K. v. MOOSA KOYA & CO. VS INCOME TAX OFFICER — 1988 DIGILAW 410 (KER)

Judgment :- 1. The petitioner is a registered firm. It is a dealer in hill produce. It is an assessee on the files of the Ist respondent - The Income Tax Officer, Award, Circle I, Calicut. It is maintaining its accounts on'mercantile basis'. The Government of Kerala levied administrative surcharge on export of tapioca in exercise of the power vested in it under the Kerala Tapioca (Manufacture and Export Control) Order, 1966. The petitioner-firm collected administrative surcharge on tapioca during the accounting periods which ended by 31-3-1967, 31-3-1968, 31-3-1969 and 31-3-1970. The amounts so collected were remitted in the Government Treasury. The said levy of administrative surcharge by the Government was challenged by innumerable dealers in the High Court. The levy was annulled and refund of amounts remitted by the dealers was ordered by the High Court. The judgment of the High Court is dated 27-9-1971 (Govindan v. State of Kerala 1971 K.L.T. 910). The State took up the matter in appeals before the Supreme Court of India. The order passed by the High Court was affirmed by the Supreme Court on 7-11-1974 (State of Kerala v. Govindan 1974 KLT 876). The petitioner-firm received refund of the administrative surcharge on tapioca collected and paid by it from the Government on 28-5-1973. These facts will show that the levy of administrative surcharge on export of tapioca was struck down and refund ordered by the High Court on 27-9-1971 (accounting period ending by 31-3-1972), that the order passed by the High Court was upheld by the Supreme Court on 7-11-1974 (accounting period ending by 31-3-1975) and refund was made to the petitioner on 28-5-1973 (accounting period ending by 31-3-1974). These will respectively fall within the assessment years 1972-73,1975-76 and 1974-75. While making the assessment for the year 1974-75 (accounting period ending by 31-3-1974), the Income Tax Officer invoked S.41(1) of the Income Tax Act, 1961 and included the refund obtained by the petitioner/ assessee, Rs. 1,17,459 in the total income of the assessee. The order of assessment is Ext. P1 dated 27-3-1979. The amount was so included notwithstanding the objections raised by the assessee. The assessee filed a revision before the second respondent Commissioner of Income-tax, Cochin and objected to the inclusion of the above refund obtained in Ext. P1 order of assessment for the year 1974-75. Various contentions were taken. The order of assessment is Ext. P1 dated 27-3-1979. The amount was so included notwithstanding the objections raised by the assessee. The assessee filed a revision before the second respondent Commissioner of Income-tax, Cochin and objected to the inclusion of the above refund obtained in Ext. P1 order of assessment for the year 1974-75. Various contentions were taken. The important pleas taken up by the assessee were that the refund obtained on 28-5-1973 from the Government was not the income of the petitioner, that it could not be included for the assessment year 1974-75, that the assessee has passed on the amounts to its customers and so there is no scope for the inclusion of the refund obtained, under S.41 (1) of the Act etc. The second respondent dismissed the revision, by Ext. P3 order dated 26-3-1982. He held that S.41 (1) of the Income Tax Act will apply and the amount refunded on 28-5-1973 was rightly included as the income for the assessment year 1974-75. In this Original Petition, the attack is against Ext. P1 assessment order, as affirmed by Ext. P3 revisional order. 2. We heard counsel for the petitioner, Mr. P. Balachandran, as also counsel for the Revenue, Mr. P.K.R. Menon. It was contended that (1) the refund obtained by the petitioner is not, includible in the total income of the petitioner and so not taxable and (2) even so, it cannot be included in the income of the petitioner for the assessment year 1974-75. 3. The Revenue included the refund obtained by the assessee in assessing the income for the year 1974-75 (accounting period ending by 31-3-1974). It is common ground that the assessee received a sum of Rs. 1,17,459/-. on 28-5-1973. It has to be stated that the collections originally made by the assessee and remitted to the Government were allowed as items of expenditure in the assessment orders for the years concerned. So, the question that falls to be considered is whether the refund obtained by the assessee is assessable as income and even so, it is so assessable for the assessment year 1974-75? The Revenue has placed reliance on S.41 (1) of the Income Tax Act to include the refund obtained by the assessee in the assessable income for the year 1974 75. S.41 (1) of the Income Tax Act is as follows: "41. The Revenue has placed reliance on S.41 (1) of the Income Tax Act to include the refund obtained by the assessee in the assessable income for the year 1974 75. S.41 (1) of the Income Tax Act is as follows: "41. Profits chargeable to tax- (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." 