier stage were claimed as business expenditure by the assessed-company, no part thereof could be considered as the assessed-company's income. thereforee, he deletedthe amount of Rs. 21,107 from the assessed-company's income. Against this order of the Appellate Assistant Commissioner, the department went in appeal before the Income-tax Appellate Tribunal (hereinafter referred to as 'the Tribunal'). The Tribunal reversed the order of the Appellate Assistant Commissioner and restored that of the Income-tax Officer. The grounds on which the Tribunal sustained the addition of Rs. 21/107 to the income of the assessed-company will be referred to at a later stage. The assessed-company filed an application under Section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act'), requiring the Tribunal to refer the question of law said to arise out of the order of the Tribunal but the latter declined to do so. The assessed thereupon filed an application in this court under Section 66(2) of the Act and this court directed the Tribunal to refer the following question to this court:
'Whether, on the facts of this case, Section 10(2A) of the Act could be invoked in bringing the sum of Rs. 21,107 to tax ?'
In pursuance of the direction of this court, the Tribunal has referred the said question along with the statement of the case.
2. Although the Income-tax Officer in his order has not specifically stated that he was treating the sum of Rs. 21,107 as the assessed-company's income under Section 10(2A) of the Act, there is no dispute that, as a matter of fact, the said amount was being treated as the assessed's income under Section 10(2A) of the Act. This is made clear by the order of the Tribunal wherein it is stated that 'the department proposes to tax this amount as refund of expenditure under Section 10(2A).' It is not the department's case that this amount represented the profits of the assessed-company arising from its business during the assessment year under reference. Admittedly, this amount represents the extra price paid by the assessed-company to the Government over and above the price which it had to pay under the contract. It was this extra price that was refunded to the assessed-company during the present account year. This amount can be assessed as the assessed's income in the present year only if it satisfies the conditions laid down in Sub-section (2A) of Section 10 of the Act, the relevant portion of which reads as follows :
' Where for the purpose of computing profits or gains under this section, an allowance or deduction has been made in the assessment for any year in respect of any,.....expenditure......incurred by the assessed and,subsequently during any previous year, the assessed has received, whether in cash or in any other manner whatsoever, any amount in respect of such ......expenditure......the amount received by him.,....shall be deemed to beprofits and gains of business, profession or vocation and to have accrued or arisen during that previous year.'
As rightly observed by the Tribunal:
'The pre-requisite for the application of this provision is that the expenditure in question should have already been deducted for this purpose of computing profits.'
3. In other words, in order to include the amount in question in the assessed's income for this year under Section 10(2A) of the Act, it has to be proved that an allowance or deduction had been made for this amount in any of the earlier assessment years. The amount in question is not of the nature of either an income which the assessed-company claims to be exempt from assessment under any of the provisions of the Act or in the nature of an expenditure which the assessed claims under Clauses (i) to (xv) of subsection (2) of Section 10 of the Act, in which case the burden would have fallen upon the assessed to prove the facts which entitled him to claim the exemption or to claim the allowance or deduction as an expenditure. This is a case where the amount in question represents the refund of the amount actually paid by the assessed to the Government. It is only if an allowance or deduction had been given for this amount in the earlier assessment years that it can be included as the assessed's income of this year under Section 10(2A) of the Act. The burden, thereforee, lies upon the department to prove that an allowance or deduction had been given for this amount to the assessed-company in the earlier assessment years. The Tribunal has also accepted this position when it observed that the onus initially lies upon the department to prove that the amount of Rs. 21,107 was deducted as the expenses from the profits. The revenue has admittedly not produced any evidence to prove positively that this amount had been allowed as expenditure in any of the earlier assessment years. The assessment records of the earlier assessment years have not been produced by the department for this purpose as, according to the department, these records have been lost. The department, however, seeks to discharge the onus that lay upon it by relying upon certain circumstances, namely, that the assessed-company having paid the extra price as demanded by the Government did not resort to any legal proceedings to claim the refund and allowed even the period of limitation to expiry without initiating any legal proceedings. These circumstances, in our view, do not necessarily warrant the inference either that the assessed-company had claimed allowance or deduction of the extra price paid by it to the Government or that such a claim had actually been allowed by the department. It is not necessary in every case that legal proceedings have to be resorted to for claiming a refund from the Government. As a matter of fact, in this case, even without resort to legal proceedings, the assessed-company succeeded by merely making repeated representations to the Government in getting the refund of the extra price paid by it. The Tribunal has based its conclusion on what it calls the probabilities of the case. According to the Tribunal, it would be very improbable to expect that the assessed-company would not debit such expenses, though actually incurred, simply because there may be a possibility of getting refund for the same. Again, according to the Tribunal, such an action would not only inflate the profits and increase the tax liability, but would deprive the assessed of his money for a long period. We are unable to agree with this reasoning of the Tribunal. The assessed had disputed its liability to pay the extra price to the Government and obviously it paid it under protest and it had also been pressing for the refund of the said amount. Under these circumstances, it cannot be said that the assessed-company should have in the ordinary course of business claimed allowance of the extra price or that even if it had made such a claim, that claim was actually allowed by the department. In any case, when the circumstances are capable of being construed either in favor of the department or in favor of the assessed, the rule is that they should be construed in favor of the assessed. The conclusion of the Tribunal that the amount in question had been allowed or deducted in any earlier assessment year is not based upon any evidence at all and is based on merely surmise and conjecture. We, thereforee, hold that the amount of Rs. 21,107 is not includible in the assessed-company's income of this year under Section 10(2A) of the Act. The question referred to us is answered in the negative, i.e., in favor of the assessed and against the department. The assessed-company is also entitled to costs of this reference. Counsel's fee is fixed at Rs 250.