TMI Blog1991 (7) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... hich reads thus : "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. " The relevant assessment year is 1975-76. During the said period ending with the accounting year March 31, 1975, the assessee credited a sum of Rs. 2,11,773 to his capital account out of which a sum of Rs. 1,67,221 represented the amount received from the excise department which had been earlier paid by the assessee as litre fee pertaining to the assessment years 1970-71 to 1973-74. The State of Karnataka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure or as a trading liability. It was assumed by the parties as well as by the Bench that the deduction was in respect of a trading liability. It is on this assumption that the Bench observed, after quoting section 41(1) thus: " This sub section provides that where an allowance is granted in any year in respect of any loss, expenditure or trading liability and subsequently during any previous year, the assessee receives, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or the assessee is benefited by 'remission' or 'cessation' of trading liability, the amount received or the amount of liability which is extinguished, is chargeable as business profits of that previous year. From the facts set out in the earlier part of this judgment, it is seen that for the assessment year 1965-66, provision had been made by the assessee towards health cess in a sum of Rs. 3,90,005 ; the whole of the amount was disallowed by the Income-tax Officer. When no such allowance was granted in respect of the liability towards health cess during the assessment year 1965-66, the question of adding any amount under section 41(1) does not arise. For th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a tax, payable in the course of a trade, it will be a trading liability. But if such a law is unconstitutional, legally there is no liability at all from the very inception, and the allowance or deduction permitted in respect of such unconstitutional liability can never be called an allowance or deduction in respect of a trading liability and, therefore, section 41(1) is not attracted. When such law is declared unconstitutional, it is not a case wherein the assessee obtains the benefit of any remission or cessation of liability because the liability never existed from the very beginning in the eye of law. Learned counsel for the Revenue, however, contended that the three heads, "loss", "expenditure" and "trading liability", are not watertight compartments and an allowance or deduction may fall either under the head "expenditure" or a trading liability and that the Act nowhere defines the concept of "trading liability" in contradiction to the concept of "expenditure". Learned counsel also contended that, in the field of accountancy, trading liability is something which is incurred in connection with the carrying on of the trade and in the course of the trade, such as a liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not arise because of any bargain in the sale transaction. The law does not compel the seller to collect the tax element from the purchaser ; however, there is a compulsion on the seller (or the purchaser, as the case may be) to pay the tax, irrespective of the fact that the one who is liable to the State collects it or not from the other party to the transaction. The tax collected from the customer becomes the trading receipt of the dealer since it is collected as part of the consideration for the transaction of sale or purchase. Litre fee levied was a duty of excise. If the levy was valid, then its imposition depended on the manufacture or production of goods (as referred to in entry 51 of List II, Seventh Schedule, to the Constitution) ; liability to pay litre fee was fixed by the relevant law, having regard to the convenience of collection of the tax. Irrespective of any bargain or terms of dealings between the private parties, the charge to the tax was fixed statutorily and liability to the State arose when the terms of the charging sections were satisfied. In these circumstances, it cannot be held that liability to tax is a "trading liability", in the sense the phrase is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the company, then the money has not been spent, i.e., paid out or away, but the amount must be treated as set apart to meet a contingency. There is a distinction between a contingent liability and a payment depending upon a contingency. The question is whether in the years of account, one can describe the assessee company's liability as contingent or merely depending upon a contingency. In our opinion, the liability was contingent and not merely depending upon a contingency." From these observations, learned counsel for the assessee contended that the deduction claimed by the assessee towards the unconstitutional levy was not a real expenditure and it was only contingent depending for its finality on the levy being upheld by the Supreme Court. Since the law was declared as unconstitutional, the declaration goes back to the very inception of the levy and, therefore, the payment was not towards any real liability. This contention is no doubt very attractive. But a taxing provision has to be understood and applied in a working manner. The realities of the situation cannot be ignored. No doubt the concept of expenditure has been stated by the Supreme Court in Indian Molasses' case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be so, but it is not possible to do so in all cases. The assessee may receive the refund of