1. This is an income-tax reference where we have to deal a little with sales-tax as well. In our country, sales tax is a commercial tax on the turnover of dealers. There is however, no ban on the shifting of the incidence of the sales tax by the dealers to their customers. In many jurisdictions, collection of sales tax is regarded as part of the sale price, and it required a specific Explanation 1A in s. 2(r) of the Tamil Nadu General Sales Tax Act, 1959, to keep the collect of sales tax outside the concept of price or turnover. Whatever be the position under the sales tax enactments, accountants as well as commercial people under the sales tax collected as part of the dealer's trading receipts in his trading account. But since it is at once paid over by the dealer to the sales tax department or intended to be so paid over, it becomes a charge against profits, either in his trading account or in the profit and loss account. Thus, the net result from the arithmetic of the accounts is precisely the same as in a case where sales tax collections and the sales tax payments do not go to the credit side or the debit side, as the case may be, of the assessee's trading and profit and loss account.
2. In this case, the assessee is a firm dealing in jaggery, having dealings outside the state as well. Jaggery is exempt from local sales tax under a G.O. of the State Government. But, for a long time, it was a moot question whether jaggery is also an except item for the purpose of the Central sales tax. This was the position until this court gave its decision in a batch of writ petitions in M. Ishwarlal & Co. v. State of Madras  32 STC 377 (Mad). The nebulous state of the law till then was a very inconvenient fact for dealers in jaggery, like the assessee herein. The assessee could not very well collect sales tax from the was not a taxable item. On the other hand, if the assessee did not collect was not a taxable item. On the other hand, if the assessee did not collect any amount towards sales tax and if ultimately it turned out that jaggery was not exempt item, the assessee would have to shell out the tax from its own pocket and since there is always a time-lag between the transactions of sale and the assessment of the concerned turnover, it would be practically impossible for the assessee to get reimbursement of tax from the customers and, any case, they might probably refuse to pay, unless they are tied up with a prior agreement. Hence, as a matter of insurance against these risks, the assessee collected sales tax from the customers on every sale on the footing that jaggery may be taxable, but took care to collect the amounts not as sales tax, but under a contingent liability account. Having collected the amounts, however the assessee did not wish to render itself liable for penalty and accordingly remitted the entire amounts collected from the customers to the sales tax department.
3. In this manner, the collection of sales tax by the assessee from the customers under the 'cotangent liability account' amounted to Rs. 17,015 for the account year ended March, 31, 1968, and Rs. 1,20,364 for the account year ended March 31, 1969. The assessee did not bring into the relevant trading and profit and loss account either the collections from the customers, on the credit side, or the remittances of tax from those collection to the sales tax department, on the debit side. This accounting method was apparently preferred because the assessee did not really withthat jagger was a table item, especially when the matter was pending adjudication before the taxing authorities and this Court. In any case, it made no difference to the net result of the profit and loss account, since under the assessee's accounting, the same amount stood out of the credit side as well as of the debit side of the trading and profit and loss account. This method of accounting adopted by the assessee could not be found fault with by the ITO, m because the profit position was not affected by the assessee's accounting. He, accordingly, made the assessment of 1968-69 without taking not of Rs. 17,015 collected by the assessee from the customers under the 'contingent liability account' towards sales tax.
4. The commissioner, however, interefered with this assessment in revision, and added to the taxable income of the assessee for the relevant account year the sum of Rs. 17,015, on the footing that it must be dealt with on principle, as part of the trading profit of the assessee, whether or not it had been brought into the trading account by the assessee.
5. The assessee appealed against the Commissioner's order. At the final stage, the disposal of the appeal by Tribunal was in a curious manner. If we can paraphrase their division, the Tribunal must be regarded as having addressed the Income-tax Department thus : 'If you are going to the trading receipt of this year there must be a corresponding deduction of the same amount as trading expenditure or outgoing, because the self-same amount has been paid over by the assessee to the sales tax department. The allowance of an equivalent amount as outgoing must be grated, for that alone would make the position even and correct'. In this way, while sustaining the addition made by the commissioner of Rs. 17,015, the Tribunal gave a matching deduction of a like amount towards the remittances made by the assessee of the collections from its customers to the sales tax department, as an item of expenditure.
