Gujarat High Court
Visnagar Taluka Audyogik Sahakari ... vs Commissioner Of Income Tax on 22 September, 1999
Equivalent citations: [2000]242ITR627(GUJ)
Author: P.B. Majmudar
Bench: P.B. Majmudar
JUDGMENT B.C. Patel, J.
1. At the instance of the assessee and the Revenue, reference is before the Court raising the following two questions each :
2. By assessee "1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in upholding the addition of Rs. 1,18,05,966 made by the AO on account of excise duty refund by invoking the provisions of s. 41(1) of the IT Act, and confirmed by CIT(A)-VIII, Ahmedabad ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in considering the amount of Rs. 1,18,05,960 received by the applicant on account of refund of excise duty, as income of the applicant, in spite of the fact that the amount received is not undisputably earned by the applicant without any encumbrance and that the appeal is still pending before the Hon'ble Supreme Court ?"
3. By Revenue "1. Whether, the Tribunal is right in law and on facts in allowing the assessee to raise additional claim under s. 80HH ?
2. Whether, the Tribunal is right in law and on facts in permitting the assessee to file audit report for the purpose of claiming deduction under s. 80HHC ?"
4. We have also considered the facts as mentioned in Special Civil Appln. No. 6082 of 1999. From the record it transpires that the assessee received refund of Rs. 1,18,05,960 from the central excise department during the year 1991-92. It is the case of the Revenue that the assessee is maintaining accounts on cash basis and during the examination of the books of account, it was found that the refund received has been placed under sub-head 'liability' under the head 'Other liabilities'. In view of this, the assessee was asked to show cause as to why excise duty refund should not be treated as its income under s. 41(1) of the IT Act, 1961 ('the Act').
5. It transpires that, before the excise authorities, the assessee submitted a claim totalling to Rs. 2,12,01,581 arising from Order-in-Appeal No. GSM/415/ 1989/Ahd., dated 27th February, 1989 passed by the Collector of Central Excise (Appeal), Bombay, on the classification dispute of the product paper based decorative laminated sheets in which the product has been held to be classifiable under SH 4811.39 against the Order-in-Original No. 63 of 1987, dated 15th December, 1987, passed by the Asstt. Collector of Central Excise, Ahmedabad, classifying the product under SH 3920.31. The Collector of Central Excise, Ahmedabad, filed an appeal before the Customs, Excise and Gold (Control) Appellate Tribunal (hereinafter referred as "CEGAT") for restoration of Order-in-Original No. 63 of 1987. The assessee also preferred an appeal against the said Order-in-Appeal dated 28th February, 1989, claiming that the product should be classified under SH 4818.90. The CEGAT by an order dated 29th September, 1989/4th October, 1989 allowed the appeal preferred by the assessee and dismissed the appeal preferred by the Collector and classified the product under SH 4818.90 for the period up to 28th February, 1988 and under SH 4823.90 from 1st March, 1988 with consequential relief for the period from 15th December, 1986 to the date of passing of the order. As no refund was granted to the assessee, the assessee preferred Special Civil Appln. No. 633 of 1990 before this Court. Division Bench hearing the special civil application granted interim relief directing the central excise authorities to refund the amount of differential duty to the assessee on conditions that the assessee shall give a bank guarantee to the extent of 75 per cent and a security for the remaining 25 per cent of the amount. The excise department being aggrieved by the order passed by the CEGAT, carried the matter before the apex Court. The apex Court admitted the appeal but there was no stay against payment of excise duty refund. It transpires that the Asstt. Collector of Central Excise, Mehsana, ultimately granted refund of s. 1,18,05,966.74. When the Tribunal (under the Act) was hearing the matter, the appeal preferred by the excise department was pending before the apex Court with regard to the refund and, thus, there was no finality of the order.
6. The AO held that the provisions of s. 41(1) of the Act are clearly applicable so far as refund is concerned despite the fact that the matter was pending before the Court and there was no final adjudication. The AO held that the amount of refund is required to be added to the total income. Aggrieved by the order passed by the AO, an appeal was preferred. However, the same was rejected and ultimately the assessee moved the Tribunal by preferring ITA No. 2805 of 1995. The Tribunal rejected the appeal preferred by the assessee and, thus, confirmed the finding recorded by the AO as well as of the Appellate Officer. Against this order, the reference is at the instance of the assessee.
