TMI Blog1976 (2) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... e is a registered partnership firm consisting of three partners. It deals in tobacco including tobacco imported from other States. Its principal place of business is at Sayama in Cambay Taluka of Kaira District. The accounts of the assessee-firm are maintained on mercantile basis. The assessee had effected some sales in Madhya Pradesh. The Madhya Pradesh Government imposed sales tax on tobacco imported from other States of India under the Madhya Bharat Sales Tax Act. This sales tax was levied only for the period April 1, 1950, to June 30, 1957. The assessee was charging sales tax separately in respect of such tobacco sold in Madhya Pradesh but the sales tax was not credited to the trading account. It was taken to a separate sales tax account and the sales tax was paid to the State Government by debiting this account. Thus, the receipt of sales tax was not shown on the credit side in the accounts nor was the payment of the sales tax shown on the debit side in the accounts. The assessee challenged the levy of the sales tax in the Madhya Pradesh High Court. The Madhya Pradesh High Court by judgment dated December 16, 1959 [Bhailal Bhai v. State of M.P.--[1960] 11 STC 511 (MP)] held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the Tribunal. The Tribunal held that the transaction came within the mischief of section 41(1) of the Income-tax Act, 1961, when the assessee got refund of the sales tax paid. At the same time, relying on the decided cases, it held that this refund could not be treated as income under section 41(1) until the matter was completely finalised and that this was done when the Supreme Court passed the final order in the matter and the Tribunal took the view that the amount was rightly taxed in the assessment year 1965-66. Thereafter, at the instance of the assessee, the questions set out hereinabove have been referred to us for our opinion. At the outset it will be convenient to refer to the provisions of section 41(1). This section is in a group of sections, namely, sections 30 to 43A, which group, according to section 29, provides for the manner in which income under the head " Profits and gains of business or profession " referred to in section 28 of the Income-tax Act, 1961, has to be computed. Section 41(1) provides that 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, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain newspapers, transferred the right to print and publish those newspapers to the Express Newspapers Ltd. on August 31, 1946, and let out its machinery and assets to the latter with effect from September 1, 1946. On October 31, 1946, the Free Press Company went into voluntary liquidation and the liquidator was directed not to carry on the business of the company. The liquidator confirmed the transfer of the machinery and assets to the Express Newspapers Ltd. on November 1, 1946, the sale yielding a profit to the Free Press Company of Rs. 6,08,666 comprising Rs. 2,14,090, being the difference between the original cost and written down value of the machinery, and Rs. 3,94,576, being the amount in excess over the original cost. As the Free Press Company was dissolved later and was struck off the register of companies, the Express Newspapers Ltd. was assessed as the successor of the Free Press Company under the proviso to section 26(2) of the Indian Income-tax Act, 1922, inter alia, in respect of these two amounts, namely, the balancing charge comprising of Rs. 2,14,090 and the capital gains of Rs. 3,94,576. On these facts the Supreme Court held that the profits or gains which were ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court held: " The receipts were not chargeable to tax at all. The receipts were the outstanding dues of professional work done and were clearly the fruits of the assessee's professional activity. They were the profits and gains of a profession and they fell under the fourth head, namely, ' profits and gains of business, profession or vocation '. They were not, however, chargeable to tax under that head because under the corresponding computing section, i.e., section 10 of the Indian Income-tax Act, 1922, an income received by an assessee, who kept his accounts on the cash basis, in an accounting year in which the profession had not been carried on at all was not chargeable to tax. " At page 431, Sarkar C.J., delivering the judgment on behalf of the majority, observed : " The receipts in the present case are the outstanding dues of professional work done. They were clearly the fruits of the assessee's professional activity. They were the profits and gains of a profession. They would fall under the fourth head, viz., ' profits and gains of business, profession or vocation '. They were not however chargeable to tax under that head because under the corresponding com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat under section 41(1) what is necessary is that allowance or deduction must have been made in the assessment for any earlier year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee must have obtained, whether in cash or in any other manner whatsoever, some amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof. If these two factors are present, namely, allowance or deduction made in the course of any earlier assessment year and the obtaining, whether in cash or in any other manner whatsoever, any amount in respect of such trading liability by way of remission or cessation of the trading liability, then only the provisions of section 41(1) can be invoked. Mr. Shah's contention is that in respect of the earlier years in the course of which the assessee collected sales tax from other merchants and paid the amounts of these sales tax dues to the Government, he did not show the amount of collections on the credit side of his account nor payments made to sales tax authorities on the debit side of the account and, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature and quality of the receipt and not the head under which it is entered in the account books that would prove decisive. If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as trading receipt, and the court observed that the assessee concerned would be entitled to claim deduction of the amount as and when it paid the amount to the State Government. Khanna J., delivering the judgment of the Supreme Court, observed at page 548 : " The amount realised by the appellant (assessee) from the purchasers included sales tax. The