Kerala H.C : The petitioner is a registered firm. It is a dealer in hill produce.

Counsel Appeared

P. Radhakrishnan, M.M. Mathew & P. Balachandran, for the Petitioner : P.K.R. Menon with N.R.K. Nair, for the Respondent

PARIPOORNAN, J.:

The petitioner is a registered firm. It is a dealer in hill produce. It is an assessee on the files of the 1st respondent, the ITO, A-Ward, Circle-I, Calicut. It is maintaining its accounts on “mercantile basis”. The Government of Kerala levied administrative surcharge on export of tapioca in exercise of the power vested in it under the Kerala Tapioca (Manufacture and Export Control) Order, 1966. The petitioner-firm collected administrative surcharge on tapioca during the accounting periods which ended on 31st March, 1967, 31st March, 1968, 31st March, 1969, and 31st March, 1970. The amounts so collected were remitted into the Government treasury. The said levy of administrative surcharge by the Government was challenged by innumerable dealers in the High Court. The levy was annulled and refund of amounts remitted by the dealers was ordered by the High Court. The judgment of the High Court is dt. 27th Sept., 1971 [Govindan vs. State of Kerala (1971) KLT 910]. The State took up the matter in appeals before the Supreme Court. The order passed by the High Court was affirmed by the Supreme Court on 7th Nov., 1974 [State of Kerala vs. K.P. Govindan (1974) KLT 876]. The petitioner-firm received refund of the administrative surcharge on tapioca collected and paid by it from the Government on 28th May, 1973. These facts will show that the levy of administrative surcharge on export of tapioca was struck down and refund ordered by the High Court on 27th Sept., 1971 (accounting period ending on 31st March, 1972), that the order passed by the High Court was upheld by the Supreme Court on 7th Nov., 1974 (accounting period ending on 31st March, 1975) and refund was made to the petitioner on 28th May, 1973 (accounting period ending on 31st March, 1974). These will respectively fall within the asst. yrs. 1972-73,1975-76 and 1974-75. While making the assessment for the year 1974-75 (accounting period ending on 31st March,1974), the ITO invoked s. 41(1) of the IT Act, 1961, and included the refund obtained by the petitioner/assessee of Rs. 1,17,459 in the total income of the assessee. The order of assessment is exhibit P-1 dt. 27th March, 1979. The amount was so included notwithstanding the objections raised by the assessee. The assessee filed a revision petition before the second respondent, CIT, Cochin, and objected to the inclusion of the above refund obtained in exhibit P-1 order of assessment for the year

1974-75. Various contentions were taken. The important pleas taken up by the assessee were that the refund obtained on 28th May, 1973, from the Government was not the income of the petitioner, that it could not be included for the asst. yr. 1974- 75, that the assessee has passed on the amounts to its customers and so there is no scope for the inclusion of the refund obtained, under s. 41(1) of the Act, etc. The second respondent dismissed the revision by exhibit P-3 order dt. 26th March, 1982. He held that s. 41(1) of the IT Act will apply and the amount refunded on 28th May, 1973, was rightly included as the income for the asst. yr. 1974-75. In this original petition, the attack is against exhibit P-1 assessment order, as affirmed by exhibit P-3 revisional order.

2. We heard counsel for the petitioner, Mr. P. Balachandran, as also counsel for the Revenue, Mr. P.K.R. Menon. It was contended that (1) the refund obtained by the petitioner is not includible in the total income of the petitioner and so not taxable, and (2) even if it were so, it cannot be included in the income of the petitioner for the asst. yr. 1974-75.

3. The Revenue included the refund obtained by the assessee in assessing the income for the year 1974-75 (accounting period ending by 31st March, 1974). It is common ground that the assessee received a sum of Rs.1,17,459 on 28th May, 1973. It has to be stated that the collections originally made by the assessee and remitted to the Government were allowed as items of expenditure in the assessment orders for the years concerned. So, the question that falls to be considered is whether the refund obtained by the assessee is assessable as income and if so, whether it is so assessable for the asst. yr. 1974-75 ? The Revenue has placed reliance on s. 41(1) of the IT Act to include the refund obtained by the assessee in the assessable income for the year 1974-75. Sec. 41(1) of the IT Act is 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.”

