Income Tax Appellate Tribunal - Bangalore
Associated Trading Corpn. vs Ninth Income-Tax Officer on 15 February, 1991
Equivalent citations: [1991]37ITD549(BANG)
ORDER
R.N. Puri, Accountant Member
1. The appeals filed by the assessee pertain to assessment years 1983-84 and 1986-87. The question to be decided in these appeals is whether or not the amount of refund of excise duty received by the assessee would constitute the income of the assessee under the provisions of Section 41(1) of the Income-tax Act, 1961.
2. The assessee is a registered firm. It is engaged in the business of manufacture of industrial plastic components which are required for making of telephones. During the accounting periods under consideration, the assessee had received refund of excise duty which had been paid by it in the earlier years. In the accounting period relevant to assessment year 1983-84, it received a refund of Rs. 1,44,068 and in the accounting period relevant to assessment year 1986-87, it received a refund of Rs. 7,52,755. It is 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 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.
5. It would be apparent from the above that, for Section 41(1) to become applicable, two circumstances should prevail. One is that the assessee must have obtained in its assessment in a former year an allowance or deduction in respect of loss, expenditure or trading liability incurred by him. Secondly, in the previous year under consideration, 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. In these circumstances, the amount obtained by the assessee in respect of loss or expenditure or the value of benefit accruing to it on account of remission or cessation of liability is to be deemed to be profits and gains of business. In short, the revenue taxes as income what it had earlier allowed as a deduction.
6. In substance, the contention of the assessee is that in the computation of its taxable income, no deduction for the payment of excise duty could be considered to have been given and, since no deduction had been given, the question of taxing the refund does not arise. If this contention of the assesses that no deduction could be considered to have been given were to be accepted, then, the refund cannot be taxed. Section 41(1)entitles the Department to tax what it had earlier allowed as a deduction. Hence, the foremost question arising for consideration is whether or not a deduction for the payment of excise duty had been given in the computation of the taxable income of the assessee. In this case, there was a debit for the payment of excise duty to the profit and loss account. While determining the total income of the assessee, the ITO did not disallow the claim of the assessee for the payment of excise duty. The obvious conclusion is that in the computation of the total income of the assessee, the ITO did give a deduction for the payment of excise duty. But even then, the assessee puts forth the claim that in the computation 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 duly 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 assessee. It was stated that where excise duty paid by the assessee was in turn recovered by him from his customers, the assessee could not be considered to have been put to any expense on account of payment of excise duty and, hence, the question of a deduction being given for the payment of excise duty in the computation of its income could not arise and as such the provisions of Section 41(1) were not attracted. In support of this contention, the assessee relied on the decision of the Madras High Court in the case of CIT v. Thirumalaiswamy Naidu & Sons [1984] 147 ITR 657. In that case, the assessee had collected sales tax from its customers and paid over the same to the sales tax department. Subsequently, sales tax paid was refunded to the assessee. The question arose whether or not the amount of refund could be regarded as the income of the assessee under Section 41(1). The Madras High Court held that Sub-section (1) of Section 41 would not become applicable. The Madras High Court expressed the view that sales tax refund could be taxed as income under Section 41(1) where sales tax had been paid by the assessee out of its own coffers and, where the assessee had paid sales tax out of the collections made by it from its customers, the provisions of Section 41(1) would not be applicable.
7. We have considered the matter carefully. The assessee has relied on the above mentioned decision of the Madras High Court in the case of CIT v. Thirumalaiswamy Naidu & Sons (supra). But the Kerala High Court, in the case of CIT v. Marikar (Motors) Ltd. [1981] 129 ITR 1, has taken a different view. In that case also, the assessee had collected sales tax from the customers and had paid the same to the Sales Tax Department. It was held by the High Court that the amount of sales tax refunded by the Department to the assessee was the income of the assessee under Section 41(1). There is divergence of opinion between the Madras High Court and the Kerala High Court on the issue whether in a case where sales tax had been collected by the assessee from its customers, the provisions of Section 41(1) will be attracted or not when the sales tax paid by the assessee to the Sales Tax Department was subsequently refunded by the Department. With due respect to the decision of the Madras High Court in the case of Thirumalaiswamy Naidu & Sons (supra), we are inclined to follow the decision of the Kerala High Court in the case of Marikar (Motors) Ltd. (supra). 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 the case of Motilal Ambaidas v. CIT [1977] 108 ITR 136 at page 137 : "... that whenever any sale takes place, whether the price quoted to the purchaser includes sales tax or whether sales tax is separately collected, the sales tax forms part of the consideration for the sale and it forms part of the turnover of the seller. The amount of the sales tax payable in respect of the sales effected by a particular assessee forms part of his trading receipts and has to be shown on the credit side. As and when he pays the sales tax to the authorities, he can claim deduction for the sales tax paid ; in case he has to refund the sales tax to the original purchaser who purchased the goods from him, when the amount so refunded will also be a deduction which he can claim and it must be granted to him, that being deduction on the expenditure side...
