1. In this case, at the instance of the revenue, the following two questions have been referred to us for our opinion by the Tribunal :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 42,945 being the sales tax refund was not liable to the taxed in the assessment year 1966-67
(2) Whether, on the facts and in the circumstances of the case, the Tribunal Was right in law in holding that the right to receive sales tax refund arose within the meaning of section 41(1) of the Act, on the date When the judgment of the Gujarat High Court was delivered in the case of Commissioner of Sales Tax v. Sumatilal Popatlal & Company and not on the date when the Sales Tax Officer passed the order of refund ?'
2. The facts leading to this reference are as follows : The assessment year under consideration is 1966-67, the previous year being Samvat year 2021. While processing the assessment for the assessment year 1966-67, a point arose for consideration before the Income-tax Officer whether the refund of sales tax which was allowed as a deduction in the respective assessment years was liable to be assessed as the income of the assessee in the year in which it was refunded to the assessee. In respect of sales of hessian during the period June 30, 1957, to December 31, 1959, the assessee had paid an aggregate amount of Rs. 42,945 as and by way of sales tax. On December 5, 1962, this High Court delivered the judgment in Commissioner of Sales Tax v. Sumatilal Popatlal & Co. and it was held in that case that no sales tax could be levied on sales of hessian. After the pronouncement of this decision, the assessee applied for refund of sales tax aggregating to Rs. 42,945. On August 19, 1965, the Sales Tax Officer issued the refund order and the main controversy in the present reference is as to in which year this amount of refund should be included as part of the income of the assessee, that is, in 1965 being the previous year relevant to the assessment year 1966-67 or in the previous year relevant to the assessment year 1964-65. The assessee contends that this amount of Rs. 42,945 being the refund of sales tax should be included in his income in the Assessment year 1964-65 whereas the department insists that it should be included in the assessment year 1966-67. It may also be pointed out that after the receipt of the amount the assessee filed a revised return for the assessment year 1964-65, showing the amount of Rs. 42,945 as part of his income but this revised return was not accepted by the Income-tax Officer and ultimately he included the amount as part of the income of the assessee in the assessment year 1966-67. It is common ground between the parties that the assessee's books of account are kept on the mercantile system of accounting as distinguished from cash or receipt basis. It is also common ground that, apart from applying from refund of sales tax after the decision of this High Court in Commissioner of Sales Tax v. Sumatilal Popatlal & Co., the assessee had not initiated any proceedings in connection with his sales tax liabilities. The assessee contends that the right to refund arose on December 5, 1962, when the Gujarat High Court held that sales tax was not leviable on hessian and according to the assessee on that date the right to refund accrued to the assessee and it is that date which should be taken into consideration for the purpose of deciding in which assessment year the amount of Rs. 42,945 should be included. The Income-tax Officer relied upon section 41(1) of the Income-tax Act, 1961, for the purpose of holding that the amount should be included in the income for the assessment year 1966-67. Against the decision of the Income-tax Officer, the assessee went in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner relied upon the decision of the Allahabad High Court in Jagatnarain Durga Prasad v. Commissioner of Income-tax and he confirmed the order of the Income-tax Officer. Against the decision of the Appellate Assistant Commissioner, the matter was taken in further appeal before the Tribunal by the assessee. The Tribunal held that the right to receive the refund came into existence on the date when the judgment was delivered by the Gujarat High Court, that is, on December 5, 1962, in the case of Commissioner of Sales Tax v. Sumatilal Popatlal & Co. and, therefore, the income arising from the refund of sales tax which had been previously paid, should be assessable in the assessment year 1964-65. Thereafter, at the instance of the revenue, the questions set out hereinabove have been referred to us for our opinion by the Tribunal.
3. Before proceeding further with the discussion on the point, it will be necessary to refer to section 41(1) of the Act of 1961. That section is in these terms :
'41. (1) 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 or deduction has been made is in existence in that year or not.'
