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Motilal Ambaidas Vs. Commissioner of Income-tax, Gujarat-ii - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 157 of 1974
Judge
Reported in[1977]108ITR137(Guj)
ActsIncome Tax Act, 1961 - Sections 3, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 41(1), 41(2), 42 and 43A
AppellantMotilal Ambaidas
RespondentCommissioner of Income-tax, Gujarat-ii
Appellant Advocate J.P. Shah, Adv.
Respondent Advocate K.H. Kaji, Adv.
Cases ReferredState of Madhya Pradesh v. Bhailal Bhai
Excerpt:
direct taxation - refund - section 41 (1) of income tax act, 1961 - refund of excess sales tax collected from assessee - assessee liable to be assessed for refunded amount - such amount accrued to assessee on final settlement of issue by apex court. - - the receipt were the outstanding dues of professional work done and were clearly the fruits of the assessee's professional activity. they were clearly the fruits of the assessee's professional activity. the emphasis on the words 'carried on' placed by the supreme court in these two cases clearly shows that if the business or profession came to an end and was not being carried on at the time of the receipt of the profits or gains or at the time when the profits or gains accrued, the amount could be brought to tax. he, therefore,.....divan, c.j.1. in this case, at the instance of the assessee, the following two questions have been referred to us for our opinion : '(1) whether, on the facts and in the circumstances of the case, the hon'ble tribunal is correct in holding that provision of section 41(1) is attracted and the refund from the sales tax is taxable under the act (2) whether, on the facts and in the circumstances of the case, the hon'ble tribunal is correct in law in holding that the income has been rightly assessed to tax in the year 1965-66, when the order of the supreme court has been announced or in the year when the high court decision was given or in the years in which the amount was collected by the assessee ?' 2. the facts leading to this reference are as follows : we are concerned with the assessment.....
Judgment:

Divan, C.J.

1. In this case, at the instance of the assessee, the following two questions have been referred to us for our opinion :

'(1) Whether, on the facts and in the circumstances of the case, the hon'ble Tribunal is correct in holding that provision of section 41(1) is attracted and the refund from the Sales tax is taxable under the Act

(2) Whether, on the facts and in the circumstances of the case, the hon'ble Tribunal is correct in law in holding that the income has been rightly assessed to tax in the year 1965-66, when the order of the Supreme Court has been announced or in the year when the High Court decision was given or in the years in which the amount was collected by the assessee ?'

2. The facts leading to this reference are as follows : We are concerned with the assessment year 1965-66, the relevant previous year being Samvat year 2020. The assessee is a registered partnership firm consisting of three partners. It deals in tobacco including tobacco imported from other States. Its principal place of business is at Sayama in Cambay Taluka of Kaira District. The accounts of the assessee-firm are maintained on mercantile basis. The assessee had effected some sales in Madhya Pradesh. The Madhya Pradesh Government imposed sales tax on tobacco imported from other States of India under the Madhya Bharat Sales Tax Act. This sales tax was levied only for the period April 1, 1950, to June 30, 1957. The assessee was charging sales tax separately in respect of such tobacco sold in Madhya Pradesh but the sales tax was not credited to the trading account. It was taken to a separate sales tax account and the sales tax was paid to the State Government by debiting this account. Thus, the receipt of sales tax was not shown on the credit side in the accounts nor was the payment of the sales tax shown on the debit side in the accounts. The assessee challenged the levy of the sales tax in the Madhya Pradesh High Court. The Madhya Pradesh High Court by judgment dated December 16, 1959 [Bhailal Bhai v. State of M.P. ] held that this particular levy of sales tax was unconstitutional and invalid. As a result of this, the assessee got a refund of the sum of Rs. 42,263 in the year 1961. This refund was from the Madhya Pradesh Government. At the same time, the Government of Madhya Pradesh went in appeal to the Supreme Court against the decision of the Madhya Pradesh High Court. The Supreme Court by its judgment dated January 20, 1964 [State of Madhya Pradesh v. Bhailal Bhai - : [1964]6SCR261 ] confirmed the decision of the Madhya Pradesh High Court. The refund of the sum of Rs. 42,263 was credited in the books of account of the assessee-firm in Samvat year 2020 but the actual amounts were received were received as follows : A sum of Rs. 34,490 was actually received in the course of Samvat year 2020 and the balance amount of refund, namely, Rs. 7,773, was received by the assessee-firm in the course of Samvat year 2021. The Income-tax Officer concerned assessed this amount of Rs. 42,263 received by way of sales tax refund on three alternative bases and he made the assessments in three alternative years by way of protective assessment. Samvat year 2015, corresponding to assessment year 1960-61, was the year in the course of which the Madhya Pradesh High Court announced its judgment. Samvat year 2016 was the year in which the sales tax was directed to be refunded and the accounting year, Samvat year 2020, was the accounting year in which the judgment of the Supreme Court was pronounced confirming the judgment of the Madhya Pradesh High Court. The assessments for the three years, assessment years 1960-61, 1961-62 and 1965-66, were reopened and the same amount was brought to tax in each of these three assessment years in three separate assessment proceedings.

3. Against the decisions of the Income-tax Officer in each of these three assessment years, the assessee went in appeal. The Appellate Assistant Commissioner by his order allowed the assessee's appeal so far as assessment years 1960-61 and 1961-62 were concerned. He held that the assessee was rightly taxed as regards the sales tax refund in the assessment year 1965-66, as the amount had become refundable to the assessee on January 20, 1964, when the decision of the Supreme Court was pronounced. He dismissed the appeal for the assessment year 1965-66.