10. Attention is also drawn to the decision of the Punjab High Court in the case of CIT v. Saraswati Industrial Syndicate Ltd. [1973] 91 ITR 501. It was held :
Under the Sales-tax Act the dealer who sells goods is liable to pay the tax. The purchasers are not responsible for payment of the tax to the authorities. The seller does not levy tax on the purchaser or collect tax from him; what he does is to increase the price of the article so as to ensure that he is not a loser by paying the sales tax. The amount of sales tax even though shown separately in the transaction is a part of the consideration which the seller charges on the transfer of property.
11. The Calcutta High Court, in the case of Ikrahnandi Coal Co. v. CIT [1968] 69 ITR 488, had also taken the same view. The Calcutta High Court was of the view that the amount of sales tax, even though shown separately in the transaction of sale as sales tax, was part of the consideration which the seller charged for transfer of the property. The Calcutta High Court was of the view that the fact that the statute provides that the seller may collect sales tax did not rob the transaction of its trading character.
12. From the above decisions, it becomes clear that the amount recovered by the assessee from its customers to compensate itself for the payment of excise duty or sales tax is part of its turnover.
13. With the above stated legal position in view let us now proceed to examine the argument of the assessee. The assessee says that no "detriment" had been caused 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 to recover all the expenses incurred by him. A manufacturer will fix up the price of the goods manufactured by him in such a manner that he is able to recover the various expenses incurred by him and besides he is also left with a surplus. There is hardly any expedituure which a manufacturer will like to meet "out of his own pocket". For example, the expenditure incurred by a person on the payment of salary will be taken by him into consideration while fixing the price of his goods. Just because salary paid has been recovered in the form of the price of the goods sold, it cannot be argued that there was no expenditure on salary for which a deduction could be considered to have been allowed in arriving at the surplus at the end of the year. What the assessee has received from its customers is by way of price of the goods sold. It cannot be said that what the customers had paid was by way of salary of the employees of the assessee and as such the assessee was not put to any expenditure on account of payment of salary. From the above, it is obvious that the determination of the question, as to whether a deduction for a certain expenditure had been given or not, would not depend on whether the amount spent had been recovered or not. There are outgoings and incomings of the business. Profit is computed taking into consideration the various incomings and outgoings. Profit or loss is the net result that obtains on deducting outgoings from incomings. If in the process of arriving at the net result, deduction has been given for a certain outgoing, it has to be said that deduction for that outgoing has been given. It is so obvious that but for that deduction the net profit would have been higher. The fact that the amount spent on a certain item of expenditure was subsequently recovered in the form of the price of the goods sold and the deficit caused by the expenditure was thus "made up" will not mean that in the process of the computation of profit, no deduction could be said to have been given for that item of expenditure. The weakness of the argument of the assessee is apparent from the fact that what is being claimed is only that no deduction should be considered to have been allowed and not that no deduction has been allowed. The amount spent may subsequently be recovered but the question as to whether deduction for the expenditure has been given or not cannot be 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. Letus 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 the assessee that, no deduction for the payment of excise duty should be considered to have been given on the ground that the debit of excise duty paid was counterbalanced by the credit of the amount recovered, is unsound. One may say in a sense that since the amount spent has been recovered, one has not been put to any loss on account of the spending but on that basis it cannot be said that in the computation of income no deduction can be considered to have been given. If the amount recovered from the customers was not liable to be included in the income, then the pica could be put forth that the amount received was utilised to wipe out the debit balance in the excise duty paid account and there was no balance left to be transferred to Profit and Loss Account and thus the question of a deduction being given in the computation of the income could not arise. But the fact remains that the amount recovered is a trading receipt and it has to be included in the income and the question of allowing the expenditure is a separate question. Hence, the question as to whether or not a deduction for the payment of excise duty had been given in the computation of the income of the assessee is only to be decided by reference to the fact whether the ITO had allowed or disallowed the expenditure. The fact that the assessee had recovered the amount of the expenditure in the form of the sale price of the goods sold is not a relevant consideration. In this case, the assessee had debited the expenditure on the payment of excise duty to its profit and loss account. The ITO had not disallowed the expenditure. It is thus obvious that a deduction had been allowed to the assessee in the computation of its income on account of payment of excise duty. Just because the expenditure incurred was sought to be recovered by the assessee by suitably adjusting the price of its goods, it cannot be said that in the computation of the taxable income no deduction for the payment of excise duty is to be considered to have been allowed. We, hence, do not find it possible to accept the contention of the assessee that the provisions of Section 41(1)would not be applicable on the ground that no deduction for the payment of excise duty could be considered to have been allowed to it in the earlier years.
