RAJAGOPALAN, J. - The questions referred to this Court under section 66(I) of the Income-tax Act arose out of the proceedings under action 34 of the Income-tax Act and section 15 of the Excess Profits Tax Act with reference to the revised assessment for the assessment year 1946-47. The previous year for income-tax and the chargeable accounting period for the excess profits tax ends with August 26, 1945. The assessee, a firm which traded mainly in arecanuts, had its head office at Virudhunagar, in what was then known as British India. The assessee has to pay the excise duty imposed by the Government of India on arecanuts, even on those which he had bought in Travancore and brought into the taxable territories. In the accounting year he was assessed to an excise duty which amounted to Rs. 40,174. He also paid it during the accounting year. In the year of account the Travancore State also imposed an excise duty on arecanuts, which amounted in the case of the assessee of Rs. 29,748. On the representations of the dealers in arecanuts, the Government of India ultimately decided to refund the excise duty paid to it by the dealers, who had also been subjected to excise duty by the Travancore State.
The assessee maintained his accounts on the mercantile basis. He debited himself with Rs. 40,714 in the year of account. That was the amount paid to the Government of India. That amount was ordered to be refunded to the assessee on November 12, 1945, in the succeeding accounting period and the amount was actually received in July, 1946. Before the Income-tax officer, who completed the assessment in May, 1946, the assessee claimed that he was entitled to deduct the entire sum of Rs. 40,174 as revenue expenditure incurred in the accounting year, and that the refund obtained by him in the succeeding year ought not to be taken into account in calculating his income, profits and gains for the accounting year. The question, however, was whether this sum, which had been ordered to be refunded to the assessee should not be taken to wipe our the debit in the year of account. The Income-tax Officer took the view that the refund order received by the assessee in November, 1945, should be related back to the period when this duty was collected, and this meant the elimination of the entire debit. The assessee however produced the demand for payment of Rs. 29,748 issued by the Travancore Government for the excise duty payable to that State. Taking this liability into account, the Income-tax Officer included in the assessment the sum of Rs. 10,426, being the difference between the refund obtained from the Government of India and the liability of the assessee to the Government of Travancore. Against this order, the assessee appealed without success to the Assistant Commissioner and to the Tribunal.
Though the assessee was granted relief on the basis that he would have to pay Rs. 29,748 to the Travancore State, he has not so far paid the amount. On August 28, 1946, the assessee debited his account with this sum of Rs. 29,748. His accounts were credited again with that amount on September 4, 1946. The explanation of the assessee was that he had sent that amount for payment to the Travancore State through his agent Manickam, but eventually he decided not to pay it then.
When these entries were seen by the Income-tax Officer he took proceedings under section 34 of the Income-tax Act and section 15 of the Excess Profits Tax Act, and he issued a notice to the assessee on August 26, 1949. On december 12, 1949, the assessee was assessed for 1946-47, on this additional sum of Rs. 29,748 both to income-tax and excess profits tax. The Tribunal finally rejected the appeals preferred by the assessee.
The question that were referred to this Court under section 66(1) of the Income-tax Act were : 1. Whether the proceedings under section 34 as amended in 1948 of the Income-tax Act, 1922, and section 15 of the Excess Profits Tax Act, 1940, were valid.
2. Whether the sum of Rs. 29,748 was includible in the reassessment made under section 34 of the Income-tax Act, 1922, and section 15 of the Excess Profits Tax Act, 1940.
In its order on the appeals the Tribunal recorded : 'In any case as section 34 proceedings were taken under the section after its amendment in 1948, it is not even necessary that there should have been any definite information leading to a discovery before the section can be applied. It is true that section 15 of the Excess Profits Tax Act has not been similarly amended, but in view of our finding that there was definite information which led to a discovery, it is not possible to draw any distinction in respect of the two appeals.'
What constituted definite information, in the opinion of the Tribunal, was, 'the subsequent conduct of the assessee and the entries in the accounts which were not in existence at the time of the original assessment, constituting definite information leading to the discovery that income had escaped assessment.'