4. Against the decision of the Appellate Assistant Commissioner the assessee went in appeal before the Tribunal. The Tribunal held that the transaction came within the mischief of section 41(1) of the Income-tax Act, 1961, when the assessee got refund of the sales tax paid. At the same time, relying on the decided cases, it held that this refund could not be treated as income under section 41(1) until the matter was completely finalised and that this was done was the Supreme Court passed the final order in the matter and the Tribunal took the view that the amount was rightly taxed in the assessment year 1965-66. Thereafter, at the instance of the assessee, the question set out hereinabove have been referred to us for our opinion.

5. At the outset it will be convenient to refer to the provisions of section 41(1). This section is in a group of sections, namely, sections 30 to 43A, which group, according to section 29, provides for the manner in which income under the head 'Profits and gains of business or profession' referred to in section 28 of the Income-tax Act, 1961, has to be computed. Section 41(1) provides that where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has 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, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and, accordingly, chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance of deduction has been made is in existence in that year or not. It may be pointed out that under the Indian Income-tax Act, 1922, the provision corresponding to section 41(1) was section 10(2A). However, there is this difference between the provisions of section 10(2A) of the Act of 1922 and section 41(1) of the Act of 1961. The words occurring at the end of section 41(1) 'whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not' were not to be found in section 10(2A) of the Act of 1922. It must be borne in mind that under the scheme of section 10 of the Act of 1922, under sub-section (1) of section 10, tax was to be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. Sub-section (2) of section 10 and the other sub-sections of section 10 provided for the manner in which the income under the head 'Profits and gains of business, profession or vocation' was to be computed. It was clear under the scheme of section 10 that unless the business, profession or vocation was carried on, the income could not be brought to tax under section 10(1) and if it could not be brought to tax, there was no question of computing such income in accordance with the provisions of any of the remaining sub-sections of section 10.

6. The question regarding whether the business should actually be carried on or not when the provisions of section 10(2) or other sub-sections of section 10 are sought to be invoked was first considered by the Supreme Court in Commissioner of Income-tax v. Express Newspapers Ltd. : [1964]53ITR250(SC) . In that case the facts were that the Free Press Company which was carrying on the business of publishing certain newspapers, transferred the right to print and publish those newspapers to the Express Newspapers Ltd. on August 31, 1946, and let out its machinery and assets to the latter with effect from September 1, 1946. On October 31, 1946, the Free Press Company went into voluntary liquidation and the liquidator was directed not to carry on the business of the company. The liquidator confirmed the transfer of the machinery and assets to the Express Newspapers Ltd. on November 1, 1946, the sale yielding a profit to the Free Press Company of Rs. 6,08,666 comprising Rs. 2,14,090, being the difference between the original cost and written down value of the machinery, and Rs. 3,94,576, being the amount in excess over the original cost. As the Free Press Company was dissolved later and was struck off the register of companies, the Express Newspapers Ltd. was assessed as the successor of the Free Press Company under the proviso to section 26(2) of the Indian Income-tax Act, 1922, inter alia, in respect of these two amounts, namely, the balancing charge comprising of Rs. 2,14,090 and the capital gains of Rs. 3,94,576. On these facts the Supreme Court held that the profits or gains which were earned when the business was being carried on by the assessee during the accounting year fell outside the provisions of section 10(1). The Supreme Court held in this case that in order that the excess over the written down value up to the original cost to the assessee realised on the sale of machinery used in his business might be brought to tax as profits of the business under the section proviso to section 10(2)(vii) of the Act of 1922 (equivalent to section 41(1)(2) of the Act of 1961), it was necessary that the machinery should have been sold when the business was being carried on. As the machinery was sold in this case after the business of the Free Press Company was closed and during the winding-up proceedings, the second proviso to section 10(2)(vii) did not apply and, therefore, the sum of Rs. 2,14,090 could not be brought to tax. At page 254 of the report, Subba Rao J., as he then was, delivering the judgment of the Supreme Court, observed - See : [1964]53ITR250(SC) :

'The main condition which attracts all the other sub-sections and clauses of the section (section 10) is that the tax shall be payable by an assessee in respect of the profits or gains of business, etc., carried on by him. The crucial words are 'business carried on by him'. If the profits or gains were not earned when the business was being carried on by the assessee during the accounting year, they would fall outside the provision of section 10(1). For instance, if the machinery was sold after the business was closed or when the business was under liquidation, it would not be appropriate to hold that the profits or gains earned by the sale were in respect of the business that was being carried on by the assessee.'

7. This decision was followed by the Supreme Court in Nalinikant Ambalal Mody v. S. A. L. Narayan Row, Commissioner of Income-tax : [1966]61ITR428(SC) . In Nalinikant Ambalal Modi's case : [1966]61ITR428(SC) , the assessee, who was an advocate, had adopted the calendar year as the accounting year and had kept his accounts on the cash basis. He ceased to carry on his profession on March 1, 1957, when he was elevated to the Bench of a High Court. In the years 1958 and 1959, during no part of which he carried on any profession, he received certain moneys on account of fees outstanding for professional work done by him. On these facts the majority of the learned judges of the Supreme Court held :

'The receipts were not chargeable to tax at all. The receipt were the outstanding dues of professional work done and were clearly the fruits of the assessee's professional activity. They were the profits and gains of a profession and they fell under the fourth head, namely, 'profits and gains of business, profession or vocation'. They were not, however, chargeable to tax under that head because under the corresponding computing section, i.e., section 10 of the Indian Income-tax Act, 1922, an income received by an assessee, who kept his accounts on the cash basis, in an accounting year in which the profession had not been carried on at all was not chargeable to tax.'

