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Commissioner of Income-tax Vs. Kesaria Tea Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference No. 16 of 1997
Judge
Reported in(2000)161CTR(Ker)149; [2000]243ITR362(Ker)
ActsIncome Tax Act, 1961 - Sections 41 and 41(1)
AppellantCommissioner of Income-tax
RespondentKesaria Tea Co. Ltd.
Appellant Advocate P.K.R. Menon and; George K. George, Advs.
Respondent Advocate P.G.R. Warriyar, Adv.
Excerpt:
.....the case to division bench. power to refer to full bench is expressly reserved to division bench. merely because a single judge/division bench entertains another view or merely because another view is possible, the judgment shall not be distinguished. - the tribunal noticed that the reassessment made for the assessment years 1980-81 and 1981-82 had been held to be bad in law and further it was held that the provision for purchase tax liability could not be allowed, as sales tax assessments were pending for those years. learned counsel for the assessee submitted that the order passed by the tribunal for earlier assessment years 1980-81 and 1981-82 and hearing notices issued by the sales tax authorities clearly indicate that the matter had not attained finality. the tribunal had in..........in the computation of profits and gains of a business or profession, in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee ; and (2) subsequently during any previous year the assessee had obtained whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof. it is, therefore, clear that the following conditions must be fulfilled before section 41(1) of the act can be held to be applicable : (i) in the assessment of an assessee, an allowance or deduction has been made in respect of any loss, expenditure or trading liability incurred by him and (ii)(a) any amount is obtained in respect of such loss.....
Judgment:

Arijit Pasayat, C.J.

1. Accepting the prayer for reference in terms of Section 256(1) of the Income-tax Act, 1961 (in short 'the Act'), the Income-tax Appellate Tribunal, Cochin Bench (in short 'the Tribunal'), has referred the following' question for opinion of this court :

'Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that Rs. 3,02,758 cannot be brought to tax and in deleting the addition of Rs. 3,02,758 sustained by the Commissioner of Income-tax (Appeals) ?'

2. The factual position as set out in the statement of case is as follows : The assessee, a company in which public are not substantially interested, is engaged in the business of exporting tea, pepper and other spices. For the assessment year 1985-86 corresponding to the previous year ending March 31, 1985, the assessee wrote back in its account a sum of Rs. 14,65,997 representing provision for purchase tax of earlier years, i.e., 1978-79 to 1980-81. A sum of Rs. 6,61,413 was brought to tax in reassessment for the assessment year 1980-81 by disallowing provision made in the accounts. In assessment for the assessment year under consideration, i.e., 1985-86, the Assessing Officer added a total sum of Rs. 14,65,997 as provision for purchase tax for earlier years written back during that year. The matter was carried in appeal before the Commissioner of Income-tax (Appeals), Cochin (in short 'the CIT(A)'). He was of the view that since the sum of Rs. 14,65,997 included two sums, i.e., Rs. 6,61,413 and Rs. 5,01,826, relat-able to the assessment years 1980-81 and 1981-82, which have already been included in the assessments for the concerned years, only Rs. 3,02,758 relatable to the assessment year 1978-79 was to be included. For arriving at such a conclusion, the Commissioner of Income-tax (Appeals) referred to the fact that the additions in reassessments for the assessment years 1980-81 and 1981-82 had since been confirmed in appeal by the Commissioner of Income-tax (Appeals) and the matter for those years were pending before the Tribunal. It was further noticed that the special leave petition filed by the Kerala Government against the decision of this court in the case of Dy. CST v. Neroth Oil Mills Co. Ltd, [1982] 49 STC 249, which was the foundation of the claim, was rejected by the apex court in November, 1984, and so it could be said that the liability finally ceased during the year under appeal. Therefore, he also held that the addition of Rs. 3,02,758 under Section 41(1) was warranted in the case of the assessee. Further, he observed that if the assessee succeeds in appeals relating to the assessment years 198D-81 and 1981-82 before the Tribunal, the entire sum of Rs. 14,65,997 could be brought to tax. The matter was carried in appeal before the Tribunal. The Tribunal noticed that the reassessment made for the assessment years 1980-81 and 1981-82 had been held to be bad in law and further it was held that the provision for purchase tax liability could not be allowed, as sales tax assessments were pending for those years. So far as the finding of the first appellate authority that in view of a decision of the apex court in Neroth Oil Mills' case [1982] 49 STC 249, there was cessation of liability during the year ending on March 31, 1985, the Tribunal noticed that for claiming exemption from payment of Central sales tax in terms of the Central Sales Tax Act, 1956 (in short 'the CST Act'), the assessee had to prove two conditions. In Neroth Oil Mills' case, only the first condition was the bone of contention before this court and the second condition was not under consideration. The conditions are : (i) things purchased and things exported are one and the same commodity ; and (ii) purchases were against firm orders for export. The finding of the Tribunal was that the decision of this court in Neroth Oil Mills' case [1982] 49 STC 249 has not resulted in cessation of liability for purchase tax. Referring to the rejection of the special leave petition, it was observed that the same did not amount to an adjudication on the merits. It was further noticed that the Sales tax Department was pursuing the matter in respect of purchase tax for and from the assessment year 1974-75 and cases were pending before the sales tax authorities. It was, therefore, observed that unilateral action on the part of the assessee cannot extinguish statutory liability. The Tribunal was, therefore, of the view that no part of Rs. 14,65,997 could be brought to tax. Accordingly, the addition sustained by the Commissioner of Income-tax (Appeals) was deleted. The Revenue moved an application for reference under Section 256(1) which, as indicated above, has been accepted and the question has been referred.