6. For the next year 1969-70, the ITO adopted the line of thinking of the Commissioner and added Rs. 1,20,364 representing sales tax collections effected by the assessee from its customers during the relevant account year. What the officer did in this assessment was to simply add this amount, without giving a corresponding deduction for the remittances made by the assessee of the sales tax collections to the sales tax department. The necessary corrective, however, was administered by the AAC in an appeal against this assessment by giving a deduction for Rs. 1,20,364, being the payments made into the sales tax department of the collections of the year.
7. The position thus was that in the two assessments of 1968-69 and 1969-70, the assessee's accounts did not give credit for and take ito account either the total sum of Rs. 1,37,379 being sales tax collections effected by the assessee from its customers or debit a like amount for the remittances made by the assessee to the sales tax department towards sales tax liability for jaggery sales during the two years. In both the assessment years, the final determination by the taxing authorities, considered as a whole, was at variance with the assessee' accounting or, rather, non-accounting, of the amount of Rs. 1,37,379 either on the credit side or on the debit side off the trading account. As we earlier mentioned, the Commissioner in one year and the ITO in the other year took liberties with the assessee' accounts and treated as trading receipts what were really not regarded as trading receipts or any kind of receipts, for that matter, since the collection from the customers were made only in a contingent way. Insead of examining whether the action of the commissioner or of the ITO was correct as a matter of commercial accounting, was the Tribunal and the AAC did was to take further liberties with the assess's accounting method for the purpose of restoring the balance, as it were, by granting matching deductions in the same assessments as respects the payments made by the assessee of the sales tax collections to the sales tax department.
8. While so, as already indicated, in M. Ishwarlal & Co. v. State of Madras  32 STC 377, this Court held that jaggery was exempt from Central sales tax by the very force of the exemption granted to that commodity by the State Government under the Tamil Nadu General Sales tax Act. The assessee was one of the writ petitioners before this Court. The decision of this Court meant that the amount of Rs. 1,37,379 paid by the assessee to the sales tax department as Central sales tax on interStates sales of jaggery had to be refunded to the assessee from out of its jaggery pocket, but only from out of its collections from the customers, the position was that the amount of sales tax liable to be refunded by the sales tax department to the assessee had, in turn, to be passed on by the assessee to its customers. The assessee could not very well call the sum of Rs. 1,37,379 as its own money, for the amount belonged to the customers, who were rightfully entitled to a return of the money, for the amount belonged to the customers, who were rightfully entitled to a return for the money the amount it became refundable to the assessee, following the Court's decision that the levy and recovery of the tax was invalid.
9. The judgment of this Court declaring the exemption of jaggery under the Central Sales Tax Act was rendered some time in July, 1972. In connection with the assessee's assessment for 1974-75 for the year ended March 31, 1974, the ITO considered that the refund of Central sales tax of Rs. 1,37.379, which the assessee was entitled to receive under the judgment of this court, really represented taxable trading receipt of the account of this Court, really represented taxable trading receipt of the account year concerned, He, however, invoked s. 41(1) of the Act for bringing to tax this amount.
10. On appeal, the Tribunal deleted this amount. They went into the background history of the occasion for refund of the Central sales tax of Rs. 1,37,379 and held that the amount cannot be taxed. They also observed that, in the events that happened, s. 41(1) cannot be invoked to tax this amount.
11. In this reference, brought by the Department from the Tribunal, s order, the question of law as framed by the Department stresses only one aspect of the Tribunal's decision, the aspect touching the applicability of s. 41(1). Having regard to the comprehensive way in which the matter had been health with by the Tribunal in their order, we amend the question to make it accourd with the fullness of the controversy in this case :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the sum of Rs. 137,379 from the taxable trading receipt of the assessee for 1974-75 ?'