4. Exhibits P-1 and P-3 orders proceed on the basis that the collections originally made by the assessee and remitted to the Government were allowed as an expenditure in the assessment orders for the years concerned. Exhibits P-1 and P-3 also proceed on the basis that the method of accounting adopted by the petitioner-firm is “mercantile”. Since deduction has been made in the assessments for the previous years in respect of the amounts remitted to the Government the only further question is whether, subsequently during any year, the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such expenditure or some benefit in respect of such liability by way of remission or cessation thereof ? The High Court annulled the levy of administrative surcharge and ordered refund on 27th Sept., 1971. It was affirmed by the Supreme Court on 7th Nov., 1974. Even before the judgment of the Supreme Court, the assessee obtained refund on 28th May, 1973. The Revenue has taxed the amount of refund so obtained for the year in which refund was made, viz., 1974-75. At the time when the refund was made, the decision rendered by the High Court on 27th Sept., 1971, Govindan’s case (supra) was pending in appeal before the Supreme Court. It was only subsequently, as late as 7th Nov., 1974, that the Supreme Court affirmed the decision of the High Court in [Govindan’s case (supra)]. Can it be said that the assessee was absolved of the liability finally, when the matter was still pending before the Supreme Court and can the refund made even before the said date be brought to tax in the year in which it was refunded ?

5. The general import of s. 41 of the IT Act, as stated in Chaturvedi & Pithisaria’s Income-tax Law, Third Edition, at page 1531, is as follows : “Sec. 41 enacts adjustment provisions whereby the Revenue takes back what it has already allowed if certain conditions come to pass and the assessee recoups something for which an allowance had already been made and deducted from his business income. Each of the six subsections of s. 41 enumerate a particular circumstance and provide that if such circumstance comes to pass, certain income would be made taxable as deemed income. The section further fixes the year in which the recoupment, etc., is to be taxed. The year, generally, is that in which the recoupment amount becomes payable or the alternative benefit, etc., comes to be obtained.”

6. Sec. 41(1) of the IT Act is not a charging section. It is only a machinery section. In order to bring a case under s. 41(1) of the Act, it has to be shown by the Revenue that there has been remission or cessation of the liability [Liquidator, Mysore Agencies (P) Ltd. vs. CIT (1978) 114 ITR 853 (Kar) : TC19R.244]. The remission or cessation of the liability is deemed to be the income of the assessee and it is chargeable to income-tax as income of the previous year. In this case, “remission of liability” does not arise nor was it emphasised. What was emphasised is the “cessation of the liability”. It is common ground that the assessee maintains its books of account on “mercantile basis”. On these facts, the question arises as to the time when the income could be said to “accrue” or “arise” to an assessee for the purpose of the IT Act. This has been explained by the Supreme Court in E.D. Sassoon & Co. vs. CIT (1954) 26 ITR 27 (SC). What was said in the above case was stated lucidly in a recent judgment of the Supreme Court in CIT vs. Hindustan Housing & Land Development Trust Ltd. (1986) 58 CTR (SC) 179 : (1986) 161 ITR 524 (SC) at p. 527, thus : “In the majority judgment delivered by N.H. Bhagwati J., it was explained that the words ‘arising or accruing’ describe a right to receive profits, and that there must be a debt owed by somebody. ‘Unless and until there is created in favour of the assessee a debt due by somebody’, it was observed, ‘it cannot be said that he has acquired a right to receive the income or the income has accrued to him’.”

7. In this case, when the question of law was still pending in appeal before the Supreme Court, the assessee obtained refund from the Government on 28th May, 1973. It is only by the final judicial pronouncement by the Supreme Court on 7th Nov., 1974 that the assessee was “absolved” of the liability. The liability ceased only then, because the decision of the High Court, nullifying the levy and ordering refund became final only by the decision of the Supreme Court which was rendered on 7th Nov., 1974. There was no absolute right to receive the amount on 28th May, 1973. If the Supreme Court had reversed the judgment of the High Court, by allowing the appeal filed by the State, the right to get the refund would have fallen altogether. The very basis or foundation of the claim for refund made by the assessee was in serious jeopardy and nothing can be said to be due or would be due, if the appeal was decided against the assessee. The question whether the assessee was entitled to refund was itself pending for consideration in the Supreme Court, when the amount was refunded to the assessee by theGovernment on 28th May, 1973. In these circumstances, it is difficult to hold that there was a “debt” owed by the Government to the assessee, when refund was made by the Government to the assessee on 28th May, 1973, and it was made only subject to the result of the decision of the Supreme Court in the appeal pending before it. The entitlement to refund itself was the subject-matter of an appeal pending before the Supreme Court. In such circumstances, it cannot be held that any income accrued or arose to the assessee on 28th May, 1973, relevant for the asst. yr. 1974-75, when the assessee obtained refund of the amount from the Government. The benefit, in respect of deduction already obtained by the assessee, by way of cessation of the liability, can be said to arise or accrue only when the final judgment was rendered by the Supreme Court on 7th Nov., 1974, which is relevant for the asst. yr. 1975-76. In this connection, reference may be made to the decision of the Supreme Court in CIT vs. Hindustan Housing & Land Development Trust Ltd. (1986) 161 ITR 524 (SC). In that case, the land belonging to the assessee-company was acquired under the Defence of India Rules.