8. At page 431, Sarkar C.J., delivering the judgment on behalf of the majority, observed :

'The receipts in the present case are the outstanding dues of professional work done. They were clearly the fruits of the assessee's professional activity. They were the profits and gains of a profession. They would fall under the fourth head, viz., 'profits and gains of business, profession or vocation'. They were not however chargeable to tax under that head because under the corresponding computing section, that is, section 10, an income received by an assessee who kept his accounts on the cash basis in an accounting year in which the profession had not been carried on at all is not chargeable and the income in the present case was so received. This is reasonably clear and not in dispute : See Commissioner of Income-tax v. Express Newspapers Ltd. : [1964]53ITR250(SC) .'

9. It is, therefore, clear that under the Act of 1922 before any income could be brought to tax under the head 'profits and gains of business, profession or vocation', it was necessary that the business, profession or vocation must have been actually carried on by him at the time when the profits and gains of a profession accrued to the assessee concerned if he was maintaining accounts on mercantile basis or when the profits or gains were received if the assessee concerned was maintaining his accounts on cash basis. The emphasis on the words 'carried on' placed by the Supreme Court in these two cases clearly shows that if the business or profession came to an end and was not being carried on at the time of the receipt of the profits or gains or at the time when the profits or gains accrued, the amount could be brought to tax. It, therefore, necessarily followed that even the item mentioned under section 10(2A) of the Act of 1922 could not be brought to tax if the business or profession had ceased and was not being carried on at the time when the assessee received, either in cash or in any other manner whatsoever, some benefit in respect of the trading liability referred to in respect 10(2A) of the Act of 1922. Such benefit might be by way of remission or cessation of the trading liability, but since section 10(2A) formed part of section 10, it was necessary that the business must have been carried on. It was against this background of legal position that when the legislature enacted provisions similar to section 10(2A) of the Act of 1922 in section 41(1), sub-section (1), of the Act of 1961, it added the words at the end : 'whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not'. Barring this difference between the two section, the rest of the provisions of section 10(2A) of the Act of 1922 and section 41(1) of the Act of 1961 are identical.

10. Mr. J. P. Shah for the assessee contended before us that under section 41(1) what is necessary is that allowance or deduction must have been made in the assessment for any earlier year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee must have obtained, whether in cash or in any other manner whatsoever, some amount in respect of such loss or expenditure some benefit in respect of such trading liability by way of remission or cessation thereof. If these two factors are present, namely, allowance or deduction made in the course of any earlier assessment year and the obtaining, whether in cash or in any other manner whatsoever, any amount in respect of such trading liability by way of remission or cessation of the trading liability, then only the provisions of section 41(1) can be invoked. Mr. Shah's contention is that in respect of the earlier years in the course of which the assessee collected sales tax from other merchants and paid the amount so these sales tax dues to the Government, he did not show the amount of collections on the credit side of his account nor payments made to sales tax authorities on the debit side of the account and, therefore, there was no question of any deduction having been made in the assessment for any earlier assessment year. He, therefore, contended that the condition precedent for the applicability of section 41(1) has not been satisfied in the instant case.

11. In order to appreciate and understand this contention of Mr. J. P. Shah, we must first understand and appreciate the correct legal position regarding liabilities for sales tax dues. In Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax : [1971]82ITR363(SC) the Supreme Court observed that under all sales tax laws including the statute with which the Supreme Court was concerned in that particular case, the moment a dealer makes either purchases or sales which are subject to taxation, the obligation to pay the tax arises and taxability is attracted. Although that liability cannot be enforced till the quantification is effected in assessment proceedings, the liability for payment of tax is independent of the assessment.

12. In Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax : [1973]87ITR542(SC) the facts were somewhat similar to the facts of the case before us. In that case the appellant, a private company dealing in furniture, also acted as an auctioneer. In respect of the sales effected by it as auctioneer, the appellant realised during the relevant period, in addition to the commission, Rs. 32,986 as sales tax. This amount was credited separately in its account books under the head 'Sales tax collection account'. The appellant did not pay the amount of sales tax to the actual owner of the goods. Nor did it deposit the amount realised by it as sales tax in the State exchequer, because it took the position that the statutory provision creating that liability upon it was not valid, nor did the assessee refund it to the persons from whom it had been collected. In the cash memos issued by the appellant to the purchasers in the auction sale the appellant was shown as the seller. On these facts the Supreme Court held that the sum of Rs. 32,986 realised as sales tax by the assessee in its character as an auctioneer formed part of its trading or business receipts. It was further held that the fact that the assessee credited the amount received as sales tax under the head 'Sales tax collection account' did not make any material difference. It was observed by the Supreme Court that it is the true nature and quality of the receipt and not the head under which it is entered in the account books that would prove decisive. If a receipt, is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as trading receipt, and the court observed that the assessee concerned would be entitled to claim deduction of the amount as and when it paid the amount to the State Government. Khanna J., delivering the judgment of the Supreme Court, observed at page 548 :

'The amount realised by the appellant (assessee) from the purchasers included sales tax. The appellant, however, did not pay the amount of sales tax to the actual owner of the goods auctioned because the statutory liability for the payment of that sales tax was that of the appellant. The appellant-company did not also deposit the amount realised by it as sales tax in the State exchequer because it took the position that the statutory provision creating that liability upon it was not valid. As the amount of sales tax was received by the appellant in its character as an auctioneer, the amount, in our view, should be held to form part of its trading or business receipt. The appellant would, of course, be entitled to claim deduction of the amount as and when it pays it to the State Government.

