TMI Blog2002 (9) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as the CEGAT held that the goods were not liable to duty. On September 20, 1988, the excise duty was refunded. On appeal filed to the High Court, it was dismissed. Thereafter, the Excise Department filed S.L.P. in this court. The fate of the S.L.P. 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 Income-tax 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 cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh 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. 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." Section 41(1) applies if the following conditions and circumstances are satisfied: In the assessment for the relevant year an allowance or deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 overlapping 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 CIT v. Kesaria T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Government. It is also not correct for the Income-tax Officer 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 section 41(1) of the Act." The High Court correctly appreciated the scope of section 41(1) and applied the second limb of the sub-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. While so, based on the decision of the High Court in the writ petition, the Income-tax Officer 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 a writ petition which was allowed by the High Court. The facts of the case are quite close to Rameshwar Prasad's case [1983] 141 ITR 763 (All). The following observations in the judgment may be noted as they clearly reveal the fact situation in that case: "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 cannot be said to have ceased because the judgment of the single judge of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in Visnagar Taluka Audyogik Sahakari Mandli Ltd. v. CIT [2000] 242 ITR 627. That decision prima facie 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 Ltd.'s case [1976] 105 ITR 864 (All) and Rameshwar Prasad's case [1983] 141 ITR 763 (All) 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 CIT v. Bharat Iron and Steel Industries [1993] 199 ITR 67 (Guj). In the said Full Bench decision, though the discussion by and large proceeded on the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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