12. One of the grounds on which the Tribunal deleted this amount of Rs. 1,37,379 from the assessee's taxable income was that if the refund were included in the assessees hands as income for this year, the Income-tax Department will have to give a corresponding allowance if and when the assessee hands over portions of these amounts to its customers in the coming years. As the Tribunal picturesquely put it, by the same 'stroke of pen' by which the Department would be adding the amount of Rs. 1,37,379 for this year, it will have to go on making allowances and deductions as and when the assessee repays to the parties the amounts originally collected from them as contingency payments towards sales tax collections.
13. The Department's learned junior standing counsel, Mrs. Nalini Chidambaram, addressed her submission on this part of the Tribunal's reasoning. She said that the Tribunal cannot very well cancel the assessment of Rs. 1,37,379 as a trading receipt of this year merely because they wanted to save the Income-tax Department the other of having to allow deductions in the future years in respect of repayments which might be made by the assessee to the customers out of the refund of Rs. 1,37,379. Learned counsel for the Department uttered the reminder that matters of income-tax, each assessment year is separate and self-counted and our attention should not stray beyond the assessment year under discussion. The axiom can be easily overstated to mean that income-tax is concerned only with short-term trends and not with long-term trends, ignoring the possibility that a man may be as much ruined by minor deviations in assessments over a period of years, as by a single big and bad assessment in one year. Be that as it may, we are satisfied that the Tribunal was in error i thinking that merely as a pragmatic labour-saving device, the sum of Rs. 1,37,379 should be omitted from consideration this year so as to avoid this matter from having to be raked up again and again in future years of assessment.
14. The Tribunal had pointed out in their order that the refund of Rs. 1,37,379 during this year did not make any difference to the trading position of the assessee during this year. The Tribunal pointed out that in the two preceding years, the amount of Rs. 1,37,379, in the aggregate, was collected by the assessee from its customers and the same amount was paid over by the assessee from its customers and the same amount was paid over by the assessee to the Sales Tax Department. And although the assessee itself not account for them either on the credit side or on the debit side of its trading account, the appellate authorities, between them had rigged up the assessee's trading account by adding that amount on both sides of the account. In the result, the Tribunal pointed out, the trading position has been squared. On this basis, the Tribunal took the view that there cannot be a further addition to the trading account of the assessee this year merely because the sum of Rs. 1,37,379 had been refunded by the Sales Tax Department to the assessee during this year.
15. Mrs. Nalini Chidambaram criticised this part of the Tribunal's order as well. Her argument ran something like this : when the amount of Rs. 1,37,379 is liable to be refunded, the assessee has go to be taxed on it. If not, and if the assessee is allowed to go scot-free, this freedom from taxation might prove underserved in the event of the assessee retaing to itself either the entire refund of Rs. 1,37,379 or any portion thereof, without passing it on to the customers. According to learned counsel, since the assessee had already shifted the burden of sales tax on to the customers by collecting the sales tax from them, it would be an just enrichment on the part of the assessee, if the assessee does not now shift the benefit of refund to the customers.
16. The contention smacks of put morals. It does not bear on the postulates of fiscal jurisprudence. Suppose the assessee intends to obtain just enrichment from the refund of Rs. 1,37,379, or even commit the seven deadly sins, even so, we do not see how the amount could be taxed as income in the assessee's hands. The taxing power under the I.T. Act is not meant to be an instrument for chastising an assessee for straying from the straight and narrow path, or prevent from doing so. The income-tax authorities cannot play the role of a moral policeman of the business world. The tax code is quite an moral instrument, and even as it taxes the just as well as the just, so also, on occasions, it excludes from taxation the just as well as the just. In any case, the taxing of the element of unjust enrichment is no guarantee that any of the money would be disgorged. In which event, the tax would have early served as a penal censure on bad morals, and not as a levy on income.