3. Learned counsel for the Revenue submitted that the legal issues have not been properly considered. After the decision of this court and the apex court, the matter had attained finality and this aspect was lost sight of by the Tribunal. Learned counsel for the assessee submitted that the order passed by the Tribunal for earlier assessment years 1980-81 and 1981-82 and hearing notices issued by the sales tax authorities clearly indicate that the matter had not attained finality. The Tribunal had in the earlier orders held that the reassessments were bad and further held that the provision for purchase tax liability cannot be disallowed as sales tax assessments were pending. Reference applications were also rejected. Petitions filed by the Revenue against the order of the Tribunal striking down reassessment orders for the previous two assessment years, i.e., 1980-81 and 1981-82, and also striking down disallowance made in respect of the provisions for purchase tax were dismissed in O. P. Nos. 1064 and 2955 of 1994. The factual -position as indicated above was also analysed. Learned counsel for the assessee submitted copies of several assessment orders which relate to the assessment year 1979-80 under the Kerala General Sales Tax Act, 1959 (in short 'the State Act'), and the assessment years 1980-81 and 1981-82 under the aforesaid Acts, the order of assessment dated December 28, 1997, for perusal. According to him, they are clearly indicative of the fact that the matter had not reached finality and there was no cessation of liability as contended by the Revenue.

4. Section 41 deals with 'profits chargeable to tax'. Section 41(1) deals with cessation of liability. The said provision has application only if (1) an allowance or deduction had been made in the computation of profits and gains of a business or profession, in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee ; and (2) subsequently during any previous year the assessee had obtained whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof. It is, therefore, clear that the following conditions must be fulfilled before Section 41(1) of the Act can be held to be applicable : (i) in the assessment of an assessee, an allowance or deduction has been made in respect of any loss, expenditure or trading liability incurred by him and (ii)(a) any amount is obtained in respect of such loss or expenditure ; or (ii)(b) any benefit is obtained in respect of such trading liability by way of remission or cessation thereof ; (iii) such amount or benefit is obtained by the assessee ; and (iv) such amount or benefit is obtained in a subsequent year. Where the provisions of Section 41(1) are attracted, the sub-section enacts two fictions whereunder-

(a) the amount obtained by the assessee or the value of benefit accruing to him is deemed to be profits and gains of business or profession which otherwise would not be income, and

(b) such amount or value of benefit is made chargeable to income-tax as the income of the previous year wherein such amount or benefit was obtained, and, that is so irrespective of the fact whether the business or profession in respect of which the allowance or deduction had been made is in existence in that year or not.

5. In other words, the deeming provisions of Section 41(1) have thus two effects, namely :

(i) that although ordinarily the amount of remission or cessation, etc., would not be profits and gains, it has to be regarded as such profits and gains, and

(ii) such an amount so forgiven by way of remission or cessation, etc., has to be regarded as profits and gains of business or profession accruing or arising in the previous year wherein it is obtained.

6. It is apparent on a bare reading of Section 41(1) that it consists of two parts. The first part contemplates loss, expenditure or trading liability insome former year for which allowance or deduction had been made in any previous assessment year. The second part contemplates recoupment of 'such' loss or expenditure or benefit in respect of 'such' trading liability by way of remission or cessation thereof in some subsequent year. The word 'such' appearing in the second part is significant. It signifies that the recoupment or benefit must be in respect of loss, expenditure or trading' liability mentioned in the first part. For Section 41(1) to be invoked, the concerned liability of the assessee must have ceased finally. There must be no possibility of the liability reviving in any future time. If there is any such possibility, then cessation is not complete and Section 41(1) is not attracted. Under all sales tax laws, the moment a dealer makes a sale or purchase where the statute makes purchase taxable in the hands of the purchaser, an obligation to pay tax arises and taxability is attracted. Sales tax is a compulsory levy under the sanction of the Legislature and there is no discretion left to the assessee as regards the extent of payment. The direct purpose for which money is laid out is not the benefit of business, and payment goes for the benefit of the State. It is payable irrespective of any profit being earned. But without such payment, the business of buying and selling cannot be carried on. Therefore, sales tax payment is deductible as a business expense.

7. If the legal principles as set out are applied to the factual position highlighted above, the inevitable conclusion is that the Tribunal was justified in its conclusion. Reference is accordingly answered in the affirmative, in favour of the assessee and against the Revenue.


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