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Petitioner: COMMISSIONER OF INCOME TAX VS Respondent: BHARAT IRON AND STEEL INDUSTRIES
Court Name: Gujarat High Court Judge(s): S. B. Majmudar, R. K Abichandani, R. O. Mankad Title: COMMISSIONER OF INCOME TAX vs BHARAT IRON AND STEEL INDUSTRIES Case No.: Income Tax Reference No, 292 of 1978 Date of Judgment:1992-01-28 Reported As: 1993 PTD 833 Result: Order accordingly
JUDGMENT
JUDGMENT ' R.C. MANKAD, ACTG. C..1.---The assessee is a registered partnership firm running an iron rolling mill and the assessm ent year under reference is 1974-75, the previous year being the financial year ending on March 31, 1974. The assessee manufactured round bars, square bars, flat bars, octagonal bars, angles and channels from scrap based ingots produced in electric arc furnaces and these products were classified by the Assistant Collector of Central Excise, Bhavnagar, and the Superintendent of Central Excise (Tech.), Bhavnagar, as liable to basic central excise duty under Notification No, 138/75-Central Excises, dated August 29, 1965, as amended by Notification No, 121/69 Central Excises, dated April 29, 1969, and Notification No, 74/72 Central Excises, dated March 17, 1972. The Assistant Collector and the Superintendent of Central Excise, Bhavnagar, also held that the aforesaid rolled products manufactured by the assessee were liable to regulatory duty of excise under Notification No, 144/72-Central Excises, dated May 28, 1972, in addition to basic excise duty as aforesaid. Being aggrieved by the order passed by the Assistant Collector and the Superintendent of Central Excise, Bhavnagar, the assessee went in appeal before the Appellate Collector of Central Excise, Bombay. The Appellate Collector held that there was no warrant to interpret serial No,(1) of Notification No, 206/63-Central Excises, dated November 30, 1963, as amended by Notification No, 123/65-Central Excises, dated August 14, 1965, by restricting its scope only to those ingots which, before cutting or breaking, do not resemble any of the items mentioned in sub-item (i) of item No,26AA of the relevant Schedule. He, therefore, held that re-rolled products manufactured by the assessee from scrap based ingots produced in electric arc furnaces when cut or broken so as to resemble the shape of any product mentioned in sub-item (i) of item No,26AA of the relevant Schedule are exempt from payment of duty under Notification No,206/63
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Central Excises, dated November, 30, 1963, as amended from time to time. In this view of the matter, the Appellate Collector set aside the orders passed by the Assistant Collector and the Superintendent of Central Excise, Bhavnagar, regarding the classification of the aforesaid products which formed the subject matter of the appeals. The Appellate Collector further directed that the assessee would be entitled to the consequential relief. In view of the order passed by the Appellate Collector, the assessee, by its letter, dated April 6, 1974, addressed to the Assistant Collector of Central Excise, Bhavnagar, requested him to refund the excise duty alleged to have been illegally, recovered from it. It appears that, in Apite of several letters writen by the assessee claiming refund of the excise duty, the Assistant Collector did not refund the excise duty as ordered by the Appellate Collector. The assessee, therefore, filed a petition being Special Civil Application No, 160 of 1974, in this Court seeking a direction against the Assistant Collector and other respondents in the petition to refund the excise duty alleged to have been illegally recovered from it. This petition was filed sometime in April, 1974. The assessee filed a return of income for the assessment year 1974-75 on August 28, 1974. On December 28, 1974, the Joint Secretary to the Government of India, Ministry of Finance, issued notice to the assessee under section 36(2) of the Central Excises and Salt Act, 1944 (the "Excise Act" for short), calling upon it to show cause why the order of the Appellate Collector of Central Excise, Bombay, should not be set aside. The assessee resisted the review or revision of the order of the Appellate Collector by its reply dated February 26, 1975. However, during the pendency of the review or revisional proceedings before the Central Government, as aforesaid, excise duty of Rs,1,81,427 was refunded to the assessee on August 8, 1975. The review or revisional proceedings under section 36(2) of the Excise Act were dropped on April 30, 1976. ' The Income Tax Officer, in the course of assessment for the assessment year 1974-75, invoked the provisions of section 41(1) of the Income Tax Act, 1961 ("the Act" for short), and included the aforesaid amount of Rs,1,81,427 in the total income of the assessee for the said assessment year on the ground that the assessee had become entitled to the refund of the said amount under the order of the Appellate Collector passed on January 8, 1974. According to the Income Tax Officer, since the Appellate Collector had passed the order under which the assessee had become entitled to the refund of the aforesaid amount of excise duty in the year of account, which ended on March 31, 1974, relevant to the assessm ent year 1974-75, the said amount was liable to be included in the assessee's total income for the said assessment year 1974-75. ' Being aggrieved by the order of the Income Tax Officer, the assessee went in appeal before the Appellate Assistant Commissioner of Income-tax. It was urged before the 'Appellate Assistant Commissioner that though the assessee .Had become entitled to the refund of the aforesaid amount of excise duty under the order of the Appellate Collector of Central Excise, the Central Government had not accepted the stand taken by the Appellate Collector of Central Excise and sought to set aside his order in exercise of its powers under section 36(2) of the Excise Act. The assessee was refunded the aforesaid amount of excise duty only on April 30, 1976. In these circumstances, it was urged on behalf of the assessee that the said amount of Rs,1,81,427 was not liable to be included in the assessee's total income for the assessment year 1974-75. The Appellate Assistant Commissioner held that no refund had accrued to the assessee in the year of account relevant to the assessement year 1974-75 since the very foundation of the claim for refund was in jeopardy having regard to the review/revisional jurisdiction invoked by the Central Government under section 36(2) of the Excise Act. The Appellate Assistant Commissioner, therefore, held that the aforesaid amount was not taxable in the assessment year under reference, i,e, the assessment year 1974-75. The Revenue challenged the order of the Appellate Assistant Commissioner before the Income-tax Appellate Tribunal ("the Tribunal" for short). The Tribunal held that, since the Central Government had not accepted the assessee's claim for refund, the Appellate Assistant