17. The pertinent question before us, therefore, is whether the right to the refund of Rs. 1,37,379, which arose to the assessee during the relevant account year, can be regarded as part of the assessee's trading receipts of the year As we indicated at the beginning of this judgment, there is something to be said for the view that collections of sales tax made by a dealer must be regarded in the accounting sense, as part of his trading receipts whether or not they could be technically regarded as part of the taxable turnover for the special purposes of sales tax under the relevant sales tax enactments. But, the particular reason why, on principles of commercial accounting, sales tax collections form customers are to be dealt with as trading receipts of the dealer is not because of their fiscal character, but because they are intimately connected with the dealer's trading transactions. If the price received from the customers is a trading receipt, sales tax paid by the customers would also qualify as a trading receipt. Sales tax is paid by the customers at the time of the sale transaction and as part of the bargain. Hence it is also intimately connected with the trading transaction. In this sense, sales tax, like sales price, forms a proper credit item in the dealer's trading account. But the commercial orientation or connection which is present in the fiscal payment of sales tax is a quality of that payment only where the dealer received it in a trading transaction, such as a transaction of purchase or sale of commodities in the course of trade. Where, however, the payment in relation to a tax is not made in the course of any trading transaction, the amount, although paid receipts. The fund by the Sales Tax Department of Rs. 1,37,379 is a purely fiscal transaction. There is no business relationship of any kind between the assessee and the Sales Tax Department, although jocularly the taxing departments are called 'partners' in much the same way as prisoners are called 'government guests'. The relationship between the two is purely that of a taxpayer and a tax collector. Just as sales tax is demanded by the Department under the mandate of the fiscal statute concerned, so too sales tax is refunded under the compulsions of the same fiscal statute. The receipt, therefore, has no connection whatever with any trading relationship of any trading transaction. It is a settled position in trading receipt or a business expenditure must have been received or paid by the person concerned as trader, and not a taxpayer. (See the Supreme Court's decision in CIT v. Malayalam Plantations Ltd. : 53ITR140(SC) ) The implication to the contrary in the Revenue's argument just before, be rejected.
18. Mrs. Nalini Chidambaram then urged that the amount of Rs. 1,37,379 properly falls to be charged to tax under s. 41(1) of the Act. Learned counsel pointed out that this section enacted a statutory fiction and, therefore, ordinary standards as to what is a trading receipt and what is not trading receipt have no place in the discussion. She said that we have only to apply the deeming provisions of this section to the given fact-situation to see if the receipts can be brought to tax or not.
19. We agree that s. 41(1) introduces a fiction. Before a provision of this kind came into being in the statute book, the fact-situations which are now covered by it were never dreamt of as proper taxable events, or subjects of charge, under the Income-tax Act. For instance, where an assessee incur a debt and the creditor remits the liability either in whole or in part, the assessee might get a benefit, but the remission does not involve anything coming in to him as income. Section 41(1) and its predecessor, s. 10(2A) of the Indian I.T. 1992, changed this fundamental principle, by the introduction of the statutory fiction under which what was not income was deemed to be income. It is unnecessary to go into an elaborate analysis of the language of s. 41(1). It is sufficient for our present purpose to observe that they are two irtant requisites for invoking this provision. One is that the assessee must have incurred a trading liability in some year with respect to whcih he should have obtained a deduction or allowance in an assessment of his income in a former year. The second requirement is that subsequently in the assessment year under consideration a diminution, remission or cessation of that liability occurs, resulting in some benefit to the assessee. It both these requirements are fulfilled, then the value of the benefit will be deemed to be the taxable income of the year of remission or cessation of liability.
20. The Tribunal in their order have pointed out how in one important respect the requirement of this section has not been fulfilled in the present case. The Tribunal pointed out that although the amount of Rs. 1,37,379 was refunded by the Sales Tax Department and that refund might be treated as a remission of liability, yet, it did not involve a benefit to the assessee for the benefit of the assess's customers. The ultimate beneficiaries are the assessee's customers from whom the assessee had collected the sales tax, in the first instance. The assessee is not the beneficiary, but, on the contrary, was in a fiduciary position to pass on the refunds, sooner or later, to the customers.