the tax paid under an unconstitutional law after several years by which time his earlier completed assessment for income-tax purposes cannot be reopened due to the bar of limitation. lump sum received by the assessee after several years which clearly would go to augment his income is treated under section 41(1) as taxable during that year of receipt, and Parliament has obviously thought it fit to impose tax on this receipt during the year in which it is received to avoid reopening of the concluded assessment by unearthing the previous concluded proceedings. The assessee, in the instant case, claimed deduction of the litre fee and it was certainly allowed only under section 37 of the Act as an expenditure. The litre fee paid was treated as an expenditure as claimed by the assessee. For the purpose of the deductibility, if the payment can be claimed as expenditure by the assessee, it is not permissible for the same assessee now to contend that it was not an expenditure. That such deductions are allowed normally under section 37 of the Act as an expenditure is clear from the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision, so as to check tax evasion by claims of cash expenditure. The Madhya Pradesh High Court in M. P. Financial Corporation v. CIT [1987] 165 ITR 765, held that the expression "expenditure" used in section 37 may, in the circumstances of a particular case, cover an amount which is really a loss and the said amount has not gone out of the assessee's pockets ; the view of the Calcutta High Court in CIT v. Indian jute Mills Association [1982] 134 ITR 68, giving a wider meaning to the expression 'expenditure" depending on the facts of a particular case, was accepted by the Madhya Pradesh High Court. The trend of judicial decisions is in favour of taxing such tax refunds under section 41 and, in all such cases, taxes were paid under an unconstitutional levy or unnecessarily assumed to be an allowance or deduction made in the year in which such taxes were paid, in respect of expenditure and, therefore, the refund or adjustment made subsequently was treated as falling under section 41 for taxation under the Act. Motilal Ambaidas v. CIT [1977] 108 ITR 136, is a decision of the Gujarat High Court. Earlier, the levy of sales tax was held unconstitutional by the High Court which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the refunded sales tax amount was held taxable under section 41(1). The refund obtained was held to be the "amount of refund in respect of the expenditure of sales tax incurred by him in the previous year". K. V. Moosa Koya and Co. v. ITO [1989] 175 ITR 120 is a decision of the Kerala High Court. The Government had levied a surcharge which was declared unconstitutional resulting in refund of the surcharge to the assessee. The inclusion of this refunded amount for the levy of tax under section 41(1) of the Act was resisted by the assessee unsuccessfully. The Bench, at page 124, held that the liability to pay the surcharge ceased only on the declaration by the court that the levy of surcharge was illegal and hence there was a cessation of liability from that day. The ratio of this decision no doubt runs counter to the earlier decision of this court in Guruswamy's case. However, it reflects the trend of judicial thinking giving a wider scope to the word in section 41(1). An earlier decision of the same High Court in CIT v. Marikar (Motors) Ltd. [1981] 129 ITR 1, also is to the same effect. In Rameshwar Prasad Kishan Gopal v. V K. Arora, ITO [1983] 141 ITR 763, the Allahabad High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition 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 had 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 section 41(1) of the Act. " This was not a case where duty was paid and, in that regard, deduction had been obtained and subsequently the assessee obtained the refund. In an earlier decision of the Allahabad High Court in Jagatnarain Durga Prasad v. CIT [1970] 76 ITR 214, the assessee had paid certain amounts as sales tax on forward contracts and these payments were excluded from assessment under the Income-tax Act. Subsequently, it was held that the levy of sales tax was not attracted to the, forward contracts and, consequently, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l receipt. The assessee cannot have it both ways, He cannot claim the payment of the licence fee as an outgoing and regard the subsequent refund as a capital receipt. In my opinion, the sum in question is a revenue gain and not a capital receipt." The Calcutta High Court in Ikrahnandi Coal Co. v. CIT [1968] 69 ITR 488, also upheld the Revenue's contention that the amount received as refund of sales tax paid earlier was assessable as the income of the assessee in the year in which the refund was obtained by the assessee. The sales tax which was collected by the assessee earlier from its customers was part of the sale consideration and hence would go as part of the sale price, even though such collections were shown separately by the assessee in its accounts. The assessee contended that those refunded amounts Were likely to be demanded by the customers ; on this, the court held at page 497 : "The potentiality of the money being refunded or the potentiality of the money being claimed by a buyer from the assessee could not destroy or alter the sale price in the present case or the real transaction between the parties that it was a case of sale and purchase of merchandise in the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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