14. Apart from the above objection, the assessee had also raised certain other objections to the application 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 in future.
15. We have considered the matter carefully. The decision of the Allahabad High Court in the case of J.K. Synthetics Ltd. (supra) will be of no help to the assessee. As would be apparent from the above, the claim of the assessee that provisions of Section 41 (1) do not become applicable is on the ground that there has been no cessation of the liability yet. But in this case, the payment of excise duty required to be made for a particular year had already been made and there was no undischarged liability outstanding at the end of the year. In such a situation, to say that there had not taken place cessation of liability makes no sense. The liability must first exist in order to cease to exist. If the liability does not exist, where is the question of its cessation. When accounts are maintained on mercantile basis, deduction is admissible even in regard to an accrued liability. Section 41(1) is so worded that it also provides for bringing to tax the amount of the benefit arising to an assessee on account of cessation of liability. There are two situations which have been surmised. The first one is where the assessee had already made payment to his creditor and later the whole or part thereof is returned to the assessee. In such a situation, if an allowance had been granted in respect of this expenditure then, the amount obtained by the assessee will be deemed to be his income. The second situation is where the liability of the assessee is still undischarged and that the remission or cessation of the liability takes place, either fully or in part. In such a situation, if a deduction had been given in respect of the trading liability, then the value of the benefit accruing to him on account of remission or cessation of the liability will be deemed to be the income of the assessee. The situation where the liability had already been discharged is different from the situation where the liability was still undischarged. In the case of J.K. Synthetics Ltd. (supra) decided by the Allahabad High Court, the liability was still undischarged and the question that was examined was whether the liability of which the assessee was absolved by a judicial pronouncement could be said to have ceased, if an appeal against the judgment was pending. It was held that there was "cessation" of liability only when the liability had finally ceased without there being a chance of its revival. 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. (supra) on which the assessee has relied will be of no help in deciding the issue under consideration. Sampath lyengar, 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 if expenditure previously incurred by the assessee would connote that a payment ha 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, earlier, an over payment had been made by the assessee and that on subsequent checking the over payment is discovered, and therefore, the creditor returned a portion in which event, the assessee would have obtained payment within the meaning of this sub-section. The same principle would apply where a mistaken payment had been originally made and, on discovery of such mistake, the entire amount was returned to the assessee. Thus, where licence fee or kist or sales tax collected from the assessee and allowed as a deduction earlier is refunded to the assessee, the same will be chargeable to lax in the hands of the assessee. On the other hand, the words 'any benefit... by way of remission or cessation thereof would refer to cases where the liability of the assessee though accrued and hence, allowed, has still not been discharged and a remission or cessation of the liability takes place, either wholly or in part, before the assessee makes any payment or further payment in discharge of his liability.
16. From the foregoing discussion, it is clear that a situation where the liability had already stood discharged and the refund was received subsequently is different from the situation where the liability was still outstanding and where the question was whether there could be said to have taken place the remission or the cessation of that liability. Hence, in the context of the present case, the question as to whether or not the remission or cessation of the liability could be considered to have taken place is a meaningless question. The question with which we are confronted is whether or not, where the amount paid by an assessee earlier is now being refunded to him, should the amount of refund be brought to tax?
17. Now we will proceed to the consideration of the decision of the Kerala High Court in the case of K.V. Moosa Koya & Co. v. ITO [1989] 175 ITR 120. The Government of Kerala had levied administrative surcharge on export of Tapioca. The assessee collected administrative surcharge on exports of Tapioca made by it and remitted the amounts collected into the Government Treasury and these amounts were allowed as expenditure in the assessments of the assessee for the relevant years. The levy was, however, annulled by the High Court of Kerala by its judgment dated 27-9-1971 and refund of the amounts paid by the dealers was ordered. The State Government took up 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 Slate 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 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 income-tax Act...[1989] 175 ITR 120 (124)
8. The facts of the case under consideration are similar to the facts of the above mentioned case decided by the Kerala High Court. The present assessee also maintains its accounts on mercantile basis. It had received refunds during the years under consideration. But the Excise Department had given these refunds subject to the decision of the Supreme Court and by the end of the accounting periods under consideration, the judgment of the Supreme Court had not been delivered. It has been held by the Gujarat High Court in the case of CIT v. Rashmi Trading [1976] 103 ITR 312 that the amount is taxable in the year of receipt. It was held by the Gujarat High Court that the words "obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure" in Section 41 clearly refer to the actual receiving of that amount. In the case decided by the Gujarat High Court also, the assessee had maintained its accounts on mercantile system. It was held that notwithstanding that, the amount of refund was to be taxed under the provisions of Section 41(1) only on the basis of receipt. The Gujarat High Court observed:
... But the material words, in our opinion, in this section are that 'the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure'. The words 'obtained any amount' are to be read as distinguished from the 'benefit accruing to the assessee in respect of any trading liability' and the benefit may be by way of remission or cessation of that very liability. So far as the value of the benefit is concerned, it can only accrue and in respect of the value of such benefit, the accrual basis can be taken into consideration so far as remission or cessation of the trading liability is concerned. But it must be borne in mind that the section speaks of 'benefit in respect of such trading liability' as allowance and not as having been obtained by the assessee. This clear distinction between 'obtaining of any amount in respect of loss or expenditure' on the one hand and 'accrual of any benefit in respect of a trading liability by way of remission or 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 expenditure. 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 (supra) 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 noticed by the Hon'ble Kerala High Court in the case of K.V. Moosa Koya & Co. (supra). The Gujarat High Court was categorically of the view that a refund is to be taxed on the basis of receipt notwithstanding the fact that the assessee had maintained its accounts on mercantile basis. We are inclined to follow the decision of the Gujarat High Court in the case of Rashmi Trading (supra). It has been observed by their Lordships of the Kerala High Court in the case of K.V. Moosa Koya & Co. (supra) that the benefit 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.
