THE COMMR OF INCOME TAX V. M/S MOTOR INDUSTRIES CO LTD

ITA/1410/2006

AI Insights

The case involves the Commissioner of Income Tax and the Joint Commissioner of Income Tax as appellants against M/s. Motor Industries Co. Ltd. as the respondent. The dispute arose from the reopening of an assessment for the year 1991-92 concerning an excise duty refund of Rs.1,29,00,924 received by the assessee, which was later recalled by the Central Excise Authorities. The Assessing Officer reopened the assessment under Section 148 of the Income Tax Act, 1961, bringing the refund amount to tax under Section 41(1). The Appellate Tribunal set aside this order, leading to the present appeal by the revenue. The High Court of Karnataka examined the legality of the reopening of the assessment, the conformity of the notice to legal requirements, and the status of the excise duty refund as income.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 729157 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 05-04-2013
• Assessment Year: misc
• Other Referred Cases: UNION OF INDIA AND ANOTHER v. J.K.SYNTHETICS LTD., CALCUTTA DISCOUNT COMPANY LIMITED v. INCOME TAX OFFICER, COMPANIES DISTRICT, POLYFLEX (INDIA) (P) LIMITED V/S COMMISSIONER OF INCOME TAX, COMMISSIONER OF INCOME TAX v. THIRUMALASWAMY NAIDU & SONS
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: PERCY J PARDIWAL
• Assessee Lawyers: K V ARAVIND
• Keywords: Excise duty refund; Income Tax; Jurisdiction; Material facts; Reopening of assessment
• Section: 148; 151; 41(1); 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 5TH DAY OF APRIL 2013 PRESENT THE HON’BLE MR. JUSTICE K. SREEDHAR RAO AND THE HON’BLE MR. JUSTICE B. MANOHAR I.T.A.NO.1410 OF 2006 BETWEEN: 1. THE COMMISSIONER OF INCOME TAX CENTRAL CIRCLE, C.R.BUILDING QUEENS ROAD, BANGALORE-30. 2. THE JOINT COMMISSIONER OF INCOME TAX SPECIAL RANGE – 6 BANGALORE (NOW JCIT, SR-3) ...APPELLANTS [BY SRI K.V.ARAVIND, ADV] AND: M/S.MOTOR INDUSTRIES CO. LTD., HOSUR ROAD ADUGODI BANGALORE 560 030. …RESPONDENT [BY SRI PERCY J. PARDIWAL, SENIOR ADVOCATE FOR M/S.KING AND PARTRIDGE] THIS ITA FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF THE ORDER PASSED DURING MAY 2006 IN ITA NO.291/Bang/2001 FOR THE ASSESSMENT ® 2 YEAR 1991-92 PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN ITA NO.291/Bang/2001 DURING MAY 2006 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER & CONFIRM THE ORDER PASSED BY THE JOINT COMMISSIONER OF INCOME TAX, SPECIAL RANGE- 6, BANGALORE, (NOW JCIT, SR-3), IN THE INTEREST OF JUSTICE AND EQUITY. THIS ITA COMING ON FOR ‘BEING SPOKEN TO’ AFTER RECALLING OF THE EARLIER ORDER DT.27.08.2012, THIS DAY, SREEDHAR RAO, J., DELIVERED THE FOLLOWING: JUDGMENT The respondent assessee for the assessment year 1991-1992 had received the refund of excise duty excess paid to a tune of Rs.1,29,00,924/-. The Central Excise Authorities found that the refund order was improper. Therefore, they issued a notice recalling the order of refund and directed the assessee to remit the amount to the Department. The assessee filed Writ Petition Nos.7962- 7964/1991 challenging the order of recall. However, the assessee remitted a part of the refund amount in a sum of Rs.28.00 lakh and retained the refund amount of Rs.1,01,24,971/- with it. The writ petition was dismissed on 20.3.1998. 3 2. The Assessing Officer issued notice dated 30.3.1998 U/s.148 for reopening the assessment. The Assessing Officer issued a letter dated 30.10.1999 to the assessee seeking its explanation in respect of the above said refund amount. The assessee explained that the recall of the refund amount is challenged in the said writ petitions and that the refund amount is shown as current liability in the returns filed for the relevant period. Thereafter, the Assessing Officer issued notice under Section 148 for reassessment and concluded the assessment under Section 41(1) of the Income Tax Act, 1961 (‘the said Act’ for short) bringing the said amount to tax. The C.I.T. (Appeals) confirmed the order of the Assessing Officer. 3. The Appellate Tribunal has found that the notice issued under Section 148 does not conform to the requirements of law to enable the reopening of the assessment and thus set aside the order of the C.I.T. (Appeals). The Revenue aggrieved by the said order has filed this appeal. 4 4. This Court, while admitting the appeal framed the following substantial question of law for consideration:- “Whether the Tribunal was correct in holding that the reopening of assessment for the current assessment year was not correct in law and the basis of re-opening of assessment that excise duty refund received by the assessee should be brought to tax under section 41(1) of the Act was the mere opinion of the Assessing Officer and therefore reopening was barred as it was made beyond a period of four years? 5. Upon hearing the counsel for the appellants and respondents, the question of law framed is modified in the following manner covering three different aspects of the issue involved in the appeal: (i) Since the notice for reopening the assessment under Section 148 is not preceded by sanction from the Commissioner or Chief Commissioner of Income Tax as required under Section 151. Whether, the Assessing Officer had no jurisdiction to reopen the assessment? ii) Whether the notice issued does not conform to the requirements of law. In the notice, there is no allegation that the assessee has failed to disclose “fully and truly all material facts necessary for the assessment.” In the absence of such satisfaction and specific mention in the notice, the order of reopening of the assessment is bad in law? 5 Whether the refund made by the Excise Department had become the subject matter of dispute before the Courts. Until the lis was decided conclusively, the refund could not be considered as an ‘income’ for the assessment of tax, in view of the Ruling of the Supreme Court in the case of UNION OF INDIA AND ANOTHER v. J.K.SYNTHETICS LTD., reported in (1993) 199 ITR 14 (SC)? 