The assessee was maintaining its accounts on “mercantile” basis. The requisition of the land was made by a notice dt. 27th Dec., 1952. The Land Acquisition Officer awarded a sum of Rs. 24,97,249 as compensation. Dissatisfied with the amount of compensation, the company filed an appeal before the arbitrator. The arbitrator made an award dt. 29th July, 1955, and fixed the amount of compensation at Rs. 30,10,873. From the aforesaid decision of the arbitrator, the State Government filed an appeal to the High Court. During the pendency of the appeal, on 25th April, 1956, the Government deposited Rs. 7,36,691 which the assessee was permitted to withdraw on 9th May, 1956, on furnishing security. For the asst. yr. 1956-57, the relevant accounting period ending on 31st March, 1956, the ITO brought to tax a sum of Rs. 7,24,914 as the income of the assessee. The ITO treated the sum as liable to income-tax during that year on the basis that the income accrued to the assessee on the date of the award. In second appeal, the Tribunal held that the sum of Rs. 7,24,914 was not taxable in the asst. yr. 1956-57. At the instance of the Revenue, the matter was taken to the High Court. The High Court answered the question in favour of the assessee and against the Revenue. The Revenue took up the matter in further appeal before the Supreme Court. The Supreme Court adverted to the decision in E.D. Sassoon’s case (supra) and posed the question as to the point at which income could be said to “accrue or arise” to an assessee for the purpose of the Indian IT Act. The fact that the award was made by the arbitrator on 29th July, 1955, relevant for the asst. yr. 1956-57, was noticed. But, it was stated that the entire amount was in dispute in the appeal filed by the State Government. The Supreme Court observed that there was no absolute right to receive the amount at that stage and if the appeal was allowed in its entirety, the right to payment of the enhanced compensation would have fallen altogether. It was stated that the very foundation of the claim made by the assessee was in serious jeopardy and nothing would be due if the appeal was decided against the assessee. After citing with approval the decision of the Andhra Pradesh High Court in Khan Bahadur Ahmed Alladin & Sons vs. CIT (1969) 74 ITR 651 (AP), of the Gujarat High Court in Topandas Kundanmal vs. CIT (1978) 114 ITR 237 (Guj), of the Supreme Court in Raja Harish Chandra Raj Singh vs. Dy.

Land Acquisition Officer AIR 1961 SC 1500 and the later decision of the Gujarat High Court in Addl. CIT vs. New Jehangir Vakil Mills Co. Ltd. (1979) 10 CTR (Guj) 61 : (1979) 117 ITR 849 (Guj), it was stated that : “It is on the final determination of the amount of compensation that the right to such income in the nature of compensation would arise or accrue and till then there was no liability in praesenti in respect of the additional amount of compensation claimed by the owner of the land.”

8. In the light of the above decision of the Supreme Court and the principles discernible therefrom, the assessee in this case is absolved of the liability only by the decision of the Supreme Court; only then, the liability can be said to have ceased. So, the benefit in respect of deductions already made in the assessments for the earlier years, by way of cessation of the liability, arose or accrued to the assessee only when the Supreme Court rendered its judgment on 7th Nov., 1974, and that will fall during the asst. yr. 1975-76. In this view of the matter, we are of the opinion that the ITO acted illegally and without jurisdiction in including the amount of refund received by the petitioner (Rs. 1,17,459) in the total income of the assessee for the asst. yr. 1974-75. Exhibit P-1, to that extent, is unauthorised and illegal. Exhibit P-3 order passed in revision affirming exhibit P-1 is also infirm and illegal. We quash exhibits P-1 and P-3.

The original petition is allowed. There shall be no order as to costs.

[Citation : 175 ITR 120]