The Tribunal also recorded :
'It is manifest that the item in dispute was left out of the original assessment on the understanding that this amount was due to the Travancore State Government and it was bona fide going to be paid. The subsequent entries in the account books, however, conclusively prove and it was not denied that the assessee had no intention whatsoever of paying the said excise duty to the Travancore State Government....... At the time of the original assessment, one representation was made to the Income-tax Officer which however was subsequently found to be definitely incorrect.'
It was on the last point that, in our opinion, the Tribunal misdirected itself. The Tribunal apparently failed to examine the precise scope of the representation of the assessee, on the basis of which he was granted relief. In the original assessment proceedings for 1946-47, in his assessment order dated May 18, 1946, the Income-tax Officer recorded :
'It is, however, claimed that duty has to be paid in respect of nuts to the Travancore State authorities at Rs. 0-2-6 per lb. According to a notice sent by the Travancore authorities it is seen that the amount of duty payable by the assessee is Rs. 29,748.'
That we take it was the representation made by the assessee at that stage.. the only representation made by the assessee was that he had to pay Rs. 29,748 to the Travancore State. There was apparently no further representation at that stage, that he would pay that amount immediately to the Travancore State authorities. In his assessment order dated December 12, 1949, in proceedings under section 34 of the Income-tax Act and section 15 of the Excess Profit Tax Act, the Income-tax Officer recorded :
'It was represented by the firm that out of the sum of Rs. 40,174, they had to pay to the Travancore excise authorities a sum of 29,748. Since it appeared from the assessees representation that they would have to pay shortly to the Government of Travancore a sum of Rs. 29,748, this amount was allowed in the assessment.'
What inference the Income-tax Officer drew either in 1946 or in 1949 from the facts placed before him by the assessee was not what the assessee himself represented. That distinction was obviously lost sight of by the Tribunal when it recorded :
'At the time of the original assessment one representation was made to the Income-tax Officer which however was subsequently found to be definitely incorrect.'
The information that the assessee did not pay the Travancore State was no doubt available to the Income-tax Officer, but that by itself did not lead to any discovery, that by a representation which the Income-tax Officer believed to be true while the assessee knew it was not true, the assessee obtained a relief to which he was not entitled.
The assessee, it should be remembered, maintained his accounts on mercantile basis. An ascertained liability with a corresponding entry in his accounts would have been sufficient. The Assistant Commissioner was aware of this position. In his order on appeal he pointed out :
'Therefore, a definitely ascertained liability did exist in respect of excise duty payable to the Travancore Government though such a liability was not discharged either during the previous year or up to this date. No entries were, however, made by the appellants in their books creating any such liability for excise duty payable to the Travancore State.'
That there was no specific entry for Rs. 29,748 in the assessees accounts in the accounting year was not the basis, on which this sum was subsequently assessed in proceedings under section 34 of the Income-tax Act and section 15 of the Excess Profits Tax Act. Whether with the mercantile system of account adopted by the assessee, the authorities and the Tribunal were right or not in disallowing the relief claimed on the basis of an ascertained liability of Rs. 40,174, which was also discharged, does not arise for consideration now. Apparently, the Income-tax Officer treated Rs. 29,748 as included in the sum of Rs. 40,174, with which the assessee had debited himself when the Income-tax Officer granted the relief to the assessee in 1946. Had the assessee closed the entry of Rs. 40,174 in the year of account and debited himself only with Rs. 29,748 the fact that he did not pay the amount in the succeeding year would not have justified upon when the relief was granted in 1946 did not really after the position in 1949.
The Tribunal really proceeded on the assumption that the assessee had obtained relief in 1946 on a representation which was not true. For that there was no basis in the records before the Tribunal. An ascertained liability is still there. It is still legally enforceable against the assessee. That the assessee avowed his intention in the proceedings before the Tribunal not to discharge that ascertained liability will not alter his legal liability to the Travancore State nor affect his legal rights under the Income-tax Act and the Excess Profits Tax Act. It is section 10(2A) of the Income-tax Act that would apply, when the required conditions are satisfied.
Our answer to the first question is in the negative and in favour of the assessee. In view of that answer to question 1, question 2 does not call for an answer. Should, However, an answer to question 2 be necessary, we would be of the view, the independently of our answer to question 1, the answer to question 2 should be in the negative and in favour of the assessee.
Since the assessee has succeeded, he will be entitled to the costs of this reference, counsels fee Rs. 250.
Reference answered accordingly.