4. It is true that section 41 is one of the sections providing for machinery of assessment and ordinarily it has got to be read in the light of the system of accounting adopted by the assessee in those years unless the section required us to reach a different conclusion. It is common ground between the parties that the books of account of the assessee or maintained on mercantile system and these books of account maintained in accordance with that system have been accepted by the department. Mr. Patel for the assessee has contended that section 41(1) cannot be read divorced from the full implications of the system of account keeping. It is true that, when the legislature in section 41(1) speaks of 'an allowance or deduction having been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee', it means that the allowance or deduction has been allowed in the assessment for any particular year in the past on the basis of the system of account keeping maintained by the particular assessee. But the material words, in our opinion, in this section are that' the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure'. The words 'obtained any amount' are to be read as distinguished from the 'benefit accruing to the assessee in respect of any trading liability' and the benefit may be by way of remission or cessation of that very liability. So far as the value of the benefit is concerned, it can only accrue and in respect of the value of such benefit, the actual basis can be taken into consideration so far as remission or cessation accrual basis can be taken into consideration so far as remission or cessation of the trading liability is concerned. But it must be borne in mind that the section speaks of 'benefit in respect of such trading liability : as allowance and not as having been obtained by the assessee. This clear distinction between 'obtaining of any amount in respect of loss or expenditure' on the one hand and 'accrual of any benefit in respect of a trading liability by way of remission or cessation thereof' points out the emphasis which the legislature has laid upon actual cash receipt so far as the amount being obtained is concerned and accrual basis so far as the benefit in respect of the trading liability is concerned. The mere wording of the section, in our opinion, clearly indicates that, so far as the loss or expenditure is concerned in respect of which an allowance or deduction has been made in the past, what counts is obtaining of any amount in respect of such loss or expenditure. The amount may be received in any year or in any other manner whatsoever, but it must be 'obtained' whereas, so far as the benefit in respect of trading liability is concerned, it must be by way of remission or cessation of the said liability and the relevant date is the date of accrual of such benefit. The value of the benefit is to be considered the income of the assessee as of the date of accrual of the benefit.
5. We may point out that Sampath Iyengar in his Commentary on Income-tax Act, sixth edition, section volume, at page 1077, has observed in connection with section 41(1) as follows :
'The words 'the assessee has obtained any amount' in the context of expenditure previously incurred by the assessee, would connote that a payment had already been made by the assessee to his creditor and that the creditor returns back the whole or a part thereof to the assessee. It might be that, earlier, an over-payment had been made by the assessee and that on a subsequent checking, the over-payment is discovered, and therefore, the creditor returns back a portion, in which event, the assessee would have 'obtained payment' within the meaning of this sub-section. The same principle would apply where a mistaken payment had been originally made and on discovery of such mistake, the entire amount is returned to the assessee. Thus, where licence fee or kist or sales tax collected from the assessee and earlier allowed as a deduction are refunded to the assessee, the same will be chargeable in the hands of the assessee under the present section. Next, the words 'any benefit...... by way of remission or cessation thereof' would denote that the liability of the assessee is still undischarged and that the remission or cessation of the liability takes place, either wholly or in part, before the assessee makes any further payment in discharge of his liability.'
6. We find that in Commissioner of Income-tax v. Lakshmamma, Hegde J., as he then was, in the Mysore High Court, has observed regarding section 10(2A) of the Act of 1922 which was equivalent to section 41(1) of the present Act as follows :
'It is true that in the view of section 10(2A), at present, there is no room for controversy as regards receipts similar to the one that we are considering in this case. At present it is immaterial whether there is remission or refund or whether the system of accounting adopted by the assessee is the cash-credit system or the mercantile system.'
