TMI Blog1958 (3) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... tment and benefit was given to the assessee of section 25(4). The firm had paid excess profits tax in respect of the chargeable accounting period 1st of April, 1944 to the 24th of March, 1945, and had also made a deposit under the provisions of section 10 of the Indian Finance Act, 1942, read with section 2 of the Excess Profits Tax Ordinance, 1943 and had thus become entitled to repayment of a portion of the excess profits tax paid by them. The Department brought the amount, which was repayable to the firm, to tax under the provisions of section 11(11) of the Indian Finance Act of 1946. The contention of the assessee was that the repayment of this amount was profits of his business within the meaning of section 10 of the Income-tax Act, and they were not liable to pay any tax in respect of this amount by reason of section 25(4) of the Act. The Tribunal by a majority decided the matter in favour of the assessee and the Commissioner of Income-tax has now come on this reference. The majority of the members of the Tribunal, in coming to the decision that they did, largely relied on certain English decisions. This is an appropriate case where the note of warning, which has so often bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that period. We have then a proviso to this section, which deals with the relief which an assessee may obtain under section 7 of the Act. As we have already pointed out, it may happen that after having paid excess profits tax for one chargeable accounting period, by reason of deficiency in profits in the next period, the assessee may become entitled to a refund and provision had to be made with regard to this refund. The assessee having treated the amount to which he became entitled as excess profits tax and having paid it and having received a deduction for it under section 12, the amount escaped tax. It was a permissible deduction and the amount was not brought to tax. But when the Legislature provided for the return of a part of that amount by reason of the assessee becoming entitled to relief under section 7 of the Act, it was but proper that that amount should be brought to tax and the scheme for bringing it to tax was incorporated in the proviso to section 12, and what the proviso lays down is that the amount repayable shall be taken into account in computing the profits and gains of the business for the purposes of income-tax as if it were a profit of the business accruin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Finance Act, 1942, or of section 2 of the Excess Profits Tax Ordinance, 1943 (XVI of 1943), shall be deemed to be income for the purposes of the Indian Income-tax Act, 1922, and shall, notwithstanding the provisions of section 34 of that Act, be treated as income of the previous year which constitutes or includes the chargeable accounting period in respect of which the said sum is repayable. It may be mentioned, before we go on to consider this sub-section that after the Finance Act of 1942, the Excess Profits Tax Ordinance of 1943 was enacted, which made the deposit under section 10 of the Finance Act, which had so far been optional, compulsory. Therefore, after the enactment of the Ordinance, there was an obligation upon the assessee to make a deposit with the Government. The concessions that he was to obtain were identical. The only change that was made was that instead of the making of the deposit being at the option of the assessee, the option was taken away and there was a statutory obligation upon him to make the deposit contemplated by section 10 of the Finance Act. Now, as it will be noticed, section 11(11) of the Finance Act made the repayment of the excess profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of excess profits tax constituted a deduction and both were submitted to tax by the Legislature; and when they were repaid, as it were, they resumed their characteristic or character of business income. The only difference, according to Mr. Palkhivala, between these two repayments was that it is provided by the Legislature that in the first case-the repayment in respect of deficiency of profits, the income was treated as the income of the year in which the deficiency was suffered and in the case where the deposit was made, the income was treated as the income for the year in which the repayment was made. Mr. Palkhivala also points out that inasmuch as the payment of deposit under section 10 was never treated as a deduction under section 12 and as it had borne tax, no provision was made for submitting it to tax when it was returned, and only interest on the deposit was submitted to tax as an income earned by the assessee. It is also pointed out that excess profits tax is paid out of the income of the business. It is the very fact that it bears that character that subjects it to the excess profits tax, and when it is refunded, inasmuch as what is refunded is the excess profits tax pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 10 of the Finance Act, is deemed to be an income; and the other is the fiction with regard to the year with regard to which this repayment is to be considered. We are largely concerned with the first legal fiction. Mr. Palkhivala's submission is that the Legislature has not introduced any legal fiction with regard to the character which this repayment bears, and, therefore, it is not permissible to the court to extend the legal fiction and the legal fiction must be strictly confined to superseding only to the extent of that fiction the realities of the case. Mr. Palkhivala says that the only legal fiction is to make the repayment of excess profits tax an income and treating that income and dealing with that income for the purpose of tax under the provisions of the Indian Income-tax Act. It is pointed out that the Legislature has expressly provided that this repayment should be deemed to be income for the purpose of the Indian Income-tax Act and, therefore, you must turn to the Indian Income-tax Act in order to determine how this income should be computed, and it is necessary to decide under which head of income this particular income would fall, and if on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness income. The real question is: Did that imprint continue when the assessee got it back under the provisions of section 11(11)? Now, the provisions with regard to the payment of a deposit are not part and parcel of the Excess Profits Tax Act. They have nothing to do with the machinery of the Act. They have nothing to do with the assessment of excess profits. The repayment of the tax is a statutory concession given by the Legislature in consideration of the deposit made by the assessee. It was clearly a concession when the deposit was voluntary. It is equally a concession when the deposit becomes compulsory, because the State is taking from the assessee a deposit, which strictly under the law of taxation, it is not entitled to, and in return for that, it not only pays two per cent, interest but it also refunds a part of the tax. Therefore, the income that the assessee receives is not a business income but is an income arising by reason of a concession made by the State; in other words, it is a statutory income, an income which owes its origin not to any activity on the part of the assessee but it is the result of a concession made by the State pursuant to a particular policy. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. All that was left to the future was the determination of the time when the payment should be made and the conditions under which such amount should be paid. It is perfectly true that under section 10 of the Finance Act of 1942, the assessee had the right to the return of a portion of the tax paid by him. But what Mr. Palkhivala seeks to do is to equate that right with the right of the assessee to treat that as his business income. The conditions under which this repayment was to be made was left to the Government. The Government out of generosity of its heart might have said that the repayment should bear no tax whatever. It might have fixed a special tax, a special rate, but all that the Government did was that it treated the repayment as an income and allowed the Income-tax Act to deal with that income. We agree with Mr. Palkhivala that we have to compute this income in the manner laid down in the Indian Income-tax Act. But there is no difficulty with regard to that, because there is always section 12 which deals with all residuary income and if a special type of income is created by the statute it is obvious that it cannot fall under any of the recognised heads of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , points out at p. 98 : The problem which arose in the case of repayment of Excess Profits Duty was different. Nobody knew or could know how soon, or how late, repayment might fall to be made; nor whether the business whose profits were assessed to Excess Profits Duty would be in the same hands when repayment (if any) came to be made. By that time the business might have ceased to be in existence. Repayment might therefore have to be made to a person who was not carrying on the original business. The original trader might have given up business died and an executor might have come in his place. The solution provided for all these cases is that contained i n the second part of the paragraph, according to which the amount repaid to any person is to be treated as profit for the year in which the repayment is received'. It is obvious that the amount of the former trading profits so repaid could not actually be trading profits for such year. None the less, the amount repaid is to be treated as if it were that which-in fact-it is not, and cannot be. The amount repaid consists of trading profits which reach the taxpayer out of their proper time. However belated his fruition of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned and the language used was identical with the language of rule 4 that where any person has received repayment of any amount previously paid by him by way of excess profits duty, the amount repaid shall be treated as profit for the year in which the repayment is received, and Lord Hanworth, M.R., points out at p. 216: The whole scheme of these payments and repayments and adjustments was to make the total of the amount of the Excess Profits Duty paid by the taxpayer during the whole period during which he was paying Excess Profits Duty accord with his profits or losses during that period-a period, it may be, and indeed it proved to be, of several years , and at p. 217 the learned Master of the Rolls analyses the nature of this repayment: But in respect of what is that payment made? It is not a legacy, it is not a sum which has fallen from the skies; it is a sum which is repaid because there was too large a sum paid by the company to the Revenue Authorities over the whole period during which Excess Profits Duty was paid, and that sum means and is intended to represent a repayment of a sum which was paid by them in represent of the duty charged upon the excess profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des for appeals in connection with the assessment of tax on this repayment. Far from the Finance Act setting up a separate, independent and autonomous scheme of taxation of this particular income, section 11(1) expressly provides that this amount should be deemed to be income for the purposes of the Indian Income-tax Act, and, in our opinion, the whole machinery laid down by the Indian Income-tax Act must be brought into play for the purpose of assessing this income. It may be said at the highest that the repayment is charged to tax by reason of sub-section (11) of section 11 of the Finance Act, but having charged it to tax, the computation, various stages of assessment, the recovery, is all left to the provisions of the Indian Income-tax Act. But, as we have already pointed out, even though we agree with Mr. Palkhivala on this aspect of the matter, our turning to the Indian Income-tax Act does not help us to determine under what head of income this particular income would fall. We have to decide that from the nature of the income itself and if we come to the conclusion that it is not an income from business but it is an income from other sources, then it would fall under section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Chief Justice does look upon the income constituted by sub-section (14) of section 11 in language identical with subsection (11) of section 11 as an income which is in a class by itself and an income which is sui generis. With respect we may not be prepared to go to the whole length with the learned Chief Justice and say that this income falls under a head which is not contemplated by the Indian Income-tax Act. The head contemplated by section 12 is wide enough to embrace any and every kind of income including this special kind of income constituted by section 11(14) and section 11(11). But whether the income is sui generis or it is an income falling under section 12 is a question which does not in any way help the assessee, because he must fail whether the income is sui generis or is an income falling under section 12. In order to succeed on this reference, he must succeed in showing that the income is a business income which should be subjected to tax as a business income. Mr. Palkhivala also wanted to argue that even if this income does not fall under section 10, section 25(4) would still apply because all that section 25(4) requires is the income, profits and gai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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