Full Judgment Text
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CASE NO.:
Appeal (civil) 823 of 2001
PETITIONER:
POLYFLEX (INDIA) PVT. LTD.
RESPONDENT:
COMMISSIONER OF INCOME TAX, KARNATAKA
DATE OF JUDGMENT: 06/09/2002
BENCH:
S. RAJENDRA BABU & K.G. BALAKRISHNAN & P. VENKATARAMA REDDI
JUDGMENT:
JUDGMENT
2002 Supp(2) SCR 123
The Judgment of the Court was delivered by
P. VENKATARAMA REDDI, J. In this appeal by Special Leave, the question of
applicability of Section 41(1) of the Income Tax Act to the case on hand
arises for consideration.
For the assessment year 1989-1990, a sum of Rs. 9,64,206 which is the
amount of excise duty refunded by the department was brought to tax by
invoking Section 41(1) of the Income Tax Act (for short ’Act’). It appears
that the excise duty was paid in the year 1986. On appeal, the first
Appellate Authority as well as CEGAT held that the goods were not liable to
duty. On 20.9.1988, the excise duty was refunded. On appeal filed to the
High Court, it was dismissed. Thereafter, the Excise Department filed SLP
in this Court. The fate of the SLP is not known. The appellant contended
before the first Appellate Authority that there was no remission or
cessation of trading liability within the meaning of Section 41(1) so long
as the issue was pending determination by the Supreme Court. That
contention was accepted and the appeal was allowed. The appeal filed by the
Income Tax Department against the said order was also dismissed. On a
reference application filed by the Commissioner of Income Tax, the Tribunal
referred the following question of law for the opinion of the High Court of
Karnataka:
"Whether on the facts and in the circumstances of the case the Tribunal is
right in law in holding that excise duty refund is not assessable under
Section 41(1) of the I.T. Act."
The High Court held that the Tribunal was not right in holding that the
refunded amount was not assessable under Section 41(1) of the Act. However,
the High Court observed that the Tribunal may consider the question whether
the excise duty was actually refunded to the assessee or not and pass
appropriate orders in the light of its finding. This observation was made
after referring to the argument of the assessee’s counsel that the amount
has not been received by the assessee. In coming to the conclusion that the
excise duty refunded was liable to be taxed under Section 41(1) of the Act,
the High Court relied on the decision of this Court in C/T. v.
Thirumalaiswamy Naidu and Sons, 230 ITR 534. This view of the High Court
has been questioned in this appeal.
The learned counsel for the appellant - assessee submits that the ratio of
decision of this Court in Thirumalaswamy Naidu’ case, on which the opinion
of the High Court rests, has no application to the present case. As the
question of liability to pay excise duty on the goods has not been settled
finally during the assessment year in which the refund was obtained,
Section 41(1) is not attracted, according to the learned counsel. It is
contended, as was contended before the Appellate Authorities and the High
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Court, that there was no cessation of liability as per Section 41(1) as the
issue was pending final adjudication and, therefore, the refunded amount
does not form part of the deemed income of the year 1989-90.
It is true that in Thirumalaiswamy Naidu’s case the question of
interpretation or applicability of any particular limb of Section 41(1) of
the Act did not specifically fall for consideration. However, this Court
did make it clear that when the assessee actually made payment towards
statutory levy (sales tax) and later got back the amount by way of refund
as a sequel to the judgment of the High Court, it becomes a revenue receipt
and in such a situation, Section 41(1) is clearly attracted. The following
are the crucial observations in the judgment:
"The entire amount of sale turnover of the assessee inclusive of the amount
of tax collected was clearly includible in the assessee’s taxable income.
If any deduction was given from that income and later the same was refunded
back to the assessee, the refund will have the character of revenue
receipt. It has to be treated as a receipt on the revenue account and has
to be assessed as such. The position has been placed beyond doubt by the
express provisions of section 41(1) of the Income-tax Act. "
(Emphasis supplied)
Though there is no elaborate discussion as regards applicability of Section
41(1) of the Act the Court did refer to and rely on that provision in
support of its conclusion.
Section 41(1), as it stood at the relevant time reads as follows:
"41(1) Profits chargeable to tax: 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(1) applies if the following conditions and circumstances are
satisfied:
In the assessment for the relevant year an allowance or deduction has been
made in respect of any loss, expenditure or trading liability incurred by
the assessee. This is the first step. Corning to the next step the assessee
must have subsequently (i) obtained any amount in respect of such loss or
expenditure or (ii) obtained any benefit in respect of such trading
liability by way of remission or cessation thereof. In case either of these
events happen, the deeming provision enacted in the closing part of sub-
section (1) comes into play. Accordingly, the amount obtained by the
assessee or the value of benefit accruing to him is deemed to be profits
and gains of business or profession and it becomes chargeable to income-tax
as the income of that previous year.