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Commissioner was right in holding that the amount of Rs,1,81,427 had not accrued to the assessee in the year of account relevant to the assessment year 1974-75. The Tribunal, therefore, upheld the view of the Appellate Assistant Commiskoner that the addition of Rs,1,81,427 made by the Income- tax Officer was not justified. ' In the background of the above facts, at the instance of the Revenue, the following questions have been referred to us for our opinion: "(1) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the amount of Rs,1,81,427 had not accrued in the year of account relevant to the assessm ent year 1974-75 in question and hence the addition was not justified? . (2) Whether the finding of the Tribunal that the amount of Rs,1,81,427 had not accrued in the year of account and the addition thereof was not justified is correct in law and sustainable from the material on record?" ' Section 41(1) of the Act under which the Income Tax Officer made the addition is in the following 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." ' Section 41 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 Act 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 p, various 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. 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 difference between the provisions of section 10(2) of the Act of 1922 and section 41(1) of the Act. 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. ' Section 41(1) came up for consideration before a Division Bench of this Court in CIT v. Rashmi Trading (1976) 103 ITR 312. That was a case in which the assessee applied for refund of sales tax on hessian paid by it during the period from June 30, 1957 to December 31, 1959, relying on the judgment of this Court, dated December 5, 1962, in the case of CST v. Sumatilal Popatlal and Co. (1964) 15 STC 498 (Gui), holding that no sales tax could be levied on sales of hessian. The Sales Tax Officer issued a refund order for Rs,42,945 on August 19, 1965. The assessee contended that the right to refund arose on December 5, 1962, when this Court held that sales tax was not leviable on hessian and as the assessee was following the mercantile system of accounting, the amount of refund should be included in the assessment for the assessment year 1964-65. The Income Tax
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Officer, however, held that the said amount of refund was liable to be assessed in the assessment' year 1966-67, the relevant previous year for which was the Samvat year 2021. The Appellate Assistant Commissioner, before whom the assessee went in appeal, confirmed the order of the Income Tax Officer. In further appeal, the Tribunal held that the right to receive the refund came into existence on the date when the judgment was delivered by the High Court, i,e,, on December 5, 1962, 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. On a reference at the instance of the Revenue, the main controversy which arose before the Division Bench of this Court was in the light of the special characteristic of the sales tax law. The question which arose for consideration was whether the word "obtained" occurring In section 41(1) means actually obtained or means obtainable, or when the assessee became entitled to obtain the same? That was the question which was considered in the light of the sales tax law. It was contended on behalf of the assessee that the decision of this Court in CST v. Sumatilal Popatlal and Co. (1964) 15 STC 498 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 that 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 Aid 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. Relying on the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363, it was urged that the liability to pay sales tax arose the moment sale was made and it was on that footing that, in the previous year, sales tax had been paid by the assessee. Therefore, it was urged, when this Court declared on December 5, 1962, that no sales tax was payable on sales of hessian, it necessarily followed that the amounts which had been paid in the past on the basis of the sales of hessian were all wrongly collected from him. Therefore, it was urged that 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 this Court and, since the assessee was 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,42,945 irrespective of the date on which the amount was actually received. The Division Bench of this Court did not accept the above contention of the assessee. It was held that the decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363, merely mentions when the liability to pay sales tax arises. It does not mention when the right to receive the refund in an appropriate case can be said to arise and the converse of the case cannot be inferred from the said decision. 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 reciept. W fiat is material under section 41(1) is the date of obtaining of any amount in respect of the expenditure incurred in any earlier year. It was held that the only meaning that can be attached to the words "obtained, whether in cash or in any other manner wtatsoever, 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 assessee. It was emphasised that it must be the obtaining of the actual cash which is contemplated by the Legislature when it used the words "has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure in the past". It was held that in the context in which these words occur, no other meaning is possible. It would thus be clear that the Division Bench of this Court did not accept the assessee's contention that, since the assessee was maintaining accounts on mercantile basis, he could have made the relevant credit entries in his books of account in
