Full Judgment Text
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PETITIONER:
THE COMMISSIONER OF EXCESS PROFITS TAX, HYDERABAD
Vs.
RESPONDENT:
M/S. S. R. V. G. PRESS COMPANY, KURNOOL
DATE OF JUDGMENT:
10/03/1961
BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
KAPUR, J.L.
CITATION:
1961 AIR 1274 1962 SCR (1) 232
ACT:
Excess Profits Tax--Sales Tax--Provisional payment in
advance, if permissible deduction--Excess Profits Tax Act,
1940 (XV of 1940), r. 12, SCh. 1.
HEADNOTE:
The respondents were entitled to a rebate of sales tax on
goods purchased by them and used in their manufacturing
process. They had adopted the system which was permissible
under law,
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of paying sales tax provisionally assessed by the Sales Tax
Officer on the basis of turnover of the previous year, the
liability being adjusted at the end of the year of account
in the light the actual turnover of that year, as a result
of which, in some years the respondents were assessed to pay
tax in excess of the amount provisionally assessed, in
others they obtained refund of the excess tax paid under the
provisional assessment. The Income Tax Officer recognised
the system and permitted deduction of sales tax actually
paid under the provisional assessment. The Excess Profits
Tax Officer had in assessing liability to excess profits tax
for previous periods adopted the same method of computation,
but for the chargeable accounting period, he did not allow
the deduction of the full amount of tax provisionally
debited to the sales tax, because in his view it was not
reasonable and necessary expenditure and thus not a
permissible deduction.
The question was whether the sales tax payments were
unreasonable and unnecessary having due regard to the
requirements of the business and consequently not deductible
under r. 12 Sch. 1 of the Excess Profits Tax Act.
Held, that it is for the Excess Profits Tax Officer to
decide whether the deductions claimed are reasonable and
necessary having regard to the requirements of the business.
But the reasonableness and necessity of the expenditure
sought to be deducted under r. 12 Sch. 1 of the Excess
Profits Tax Act in assessing excess profits tax liability
must be adjudged in the light of commercial expediency, and
not on any legalistic consideration. Payments made in
satisfaction of liability which arises by virtue of
assessment made by the Sales Tax Officer cannot be called
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unreasonable. Payment of sales tax as assessed being
obligatory and necessary for the purpose of carrying on the
business, it must be deemed to satisfy the requirements of
r. 12 of Sch. 1 of the Excess Profits Tax Act.
In re M. P. Kumaraswami Raja, (1955) 6 Sales Tax Cases
113, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 270 of 1960.
Appeal from the judgment and order dated February 21, 1956,
of the Andhra Pradesh High Court in Case Reference No. 4 of
1955.
K. N. Rajagopal Sastri and D.. Gupta, for the appellant.
H. J. Umrigar, Thiyagaraja and G. Gopalakrishnan, for the
respondents.
1961. March 10. The Judgment of the Court was delivered by
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234
SHAH, J.-The assessees are a firm carrying on business at
Kurnool, of manufacturing ground-nut oil and cake. Under
the Madras General Sales Tax Act IX of 1939, the assessees
were entitled to a rebate of sales tax paid on goods
purchased by them and used in the manufacturing process.
The assessees maintained their books of account according to
the Samvat Year ending with Diwali. The system of
accounting was a mixture of mercantile and cash. Purchases
and sales of goods on credit were duly entered in the books
of account. The sales tax actually recovered by the tax
authorities was debited when paid and amounts if any
refunded were credited when received. The assessees had
adopted the system which was permitted by the Act of paying
tax calculated on the turnover of the previous year of
account. Under this system, tax was provisionally assessed
by the Sales Tax Officer on the basis of the turnover of the
previous year, and thereafter the liability was adjusted at
the end of the year of account in the light of the actual
turnover of that year, and of rebate allowed in respect of
groundnuts pressed into oil. As a result of the final
adjustment made by the sales tax authorities, in some years
the assessees were assessed to ’pay tax in excess of the
amount provisionally assessed and in others they obtained
refund of the excess tax paid under the provisional
assessment. The following tabular statement shows the
official years for sales tax, provisional demands made by
the sales tax authorities, the final demands and the
adjustments made in that behalf.