We are of the view, apart from what has been laid down in Thirumalaiswamy
Naidu’s case (supra), that the ingredients of Section 41(1) are satisfied
in the instant case and, therefore, the amount of excise duty refunded
becomes taxable during the year in question. This is a case in which the
assessee can be said to have obtained the amount by way of refund in
respect of the business expenditure incurred by it during an earlier year,
for which the assessee had the benefit of deduction or allowance. Normally,
the payment of certain amount to discharge the statutory levy such as sales
tax, excise duty in the course of carrying on business is an expenditure.
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If authority is needed, we may refer to Kedar Nath Jute Manufacturing Co.
v. C.I.T., 82 ITR 363 wherein this Court held that the amount of sales tax
paid or payable by the assessee is an expenditure within the meaning of
Section 10(ii)(xv) of the Act.
We are inclined to think that in a case where a statutory levy in respect
of goods dealt in by the assessee is discharged and subsequently the amount
paid is refunded, it is the first clause that more appropriately applies. U
will not be a case of benefit accruing to him on account of cessation or
remission of trading liability. U will be a case which squarely falls under
the earlier clause, namely, "obtained any amount in respect of such
expenditure". In other words, where expenditure is actually incurred by
reason of payment of duty on goods and the deduction or allowance had been
given in the assessment for earlier period, the assessee is liable to
disgorge that benefit as and when he obtains refund of the amount so paid.
The consideration whether there is a possibility of the refund being set at
naught on a future date will not be a relevant consideration. Once the
assessee gets back the amount which was claimed and allowed as business
expenditure during the earlier year, the deeming provision in Section 41(1)
of the Act comes into play and it is not necessary that the Revenue should
await the verdict of higher Court or Tribunal. If the Court or Tribunal
upholds the levy at a later date, the assessee will not be without remedy
to get back the relief.
True expenditure and trading liability may be over-lapping concepts, but
the law- makers apparently intended to deal with allied concepts separately
and specifically so as to make the provision as comprehensive as possible
in order to effectuate the objective underlying the provision. The anatomy
of the Section and the collocation of the words employed therein would
suggest that the test of cessation or remission of liability has to be
applied vis-a-vis trading liability and it cannot be projected into the
previous clause.
The typical example of remission or cessation of trading liability is to be
found in the recent decision rendered by us in Chief Commissioner of Income
Tax v. Kesaria Tea Co. Ltd, [2002] 3 SCC 684. In that case the assessee
made a provision in the books of account towards purchase tax liability
which was in dispute. Under the impression that the dispute was finally
settled with the dismissal of SLP in some other case, the assessee thought
it fit to reverse the provision made earlier and accordingly ’wrote back’
in its accounts the sums for which the provision was made during earlier
years towards purchase tax. It was sought to be taxed by the Income-tax
department treating the same as the income of the year during which such
reversal of entries was made. However, the Tribunal (with which the High
Court agreed) held on facts that the issue regarding the exigibility of
purchase tax still remained notwithstanding the holding of the High Court
on a part of the controversy relevant to the issue. Even reassessment
proceedings were pending. It was, therefore, held that the liability did
not cease during the year in question. This Court affirmed the view taken
by the High Court of Kerala. It may be seen that unlike the present case,
there was no actual refund as no amount towards purchase tax was paid but
only a provision towards liability was made in the books of account.