7. So far as deduction under s. 80HHC of the Act is concerned, the Appellate Officer held that the AO was justified in not allowing any deduction under s. 80HHC. Before the Tribunal the assessee contended that excise duty refund was not taxable as business income of the year and it had no occasion or opportunity to file audit report. The Tribunal was of the view that the income should be included in the year, i.e., 1991-92 under s. 41(1) of the Act which is deemed business income and held that the assessee should be permitted to file its audit report to obtain deduction under s. 80HHC. Against this order, the Revenue has sought reference before this Court as mentioned hereinabove.
8. Before us it was submitted that from reading s. 41(1), it is clear in the instant case that the authorities have erred in invoking the provisions contained in s. 41(1) of the Act. The said section reads as under :
"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 ...."
9. It is contended before us that, so far as the central excise duty refund is concerned, the matter was sub judice when the amount was received and, therefore, the assessee was not liable to tax as contemplated under s. 41(1) of the Act. Mr. Puj, the learned Advocate, invited our attention to a decision of Allahabad High Court in the case of J. K. Synthetics Ltd. vs. O. S. Bajpai, ITO (1976) 105 ITR 864 (All) : TC 19R.336. The assessee in that case was engaged in the manufacture of polymer chips. The excise department was demanding excise duty on the product. The company used to make provision for payment of duty every year since 1964-65. This claim was consistently disallowed by the ITO but was allowed by the AAC as a result of which a total sum of Rs. 2,87,60,109 had been allowed to the company as deduction on account of excise duty for asst. yrs. 1964-65 to 1971-72. The company made a provision of Rs. 2,08,29,486 in respect of its liability of excise duty for the previous year in question. The company preferred a writ petition under Art. 226 of the Constitution of India before the High Court of Delhi, challenging the order of the Collector of central excise demanding duty on polymer chips. The learned single Judge hearing the petition allowed the same on 28th August, 1970. On the basis of this judgment, the ITO disallowed the deduction claimed by the company in respect of current liability and also treated the sum of Rs. 2,87,60,109 on account of the past liability as income under s. 41 of the Act and, thus, a total sum of Rs. 4,95,89,595 came to be added by way of income. The High Court pointed out as under :
".... Now, admittedly, in the instant case deductions were allowed to the assessee on account of excise duty in the years 1964-65 to 1970-71. If the liability of the assessee can be said to have ceased in the relevant previous year the assessee would clearly be liable to be assessed in respect of such liability. But the question is whether the liability can be said to have ceased in the instant case. It is not disputed that the decision of the Delhi High Court has not been accepted by the excise department. It has preferred a Letters Patent Appeal which has been admitted and is pending. In our opinion, in such circumstances, the liability cannot be said to have ceased. A cessation of liability for the purposes of s. 41(1) of the Act would mean irrevocable cessation so that there is no possibility of the liability being revived in future. If there is such a possibility then the cessation is not complete and s. 41(1) is not attracted. The decision of the Delhi High Court is under appeal and there is a likelihood of its being reversed. It cannot, therefore, be said that on the date when the learned single Judge of the Delhi High Court delivered his judgment the liability ceased. Indeed, there might be a further appeal to the Supreme Court. In these circumstances, the ITO was not competent to invoke the provisions of s. 41(1) of the IT Act because the decision of the learned single Judge of the Delhi High Court had lost its finality as a result of the appeal against it. A decision liable to appeal may be final until the appeal is not preferred but once an appeal is filed the decision loses its character of finality and becomes sub judice, i.e., a matter under judicial enquiry. The appeal destroys the finality of the decision. This is the view expressed by the Calcutta High Court in Satyanarayana Prosad vs. Diana Engg. Co. AIR 1952 Cal. 124 and the Oudh Chief Court in Girja Dat Singh vs. Gangotri Dat Singh AIR 1948 Oudh 88."
11. The matter was carried in appeal before the apex Court. The decision is reported in case of Union of India vs. J. K. Synthetics Ltd. (1993) 199 ITR 14 (SC) : TC 19R.338. Before the apex Court, the question was whether the assessee's liability to excise duty in certain matters had ceased justifying the action under s. 41(1). The apex Court pointed out that "it is obvious that the liability to tax under s. 41 will depend on the outcome of appeal before this Court". Thus, it is very clear that cessation of liability can be postulated only after the final decision is rendered with regard to that liability.
