High Court Of Rajasthan
CIT vs. Bhawan Va Path Nirman (Bohra)& Co.
Sections 36(1)(iii), 41(1), 145
Asst. Year 1995-96
Rajesh Balia & D.N. Joshi, JJ.
IT Appeal No. 2 of 2002
18th April, 2002
Counsel Appeared :
H.S. Rathore for Sundeep Bhandawat, for the Revenue : Anjay Kothari, for the Assessee
JUDGMENT
RAJESH BALIA, J. :
This appeal is directed against the order passed by the Tribunal, Jodhpur Bench, Jodhpur, relating to the asst. yr. 1995-96.
2. While admitting the appeal, the following two questions have been framed on 4th April, 2002 : “1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law allowing interest paid to third parties placing reliance on the judgment of CIT vs. Jain Construction Co. (1999) 156 CTR (Raj) 290, whereas in the said judgment, the Hon’ble High Court has not held that interest to third parties are allowable out of income arrived by applying net profit rate ? Whether, on the facts and in the circumstances of the case and position of law, the Tribunal was justified in giving the relief on account of the sales-tax refund which was credited by the assesseefirm itself in his P&L a/c and declared it as the part of its income under s. 41(1) of the Act ?” So far as question No. 1 is concerned, we notice that this Court has considered the same issue in IT Appeal No. 1 of 2002 and IT Appeal No. 3 of 2002 [reported as CIT vs. Bhawan Va Path Nirman (Bohra) & Co. (2002) 175 CTR (Raj) 160—Ed.], which had arisen out of the same order passed by the Tribunal as is under challenge in this case, relating to the asst. yrs. 1994-95 and 1996-97, respectively, and decided today by a separate order. The Court found no merit in the contention raised by the Revenue for any interference in the conclusion reached by the Tribunal in estimating taxable income by applying the net profit rate subject to appropriation towards depreciation and interest. Following the decisions in the said two appeals, question No. 1 must be held in favour of the assessee and against the Revenue that in the present facts and circumstances of the case, the Tribunal was justified in allowing deduction on account of interest payable to third parties while determining income on estimate basis. In making the estimate, the Tribunal has taken into account the past practice of fixing net profit rate without taking into consideration the depreciation and interest and they are to be adjusted towards the net profit worked out at the rate fixed by the AO itself in consecutive six years immediately prior to the asst. yr. 1994-95. We have also noticed from the material emerging from the Tribunal’s order that the foundation for fixing the net profit rate for the assessment year in question, i.e., 1995-96, has been the net profit rate which has been taken into account by the ITO for the preceding years by making it subject to such deduction on account of depreciation and interest. It may also be noticed that net profit rate is subject to adjustment on account of allowable depreciation is not disputed by the Revenue also now. Thus, it is accepted that the net profit rate is not the final estimate but is subject to further adjustments. What adjustments are to be made has been decided by the Tribunal on the basis of the case history of the assessee. Therefore, this finding of fact does not call for any interference by this Court. So far as the second question is concerned, it relates to inclusion of refund received during the previous year relevant to the asst. yr. 1995-96 from the ST 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 allowable expenses subject to the conditions given in s. 43B, which in substance restricts the allowability 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 IT 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 assessee by way of refund or otherwise then on receipt of such amount by way of refund from the person or from any other sources to whom such payment has been made, the assessee is not allowed to retain the benefit which he has earlier obtained by reducing his tax liability on earlier occasion. However, where no deduction for any expenses incurred by the assessee on earlier occasion has been claimed or claimed but has not been allowed by the AO in determining the income chargeable to tax under the IT Act, then merely by making entries in books no benefit of reducing tax liability by reducing the taxable income is obtained by the assessee, nor on refund of such amount in a later assessment year, any question of subjecting it to tax can arise under s. 41(1)(a). Sec. 41(1)(a) provides that refund of any allowance or deduction made in the assessment of any earlier year is liable to be subjected to tax in the year of refund or recovery. For the present purpose, the relevant part of s. 41(1)(a) of the Act may be reproduced hereunder : 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 (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,— (a) the first-mentioned person 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 such person 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; or (b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in cl. (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall 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.”
6. 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 s. 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 IT Act in the assessment and not merely on the basis of treatment of such amount in the books of account.
7. In the present case, the question relates to refund of sales-tax received from the Sales-tax Department, which was in earlier years found to be paid by him as the same was deducted at source.
8. It is contended by the Revenue before us that since the net profit rate has been applied in the case of assessee by rejecting his books of accounts, it is inherent in determination of net profit rate that all allowable expenses as are admissible under the provisions of the Act have been taken into consideration and allowed by the AO and, therefore, it must be deemed that when the assessee had paid in any earlier year, the amount of sales-tax, which has been deducted at source, the same was allowed and as the same has been refunded in the previous year in consideration, it has to be taxable under s. 41(1)(a). The contention in substance is that in the assessment of income arrived by estimating the net profits on the basis of estimated net profit rate, it must be assumed that all allowable expenses under s. 43B on account of any liability discharged by the assessee towards the sales-tax was duly considered and allowed and therefore, when the same is refunded, it becomes taxable.
9. On the other hand, learned counsel for the respondent has contended that in order to invoke the provisions of s. 41(1) of the Act to include the quantum of any sum, whether by way of receiving refunds or by remission of liability or by receiving any benefit, the precondition is that on an earlier occasion, such deduction or allowance must have been subjected to a specific consideration and allowance. In the absence of any specific consideration and allowance of deduction, in the assessment of any particular earlier assessment year/years, s. 41(1)(a) cannot be invoked. He, in this connection placed reliance on a decision of the Hon’ble Supreme Court given inTirunelveli Motor Bus Service Co. (P) Ltd. vs. CIT (1970) 78 ITR 55 (SC).
