Madhya Pradesh High Court
Addl. Commissioner Of Income-Tax vs Chandrakant D. Patel on 6 November, 1979
JUDGMENT Vijayvargiya, J.
1. By this reference under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as " the Act"), the I.T. Appellate Tribunal, Indore Bench, Indore, has referred the following question of law for the opinion of this court:
" Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of sales tax refund of Rs. 55,611 is not taxable in the hands of the assessee ? "
2. The material facts giving rise to this reference, as set out in the statement of the case, are these. The assessee is a firm consisting of three partners having equal shares. It deals in tobacco, which is also imported from other States. The accounting period relevant to the assessment year ended on Diwali 1968, i.e., October 21, 1968. The system of accounting followed by the assessee is mercantile. The assessee-firm came into existence on February 18, 1964, and was assessed for the first time for the assessment year 1965-66. Prior to this, the business belonged to one of the partners, Shri Dhulabhai, individually, who was the sole proprietor of the business, and in that capacity the first assessment was made on him for the year 1950-51. Dhulabhai paid sales tax on the tobacco imported by him from outside the State for the period April 1, 1951, to September 30, 1957. The assessee had challenged the levy of sales tax and filed a civil suit for refund on December 21, 1957, in the court of Additional District Judge. The court, by its decree dated June 30, 1961, directed a refund of the sales tax to the assessee. On appeal by the State Government against the decree of the trial court, the High Court set aside the said decree. The assessee preferred an appeal to the Supreme Court which was allowed on April 5, 1968, and the judgment and decree of the High Court were reversed and that of the trial court were restored. Consequently, an amount of Rs. 55,611 became due to the assessee as refund of sales tax and this amount was taxed by the ITO on the basis of mercantile system of accounting in the assessment year 1969-70. The ITO also mentioned the fact that the sales tax had been allowed as a deduction in the past and the refund of it was income chargeable to tax under Section 41 of the Act. On appeal by the assessee, the AAC negatived the conclusion of the ITO that Section 41(1) of the Act applied to the assessee's case but the order of the ITO was upheld on other grounds. The assessee challenged the order of the AAC by preferring an appeal before the I.T. Appellate Tribunal (hereinafter referred to as " the Tribunal"). The Tribunal allowed the appeal and Came to the conclusion that the amount of sales tax refund of Rs. 55,611 was not taxable in the hands of the assessee for the assessment year 1969-70. At the instance of the Commissioner, the Tribunal has referred the aforesaid question of law for the opinion of this court.
3. We have heard the learned counsel for the parties. The learned counsel for the Department contended that even if Section 41(1) of the Act was not attracted, the refund of the sales tax, being a trading receipt, was taxable in the accounting year in the normal course as profits and gains of business. The learned counsel for the assessee supported the view taken by the Tribunal.
4. Following the decision of the Supreme Court in Chowringhee Sales Bureau P. Ltd. v. CIT [1913] 87 ITR 542, the Tribunal held that the sales tax refund was in the nature of a trading receipt. However, it came to the conclusion that the amount of sales tax was in the nature of a trading receipt at its inception when it was recovered in each year as sales tax by the assessee. In this view of the matter, the Tribunal came to the conclusion that as the provisions of Section 41(1) of the Act were not applicable, the amount was not liable to be taxed under any other provisions of the Act. For this view, the Tribunal placed reliance upon a decision of the Supreme Court in CIT v. Hukumchand Mohanlal [1971] 82 ITR 624. The Tribunal also held that the amount of the refund of sales tax was not taxable in the assessment year on the ground that a trading receipt should be brought to tax at the earliest point of time in accordance with the system of accounting regularly followed by an assessee and that as in the present case the assessee followed the mercantile system of accounting and the amount of sales tax constituted a trading receipt at its inception when it was recovered by the assessee in the respective years the same could not be taxed in the assessment year in question.
5. We are of the opinion that none of the grounds, on which the Tribunal held that the amount in question was not taxable in the assessment, year, is tenable in law Even if the provisions of Section 41(1) of the Act were not attracted if the amount in question constituted a trading receipt and was accrued or received, as the case may be, in the assessment year there is no reason why it should not be held to be taxable in that year. The facts of the Supreme Court case in [1971] 82 ITR 624 were quite different. In that case, the assessee's husband carried on business as sole selling agent of M/s. Mohanlal Hargovindas. The assessee succeeded to the business on the death of her husband in February, 1960. M/s. Mohanlal Hargovindas had recovered certain amounts towards sales tax from the assessee's husband relating to the period January 26, 1950, to March 31, 1951. In an appeal filed by the said firm, the Commissioner of Sales Tax remitted the sum of Rs. 24,341 so recovered by the firm from the assessee's husband. Consequently, M/s. Mohanlal Hargovindas refunded that amount to the assessee by means of a draft dated October 31, 1961. On these facts, the ITO sought to tax this amount under the provisions of Section 41(1) of the Act. On these facts the Supreme Court held that if the husband of the assessee had been alive and had received the amount which had been remitted during his lifetime he would certainly have been liable to pay tax under the provisions of Section 41(1) of the Act. But Kanhaiyalal having died, and his widow being the assessee, she cannot possibly be brought within the said section. The learned counsel for the assessee placed reliance upon the following observations of the Supreme Court in that case (p. 626).