12. Mr. Puj invited our attention to a decision of the Full Bench of this Court in the case of CIT vs. Bharat Iron & Steel Industries (1993) 199 ITR 67 (Guj) : TC 19R.120. In that case, the assessee was a registered partnership firm and the assessment year under reference was 1974-75, the previous year being the financial year ending on March 1974. Central excise department recovered the amount by way of Central excise duty to which the company objected. The company preferred appeal before the Appellate Collector who allowed the appeal with a direction that the assessee would be entitled to the consequential relief. The Asstt. Collector despite the Appellate Collector's order and requests made by the assessee to refund the excise duty did not respond and, hence, a writ petition was filed before this Court seeking a direction for refund of the excise duty alleged to have been illegally recovered. The assessee filed return of income in the year 1974-75 in August, 1974. On 28th December, 1974, Joint Secretary to the Government of India issued a notice to the assessee under s. 36(2) of the Central Excises and Salt Act, 1944, calling upon it to show cause as to why the order of the Appellate Collector of Central Excise, Bombay, allowing the claim of refund should not be set aside. The assessee resisted the review or revision of the order of the Appellate Collector by its letter dated 26th February, 1975. During pendency of the review or revisional proceedings before the Central Government, excise duty of Rs. 1,81,427 was refunded to the assessee on 8th August, 1975 and the proceedings under s. 36(2) of the Central Excise Act were dropped thereafter on 30th April, 1976.
13. The AO, in the course of assessment, invoked the provisions of s. 41(1) fot he Act and included the aforesaid amount in the total income of the assessee for the asst. yr. 1974-75 on the ground that the assessee had become entitled to the refund of said amount under the order of the Appellate Collector on 1st August, 1974. The AO was of the view that as the Appellate Collector has passed the order under which the assessee had become entitled to the refund of excise duty in the year of account which ended on 31st March, 1974, relevant to the asst. yr. 1974-75, the said amount was liable to be included in the assessee's total income for the said asst. yr. 1974-75. It may be noted at this stage that the amount was refunded on 8th August, 1975. The Tribunal held that since the Central Government had not accepted the assessee's claim for refund, the AAC was right in holding that the amount had not accrued to the assessee in the year of account relevant to the accounting year 1974-75. The Tribunal upheld the view of the AAC that the addition made by the ITO was not justified.
14. The Full Bench in case of Bharat Iron & Steel Industries (supra) in concluding para observed as under :
".... It was during the pendency of the review or revisional proceedings that the amount of Rs. 1,81,427 was refunded to the assessee on 8th August, 1975. The facts stated above clearly show that, in view of the pendency of the review or revisional proceedings, the assessee's claim for refund of the excise duty was in jeopardy. In other words, there was no final decision on the question whether or not the assessee was entitled to claim refund of excise duty of Rs. 1,81,427. It was only when the review or revisional proceedings was dropped on 30th April, 1976 that the assessee became finally entitled to claim refund of Rs. 1,81,427. The payment of Rs. 1,81,427, which the assessee had received on 8th August, 1975, was subject to the decision in the review or revisional proceedings. Having regard to the facts and circumstances stated above, in our opinion, the assessee obtained the refund of the excise duty amount only on 30th April, 1976 - the date on which the review or revisional proceedings were dropped. The year of account of the assessee is the financial year and, therefore, the refund of excise duty of Rs. 1,81,427 became includible in the assessee's total income for the asst. yr. 1976-77 under s. 41(1) of the Act. In our opinion, the Tribunal was right in holding that the said amount of Rs. 1,81,427 was not chargeable to income-tax in the asst. yr. 1974-75."
15. Thus, even during the pendency of the proceedings if the amount of refund is received, the provisions contained in s. 41(1) cannot be invoked as there is no final decision on the question whether or not the assessee is entitled to claim the refund of excise duty.