Official Provi- Filial Adjustment
Year sional Refund/Addi-
ended. demand. demand. tional levy.
Rs. Rs. Rs. Rs.
31-3-1942 2,679 1 872 807
31-3-1943 3,046 2,863 183
31-3-1944 14,509 18,402 3,893
31-3-1945 47,276 20,037 27,239
31-3-1946 45,315 13,379 31,936
For the assessment year 1946-47 (corresponding to the year
of account October 18, 1944 to November 4,1945), the
assessees claimed in their assessment to
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income-tax to deduct Rs. 49,633 being the amount of sales-
tax paid under a provisional assessment. In the year ending
31-3-1945, the assessees had paid Rs. 47,276 as sales-tax
provisionally assessed. They also had paid in that year Rs.
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3,894 in adjustment of the liability for the previous year
towards sales-tax due. After giving credit for Rs. 1,537
received as rebate, the total sales-tax liability under the
provisional assessment was Rs. 49,633. The Income-tax
Officer accepted this claim, and debited it from the income
in the assessment year 1946-47 in assessing the taxable
income of the assessees. Deduction of salestax actually
paid under provisional assessment less rebates was permitted
by the Income-tax Officer not only in the assessment year
1946-47 but also in the earlier years. The Excess Profits
Tax Officer had also adopted for the chargeable accounting
period prior to October 18, 1944 the same method of
computation, but for the chargeable accounting period
October 18,1944 to November 4, 1945, the Excess Profits Tax
Officer allowed out of the amount of Rs. 47,276 debited to
sales tax only Rs. 17,055 as properly attributable to that
period in computing the Excess Profits Tax liability.
According to the Excess Profits Tax Officer, the excess
amount paid under he provisional assessment i.e., Rs. 30,221
could not be taken into account, because under r. 12 of Sch.
1 of the Excess Profits Tax Act, expenditure in excess of
the amount reasonable and necessary for the business was not
a permissible deduction. In appeal against the order of the
Excess Profits Tax Officer, the Tribunal affirmed the order.
Against the order passed by the Tribunal confirming the
order of the Excess Profits Tax Officer, the assessees
applied for and obtained an order referring the following
question to the High Court of Judicature of Andhra Pradesh,
"Whether there are materials for the Tribunal to hold that
the aforesaid sales-tax payments of Rs. 30,221 were
unreasonable and unnecessary having due regard to the
requirements of the business and not consequently deductible
under r. 12 of Sch. 1 of the Excess Profits Tax Act?"
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The High Court answered the question in the negative and
against the order of the High Court, this appeal is
preferred with leave under s. 66A(2) and (3) of the Income-
Tax Act read with s. 21 of the Excess
Profits Tax Act.
It is manifest that the assessees had not altered the method
according to which their accounts were maintain-Id. Year
after year, they were paying tax provisionally assessed by
the Sales-tax Officer on the turnover of the previous year
subject to adjustment at the close of the year of account.
This system of payment of tax under provisional assessments
was not adopted with a view to evade,, tax liability. Nor
was recovery of the amounts ordered to be refunded to the
assessees delayed because of any deliberate, inaction on the
part of the assessees. It is not found that excess tax on
inflated returns was paid in anticipation of the repeal of
the Excess Profits Tax Act. The assessees for reasons of
convenience adopted, as they were entitled under the Madras
General Sales Tax Act, a system of payment of tax on
provisional assessment based on the turnover of the,
previous year subject to final adjustment to be made at the
end of the year. The assessees could opt for the system of
paying sales-tax on provisional assessment, but the
liability to pay tax imposed was on that account not
voluntarily incurred. This system produced no direct
benefit to the business and adjudged in retrospect, it
undoubtedly reduced the taxable income; but if otherwise the
payment was reasonable and necessary having regard to the
requirements of the business, it was not liable to be
ignored in assessing the Excess Profits Tax liability of the
assessees. By r. 12 of Sch. 1 of the Excess Profits Tax
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Act, it is provided that "in computing the profits of any
chargeable accounting period, no deduction shall be allowed
in respect of expenses in excess of the amount which, the
Excess Profits Tax Officer considers reasonable and
necessary having regard to the requirements of the
business;...".