Another case which is illustrative of the point is the decision of
Allahabad High Court in Rameshwar Prasad v. V.K. Arora, 141 1TR 763. In
that case the assessee, who was following the mercantile system of
accounting was allowed deduction in respect of its liability towards excise
duty. The assessee, however, filed writ petition disputing its liability to
pay the duty. During the pendency of the writ petition, the excise duty
amount was deposited with the Court, The writ petition was ultimately
allowed and the amount deposited by way of security was refunded to the
petitioner. However, that decision of the High Court did not become final
as the State went in appeal to the Supreme Court. Therefore, the assessee
still treated the security deposit amount received from the Court as a
possible liability and objected to its inclusion in the taxable income
under Section 41 (1). The High Court held as follows:
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"The excise duty had been deposited by the petitioner in the court itself
and that amount was directed to be refunded to it. The amount, therefore
was refunded to the petitioner by the court and not by the State Govt. It
is also not correct for the ITO to state that there is no present liability
existing against the assessee. It is clear, therefore, that since the
assessee followed the mercantile system of accounting, it was allowed
deduction in respect of its liability to excise duty. The petitioner
challenged its liability to pay the excise duty and during the pendency of
the writ petition deposited the excise duty in the court. That payment was
not by way of discharge of the liability but was only by way of security
and when the writ petition was allowed by the court the amount was refunded
to the petitioner. It was not, therefore, a case where an allowance had
been made in respect of any expenditure incurred by it or reimbursement of
the expenditure subsequently. It was an allowance in respect of a trading
liability and in view of the fact that the decision of this court has not
become final and is the subject-matter of appeals before the Supreme Court,
there has been no remission or cessation of the liability so as to attract
s.41 (1) of the Act"
The High Court correctly appreciated the scope of Section 41 (I) and
applied the second limb of the sub-section to the fact situation. It may be
noted that assessee did neither pay the excise duty to the Government nor
did it get refund of duty from the concerned authority. Notwithstanding the
High Court ’s judgment in favour of the petitioner, the stage had not yet
reached when it can be said that the liability for which allowance was
given earlier ceased. The view taken by the High Court in substance is that
the benefit in respect of the trading liability would accrue only when the
liability definitely ceased after the termination of the proceedings in the
Apex Court in favour of the petitioner. This very decision of the Allahabad
High Court was relied upon by the Tribunal without appreciating the correct
ratio of decision.
Our attention has been drawn by the learned counsel for the appellant to
the case of Union of India v. J.K. Synthetics Ltd., 199 ITR 14. One of the
points urged before the Court was whether the assessee’s liability towards
excise duty had ceased justifying action under Section 41 (1). This Court,
while affirming the view taken by the High Court .observed thus:
"So far as the second question is concerned, it is obvious that the
liability to tax under section 41 of the Act will depend on the outcome of
the appeal before this court. It is also stated that, as regards another
part of the liability, the issue is pending before the Tribunal. It would,
therefore, appear that no cessation of liability can be postulated until
the tribunal has decided the matter"
The relevant facts are not mentioned in the judgment. The question whether
the latter or earlier clause of section 41(1) applies did not arise for
consideration in that case. The decision of the High Court which was the
subject matter of appeal 4n this Court is reported in J.K. Synthetics Ltd.,
v. I.T.O., AH 105 ITR 684. From the facts stated therein it appears that
there was no actual payment of duty nor any refund obtained by the
assessee. The assessee-company was making provision in the books of account
in respect of excise duty payable while disputing the liability to pay
duty. Deduction was allowed for various assessment years. The writ petition
filed by the assessee-company contesting the demands relating to excise
duty was allowed by the High Court However, the Excise Department preferred
Letters Patent Appeal against the order in the writ petition. While so,
based on the decision of the writ petition, the I.T.O. took steps to
disallow the deduction allowed earlier and further disallowed the claim for
the current year. Questioning the addition to the income of the relevant
previous year, the assessee company filed writ petition which was allowed
by the High Court. The facts of the case are quite close to Remeshwar
Prasad’s case (supra). The following observations in the judgment may be
noted as they clearly reveal the fact situation in that case:
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"The company, no doubt, is still resisting the claim of the excise
authorities, but this fact does not debar the company from claiming
deduction on account of the excise duty being demanded from it and for
which the company had made provision in its books of accounts. The company
is following the mercantile system of accounting and it can legitimately
claim deduction in respect of a business liability even if such liability
has not been quantified or paid."
The High Court then held that the liability of the assessee as regards the
payment of excise duty can no t be said to have ceased because the judgment
of the Single Judge of the High Court did not attain finality.