The fact that the appellant credited the amount received as sales tax under the head 'sales tax collection account' would not, in our opinion, make any material difference. It is the true nature and quality of the receipt and not the head under which it is entered in the account books as would prove decisive. If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as trading receipt. We may in this context refer to the case of Punjab Distilling Industries Ltd. v. Commissioner of Income-tax : [1959]35ITR519(SC) . In that case certain amounts received by the assessee were described as security deposits. This court found that those amounts were an integral part of the commercial transaction of the sale of liquor and were the assessee's trading receipt. In dealing with the contention that those amounts were entered in a separate ledger termed 'empty bottles return security deposit account', this court observed : 'So the amount which was called security deposit was actually a part of the consideration for the sale and, therefore, part of the price of what was sold. Nor does it make any difference that the price of the bottles was entered in the general trading account while the so-called deposit was entered in a separate ledger termed 'empty bottles return deposit account', for, what was a consideration for the sale cannot cease to be so by being written up in the books in a particular manner'.'

13. In Sinclair Murray & Co. P. Ltd. v. Commissioner of Income-tax : [1974]97ITR615(SC) the same principle was followed by the Supreme Court. In Sinclair Murray & Company's case : [1974]97ITR615(SC) , during the accounting period relevant to the assessment year 1953-54, the appellant-company, with its head office in Calcutta, sold jute in Orissa to certain mills for being used in Andhra Pradesh and charged sales tax under a separate head in the bill as 'Sales tax : Buyers' account......... to be paid to the Orissa Government'. The sales tax was not paid to the Orissa Government on the ground that the sales were inter-State sales. On these facts the Supreme Court held that assuming that the relevant section of the Orissa Sales Tax Act, 1947, was valid, the fact that the dealer was compelled to deposit the amount of sales tax in the State exchequer did not prevent the applicability of the principle laid down by the Supreme Court in Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax : [1973]87ITR542(SC) . It was further held that the amount collected by the appellant as sales tax constituted its trading receipt and had to be included in its total income. The Supreme Court further held that if and when the appellant paid the amount collected to the State Government or refunded any part thereof to the purchaser, the appellant would be entitled to claim deduction of sum so paid or refunded. The Supreme Court (see : [1974]97ITR615(SC) in that case cited with approval the following passage from the decision of Lawrence J. in Paprika Ltd. v. Board of Trade [1944] 1 All ER 372 :

'Wherever a sale attracts purchase tax that tax presumably affects the price which the seller who is liable to pay the tax demands, but it does not cease to be the price which the buyer has to pay even if the price is expressed as X plus purchase tax'

and the following passage (see : [1974]97ITR615(SC) from the judgment of Lord Justice Goddard in Love v. Norman Wright Builders Ltd. [1944] 1 All ER 618 was cited with approval :

'Where an article is taxed, whether by purchase tax, customs duty or excise duty, the tax becomes part of the price which ordinarily the buyer will have to pay. The price of an ounce of tobacco is what it is because of the rate of tax, but on a sale there is only one consideration, though made up of cost plus profit plus tax. So, if a seller offers goods for sale, it is for him to quote a price which includes the tax if he desires to pass it on to the buyer. If the buyer agrees to the price, it is not for him to consider how it is made up, or whether the seller has included tax or not.' Following passage (see : [1974]97ITR615(SC) from the judgment of S. K. Das J. in George Oakes Private Ltd. v. State of Madras : [1962]2SCR570 was cited : '...... there is nothing in those provisions (of the Sales tax Act) which would indicate that when the dealer collects any amount by way of tax, that cannot be part of the sale price. So far as the purchaser is concerned he pays for the goods what the seller demands, viz, price even though it may include tax. That is the whole consideration for the sale and there is no reason why the whole amount paid to the seller by the purchaser should not be treated as the consideration for the sale and included in the turnover.'

14. It is thus clear from these different decisions and particularly the decisions in Sinclair Murray & Company's case : [1974]97ITR615(SC) , Chowringhee Sales Bureau P. Ltd.'s case : [1973]87ITR542(SC) and George Oakes (Private) Ltd.'s case : [1962]2SCR570 that according to the Supreme Court whenever any sale takes place, whether the price quoted to the purchaser includes sales tax or whether sales tax is separately collected, the sales tax forms part of the consideration for the sale and it forms part of the turnover of the seller. The amount of the sales tax payable in respect of the sales effected by a particular assessee forms part of his trading receipts and has to be shown on the credit side. As and when he pays the sales tax to the authorities, he can claim deduction for the sales tax paid; in case he has to refund the sales tax to the original purchaser who purchased the goods from him, then the amount so refunded will also be a deduction which he can claim and it must be granted to him, that being deduction on the expenditure side. Thus, it is obvious that in the instant case the assessee-firm which was maintaining its accounts on mercantile basis was bound to show as trading receipt all the amounts which accrued due to it or which were collected by it as sales tax and it was bound to show on the debit side of the accounts, the amounts which it paid by way of sales tax. The fact that no such entries showing credits and debits in respect of sales tax collected and sales tax paid were made by the assessee-firm does not alter the real substance of the transaction nor does it alter the real character of what was required to be done by the assessee in this case.