appellant, however, did not pay the amount of sales tax to the actual owner of the goods auctioned because the statutory liability for the payment of that sales tax was that of the appellant. The appellant-company did not also deposit the amount realised by it as sales tax in the State exchequer because it took the position that the statutory provision creating that liability upon it was not valid. As the amount of sales tax was received by the appellant in its character as an auctioneer, the amount, in our view, should be held to form part of its tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection of the Orissa Sales Tax Act, 1947, was valid, the fact that the dealer was compelled to deposit the amount of sales tax in the State exchequer did not prevent the applicability of the principle laid down by the Supreme Court in Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax [1973] 87 ITR 542 (SC). It was further held that the amount collected by the appellant as sales tax constituted its trading receipt an had to be included in its total income. The Supreme Court further held that if and when the appellant paid the amount collected to the State Government or refunded any part thereof to the purchaser, the appellant would be entitled to claim deduction of the sum so paid or refunded. The Supreme Court (see [1974] 97 ITR 615, 620 (SC)) in that case cited with approval the, following passage from the decision of Lawrence J. in Paprika Ltd. v. Board of Trade [1944] 1 All ER 372 (KB) : " Wherever a sale attracts purchase tax that tax presumably affects the price which the seller who is liable to pay the tax demands, but it does not cease to be the price which the buyer has to pay even if the price is expressed as X plus purchase tax " and the following passag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refunded will also be a deduction which he can claim and it must be granted to him, that being deduction on the expenditure side. Thus, it is obvious that in the instant case the assessee-firm which was maintaining its accounts on mercantile basis was bound to show as trading receipt all the amounts which accrued due to it or which were collected by it as sales tax and it was bound to show on the debit side of the accounts, the amounts which it paid by way of sales tax. The fact that no such entries showing credits and debits in respect of sales tax collected and sales tax paid were made. by the assesseefirm does not alter the real substance of the transaction nor does it alter the real character of what was required to be done by the assessee in this case. Mr. J. P. Shah for the assessee contended that whatever might be the legal position and the correct accounting practice, the fact cannot be over looked that in the instant case the assessee had never claimed any deduction in respect of the sales tax paid by it nor had it shown on the receipts side the sales tax in any particular year. He contended, therefore, that the condition precedent to the applicability of section 4](1) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the Income-tax Act. The Income-tax Act is a permanent Act, whereas the Finance Act is passed every year and its main purpose is to fix the rates to be charged under the Income-tax Act for that year. That should be the construction is also made clear by section 55 of the Income-tax Act, whereunder super-tax shall be charged for any year in respect of the total income of the previous year of any individual, Hindu undivided family, company, etc., at the rate or rates laid down for that year by a Central Act. This section brings out the distinction between a tax charged and the rate at which it is charged. This construction is also emphasized by section 67B of the Income-tax Act, whereunder if, on the 1st day of April in any year, provision has not yet been made by a Central Act for the charging of income-tax for that year, the Income-tax Act shall nevertheless have effect until such provision is so made as if the provision in force in the preceding year or the provision proposed in the Bill then before Parliament, whichever is more favourable to the assessee, was actually in force. This shows that the charging section is only section 3 of the Income-tax Act, and that section 2 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 428 (SC) was not being carried on in the relevant previous year, there was no question of the computation of the tax being charged in accordance with or subject to the provisions of that Act, but neither in Nalinikant Ambalal Mody's case [1966] 61 ITR 428 (SC) nor in Express Newspapers Ltd.'s case [1964] 53 ITR 250 (SC) has the Supreme Court said that the provisions of section 10 were provisions of a charging section. Indeed, by now the position has been well recognised that it is only section 3 read with section 4 of the Act of 1922 and section 4 read with section 5 of the Act of 1961 which are the charging sections in the relevant Acts. The rest of the sections in the respective Acts constitute the machinery for computation and levying of tax and the machinery for the assessment of tax but the charge of tax is under section 4 of the Act of 1961. Mr. J. P. Shah for the assessee contended in this connection that as it was only for the first time under the Act of 1961 that even though the business might not have been in existence at the time when the amount referred to in section 41(1) was sought to be brought to tax, to that extent section 41(1) was a charging section. So far as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om) and what has been enacted in section 41(1) is that if a deduction has been made in a previous year and the assessee has benefited by such deduction in the past, if by chance some amount is refunded to him or comes back to him, the amount so got back should be brought to tax ; that is the sum and substance of the provision of section 41(1). There is no charging section in this and, therefore, the principle which Mr. Shah wanted to invoke, namely, that section 41(1) is the charging section and, therefore, should be strictly construed, cannot be invoked in the instant case. In Gursahai Saigal v. Commissioner of Income-tax [1963] 48 ITR 1 (SC), the Supreme Court was concerned with the provisions of sub-sections (3), (6), (8) and (9) of section 18A of the Indian Income-tax Act, 1922. The provisions arose for consideration under the following circumstances. In certain assessment proceedings under the Indian Income-tax Act, 1922, the assessee was charged