TMI Blog1991 (2) TMI 173X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be decided whether or not the amounts received by the assessee constitute the income of the assessee under the provisions of section 41(1). 3. The ITO did not accept the contention of the assessee that the refund received by it could not be regarded as its income under section 41(1) and brought to tax the amounts of refund. In appeal, the CIT (Appeals) upheld the action of the ITO. The assessee has come up in further appeal before us. The contention of the assessee is that the provisions of section 41(1) do not become applicable and the Department was in error in treating the refund as the income of the assessee. 4. Before we proceed to consider the various arguments advanced, let us notice the provisions of section 41(1). Section 41(1) says: " 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 remiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utation of its taxable income no deduction for the payment of excise duty could be considered to have been given. It was stated that what had been paid by way of excise duty was subsequently recovered by the assessee from its customers and the amount which was recovered was credited to the profit and loss account. It was stated that the debit on account of payment of excise duty was counter-balanced by the credit of the amount recovered and there was no adverse effect on the profit on account of the debit of payment of excise duty. It was stated that under the circumstances no deduction for the payment of excise duty could be considered to have been given in the computation of the taxable income of the assessee. It was stated that a distinction was required to be made between a case where the excise duty paid was in turn recovered by the assessee from its customers and a case where the excise duty paid was not recovered. It was stated that the provisions of section 41(1) were to be attracted only in the latter category of cases where the assessee had not proceeded to recover the amount of excise duty paid from its customers and hence the payment had caused "detriment" to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of Marikar (Motors) Ltd. We do not think that for applying the provisions of section 41(1), a distinction is required to be made between a case where the assessee had recovered the amount of sales tax or excise duty from its customers and a case where he had not so done. We are of the view that in either case, the provisions of section 41(1) will become applicable in the case of refund. 8. It is well settled that the amount recovered from the customer to compensate for the payment of excise duty or sales tax forms part of the dealer's turnover while the liability to pay sales tax or excise duty would be deductible as a business expense. We will draw attention to the following observation of the Supreme Court in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542: ". . . 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 trading or business receipt. " The Supreme Court was clearly of the view that sales tax collected by a dealer was his trading receipt. 9. We will also draw attention to the following observation of the Gujarat High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed to it on account of the payment of excise duty, since the amount of excise duty paid had been recovered by it from the customers. It is further stated that as both the excise duty paid and the amount recovered had been taken to profit and loss account, there was in the ultimate analysis no adverse effect on the profit and as such no deduction for the payment of excise duty should be considered to have been allowed to the assessee in the computation of its taxable income. It is then contended that as no deduction could be said to have been allowed, the question of invoking the provisions of section 41(1) to assess the refund would not arise. We do not find it possible to accept the contention of the assessee that no deduction for excise duty could be considered to have been given. Just because the assessee has sought to recover a particular expenditure by suitably adjusting the price of the goods sold, that cannot be made a ground for saying that in the computation of its income, no deduction for the expenditure in question should be considered to have been allowed. As a matter of fact, it is not only the excise duty paid that a manufacturer will seek to recover but he will seek ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decided by reference to that. Let us suppose that the assessee pays Rs. 100 by way of excise duty and it recovers the same amount from its customers. The amount recovered is a trading receipt. Let us suppose that profit, without taking into account the payment of excise duty and the subsequent recovery of the amount was Rs. 500. We will now take into account the payment of excise duty and the recovery of the amount spent. The amount recovered is a trading receipt and it has to be included in the computation of profit. Hence, the profit will go up to Rs. 600. Now, let us consider the payment of excise duty. If the department does not give deduction for it, then the profit will stay at Rs. 600. If a deduction for it is given, then the profit will come down to Rs. 500. It is thus obvious that the giving of the deduction will make difference to the profit. As would be apparent from the above illustration, the profit on which the department would have been able to charge tax, if no deduction for excise duty paid were to be given, would have been Rs. 600, and if deduction were to be given, then tax would have come to be charged only on Rs. 500. It is thus obvious that the argument of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication of the provisions of section 41(1). Now, we will turn to the consideration of those objections. It was contended by the assessee that as the matter of refund had not yet become final by the end of the accounting periods under consideration, it