4. Exts. P1 and P3 orders proceed on the basis that the collections originally made by the assessee and remitted to the Government were allowed as an expenditure in the assessment orders for the years concerned. Exts. P1 and P3 also proceed on the basis that the method of accounting adopted by the petitioner-firm is "mercantile". Since deduction has been made in the assessments for the previous years in respect of the amounts remitted to the Government, the only further question is whether, subsequently during any year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such expenditure or some benefit in respect of such liability by way of remission or cessation thereof? The High Court annulled the levy of administrative surcharge and ordered refund on 27-9-1971. It was affirmed by the Supreme Court on 7-11-1974. Even before the judgment of the Supreme Court, the assessee obtained refund on 28-5-1973. The Revenue has taxed the amount of refund so obtained for the year in which refund was made, 1974-75. At the time when the refund was made, the decision rendered by the High Court on 27-9-1971 (Govindan's case -1971 K. L. T. 910) was pending in appeal before the Supreme Court. The Revenue has taxed the amount of refund so obtained for the year in which refund was made, 1974-75. At the time when the refund was made, the decision rendered by the High Court on 27-9-1971 (Govindan's case -1971 K. L. T. 910) was pending in appeal before the Supreme Court. It was only subsequently, as late as 7-11-1974, the Supreme Court affirmed the decision of High Court in Govindan's case (1974 K. L. T. 876). Can it be said that the assessee was absolved of the lability finally, when the matter was still pending before the Supreme Court, and whether the refund made even before the said date can be brought to tax in the year in which it was refunded? 5. The general import of S.41 of the Income Tax Act, as staled in Chaturvedi and Pithisaria's Income Tax Law, Third Edition, at page 1531, is as follows: "S. 41 enacts adjustment provisions whereby the Revenue takes back what it has already allowed if certain conditions come to pass and the assessee recoups something for which an allowance had already been made and deducted from his business income. Each of the six sub-sections of S.61 enumerate a particular circumstance and provide that if such circumstance comes to pass, certain income would be made taxable as deemed income. The section further fixes the year in which the recoupment, etc., is to be taxed. The year, generally, is that in which the recoupment amount becomes payable or the alternative benefit, etc.; comes to be obtained." S. 41 (1) of the Income Tax Act is not a charging section. It is only a machinery section. In order to bring a case under S.41 (1) of the Act, it has to be shown by the Revenue that there has been remission or cessation of the liability (Liquidator, Mysore Agencies P. Ltd. v. CIT 114 ITR 853). The remission or cessation of the liability is deemed to be the income of the assessee and it is chargeable to income-tax as income of the previous year. In this ease, "remission of liability" does not arise nor was emphasised. What was emphasised is the "cessation of the liability". It is common ground that the assessee maintains its books of accounts on "mercantile basis". In this ease, "remission of liability" does not arise nor was emphasised. What was emphasised is the "cessation of the liability". It is common ground that the assessee maintains its books of accounts on "mercantile basis". On these facts, the question arises as to the time, when the income could be said to "accrue" or "arise", to an assessee for the purpose of the Income Tax Act. This has been explained by the Supreme Court in E.D. Sassoon & Co. v. C.I.T. (26 ITR 27). What was said in the above case was stated lucidly in a recent judgment of the Supreme Court in C. I. T. v. Hindustan Housing & Land Development Trust Ltd. (161 I.T.R.524 at p. 527) thus: "In the majority judgment delivered by N.H. Bhagwati J., it was explained that the words "arising or accruing" describe a right to receive profits, and that there must be a debt owed by somebody. "Unless and until there is created in favour of the assessee a debt due by somebody", it was observed, "it cannot be said that he has acquired a right to receive the income or the income has accrued to him." " In this case, when the question of law was still pending in appeal before the Supreme Court, the assessee obtained refund from the Government on 28-5-1973. It is only by the final judicial pronouncement by the Supreme Court on 7-11-1974, the assessee was "absolved" of the liability. The liability ceased only then, because the decision of the High Court, nullifying the levy and ordering refund became final only by the decision of the Supreme Court which was rendered on 7-11-1974. There was no absolute right to receive the amount on 28-5-1-973. If the Supreme Court had reversed the judgment of the High Court, by allowing the appeal filed by the State, the right to get the refund would have fallen altogether. The very basis or foundation of the claim for refund made by the assessee was in serious jeopardy and nothing can be said to be due or would be due, if the appeal was decided against the assessee. The question whether the assessee was entitled to refund was itself pending for consideration in the Supreme Court, when the amount was refunded to the assessee by the Government on 28-5-1973. The question whether the assessee was entitled to refund was itself pending for consideration in the Supreme Court, when the amount was refunded to the assessee by the Government on 28-5-1973. In these circumstances, it is difficult to hold that there was a "debt" owed by the Government to the assessee, when refund was made by the