Though, the conclusion of the High Court which was affirmed by this Court
cannot be legally faulted, we cannot however approve of the following
analysis of the Section occurring in the judgment: "in short, what this
provision means is that if an assesee has been allowed a deduction in the
computation of its total income of any liability on account of loss or
expenditure and if, subsequently, the liability of the assessee on account
of such loss or expenditure is remitted or ceases, that part of the
liability which is remitted or ceases shall be treated to be the income of
the assessee of the previous year in which such remission or cessation
takes place." The High Court proceeded on the assumption that the words
’remission and cessation thereof could be transposed into the first clause
which speaks of obtaining any amount in respect of loss or expenditure. The
High Court could have merely said that the trading liability provided for
in the books of account and for which deduction was allowed earlier did not
cease in view of the pendency of the dispute. Instead, the High Court
referred to the expression "loss or expenditure" occurring in the first
limb’. As the assessee company did not obtain any amount by way of refund
on excise duty account, the first clause of Section 41(1) will not be
applicable; it is only the latter part that applies in which case the
remission or cessation of liability would assume importance. However, in
the present case, as discussed above, it is the first clause that squarely
applies but not the second one. Whether there was cessation or remission of
liability would be an irrelevant line of enquiry here. The correct way of
understanding Section 41(1) would be to read the latter clause -"some
benefit in respect of such trading liability by way of remission or
cessation thereof as a distinct and self-contained provision. To read the
phrase "by way of remission or cessation thereof as governing the previous
clause as well, i.e. "obtained any amount in respect of such loss or
expenditure", would be doing violence to the language and structure of the
provision. That apart, the operation of the provision which is designed to
have widest amplitude will get constricted and truncated by reason of such
interpretation. Learned counsel for the appellant has also relied on a
decision of the Gujarat High Court V.T. Audyogik Sahakari Mandi Ltd. v.
C.I.T., 242 ITR 627. That decision prima fade supports the appellant. The
learned Judges proceeded on the basis that in all situations falling under
section 41(1) the test whether there was remission or cessation of trading
liability has to be applied, and therefore, concluded that even if the
amount of refund is received, section 41(1) cannot be invoked so long as
there is no final decision on the question of legality of levy. To reach
such a conclusion, the decision in J. K. Synthetics’s case (supra) and
Rameshwar Prasad’s case (supra) were relied upon. We have already explained
the ratio of those decisions. Another case on which strong reliance was
placed by the learned Judges is the judgment of the Full Bench in C.I.T. v.
Bharat Iron and Steel Industries, 199 ITR 67. In the said Full Bench
decision, though the discussion by and large proceeded on right lines, we
find that the actual decision reached in the concluding para is based on a
wrong interpretation of the provision. The Full Bench was of the view that
the assessee’s claim for refund of excise duty was in jeopardy in view of
the pending revisional proceeding although the assessee obtained refund.
The assessee received the refund of excise duty on 8.8.1975. The High Court
took the view that the assessee obtained the refund only on 30.4.1976 when
the proposed revision was withdrawn. It was therefore held that the
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refunded amount became includible in the assessee’ s total income for the
assessment year 1976-1977 under section 41(1) of the Act, but not for the
assessment year 1974-1975. The expression obtained any amount’ was
virtually given an interpretation which is contrary to its plain meaning.
However, it must be noted that the High Court rightly avoided reference to
the expression’ remission or cessation thereof.
With respect, we are unable to accept the view taken by Gujarat High Court
in the two decisions afore- mentioned as correct.
The decision of Karnataka High Court in K.G. Subramanyam v. C.l.T., 195 ITR
199 is quite apposite in the context of present case. The State of
Karnataka levied ’litre fee’ which is in the nature of a duty of excise.
The levy was challenged by the assessee. Pending such challenge, the
assessee paid the litre fee which was allowed as deduction while computing
the assessee’ s income. Later on the levy of litre fee was declared as
unconstitutional and the fee collected was refunded to the assessee.
Relying on Section 41 (1), the refunded amount was subjected to tax
treating it as income of the year during which refund was obtained. The
Tribunal and the High Court held that Section 41 (I) was attracted and the
Revenue was well justified in assessing the same. The High Court held that
the payment in discharge of statutory liability incurred while earning the
income is an expenditure and even if it is possible in some cases that such
payment is liable to be excluded from the income as a liability incurred in
the course of trade, it does not detract from its character as expenditure.
It was, therefore, held, "We have no hesitation that the deduction given to
the assessee in respect of the litre fee paid by him was by way of an
expenditure, therefore, the amounts refunded on the levy being held
unconstitutional were the amounts received by him in respect of the said
expenditure and such receipts are liable to be taxed under section 41 (1)"
The High Court observed that on the facts of that case, the question of
cessation or remission of liability did not arise for consideration at all.
We are in agreement with the view expressed by the Karnataka High Court.
In the light of the above discussion we find no merit in the appeal, though
we must say that the order under appeal is cryptic and the short reasoning
recorded therein is inaccurate. The appeal is dismissed without costs.