10. The position of law appears to be fairly settled that in considering whether the allowance had been granted or a deduction has been made in respect of a trading liability or expenses in any earlier assessment year, it has to be decided by referring to the earlier relevant assessment year in which allowance or deduction is alleged to have been made. It could not be determined by drawing inferences from what was done actually in respect of the assessment for an earlier year, in the absence of any specific consideration of the issue.
11. 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.
12. In this connection, the decision of the Supreme Court in Tirunelveli’s case (supra) is relevant. It was a case in which the assessee had submitted his return for the asst. yr. 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 P&L a/c as it has ceased to exceed as per settlement. On an earlier occasion in relation to this liability, the assessee-company in its return of income for the asst. yr. 1950-51 had disclosed an income of Rs. 14,555, which was arrived at after debiting the P&L a/c by Rs. 71,949 towards the annual bonus payable to its employees. Thus, the liability has been claimed on the basis of the entries made in the books of account of earlier assessment years and adjusted in the books of account before annual income returned and not on the basis of actual payment. The trading result disclosed by the assessee was not accepted and income was assessed on estimate basis. In computing the net taxable income for the asst. yr. 1957-58, the Revenue has included the remission of Rs. 54,479 as a balance amount, which has ceased to be liability payable by way of bonus during the previous year relevant to the asst. yr. 1957-58 by invoking the provisions of s. 10 (2A) of the Indian IT Act, 1922, which in material aspect conforms to the provisions of s. 41(1) of the IT Act, of 1961. The Tribunal has given a finding that in the manner the estimate has been made, it would appear that the book position had been given the go-by. Unless the Department is able to identify any particular item of expense as having been already allowed as a deduction in an earlier assessment, conclusively, s. 10(2A) is not available for recoupment. However, with this conclusion of the Tribunal, the High Court did not agree. The High Court held the sum so credited in the P&L a/c in 1957-58 as taxable income under s. 10(2A) of the Act of 1922. Reversing the judgment of the High Court and agreeing with the findings of the Tribunal, the Hon’ble apex Court said : “On that finding of the Tribunal, it could hardly be regarded as established that either any allowance or deduction had been granted in respect of a trading liability of the asst. yr. 1950-51, or it had been proved that the assessee had obtained any benefit relating to such trading liability in the asst. yr. 1957-58, which would attract the provisions of s. 10(2A) of the Act. That provision only applies when an allowance for deduction has been made in the assessment of any year in respect of any loss, expenditure or trading liability incurred by the assessee and, subsequently, during any previous year the assessee received any amount in respect of 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 asst. yr. 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 ITO 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 AO 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 foundation for invoking s. 41(1)(a) of the Act by identifying the year, in which the deduction on account of payment of sales-tax has earlier been considered and allowed in the assessment of the income for such year is not laid. In the absence of any such material, it is not possible to bring the refund of sales-tax amount received by the assessee during the previous year relevant to the assessment year in question to tax, merely on the inferences to be drawn by the method of estimating income applied in the previous years. The principle enunciated by the Supreme Court in Tirunelveli’s case (supra) has been applied by the Madhya Pradesh High Court in Naubatram Nandram vs. CIT (1972) 86 ITR 805 (MP) and Allahadbad High Court in Bhagwat Prasad & Co. vs. CIT (1975) 99 ITR 111 (All) by declining to invoke s. 41(1)(a) of the Act in the cases where assessments of earlier years have been made on the estimate basis without reference to grant of any allowance or deduction of any expenses with reference to any particular assessment year claimed by the assessee.
The Madhya Pradesh High Court opined in Naubatram Nandram’s case (supra) as under : “Sec. 10(2A) envisages an actual allowance or deduction and not a notional one and, insofar as there was no actual allowance or deduction in the assessment for any year in question, the section could have no application. The fact that the lease money was one of the data which figured in the estimation of the percentage of profits by the ITO was not enough to attract the provisions of s. 10 (2A), because it is one thing to say that the payment of lease money was taken into consideration in estimating the percentage of profits and quite another to say that the lease money was in fact allowed as an allowance or deduction as business expenditure in the assessment of profits for any year.” In the case of Bhagwat Prasad & Co.(supra), the Revenue has sought to include in the income of the assessee certain amount appropriated by the assessee towards revenue receipt as a result of cessation of an existing liability by resorting to s. 41. On a reference, a Bench of the Allahabad High Court said : “.. . the fiction under s. 41, that any benefit accruing to an assessee by remission or cessation of its trading liability is deemed to be the profits and gains of its business comes into play only if, while computing its income for some assessment year, an allowance or deduction in respect of the trading liability is made and subsequently the assessee acquires in respect of that trading liability some benefit whether in cash or some other manner which accrues to the assessee because of its ceasing to exist. In other words, the Revenue merely takes as income what it had earlier allowed as deduction.”
15. As a result of the aforesaid discussion, we are of the opinion that the basic condition for invoking s. 41(1)(a) of the Act has not been satisfied in the case. The amount of sales-tax refund in the hands of the assessee during the previous year relating to the assessment year in question, cannot be deemed to be income of that year, merely on the basis of drawing inferences that it might have allowed as deducted in the earlier assessment years. The appeal therefore fails and is hereby dismissed with no order as to costs.
[Citation : 258 ITR 440]