15. Mr. J. P. Shah for the assessee contended that whatever might be the legal position and the correct accounting practice, the fact cannot be overlooked that in the instant case the assessee had never claimed any deduction in respect of the sales tax paid by it nor had it shown on the receipts side the sales tax in any particular year. He contended, therefore, that the condition precedent to the applicability of section 41(1) of the Act of 1961 was not satisfied in the instant case. In reply to this connection, Mr. Kaji on behalf of the revenue urged before us that section 41(1) should be read in the light of the facts and circumstances of the case in such a manner that the words 'where an allowance or deduction has been made in the assessment for any year' are read as 'when an allowance or deduction has been made or ought to have been made in the assessment for any year'. Mr. Kaji contended in this connection that section 41(1), of the Act of 1961 is not a charging section and, therefore, it is permissible to the court, while applying the provisions of Section 41(1) in accordance with the clear intention of the legislature, to make the charge levied effective. In this connection he first relied upon the observations of the Supreme Court in Kesoram Industries & Cotton Mills Ltd. v. Commissioner of Wealth-tax : [1966]59ITR767(SC) for the purpose of pointing out as to what is meant by a charging section or charging provisions of the Act. At page 780 of the report, Subba Rao J., as he then was, delivering the judgment of the Supreme Court, observed :

'Under section 3 of the Income-tax Act (of 1922) where any Central Act enacts that income-tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, the said Act. The expression 'charged' is used both in the case of the Central Act, i.e., the Finance Act, and the Income-tax Act. It could not have been the intention of the legislature to charge the income to income-tax under two Acts. Necessarily, therefore, they are used in two different senses. The tax is to be charged for that year in accordance with, and subject to, the provisions of the Income-tax Act, but the said charge will be in accordance with the rates prescribed under the Finance Act. This construction will harmonize the apparent conflict between the two Acts. When you look at section 2 of the Finance Act, it shows that income-tax shall be charged at the rates specified in Part I of the First Schedule, and super-tax, for purposes of section 55 of the Indian Income-tax Act, 1922, shall be charged at the rates specified in Part II of the First Schedule. The primary object of the Finance Act is only to prescribe the rates so that the tax can be charged under the Income-tax Act. The Income-tax Act is a permanent Act, whereas the Finance Act is passed every year and its main purpose is to fix the rates to be charged under the Income-tax Act for that year. That should be the construction is also made clear by section 55 of the Income-tax Act, whereunder super-tax shall be charged for any year in respect of the total income of the previous year of any individual, Hindu undivided family, company, etc., at the rate or rates laid down for that year by a Central Act. This section brings out the distinction between a tax charged and the rate at which it is charged. This construction is also emphasized by section 67B of the Income-tax Act, whereunder if, on the 1st day of April in any year, provision has not yet been made by a Central Act for the charging of income-tax Act for that year, the Income-tax Act shall nevertheless have effect until such provision is so made as if the provision in force in the preceding year or the provision proposed in the Bill then before Parliament, whichever is more favourable to the assessee, was actually in force. This shows that the charging section is only section 3 of the Income-tax Act, and that section 2 of the Finance Act only gives the rate for quantifying the tax; for, this section gives an alternative for quantification in the contingency of the Finance Act not having been made on the 1st day of April, of that year.'

16. The Supreme Court also pointed out the earlier decisions of the Privy Council and pointed out that in Maharajah of Pithapuram v. Commissioner of Income-tax : [1945]13ITR122(Mad) the Privy Council had held that 'under the express terms of section 3 of the Indian Income-tax Act, 1922, the subject of charge is not the income of the year of assessment, but the income of the previous year; and the Indian Income-tax Act, 1922 as amended from time to time, forms a code, which has no operative effect except so far as it is rendered applicable for the recovery of tax imposed for a particular fiscal year by a Finance Act.' It was pointed out that the charge to tax would be under the Income-tax Act in terms of the relevant provisions of the said Act and the Federal Court in Chatturam v. Commissioner of Income-tax [1947] 15 ITR 302 , after considering the relevant English decisions, held that the liability to pay tax was founded on sections 3 and 4 of the Income-tax Act which were the charging sections. Thus, it is clear that according to several decisions by the highest Tribunals in the country, namely, the Federal Court, the Privy Council and the Supreme Court, sections 3 and 4 of the Act of 1922 were the charging sections. It is true that in Nalinikant Ambalal Mody's case : [1966]61ITR428(SC) and Express Newspapers Ltd. : [1964]53ITR250(SC) , the Supreme Court emphasized that even under section 3, which was the charging section, tax at the rate or rates mentioned in the Finance Act was to be charged for the particular year in accordance with and subject to the provisions of the Indian Income-tax Act, 1922, and the tax was to be in respect of the total income of the previous year. In both Express Newspapers Ltd.'s case : [1964]53ITR250(SC) and Nalinikant Ambalal Mody's Case : [1966]61ITR428(SC) , the Supreme Court emphasized that only profits and gains of business, profession or vocation which were computed in accordance with and subject to the provisions of the Act could be brought to tax and since the business in Express Newspapers Ltd.'s case : [1964]53ITR250(SC) and the profession in Nalinikant Ambalal Mody's case : [1966]61ITR428(SC) was not being carried on in the relevant previous year, there was no question of the computation of the tax being charged in accordance with or subject to the provisions of that Act, but neither in Nalinikant Ambalal Mody's case : [1966]61ITR428(SC) nor in Express Newspapers Ltd.'s case : [1964]53ITR250(SC) has the Supreme Court said that the provisions of section 10 were provisions of a charging section. Indeed, by now the position has been well recognised that it is only section 3 read with section 4 of the Act of 1922 and section 4 read with section 5of the Act of the 1961 which are the charging sections in the relevant Acts. The rest of the sections in the respective Acts constitute the machinery for computation and levying of tax and the machinery for the assessment of tax but the charge of tax is under section 4 of the Act of 1961

17. Mr. J. P. Shah for the assessee contended in this connection that as it was only for the first time under the Act of 1961 that even though the business might not have been in existence at the time when the amount referred to in section 41(1) was sought to be brought to tax, to that extent section 41(1) was a charging section. So far as the present case is concerned, however, we are not concerned with that aspect of the case because in the instant case, it is not in dispute that the assessee-firm was carrying on business in Samvat year 2020 which was the relevant previous year for assessment year 1965-66. Therefore, we must proceed upon the footing that the last portion of section 41(1) has no bearing and all that we are concerned with are the provisions of section 41(1) barring the last sentence 'whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not.'