21. While this consideration pointed out by the Tribunal is a pertinent one we would like to highlight another feature in this case bearing on the inapplicability of s. 41(1). We have seen that when the assessee paid an aggregate sum of Rs. 1,37,379 to the Sales Tax Department in the account years relevant to 1968-69 and 1969-70, it did not pay the amount from out of its pocket; in this sense, therefore, the assessee did not 'incur' the liability, although the liability might be regarded, in one sense, as a trading liability. For, what the assessee did was merely to take the collections form the customers by the right hand and pay the amount to the Sales Tax Department with the left hand. We may grant that sales tax liability is a trading liability of a kind, but such a liability will be truly 'incurred' by the assessee within the meaning of s. 41(1) only where the assessee pays the amount from its own pocket and does not get either reimbursement from the customers or does not use the customers' money for payment of the tax. In the latter two instances there is no liability incurred by implies that there must be a detriment undergone by the person incurring the liability, a detriment in the trade. Where a trade robs Peter to pay Paul as it were, the payment to Paul does not involve the trader into 'incurring' a trading liability, because the trader is not any the poorer for that payment having been made. So too in this case. While, since the sales tax is a commercial tax whose impact is on the assessee, tax burden or tax incidence by the assessee to the customer; in the true sense of the term, there is no 'incurring' of the liability, whoever the assessee pays over the collections to the Sales Tax Department. Either the trader does not incur a liability because what he does is merely to pass on even in a case where he pays the sales tax in advance, if he gets a reimbursement from the customers there is no trading liability which can be said no detriment to the assessee and he does not become any the poorer by the payment of the sales tax.
22. There is yet another consideration in this case. The payment of sales tax in the account years relevant to 1968-69 and 1969-70 was not (sic) allowed as a deduction by the Appellate Tribunal and the AAC, only because under the order passed by the Commissioner for the earlier assessment year 1968-69 and the order of assessment passed by the ITO for the assessment year 1969-70, an equivalent sum had been added on the receipts side so as to well the trading profits. In other words, the deduction was granted, not because the payment of the amounts collected from the customers to the Sales Tax Department was a trading liability incurred by the assessee, but because it was necessitated by the addition of equal amounts on the credit side of the trading account by the Commissioner and the ITO. The deduction, therefore, was not made in those assessment years in respect of a trading liability incurred by the assessee, but in order to iron out the distortions created by the orders of the Commissioner and the ITO in the two assessment years concerned. In such a situation as this we are convinced s. 41(1) cannot be applied.
23. In our opinion, although it may be technically outside the scope of the advice we are expected to render in this case, s. 41(1) can invoked to assess sales tax refund as a benefit to the assessee only in a case where the subject matter of the refund relates to a payment of sales tax earn which has come out of the offers of the assessee itself and not from of any collections made by the assessee in that regard from its customers. In such a case, it can be truly said that the sales tax payment in an earlier year is a 'trading liability incurred by the assessee' Any deduction made in the relevant year in respect of that sales tax payment can be truly regarded as deduction made in respect of a trading liability incurred by the assessee. And it can also be truly said that the subsequent refund of the sales tax can be regarded as a 'benefit' in respect of the trading liability by way of 'remission of the trading liability'. The situation in this case, however, is different. For as we earlier stated, the assessee had merely collected the amount from its customers and paid over the money to the Sales Tax Department, a situation which is not far removed from robbing Peter to pay Paul.
24. At the end of the discussion it remains for us to notice three decision of other High Courts cited at the bar. Of the three, we would first mention a judgment of the Madhya Pradesh High Court in CIT v. Nathubahai Desabhai : 130ITR238(MP) . In this case, sales tax authorities because the levy itself was held to be unconstitutional. The ITO brought to tax the refund of sales tax invoking s. 41(1) of the Act. The assessment was set aside by the AAC and his order was confirmed by the Tribunal. The Madhya Predesh High Court upheld the orders of the appellate authorities relying on the finding of the AAC that i the earlier assessments no deduction was ever claimed by the assessee or allowed by the Income-tax Department as and towards payment of sales tax liability which later on resulted in a refund. There is not much of a discussion in this judgment about legal aspects. On the finding of the AAC in that case which the Court accepted and acted upon, it would seem that there was not much scope for a full discussion by the Court of the implication of s. 41(1).