with interest under sub-section (8) of section 18A of the Act. That sub-section provided that in cases there mentioned interest calculated in the manner laid down in sub-section (6) of section 18A shall be added to the tax assessed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f construction on which the assessee relies applies only to a taxing provision and has no application to all provisions in a taxing statute. It does not, for example, apply to a provision not creating a charge for the tax but laying down the machinery for its calculation or procedure for its collection. The provisions in a taxing statute dealing with machinery for assessment have to be construed by the ordinary rules of construction, that is to say, in accordance with the clear intention of the legislature which is to make a charge levied effective. Reference may be made to a few cases laying down this distinction. In Commissioner of Income-tax v. Mahaliram Ramjidas [1940] 8 ITR 442, 448 (PC) it was said : ' The section, although it is part of a taxing Act, imposes no charge on the subject, and deals merely with the machinery of assessment. In interpreting provisions of this kind the rule is that that construction should be preferred which makes the machinery workable, ut res valeat Potius quam pereat '. " Again in India United Mills v. Commissioner of Excess Profits Tax [1955] 27 ITR 20 (SC), the Supreme Court ([1963] 48 ITR 1 (SC), 5) had pointed out with reference to anothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible in the interpretation of a charging or taxing provision of a taxing statute... the subject is not to be taxed unless the charging provision clearly imposes the obligation. " The earlier decision of the Supreme Court in Gursahai Saigal [1963] 48 ITR 1 (SC) was referred to and followed at pages 111 and 112 of the report. Thus, the principle which we have to follow in the instant case is that since section 41(1) so far as the present case is concerned is not a charging section it has to be construed in such a manner as to make the levy of the tax effective and to make the machinery of assessment workable. We may point out that in Commissioner of Income-tax v. Lakshmamma [1964] 52 ITR 789 (Mys) Hegde J., as he then was, delivering the judgment of the Mysore High Court, after examining all the earlier decisions on the point, observed at page 800 : " Now we can easily find out the reason for enacting section 10(2A) of the Act. Evidently, the legislature wanted to get over the effect of the decision in Mohsin Rehman Penkar's case [1948] 16 ITR 183 (Bom) and the cases that followed it. At that stage, evidently, it was thought advisable to make the provision self-contained by br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits and gains of business. Similarly, in the Calcutta case of Ikrahnandi Coal Company [1968] 69 ITR 488 (Cal) the assessee had received a refund of sales tax amounting to Rs. 41,124 as a result of an order of the Bombay sales tax authorities consequent on a decision of the Supreme Court. The income-tax authorities sought to assess this refunded amount as income of the assessee. It was contended on behalf of the assessee that sales tax was collected by the assessee from the assessee's buyers and the same was under the statute to be paid to the sales tax authorities and when the money representing the sales tax was refunded by the sales tax authorities, the identical money became refundable by the assessee to the assessee's buyers, and, therefore, the refunded amount was not assessable as his income. These arguments were rejected and it was held by the Calcutta High Court that the amount of sales tax, even though shown separately in the transaction of sale as sales tax, is a part of the consideration which the seller charges for transfer of the property. The fact that the statute provides that the seller may collect sales tax did not rob the transaction of its trading character. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear that the first condition regarding the applicability of section 41(1) is completely satisfied in this case and the refund obtained by the assessee as a result of the decision of the Supreme Court is clearly covered as an amount obtained in cash or in any other manner as referred to in section 41(1). The alternative contention of Mr. Kaji for the revenue is that question No. 1 should be reframed in the light of the decision of the Bombay High Court in Commissioner of Income-tax v. Breach Candy Swimming Bath Trust [1955] 27 ITR 279 (Bom) and that the question as reframed should read " whether, on the facts and in the circumstances of the case, the hon'ble Tribunal is correct in holding that the refund from the sales tax is taxable under the Act ? " so that it can be argued for the revenue that on the question as thus reframed the amount can be taxed even under section 4 even if the provisions of section 41(1) are not applicable. This alternative contention need not be considered in view of the conclusion that we have arrived at regarding the applicability of section 41(1) and, therefore, we have not reframed the question nor have we considered the alternative contention of Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court decision was delivered. Under these circumstances it is only Samvat year 2020 in the course of which the Supreme Court judgment was delivered on January 20, 1964, that can be said to be the previous year in the course of which this right to refund accrued. In view of section 41(1), therefore, it is that previous year in the course of which the right to receive this amount of Rs. 42,263 by way of refund accrued to the assessee and the provisions of section 41(1) are, therefore, applicable and it is the assessment year 1965-66, the previous year being Samvat year 2020, which is the year in which the amount of refund can be brought to tax under section 41(1). Under these circumstances we cannot accede to the request of Mr. Kaji made in the alternative to reframe the question and we answer the question as originally referred to us. We answer question No. 1 in the affirmative and question No. 2 also in the affirmative as to the first part. The rest of question No. 2 does not arise, that is, the income was rightly assessed to tax in the assessment year 1965-66, when the order of the Supreme Court was announced. The assessee will pay the costs of this reference to the Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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