18. In this connection what Sir John Beaumont C.J. observed in another case which was decided even before the insertion of section 10(2A) in the Act of 1922 is highly instructive. In In re Union Bank of Bijapur and Sholapur Ltd. : [1942]10ITR21(Bom) the assessee, a bank, claimed in the assessment year 1935-36 a certain amount as loss by reason of embezzlement on the part of an employee under section 10(2)(ix) of the Indian Income-tax Act and the income-tax authorities treating it as a business loss allowed it to be set off against the remainder of profits. In the accounting year 1937-38, the assessee recovered from the heirs of the employees a sum of Rs. 8,790 from the amount embezzled and the income-tax authorities, after deducting the law charges and certain other deductions from Rs. 8,790, included a net sum of Rs. 4,737 in the total income of the assessee for the assessment year 1938-39, on the ground that the assessee having treated the loss as a revenue loss and obtained relief on that basis, any recovery made in respect of that loss must be regarded as a revenue gain as an when it occurred. Sir John Beaumont observed at page 25 of the report :

'The embezzlement was, no doubt, substantially more than the income of that year. In a subsequent year a sum is found to have been recovered in respect of that embezzlement, and it seems to me that the assessee, having alleged that the embezzlement was an embezzlement of income, which could properly be set off against income in a previous year cannot affirm in another year that it was not income, and that a recovery in respect of it is a casual appreciation of capital, as he seeks to do.'

19. The basic principle of what has been said by Sir John Beaumont in In re Union Bank of Bijapur and Sholapur : [1942]10ITR21(Bom) and what has been enacted in section 41(1) is that if a deduction has been made in a previous year and the assessee has benefited by such deduction in the past, if by chance some amount if refunded to him or comes back to him, the amount so got back should be brought to tax; that is the sum and substance of the provision of section 41(1). There is no charging section in this and, therefore, the principle which Mr. Shah wanted to invoke, namely, that section 41(1) is the charging section and, therefore, should be strictly construed, cannot be invoked in the instant case.

20. In Gursahai Saigal v. Commissioner of Income-tax : [1963]48ITR1(Bom) , the Supreme Court was concerned with the provisions of sub-sections (3), (6), (8) and (9) of section 18A of the Indian Income-tax Act, 1922. The provisions arose for consideration under the following circumstances. In certain assessment proceedings under the Indian Income-tax Act, 1922, the assessee was charged with interest under sub-section (8) of section 18A of the Act. That sub-section provided that in cases there mentioned interest calculated in the manner laid down in sub-section (6) of section 18A shall be added to the tax assessed. The assessee contended that he could not be made liable to pay the interest as in his case it could not be calculated in the manner indicated. The only question that arose in this appeal was whether this contention was right. The assessee pointed out that it had not paid any advance tax at all and, therefore, there was no question of calculating interest on the footing that the tax had been paid. Section 18A(6) dealt with the case in which the tax had been paid and provided that interest should be calculated from the first day of January in the financial year in which the tax was paid. The assessee contended that since he had not paid any advance tax at all, there was no question of calculating interest from the first day of January in the financial year in which the advance tax was paid and under these circumstances the question arose before the Supreme Court whether the principle of strict construction of a taxing statute would apply to the provision of section 18A(6). The assessee before the Supreme Court, Gursahai Saigal's case : [1963]48ITR1(Bom) , contended that the rule of construction applicable to taxing statutes, particularly as laid down by Rowlatt J. in Cape Brandy Syndicate v. Inland Revenue Commissioners [1921] 1 KB 64 should be applied, namely :

'......... in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.'

21. The Supreme Court pointed out that the object of this rule of strict construction is to prevent a taxing statute from being construed 'according to its intent, though not according to its words'. It was pointed out that in A. V. Fernandez v. State of Kerala : [1957]1SCR837 the Supreme Court (see : [1963]48ITR1(Bom) ) had observed :

'If........ the case is not covered within the four corners of the provisions of the taxing statute no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter.'

22. In the light of these facts and contentions and with this background of the legal position, Sarkar J., as he then was, observed (see : [1963]48ITR1(Mad) ) :

'Now it is well-recognised that the rule of construction on which the assessee relies applies only to a taxing provision and has no application to all provisions in a taxing statute. It does not, for example, apply to a provision not creating a charge for the tax but laying down the machinery for its calculation or procedure for its collection. The provisions in a taxing statute dealing with machinery for assessment have to be construed by the ordinary rules of construction, that is to say, in accordance with the clear intention of the legislature which is to make a charge levied effective. Reference may be made to a few cases laying down this distinction. In Commissioner of Income-tax v. Mahaliram Ramjidas [1940] 8 ITR 442 it was said : 'The section, although it is part of a taxing Act, imposes no charge on the subject, and deals merely with the machinery of assessment. In interpreting provisions of this kind the rule is that that construction should be preferred which makes the machinery workable, ut res valeat potius quam pereat'.'

23. Again in India United Mills v. Commissioner of Excess Profits Tax : [1955]27ITR20(SC) , the Supreme Court : [1963]48ITR1(Bom) had pointed out with reference to another section :

''That section is, it should be emphasized, not a charging section but a machinery section and a machinery section should be so construed as to effectuate the charging sections'.'