16. In the case of CIT vs. Hindustan Housing & Land Development Trust Ltd. (1986) 161 ITR 524 (SC) : TC 39R.624, the apex Court considered almost identical situation. The Full Bench in the case of Bharat Iron & Steel Industries (supra) considered the facts of that case and observed :
"Certain lands belonging to the respondent-company which carried on the business of dealing in land and maintained its accounts on the mercantile system, were first requisitioned and then compulsorily acquired by the State Government. The Land Acquisition Officer awarded a sum of Rs. 24,97,249 as compensation. On an appeal preferred by the respondent-company, the arbitrator made an award dated 29th July, 1955, fixing the compensation at Rs. 30,10,873 and directing the payment of interest of 5 per cent from the date of the acquisition. The arbitrator also awarded an annual sum for the period of requisition. Thereupon, the State Government preferred an appeal to the High Court. Pending the appeal, the State Government deposited in the Court Rs. 7,36,691 being the additional amount payable under the award on 25th April, 1956, and the respondent was permitted to withdraw that amount on 9th May, 1956, only on furnishing a security bond for refunding the amount in the event of the appeal being allowed. On receiving the amount, the respondent credited it in its suspense account on the same date. The question was whether a sum of Rs. 7,24,914 (the balance having been already taxed) could be taxed as the income of the respondent for the asst. yr. 1956-57 on the ground that it became payable pursuant to the arbitrator's award. The Tribunal held that the amount did not accrue to the respondent as its income during the relevant previous year ending on 30th March, 1956, and was, therefore, not taxable in the asst. yr. 1956-57. On a reference, the High Court affirmed the decision of the Tribunal. On an appeal, affirming the decision of the High Court, it was held that although the award was made by the arbitrator on 29th July, 1955, enhancing the amount of compensation payable to the respondent, the entire amount was in dispute in the appeal filed by the State Government. And the dispute was regarded by the Court as real and substantial because the respondent was not permitted to withdraw the amount deposited by the State Government without furnishing a security bond for refunding the amount in the event of the appeal being allowed. There was no absolute right to receive the amount at that stage. If the appeals were allowed in their entirety, the right to payment of enhanced compensation would have fallen altogether. The extra amount of compensation of Rs. 7,24,914 was not income arising or accruing to the respondent during the previous year relevant to the asst. yr. 1956-57. The Supreme Court affirmed the decisions of this Court in Topandas Kundanmal vs. CIT (1978) 114 ITR 237 (Guj) : TC 39R.662 and Addl. CIT vs. New Jehangir Vakil Mills Co. Ltd. (1979) 117 ITR 849 (Guj) : TC 22R.196."
17. In view of this decision, it is contended before us that mere receipt of refund would not attract the provisions contained in s. 41(1) of the Act as the proceedings were pending with regard to the refund. This Court in the case of Topandas Kundanmal vs. CIT TC 39R.662 has held that, if an assessee has got an inchoate right and has not acquired any vested right to enhanced or additional compensation over and above what has been offered to him by the Land Acquisition Officer, it cannot be said that he has a vested and complete right as to the interest on such amount. It is only when the amount of compensation is adjudicated upon by the Court and it is only when the Court awards interest on such enhanced amount of compensation that the assessee has an enforceable right to the principal amount of compensation as well as interest. In the instant case, after the apex Court disposed of the matter raising real and substantial questions, it can be said that the adjudication attained finality.
18. Before us a submissions was made with regard to the mercantile accounting system and cash accounting system. According to the Revenue, in the instant case, as the assessee was maintaining cash system account, the moment the assessee received the amount, he was liable to be taxed and the moment he returns the amount, he will be entitled to claim benefit. One has to remember that there was no finality so far as the dispute is concerned. During the pendency of the dispute, the amount was received. The Full Bench of the Court in the case of Bharat Iron & Steel Industries (supra) held : "In our opinion, for considering taxability of amount coming within the mischief of s. 41(1) of the Act, the system of accounting followed by the assessee is of no relevance or consequence. We have to go by the language used in s. 41(1) of the Act to find out whether or not the amount was obtained by the assessee or whether or not some benefit in respect of trading liability by way of remission or cessation thereof was obtained by the assessee and it is in the previous year in which the amount or benefit, as the case may be, has been obtained that the amount or the value of the benefit would become chargeable to income-tax as income of that previous year".
19. In view of the decision of the Full Bench, the contention raised by the Revenue is required to be rejected. In the case of Bharat Iron & Steel Industries (supra), the Full Bench has laid down that ultimate cessation of the liability is on the final decision which culminates the dispute between the Revenue and the assessee. At the intermediary stage even if the amount of refund or part of refund is received in consequence of the Court's order, provisions of s. 41(1) cannot be invoked.
20. In view of what is stated hereinabove, so far as question No. 1 at the instance of the assessee is concerned, our answer is in the negative and in favour of the assessee and against the Revenue. So far as question No. 2 is concerned, in view of the answer to the first question, this Court need not answer the same. So far as the questions referred by the Revenue are concerned, in view of what we have said above, it would not be necessary to answer them as the amount of refund under the aforesaid circumstances is not 'income' for the period in question. Answered accordingly.
21. In view of the finding recorded hereinabove, Mr. Puj, the learned Advocate, requested this Court to permit him to withdraw Special Civil Application No. 6082 of 1999 so as to enable him to agitate further questions before the CIT(A). Permission granted. Special civil application stand disposed of as withdrawn.