But, in a case where the amount is refunded, it is manifest that the liability had already stood discharged and there was no outstanding liability, the question of cessation or remission of which could arise. In this case, the amount paid earlier has been refunded. The refund would be taxable for the year in which it is received. It is only the benefit arising out of remission or cessation of liability that will become taxable on the basis of accrual. It may be that the issue of the levy is not yet finally determined, since the matter is before the Supreme Court, tout that can be made no ground for not treating the amount of refund as the income of the assessee under the provisions of Section 41(1). On account of refund having been received by the assessee, the assessee has "obtained" amount in respect of the expenditure which had been allowed as a deduction earlier and the Department will be justified to assess the amount of the refund as the deemed income of the assessee under the provisions of Section 41(1). It is true that the matter is before the Supreme Court and in the contingency of the decision of the Supreme Court going in favour of the Excise Department, the assessee may be called upon to pay back the amounts. But on account of that, it cannot be said that the assessee has not "obtained" the amounts. It cannot be argued that the assessee has only obtained tentatively and not finally and as such the provisions of Section 41(1) do not become applicable. The fact remains that the amounts have been "obtained" by the assessee and this is sufficient to attract the applicability of the provisions of Section 41(1). If as a result of the decision of the Supreme Court, the assessee is called upon to make any payment, that will be allowable as deduction 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 liabilitty 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 above, the amount of refund received by the assessee is its income under the provisions of Section 41(1). The issue whether the assessee is obliged to return the amount of the excise duty to its customers is a different issue. If the assessee is liable to return the amount to the customers, then a deduction for that liability will have to be given. The assessee would be entitled to get deduction in case it can establish that in the accounting years under consideration it had become liable to return the amount to its customers. As a matter of fact, the assessee has not in its books created any liability in favour of its customers. According to assessee's own saying, the matter of the assessee's liability to excise duty has not yet become final, since the decision of the Karnataka High Court has not been accepted by the Excise Department and an appeal is pending before the Supreme Court. The assessee has not established that any debt had accrued in favour of the customers. Under the circumstances, the question of allowing a deduction does not arise. We will draw attention to the decision of the Supreme Court in the case of Sinclair Murray & Co. v. CIT [1974] 97 ITR 615. In that case, it was stated by the assessee that the purchaser had paid sales tax to the assessee on the understanding that if ultimately no sales tax was exigible on those sales, the amount collected as sales tax was to be refunded to the purchaser. It was hence contended that the amount collected as sales tax could not belong to the assessee but had belonged to the purchaser and as such could not be treated as the income of the assessee. The Supreme Court held that the sales tax collected by the assessee was a trading receipt of the assessee and it was to be included in the computation of the income of the assessee. The Supreme Court observed that if and when the assessee paid the same either to the State Government or to the purchaser, it would be entitled to claim deduction of the sum so paid. Therefore, the plea of the assessee that since it was obliged to return the amount to the customers, the amount of refund could not be regarded as the income of the assessee, is not acceptable. When the assessee returns the amount to the customers or establishes that it had become liable to return the amount to the customers, a deduction for it would be admissible. But for the years under consideration, the assessee has not established that it had become liable to return the amount to the customers and hence the question of allowing any deduction does not arise.
21. In the end, we uphold the inclusion of the amounts of refund of the excise duty in the computation of the total income of the assessee under the provisions of Section 41(2) of the Income-tax Act, 1961.
22. The appeals of the assessee are dismissed.