24. After considering all this legal position, the Supreme Court in Gursahai Saigal's case : [1963]48ITR1(Bom) held that in order that section 18A(6) might become workable in a case where no tax had been paid, it should be read as providing that interest should be calculated 'from the first day of January in the financial year in which the tax ought to have been paid.' Thus, in the case of Gursahai Saigal : [1963]48ITR1(Mad) , the Supreme Court has accepted as the correct legal position the principle that sections of a taxing statute other than the charging section or sections should be so read as to effectuate the intention of the legislature, which is to make the charge effective and further the provisions should be so read as to make the machinery of assessment workable.

25. It may be pointed out that in Murarilal Mahabir Prasad v. B. R. Vad : [1976]1SCR689 , Chandrachud J., after considering the earlier decisions on the point, has observed as follows :

'The true implication of the principle that a taxing statute must be construed strictly is often misunderstood and the principle is unjustifiably extended beyond the legitimate field of its operation. Indeed, the more well expressed the principle as in the Cape Brandy case [1921] 12 TC 358 , greater the reluctance to see its limitations. In that famous passage marked by a happy turn of phrase, Rowlatt J. said, 'there is no equity about a tax. There is no presumption as to a tax'. There is no equity about a tax in the sense that a provision by which a tax is imposed has to be construed strictly, regardless of the hardship that such a construction may cause either to the treasury or to the taxpayer. If the subject falls squarely within the letter of law he must be taxed, howsoever inequitable the consequences may appear to the judicial mind. If the revenue seeking to tax cannot bring the subject within the letter of law, the subject is free no matter that such a construction may cause serious prejudice to the revenue. In other words, though what is called equitable construction may be admissible in relation to other statutes or other provisions of a taxing statute, such a construction is not admissible in the interpretation of a charging or taxing provision of a taxing statute..... the subject is not to be taxed unless the charging provision clearly imposes the obligation.'

26. The earlier decision of the Supreme Court in Gursahai Saigal : [1963]48ITR1(Mad) was referred to and followed at pages 111 and 112 of the report. Thus, the principle which we have to follow in the instant case is that since section 41(1) so far as the present case is concerned is not a charging section it has to be construed in such a manner as to make the levy of the tax effective and to make the machinery of assessment workable.

27. We may point out that in Commissioner of Income-tax v. Lakshmamma : [1964]52ITR789(KAR) Hegde J., as he then was, delivering the judgment of the Mysore High Court, after examining all the earlier decisions on the point, observed at page 800 :

'Now we can easily find out the reason for enacting section 10(2A) of the Act. Evidently, the legislature wanted to get over the effect of the decision in Mohsin Rehman Penkar's case : [1948]16ITR183(Bom) and the cases that followed it. At that stage, evidently, it was thought advisable to make the provision self-contained by bringing within its ambit the amounts refunded as well as those remitted and at the same time remove the difficulties created by the two systems of accounts-keeping permitted by law.

Therefore, we have to hold that section 10(2A) so far as it covers cases similar to the one before us did not introduce any new principle of law; either it is declaratory in character or it is a measure introduced out of abundant caution.'

28. It was not a charging section so far as refund cases are concerned according to the decision of the Mysore High Court and Hegde J. has pointed out all the relevant cases earlier decided in India relating to refund and has pointed out that at least so far as refund is concerned, the principle incorporated in section 10(2A) of the Act of 1922 was not a new one but was a mere reiteration of what was already a well-settled legal position.

29. Ikrahnandi Coal co. v. Commissioner of Income-tax : [1968]69ITR488(Cal) , which was decided by the Calcutta High Court and Commissioner of Income-tax v. Saraswati Industrial Syndicate Ltd. (decided by the Punjab High Court) were both cases of refund of sales tax. In the (Punjab case prior to 1956 the assessee-firm recovered a sum of Rs. 4,155 from its customers as sales tax. No demand notice was received for paying the sales tax as it was held by the Supreme Court that sales tax was not payable on such transactions. The assessee wrote back this amount in its profit and loss account for the year 1963-64 and the Income-tax Officer sought to assess the sum as income from business for that year. It was held by the Punjab High Court that the amount of sales tax recovered by the assessee was an integral component of the sale price. The assessee had itself treated the amounts as revenue receipts by transferring them to its profits and loss account. The amount of Rs. 4,155 was, therefore, assessable to income-tax and the Tribunal was not justified in law in excluding it from assessment. The principle followed by the Punjab High Court is clearly inapplicable to the present case because in that particular case there was no question of refund but merely transferring by appropriate entry amount from deposit account to profit and loss account.

30. In the Punjab case there was no question of invoking section 41(1) and yet the amount of sales tax was brought to tax under the general provisions as profits and gains of business. Similarly, in the Calcutta case of Ikrahnandi Coal Company : [1968]69ITR488(Cal) the assessee had received a refund of sales tax amounting to Rs. 41,124 as a result of an order of the Bombay sales tax authorities consequent on a decision of the Supreme Court. The income-tax authorities sought to assess this refunded amount as income of the assessee. It was contended on behalf of the assessee that sales tax was collected by the assessee from the assessee's buyers and the same was under the statute to be paid to the sales tax authorities and when the money representing the sales tax was refunded by the sales tax authorities, the identical money became refundable by the assessee to the assessee's buyers, and, therefore, the refunded amount was not assessable as his income. These arguments were rejected and it was held by the Calcutta High Court that the amount of sales tax, even though shown separately in the transaction of sale as sales tax, is a part of the consideration which the seller charges for transfer of the property. The fact that the statute provides that the seller may collect sales tax did not rob the transaction of its trading character. Consequently, the sum in question was assessable to income-tax as income of the assessee. In this case also there was no question of the Calcutta High Court invoking the provisions of section 41(1) but straightaway all the amount refunded was brought to income-tax as part of the income of the assessee. Thus, these two decision, one of the Calcutta High Court and the other of the Punjab High Court support the conclusion reached by us that the provision of section 41(1) is not a charging provision and, therefore, the rule of strict construction which applies to the charging provision or the taking provision of a taxing statute will not apply to section 41(1).