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connection with the amount of Rs,42,945 on December 5, 1962, the date on which the judgment of this Court in the case of CST v. Sumatilal Popatlal and Co. (1964) 15 STC 498 was pronounced irrespective of the date when the amount was actually received. Under these circumstances, the view taken by the Tribunal that the material date was December 5, 1962, the date on which the judgment of this Court was pronounced in CST v. Sumatilal Popatlal and Co. (1964) 15 STC 498 was not held to be correct. It was observed that it was no doubt true that by virtue of that judgment, it became possible for the assessee 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 refund was obtained only after the Sales Tax Officer passed the order of refund on August 19, 1965, and it was only on that date that it could be said that the assessee obtained the amount of refund in respect of the expenditure of sales tax incurred by him in the previous year. The Division Bench, therefore, held that the amount in question was assessable in the previous year relevant to the assessm ent year 1966-67 and not in the previous year relevant to the assessment year 1964-65. ' In Motilal Ambaidas v. CIT (1977) 108 ITR 136, another Division Bench of this Court before whom the decision of the Court in CIT v. Rashmi Trading (1976) 103 ITR 312 (Guj.) was not cited, took a diametrically opposite view. In that case, the facts were as follows: ' The Supreme Court, by judgment dated January 20, 1964, confirmed the decision of the Madhya Pradesh High Court, that a particular levy of sales tax was unconstitutional and invalid. As a result of this, the assessee firm got a refund of the sum of Rs,42,263 in the year 1961 from the Madhya Pradesh Government. The refund of the sum of Rs,42,263 was credited in the books of account of the assessee, who followed the mercantile system of accounting in Samvat year 2020, corresponding to the assessm ent year 1965-66, but, in fact, a sum of Rs,34,490 was actually received in the course of Samvat year 2020 and the balance amount of refund of Rs,7,773 was received by the assessee in Samvat year 2021. The Tribunal held that the transaction came within the mischief of section 41(1) of the Act, when the assessee got refund of the sales tax paid, that this refund could not be treated as income under fiction 41(1) until the matter was completely finalised and that this was done when the Supreme Court passed the final order in the matter and that the amount was rightly taxed in the assessment year 1965-66. On a reference, it was contended for the assessee that, under section 41(1), what is necessary is that the allowance or deduction must have been made in the assessm ent for any earlier year in respect of loss, expenditure or trading liability incurred by the assessee, that in that case, in respect of the earlier years in the course of which the assessee collected sales tax from other merchants and paid the amounts of 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 the sales tax authoriteis 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 and, therefore, section 41(1) was not applicable. The Division Bench of this Court held that, 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. Therefore, in that 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
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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. It was held that as section 41(1) is not a charging section, it has to be construed in such a manner so as to make the levy of the tax effective and to make the machinery of assessment workable. Under the circumstances, the amounts of sales tax collections, which the assesse 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. The words at the commencement of section 41(1), "Where an allowance or deduction has been made in the assessm ent for any year" should be read as "where an allowance or deduction ought to have been made in the assessm ent for any year", so far as the facts of the case before the Court were concerned, and reading so, the provisions of section 41(1) were held to be applicable to the facts of that case. The next question which the Division Bench considered was as to in which particular assessm ent year the aforesaid amount could be brought to tax. It was observed that the assessee in that case was maintaining its accounts on mercantile basis and thus it was not the actual receipt which would matter but the question was when the right to receive the amount accrued to the assessee-fum. It was further observed that it was 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 was held, that it was obvious that it was the date of accrual of the right to receive the amount that was material and not the date of actual payment by the Government to the assessee. It was held that it was 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 could 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 the amount was subject to furnishing a bank guarantee and it became matured and was crystallized only when the Supreme Court decision was delivered. Under these circumstances, it was 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 the right to refund accrued. It was held that, in view of section 41(1), it was the previous year in the course of Which the right to receive the amount of Rs,42,263 by way of refund accrued to the assessee and the provisions of section 41(1) were, therefore, applicable and it was the assessment year 1965-66, the previous year being Samvat year 2020, which was the year in which the amount of refund could be brought to tax under section 41(1). It would thus be clear from the judgment that the system of account keeping followed by the assessee was considered to be relevant for the purpose of deciding in which year the amount of tax could be brought to tax under section 41(1) of the Act. This view is clearly in conflict with the view taken by the Division Bench of this Court in CIT v. Rashmi Trading (1976) 103 ITR 312. It was in view of this conflict of views that a Division Bench of this Court before whom this reference came up for hearing has, by its order, dated April 13, 1986 referred this matter for decision to this Full Bench. After having carefully considered the decisions of this Court in CIT v. Rashmi Trading (1976) 103 ITR 312 and Motilal Ambaidas v. CIT (1977) 108 ITR 136, we are inclined to agree with the view taken by this Court in CIT v. Rashmi Trading (1976) 103 ITR 312. The key words in section 41(1) are 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'. It is the obtaining in…
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