It is for the Excess Profits Tax Officer to decide whether
the deductions claimed are reasonable and necessary having
regard to the requirements of the
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business. But the reasonableness and necessity of the
expenditure sought to be deducted in assessing Excess
Profits Tax liability must be adjudged in the light of
commercial expediency. The payments made by the assessees
were in discharge of obligation imposed lawfully and were
necessary for the proper conduct of the business. By s. 10
of the Madras General Sales Tax Act, the assessees were
obliged within 15 days from the date of service of the
notice of assessment to pay tax and in default, the amount
was liable to be recovered as if it were an arrear of land
revenue. Again, by s. 15, if the assessees failed to submit
the return as required by the provisions of the Act or the
rules made thereunder or failed to pay the tax within the
time prescribed, they were liable to be penalised. Payments
made in satisfaction of liability which arises by virtue of
the assessment made by the Sales Tax Officer cannot be
called unreasonable. Payment of sales-tax as assessed being
obligatory and necessary for the purpose of carrying on the
business, it must in our opinion be deemed to satisfy the
requirements of r. 12 of Sch. 1 of the Excess Profits Tax
Act.
The Excess Profits Tax Officer was, in our opinion, in error
in thinking that the tax paid was in excess of the
requirements of the business. We are also of the view that
the Tribunal was in error in holding that by seeking to
deduct only the tax properly attributable to the actual
turnover during the chargeable accounting period, the Excess
Profits Tax Officer was not seeking to disturb the method of
accounting which was followed by the assessees and was
accepted by the taxing authorities for many years.
Counsel for the Commissioner submitted that the rules
relating to advance provisional assessment and levy of tax
framed under the Madras General Sales Tax Act, 1939 were
inconsistent with the provisions of the Act and the
assessees should have raised this contention and have
obtained a decision from the court before paying tax on
provisional assessment and not having done so, payments made
cannot be regarded as either reasonable or necessary.
Counsel says that in In re M. P. Kumraswami Raja (1), the
Madras High
(1) [1955] 6 Sales Tax Cases 113.
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Court has declared this scheme of taxation on provisional
assessment ultra Vires. But the reasonableness or the
necessity of payments under r. 12 Sch. 1 of the Excess
Profits Tax Act must be ascertained in the light of what may
be regarded as commercially expedient and not on any
legalistic considerations. It would not be expected of a
businessman to start a litigation in respect of a tax which
the Legislature of the State was competent to levy on the
ground that the method devised for computing the tax
liability was ultra vires. The tax was duly assessed and
paid and the reasonableness and necessity must be adjudged
in the light of the circumstances then prevailing and not in
the light of subsequent developments. It may also be
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noticed that since the Madras High Court’s decision in In re
Kumaraswami Raja’s case (1), the Madras Legislature by the
Madras General Sales Tax Amendment Act VIII of 1955
retrospectively validated the levy. By virtue of this Act,
assessments made provisionally and the levy of the tax were
to be regarded as valid notwithstanding any initial incon-
sistency between the provisions of the Act and the Rules
framed thereunder. It may also be pointed out that no such
question was referred to the High Court and not even an
argument appears to have been raised in the High Court on
this question. We are of the view that the High Court was
right in answering the question in the negative.
The appeal therefore fails and is dismissed with costs.
Appeal dismissed.
(1) [1955] 6 Sales Tax Cases 118.
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