TMI Blog2002 (4) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... ly on the basis of drawing inferences that it might have been allowed as deducted in the earlier assessment years. - The appeal therefore fails and is hereby dismissed - - - - - Dated:- 18-4-2002 - Judge(s) : RAJESH BALIA., D. N. JOSHI. JUDGMENT The judgment of the court was delivered by R. BALIA J.-This appeal is directed against the order passed by the Income-tax Appellate Tribunal, Jodhpur Bench, Jodhpur, relating to the assessment year 1995-96. While admitting the appeal, the following two questions have been framed on April 4, 2002: "1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law allowing interest paid to third parties placing reliance on the judgment of CIT v. Jain Construction Co. [2000] 245 ITR 527 (Raj), whereas in the said judgment, the High Court has not held that interest to third parties are allowable out of income arrived by applying net profit rate? 2. Whether, on the facts and in the circumstances of the case and position of law, the Income-tax Appellate Tribunal was justified in giving the relief on account of the sales tax refund which was credited by the assessee-firm itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f refund received during the previous year relevant to the assessment year 1995-96 from the Sales Tax Department on account of excess payment paid in the earlier years, in the taxable income of the previous year in question, as reimbursement of expenses. The payment of sales tax, which is an indirect tax is considered to be part of business expenditure and which ordinarily is an allowable expense subject to the conditions given in section 43B, which in substance restricts the allow ability of deduction on account of sales tax liability only to the extent of amount actually paid during the previous year or at best up to the date of filing of returns. If such deduction is allowed, in any particular year, while computing the income subjected to tax under the Income-tax Act and is subsequently refunded to the assessee then the assessee is required to include such refund amount in his taxable income as reimbursement of deduction earlier claimed and allowed. The reason is obvious. If an assessee has claimed deduction of any amount as expenses incurred by him and which has been so allowed, it results in reducing his tax liability to that extent. When such amount is received by such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year." From the very opening part of the provision, it is apparent that it applies to a case 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 subsequent thereto during any previous year, if the assessee obtains 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 same is to be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year. The sine qua non of invoking section 41 is that in any earlier assessment year, the allowance or deduction ought to have been made in computing the income chargeable under the tax. It obviously concerns the computation of taxable income made in accordance with the provisions of the Income-tax Act in the assessment and not merely on the basis of treatment of such amount in the books of account. In the present case, the question relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e absence of any specific consideration of the issue. In the present case, we find firstly there is no reference to any specific assessment year in which the amount of refund of sales tax in question was considered as allowable expenses. Therefore, at the very first instance one has to find whether in any particular assessment year, the amount sought to be included in the income of the previous year in question, was allowed as deduction or not? Secondly, when an assessment has been made on estimate basis, it cannot be discerned what particular item of expense or trading liability had been considered and allowed as a deduction or has been rejected as not allowable. In this connection, the decision of the Supreme Court in Tirunelveli's case [1970] 78 ITR 55 is relevant. It was a case in which the assessee had submitted his return for the assessment year 1957-58. In the relevant accounting year, the assessee has paid a sum of Rs. 17,470 to the employees as bonus in full settlement and the balance of Rs. 54,479 as an outstanding liability was credited to the profit and loss account as it has ceased to exceed as per settlement. On an earlier occasion in relation to this liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such loss or expenditure or has obtained some benefit in respect of such trading liability by way of remission or cessation thereof in which event the amount received by him has to be deemed to be profits and gains." The court further added that it is apparent that- the question whether an allowance had been granted or a deduction made in respect of a trading liability had to be decided by referring to the order relating to the assessment year 1950-51 and it could not be determined by drawing inferences from what was done in respect of the assessment of an earlier year. In the present case neither the Income-tax Officer nor any other officer has traced the earlier assessment year, in which the amount of sales tax in question was considered and allowed as deduction. The Assessing Officer has merely relied on the practice of subjecting the assessee to tax on his income estimated by designing a net profit rate by taking into account the past experience and has jumped to the conclusion that since in some past years, to which year the amount relates, the amount must be deemed to have been part of the consideration in the estimate arrived at by applying the net profit rate. The very f ..... 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