" As pointed out by the High Court, under the general law if a trading liability has been allowed as a business expenditure and if this liability is remitted in any subsequent year, the amount remitted cannot be taxed as income of the year of the remission nor can the account for the year in which the liability was allowed be reopened or adjusted."
6. These observations of the Supreme Court are not helpful to the asses-see. They were made in the context of the facts of that case. Moreover, they have relevance to the application of Section 41(1) of the Act. If the amount in question can properly be held taxable in the normal course as a trading receipt, the aforesaid decision of the Supreme Court does not come in the way of the Department.
7. The other ground for holding the amount as non-taxable in the assessment year was that the amount of sales tax constituted revenue receipt at its inception in the years in which it was recovered by the assessee and, therefore, it should have been taxed at the earliest point of time, in accordance with the settled principles of taxation and it was not taxable in the assessment year in question. For this view, the Tribunal placed reliance upon the decision of the Supreme Court in Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542. We are of the opinion that the view taken by the Tribunal is not correct. It cannot be deduced from the said decision of the Supreme Court in [1973] 87 ITR 542, that in the present case, the refund of sales tax constituted a trading receipt at its inception when the amount of sales tax was recovered by the assessee in the respective years. In the aforesaid Supreme Court case, the assessee, who was an auctioneer, realised the amount of sales tax from the purchaser but did not pay it to the actual owner of the goods auctioned because the statutory liability of payment of sales tax was that of the assessee. He also did not deposit the amount realised by it as sales tax in the State Exchequer and took the position that the statutory provision, creating the liability upon it, was not valid. As the amount realised by the assessee as sales tax was not paid by it to the State Exchequer, the Supreme Court held that it constituted a trading receipt in the year in which the amount was realised by the assessee as sales tax from the purchasers. In the present case, the facts are entirely different.
8. In the present case, the amount of sales tax was deposited by the assessee in the years in which it was realised by him from the purchasers. Thereafter, he filed a suit for refund of the said amount paid contending that the levy of sales tax was invalid. Eventually, the Supreme Court by its decision on April 5, 1968, held that the levy of sales tax was invalid and the decree passed by the trial court for refund of the sales tax was restored after setting aside the decree passed by the High Court. In these circumstances, as the assessee followed the mercantile system of accounting, the amount of refund became due on April 5, 1968, when the Supreme Court delivered its judgment. Thus, the amount became due in the accounting year in question. In our opinion, the refund of sales tax was in the nature of revenue receipt in the year in which the Supreme Court eventually upheld the claim of the assessee and it did not constitute any receipt, much less revenue receipt, in the years in which the amount of sales tax was recovered by the assessee from the purchasers because in those years the amount so recovered by the assessee was deposited by him as sales tax in the State Treasury and nothing remained with him which may be called as receipt. We are, therefore, of the opinion that the Tribunal erred in law in holding that the amount of refund of sales tax in question was not liable to be taxed in the assessment year in question.
9. The learned counsel for the assessee also tried to argue that the amount of sales tax was recovered and paid by Dhulabhai in his capacity as an individual and that the suit was also brought by Dhulabhai and, therefore, it cannot be said that the amount constituted a trading receipt in the hands of the assessee which was a partnership firm, and, therefore, the amount was not taxable in the hands of the assessee. This argument is not open to the assessee. The ground that the amount in question was not taxable because the collection of the sales tax was made by an individual other than the assessee seeking a refund of the amount of sales tax paid, though raised before the AAC, was expressly given up by the assessee before the Tribunal. The learned counsel for the Department suggested that the said ground was given up because, otherwise, the amount was taxable in the hands of an individual and in that case the amount of tax leviable would be much more than if the same is taxed in the hands of the assessee which is a firm consisting of three partners. Moreover, as found by the ITO, which has not been challenged by the assessee, as per the deed of partnership, the liabilities and assets as well as the litigation of the proprietary concern were taken over by the assessee-firm. In the circumstances, it is not open to the assessee to raise the aforesaid contention and on merits also it has no substance.
10. In the light of the discussion aforesaid, our answer to the question referred to us is in the negative and against the assessee. In the circumstances, parties shall bear their own costs of this reference.