7. It must be conceded that these observations are obiter because, from the point of view of the decision before the Mysore High Court, it was not strictly necessary to decide the point under section 10(2A). According to the Mysore High Court, section 10(2A) which was inserted in the Act of 1922 with effect from April 1, 1955, did not introduce any new principle of law but was only a declaratory provision so far as refunds were concerned. The sub-section had only extended the principle applicable to refunds to remissions and to cases where accounts are kept on the mercantile system and removed the doubts created by the decision of the Bombay High Court in Mohsin Rehman Penkar v. Commissioner of Income-tax and the cases that followed it.
8. However, the main controversy which has been urged before us is in the light of the special characteristic of the sales tax law. Does the word 'obtained' occurring in section 41(1) mean actually obtained or means obtainable, or when the assessee became entitled to obtain the same That is the question that we have to consider in the light of the sales tax law. It is true, as Mr. Patel has contended before us, that the decision of the Gujarat High Court in Commissioner of Sales Tax v. Sumatilal Popatlal & Company was to the effect that under the law no sales tax was payable in respect of sales of hessian and it, therefore, became clear, according to this decision which was not challenged by way of further appeal to the Supreme Court, that the amount of Rs. 42,945 which the assessee had paid to the sales tax authorities in the earlier years had no basis in law so far as the Government was concerned and the amount had been collected from him without the proper authority of law in that behalf.
9. Mr. Patel for the assessee has very strongly relied upon certain observations of Grover J. in Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax. At page 366 of the report, Grover J., delivering the judgment of the Supreme Court, has observed :
'Now under all sales tax laws including the statute with which we are concerned, the moment a dealer makes either purchases or sales which are subject to taxation, the obligation to pay the arises and taxability is attracted. Although that liability cannot be enforced till the quantification is effected by assessment proceedings, the liability for payment of tax is independent of the assessment.'
10. Relying on this passage, Mr. Patel has urged that, according to this passage, the liability to pay the sales tax arose the moment the sale was made and it was no that footing that in the previous year sales tax had been paid by the assessee. Therefore, when the Gujarat High Court declared on December 5, 1965, that no sales tax was payable on sales of hessian, it necessarily followed that the amount which had been paid in the past on the basis of the sales of hessian were all wrongly collected from him. Therefor, according to Mr. Patel, the assessee became entitled to receive back the amount of Rs. 42,945 on the very day on which the judgment had been pronounced by the Gujarat High Court and since the assessee is maintaining accounts on mercantile basis as of that date he could have made the relevant credit entries in his books of account in connection with the amount of Rs. 42,954 irrespective of the date when the amount was actually received. Mr. Patel contended that the fact that the entry was made when the sum of Rs. 42,945 was actually received by way of refund from the Sales Tax Officer is totally immaterial in this connection. In our opinion, the contention of Mr. Patel based on the passage cited above from the decision in Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax cannot be accepted. The passage merely mentions when the liability to pay sales tax arises. It does not mention when the right to receive the refund in appropriate case can be said to arise and the converse of the case cannot be inferred from the passage cited above. The fact that the liability to pay sales tax arises when a dealer either makes purchases or sales which are subject to taxation, does not mean that, in the event of the sales tax having to be refunded, the refund can be said to arise as of a particular earlier date prior to the date of the receipt, and we must emphasize once again that under section 41(1) what is material is the date of obtaining of any amount in respect of the expenditure incurred in any earlier year.