would not be justified to invoke the provisions of section 41(1). It was pointed out that the Excise Department had stated in the refund order that their appeal was pending before the Supreme Court and that the contention taken up by them before the Supreme Court was that the claim for refund having become time-barred, entitlement to claim refund was lost. It was pointed out that the Excise Department had issued refund subject to the decision of the Supreme Court. It was contended that, under the circumstances, there was no cessation of liability of the assessee to the Excise Department and hence the provisions of section 41(1) could not be invoked. The assessee placed reliance on the decision of the Allahabad High Court in the case of J.K. Synthetics Ltd. v. ITO [1976] 105 ITR 864. It was pointed out that for section 41(1) to apply, the liability must come to an end and there should be no possibility of the liability being revived ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was held that since the decision of the Single Judge of the Delhi High Court had not been accepted and a Letters Patent Appeal was pending, the liability could not be considered to have ceased. In the present case, the question is not whether there has been cessation of liability. In the present case, the liability had already been discharged. The amount paid by the assessee has been refunded to it and hence the question is whether the amount obtained by it in respect of an expenditure for which a deduction had been allowed earlier, should be treated as income under section 41(1). It is thus obvious that the decision of the Allahabad High Court in the case of J.K. Synthetics Ltd. on which the assessee has relied will be of no help in deciding the issue under consideration. Sampath Iyengar, in his "Law of Income-tax", 7th edition, Second Volume, at page 2050 has stated : " The words 'the assessee has obtained any amount' in the context of expenditure previously incurred by the assessee would connote that a payment has already been made by the assessee to his creditor or other person and that the whole or a part thereof has been returned to the assessee. It might be that, earl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the matter in appeal before the Supreme Court. The order passed by the High Court was affirmed by the Supreme Court on 7-11-1974. The assessee had received refund of the administrative surcharge on Tapioca from the State Government on 28-5-1973. This had fallen in the accounting period ending on 31-3-1974 relevant to assessment year 1974-75. The Department assessed the amount of refund for the assessment year 1974-75. When the matter went before the High Court, the High Court did not uphold the action of the Department. The High Court, was of the view that even though the refund had been received by the assessee during the accounting year relevant to assessment year 1974-75, the amount was not taxable for the assessment year 1974-75. The High Court held that the benefit on account of cessation of liability arose only when the Supreme Court rendered its judgment on 7-11-1974 which would fall for consideration for the assessment year 1975-76 and, therefore, the ITO was not justified to include the amount of refund in the total income of the assessee for the assessment year 1974-75. The High Court observed as under: " ....It is common ground that the assessee maintains its books of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessation thereof' points out the emphasis which the legislature has laid upon actual cash receipt so far as the amount being obtained is concerned and accrual basis so far as the benefit in respect of the trading liability is concerned. The mere wording of the section, in our opinion, clearly indicates that, so far as the loss or expenditure is concerned in respect of which an allowance or deduction has been made in the past, what counts is obtaining of any amount in respect of such loss or expenditurre. The amount may be received in any year or in any other manner whatsoever, but it must be 'obtained' whereas, so far as the benefit in respect of trading liability is concerned, it must be by way of remission or cessation of the said liability and the relevant date is the date of accrual of such benefit. The value of the benefit is to be considered the income of the assessee as of the date of accrual of the benefit." ---- [1976] 103 ITR 312 (315 316) 19. The distinction drawn by the Gujarat High Court in the case of Rashmi Trading between a case where the refund had been received and a case wherein there had taken place remission or cessation of the liability had not been notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for that year. 20. Another contention raised by the assessee is that since there was an implied trust created in favour of the customers from whom the duty was collected and the assessee was obliged to return the amount to them, the amount of refund received by the assessee from the Excise Department should not be regarded as the income of the assessee. We do not find it possible to accept this contention of the assessee either. The issue whether the refund of excise duty is to be deemed to be the income of the assessee under the provisions of section 41(1) and the issue whether deduction is allowable to the assessee on account of its liability to pay the amount back to the customers from whom it was collected are two separate issues. The first issue is whether certain income had arisen to the assessee or not. The second issue is that of whether deduction in respect of a certain expenditure is required to be given. It is so obvious that one issue has got nothing to do with the other. The question of the ensuing liability of the assessee to its customers has absolutely no relevance in deciding whether a certain income has arisen under section 41(1). As we have already discussed a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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