Government to the assessee on 28-5-1973 and it was made only subject to the result of the decision of the Supreme Court in the appeal pending before it. The entitlement to refund itself was the subject matter of the appeal pending before the Supreme Court. In such circumstances it cannot be held that any income accrued or arose to the assessee on 28-5-1973, relevant for the assessment year 1974-75, when the assessee obtained refund of the amount from the Government. The benefit, in respect of deduction already obtained by the assessee, by way of cessasion of the liability, can be said to arise or accrue only when the final judgment was rendered by the Supreme Court on 7-11-1974, which is relevant for the assessment year 1974-75. In this connection, reference may be made to the decision of the Supreme Court in C. I. T. v. Hindustan Housing & Land Development Trust Ltd. (161 I.T.R. 524). In that case, the land belonging to the assessee/company was acquired under the Defence of India Rules. The assessee was maintaining its accounts on "mercantile" basis. The requisition of the land was made by notice dated 27-12-1952. The Land Acquisition Officer awarded a sum of Rs. 24,97,249/-as compensation. Dissatisfied with the amount of compensation, the company filed an appeal before the Arbitrator. The Arbitrator made an award dated 29-7-1955 and fixed the amount of compensation at Rs. 30,10,873/-. From the aforesaid decision of the Arbitrator, the State Government filed an appeal to the High Court. During the pendency of the appeal, on 25th April, 1956, the Government deposited Rs. 7,36,691/- which the assessee was permitted to withdraw on 9-5-1956 on furnishing security. For the assessment year 1956-57, the relevant accounting period ended by 31-3-1956, the Income Tax Officer brought to tax a sum of Rs. 7,24,914/- as the income of the assessee. The Income Tax Officer treated the sum as liable to income-tax during that year on the basis that the income accrued to the assessee on the date of the award. For the assessment year 1956-57, the relevant accounting period ended by 31-3-1956, the Income Tax Officer brought to tax a sum of Rs. 7,24,914/- as the income of the assessee. The Income Tax Officer treated the sum as liable to income-tax during that year on the basis that the income accrued to the assessee on the date of the award. In second appeal, the Income-tax Appellate Tribunal held that the sum of Rs. 7,24,914/-was not taxable in the assessment year 1956-57. At the instance of the Revenue, the matter was taken to the High Court. The High Court answered the question in favour of the assessee and against the Revenue. The Revenue took up the matter in further appeal before the Supreme Court. The Supreme Court adverted to the decision in E. D. Bassoon's case (26 I.T.R. 27) and posed the question as to the point at which income could be said to "accrue or arise" to an assessee for the purpose of the Income Tax Act. The fact, that the award was made by the Arbitrator on 29-7-1955, relevant for the assessment year 1956-57, was noticed. But, it was stated that the entire amount was in dispute in the appeal filed by the State Government. The Supreme Court observed that there was no absolute right to receive the amount at that stage and if the appeal, was allowed in its entirety, the right to payment of the enhanced compensation would have fallen altogether. It was stated that the very foundation of the claim made by the assessee was in serious jeopardy and nothing would be due if the appeal was decided against the assessee. After citing with approval the decision of the Andhra Pradesh High Court in Khan Bahadur Ahmed Allaain & Sons v. C.I.T. (74 I.T.R. 651), of the Gujarat High Court in Topandas Kundammal v. C.I.T. (114 I.T.R. 237), the decision of the Supreme Court in Raja Harish Chandra Raj Singh v. Deputy Land Acquisition Officer (AIR 1961 SC. 1500) and the later decision of Gujarat High Court in Addl. CIT. v. New Jehangir Vakil Mills Co. Ltd. (117 ITR. 1500) and the later decision of Gujarat High Court in Addl. CIT. v. New Jehangir Vakil Mills Co. Ltd. (117 ITR. 849), it was stated that "it was on the final determination of the amount of compensation that the right to such income in the nature of compensation would arise or accrue and till then there was no liability in praesenti in respect of the additional amount of compensation claimed by the owner of the land." 6. In the light of the above decision of the Supreme Court and the principles discernible therefrom, the assessee in this case is absolved of the liability only by the decision of the Supreme Court; only then, the liability can be said to have ceased.. So. the benefit in respect of deductions already made in the assessments for the earlier years by way of cessation of the liability arose or accrued to the assessee only when the Supreme Court rendered the judgment on 7-11-1974, and that will fall during the assessment year 1975-76. In this view of the matter, we are of opinion that the Income Tax Officer acted illegally and without jurisdiction in including the amount of refund received by the petitioner (Rs. 1,17,459/-) in the total income of the assessee for the assessment year 1974-75. Ext.P1, to that extent, is unauthorised and illegal. Ext.P3 order passed in revision affirming Ext.P1, is also infirm and illegal. We quash Exts. P1 and P3. 7. The Original Petition is allowed. There shall be no order as to costs.