31. It seems to us on the facts of the present case that in order to make the machinery of assessment effective and in order to make the intention of the legislature, namely, making the levy effective, it is necessary that as in Gursahai Saigal's case : [1963]48ITR1(Bom) , we should read the words 'deduction has been made' as 'deduction ought to have been made' because, in view of the decision of the Supreme Court in Chowringhee Sales Bureau P. Ltd.'s case : [1973]87ITR542(SC) , if the amounts of sales tax had been shown on the receipts side, what the assessee-firm paid to the Government as sales tax dues even though disputing its liability to pay tax, would have been shown as deduction on the debit side. The assessee-firm would have been entitled to this deduction in view of the decision in Chowringhee Sales Bureau's case : [1973]87ITR542(SC) and Sinclair Murray & Company's case : [1974]97ITR615(SC) . Under the circumstances these amounts of sales tax collections which the assessee-firm was bound to show on the credit side when received and was entitled to claim as deduction when sales tax was paid must be treated as deductions which ought to have been made and thus the principle laid down in Gursahai Saigal's case : [1963]48ITR1(Bom) would clearly apply in the instant case. We, therefore, read the words at the commencement of section 41(1) 'Where an allowance or deduction has been made in the assessment for any year' as 'Where an allowance or deduction ought to have been made in the assessment for any year' so far as the facts of this case are concerned, and so reading that provision, it must be held that the provisions of section 41(1) apply to the facts of this case. It is, therefore, clear that the first condition regarding the applicability of section 41(1) is completely satisfied in this case and the refund obtained by the assessee as a result of the decision of the Supreme Court is clearly covered as an amount obtained in cash or in any other manner as referred to in section 41(1).

32. The alternative contention of Mr. Kaji for the revenue is that question No. 1 should be reframed in the light of the decision of the Bombay High Court in Commissioner of Income-tax v. Breach Candy Swimming Bath Trust : [1955]27ITR279(Bom) and that the question as reframed should read 'whether the facts and in the circumstances of the case, the hon'ble Tribunal is correct in holding that the refund from the sales tax is taxable under the Act ?' So that it can be argued for the revenue that on the question as thus reframed the amount can be taxed even under section 4 even if the provisions of section 41(1) are not applicable. This alternative contention need not be considered in view of the conclusion that we have arrived at regarding the applicability of section 41(1) and, therefore, we have not reframed the question nor have we considered the alternative contention of Mr. Kaji in this connection.

33. That brings us to question No. 2 as to which particular assessment year the amount could be brought to tax. Now, it is obvious that the assessee was maintaining its accounts on mercantile basis and thus it is not the actual receipt which would matter but the question is when the right to receive the amount accrued to the assessee-firm. It is well known that when accounts are maintained on mercantile basis, it is the date of accrual and not the date of actual receipt that matters. As pointed out earlier, the amount of Rs. 34,490 was received by the assessee in Samvat year 2020 and the balance sum of Rs. 7,773 was received by it in Samvat year 2021 but since the system of account keeping followed by the assessee was on mercantile basis, it is obvious that it is the date of accrual of the right to receive the amount that is material and not the date of actual payment by the Government to the assessee. The decision of the Madhya Pradesh High Court [Bhailal Bhai v. State of M.P. ] was delivered on December 16, 1959, and in view of the fact that the appeal was taken to the Supreme Court, the decision of the Supreme Court [State of Madhya Pradesh v. Bhailal Bhai - : [1964]6SCR261 ] would finally decide the question of accrual of right. It may also be pointed out that during the pendency of the appeal before the Supreme Court the amounts were paid to the assessee-firm on condition that it gave a bank guarantee that in the event of the Supreme Court decision going against it, the amount would be repaid to the Government of Madhya Pradesh. In view of this bank guarantee it is obvious that it is the date of the Supreme Court decision which can be said to be the relevant date for the purpose of ascertaining the accrual of the right to receive the amount by way of refund. It is only with the decision of the Supreme Court on January 20, 1964, which fell in Samvat year 2020, that the right to receive Rs. 42,263 can be said to have finally accrued to the assessee. The right to receive the refund in the sum of Rs. 42,263 arose by virtue of a direction given by the Madhya Pradesh High Court but when the matter was taken in appeal, by virtue of interim orders passed in that matter, the right to receive this amount was subject to furnishing bank guarantee and it became matured and was crystallized only when the Supreme Court decision was delivered. Under these circumstances it is only Samvat year 2020 in the course of which the Supreme Court judgment was delivered on January 20, 1964, that can be said to be the previous year in the course of which this right to refund accrued. In view of section 41(1), therefore, it is that previous year in the course of which the right to receive this amount of Rs. 42,263 by way of refund accrued to the assessee and the provisions of section 41(1) are, therefore, applicable and it is the assessment year 1965-66, the previous year being Samvat year 2020, which is the year in which the amount of refund can be brought to tax under section 41(1).

34. Under these circumstances we cannot accede to the request of Mr. Kaji made in the alternative to reframe the question and we answer the question as originally referred to us. We answer question No. 1 in the affirmative and question No. 2 also in the affirmative as to the first part. The rest of question No. 2 does not arise, that is, the income was rightly assessed to tax in the assessment year 1965-66, when the order of the Supreme Court was announced. The assessee will pay the costs of this reference to the Commissioner.


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