25. A judgment of the Allahabad High Court in CIT v. Taj Gas Service : 122ITR1034(All) , was also referred to in argument. The judgment of the Court does not more than reproduce the text of s. 41(1), without any attempt at elucidating even the minimal requirements of that deeming provision. In a brief judgment, the Court held that s. 41(1), was rightly applied to the case because the assessee had claimed payments of sales tax in former years as deductions and had obtained allowances in respect thereof, but subsequently obtained a refund of sales tax. It is not clear from the judgment whether the payments of sales tax made by the assessee came out of its own moneys or they represented the collections from its customers which were passed on to the Sales Tax Department. We do not therefore, derive any help from this judgment either.
26. The last case is of a decision of the Kerala High Court CIT v. Marikar (Motors) Ltd. : 129ITR1(Ker) . The narrative portion in the judgment in this case shows that the facts are more or less similar to the facts we have before us in the present case. There too, as in the present case, the assessee collected sales tax from its customers on certain dealings, but those collections were not credited to the profit and loss account, but only held in an account called 'deposits against contingent liability'. Likewise the payment by the assessee to the Sales Tax Department of the collections made from the customers was also not debited to the profit and loss account. In computation of its business income in the respective Tax Department as items of expenditure. Subsequently, the sales tax Department as items of expenditure. Subsequently, the sales tax Department refunded the sales tax paid in the earlier year. The question was whether s. 41(1) could invoked to tax the refund in the events that had happened. The question was discussed at some length by the Court, but it is clear that the assessee's objection to the application of s. 41(1) was not put forward by its learned counsel before the High Court on the basis of the undisputed fact that in the earlier years the assessee did not debit the sales tax payment, and had kept out of the trading and profit and loss account both the proceeds from the customers and the payment of sales tax to the Sales Tax Department and did not claim in the assessments to income-tax for the appropriate years any deduction respect of sales tax payment as an item of allowance. These facts, although crucial to the assesses case, and were, in fact, found to have been advanced on behalf of the assessee at the either stages of the proceedings, did not appear to have been addressed in the reference before the High Court. The decision of the Court, in that case was that sales tax refund was assessable as income under. s. 41(1) of the Act. The court, apparently, had no doubt about it. We, however, feel with respect, that the importance of the judgment is so much less because the court had not consider or examine a vital argument for the assessee which was as much available in that case it was availed of by the assessee in the present case.
27. We further find from an editorial note in the report of this case that the Supreme Court had granted special leave to appeal against this judgment.
28. For the reasons which we have earlier rendered, we hold that the sum of Rs. 1,37,379 cannot be brought to tax in the hands of the assessee as its trading receipt or income under s. 41(1) of the I.T. Act. Nor can it be brought to assessment de hors this section, under any other valid principle of taxation of income. Our answer to the question as reframed by us is in favour of the assessee and against the Department. The assessee is entitled to its costs. Counsel fee Rs. 500.
29. Learned Standing counsel for income-Tax made an oral application for leave to appeal top the Supreme Court against the judgment which have just now delivered. We consider that this is a fit case for appeal to the Supreme Court having regard to the importance of the principals of taxation involved in this case. The judgment in this case apparently goes against the tenor of two judgment, one by one by the allhabad High Court and the other by the Kerala High Court, which have been noticed in the discussion. It may also be observed that the judgment of the Kerala High Court is even now pending disposal before the Supreme Court in an appeal by special leave.
30. All things considered, this is a fit case for leave to appeal to the Supreme Court. Let a certificate be issued under s. 261 of I.T. Act, 1961.