11. Mr. Patel also relied upon certain observations of the Supreme Court in Commissioner of Income-tax v. Chunilal V. Mehta & Sons P. Ltd. : 82ITR54(SC) . It must be borne in mind that in that case the Supreme Court was dealing with section 10 (5A) of the Act of 1922. The facts of that case were that in about April, 1951, a large holding of the managed company was acquired by a group of shareholders hostile to the managing agents, that is, the assessee in that particular case. Thereafter, the relationship between the managing agents and the managed company became strained. On April 23, 1961, the directors of the managed company passed a resolution terminating the services of the assessee-firm as managing agents. This resolution was affirmed by the shareholders at their extraordinary general meeting held on May 23, 1951. Ultimately a suit was filed in the High Court regarding the remuneration to be paid to the assessee-firm and a decree in the sum of Rs. 2,34,000 was passed in favour of the assessee and the amount was received by the assessee-firm in December, 1955. Till the insertion of section 10(5A) in the Act of 1922 by the Finance Act, 1955, the compensation received by a managing agent for the termination of his agent was considered as a capital receipt but section 10(5A) provided that any compensation or other payment due to or received by a managing agent of an Indian company at or in connection with the termination or modification of his managing agency agreement with the company was to be deemed to be profits and gains of business carried on by the managing agent, and was to be liable to tax accordingly. This provision was not retrospective in operation. In this connection Hegde J., delivering the judgment of the Supreme Court, observed at page 59 :
'Section 10(5A) takes in 'payment due to or received'. In the matter of payments, there are two aspects, viz., (1) payments due, and (2) payments received. The mercantile system of accountancy takes note of 'payments due' whereas the cash system of accountancy recognises only 'payments received'. Mercantile system of accountancy, a double entry system, is maintained on the basis of accrual of rights to receive or liability to pay a certain sum of money, unlike in the case of cash system of accountancy which merely takes note of actual receipts or disbursements.'
12. Now the distinction between the mercantile system of accountancy and cash system of accountancy as pointed out by the Supreme Court must be followed. But what was observed in that case was with respect to the clear words of section 10(5A) of the Act of 1922. What we are concerned with is as to what is the meaning to be attached to the words 'obtained any amount in respect of expenditure' occurring in section 41(1). There is not the slightest mention even if any accrual of a right so far as the words of section 41(1) is concerned in respect of an expenditure incurred in the past.
13. The general principles laid down by the Supreme Court in Kesoram Industries & Cotton Mills Ltd. v. Commissioner of Wealth-tax : 59ITR767(SC) , again do not help us in solving the question before us. As to what is meant by the word 'debt' and when a debt can be said to have been due there is full discussion in Kesoram Industries & Cotton Mills Ltd.'s case 1 and the essential characteristics of a 'debt' have been clearly set out and it has been indicated that a 'debt owed' is a debt payable in future and a debt has been distinguished from a liability for a sum payable upon a contingency. The observations about the debt being a present obligation to pay a sum of money in present or in future do not help us regarding this insistence on behalf of the assessee that the court must take note of the mercantile system of account-keeping while applying the provisions of section 41(1).
14. In our opinion, the only meaning that can be attached to the words 'obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure' incurred in any previous year clearly refer to the actual receiving of the cash of that amount. The cash may be actually received or it may be adjusted by way of an adjustment entry or a credit note or in any other form when the cash or equivalent of the cash can be said to have been received by the assess. But it must be the obtaining of the actual cash which is contemplated by the legislature when it used the words 'has obtained, whether in case or in any other manner whatsoever, any amount in respect of such loss or expenditure in the past'. In the context in which these words occur, on other meaning is possible so far as we are concerned. Under these circumstances the view taken by the Tribunal that the material date was December 5, 1962, when the Gujarat High Court pronounced its decision is not correct. It is no doubt true that by virtue of that judgment it became possible for the assessee before us to claim refund of the sales tax amounts paid in the past but by merely getting a right to claim the refund, he had not obtained the amount of the refund. The amount of the refund was obtained only after the Sales Tax Officer passed the order of refund on August 19, 1965, and it is only on that date that it could be said that the assessee before us obtained the amount of refund in respect of the expenditure of sales tax incurred by him in the previous year. Therefore, it must be held that the amount was assessable in the previous year relevant to the assessment year 1966-67, and not in the previous year relevant to the assessment year 1964-65.
15. We, therefore, answer the questions referred to us as follows :
Question No (1).
In the negative, that is, in favour of the revenue and against the assessee.
16. In the light of the above discussion, we decline to answer question No. (2) as it is not necessary to answer the same. The assessee will pay the costs of this reference to the Commissioner.