6. Sri Percy J. Pardiwal, learned Senior Counsel appearing for respondents submitted that in view of the provisions contained in Sec. 151(1) of the I.T. Act, the scrutiny assessments are being reopened after a lapse of four years. The approval of Chief Commissioner or Commissioner with the needed satisfaction for the reasons recorded is mandatory. In the instant case, the assessing Officer is the Deputy Commissioner and no approval of the Chief Commissioner or Commissioner is taken preceding the issue of notice. Hence, the notice issued for reopening by the Assessing Officer is without jurisdiction. In this regard the senior counsel relied upon the ruling of the Rajasthan High Court in Commissioner of Income Tax Vs. Uttamchand Nahar (2007) 295 ITR, 403 Rajasthan and also the commentaries in Sampath Iyengar’s Law of Income Tax, 6 11th Edition, page 10305 and also the department circular No.549 dt.31.10.1989. 7. Sri, K.V. Aravind, counsel for the revenue submitted that the question of jurisdiction to reopen the assessment is urged for the first time in the appeal and also that the proviso to sec.151(1) does not apply when the assessment is reopened by the Deputy Commissioner who is the Assessing Authority. 8. The counsel for the respondent per contra submitted that objection with regard to jurisdiction for reopening was urged and argued before the CIT appeals. The said contention was also urged before the Appellate Tribunal. The Tribunal without reference to the said contention granted relief to the respondent herein on a different ground. Therefore, the contention that the jurisdiction to reopen the assessment is urged only for the first time in appeal before this court is untenable. 9. In order to appreciate the proposition of law regarding the jurisdiction for reopening the assessment, it is necessary to refer to the provisions contained in Section 151 of the I.T. 7 Act. The said section came to be amended w.e.f. 1.4.1990. Therefore, the provision of law in sec. 151 prior to 1.4.1990 and subsequent to 1.4.1990 is extracted hereunder for convenient reference:- Sanction for issue of notice 151. (1) In a case where an assessment under sub-section (3) of section 143 or Section 147 has been made for the relevant assessment year, no notice shall be issued under section 148 except by an Assessing Officer of the rank of Assistant Commissioner or Deputy Commissioner: Provided that, after the expiry of four years from the end of the relevant assessment year, no such notice shall be issued unless the Chief Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer aforesaid, that it is a fit case for the issue of such notice. (2) In a case other than a case falling under sub-section (1), no notice shall be issued under section 148 by an Assessing Officer, who is below the rank of Deputy Commissioner, after the expiry of four years from the end of the relevant assessment year, unless the Deputy Commissioner is satisfied, on the reasons recorded by such Assessing Officer, that it is a fit case for the issue of such notice.” 8 10. The amended provision of Section 151 reads thus:- “Sanction for issue of notice 151(1) In a case where an assessment under sub-section (3) of section 143 or Section 147 has been made for the relevant assessment year, no notice shall be issued under section 148 [by an Assessing Officer, who is below the rank of Assistant Commissioner, unless the Deputy Commissioner is satisfied on the reasons recorded by such Assessing Officer that it is a fit case for the issue of such notice]: Provided that, after the expiry of four years from the end of the relevant assessment year, no such notice shall be issued unless the Chief Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer aforesaid, that it is a fit case for the issue of such notice. (2) In a case other than a case falling under sub-section (1), no notice shall be issued under section 148 by an Assessing Officer, who is below the rank of Deputy Commissioner, after the expiry of four years from the end of the relevant assessment year, unless the Deputy Commissioner is satisfied, on the reasons recorded by such Assessing Officer, that it is a fit case for the issue of such notice.] 11. Upon close reading of the position of law u/s 151 prior to 1.4.1990 and after amendment w.e.f. 1.4.1990 the following salient features are discernable: a) Prior to 1.4.1990 the assessing officer who is in the rank of Asst. Commissioner 9 and Deputy Commissioner could reopen scrutiny assessment within the period of four years by issuance of notice. If it is, beyond the period of four years, it is necessary that the Chief Commissioner or Commissioner can permit reopening on satisfaction of the reasons recorded by the assessing officer that it is a fit case for issuance of notice. b) After 1.4.1990, if the assessing officer is below the rank of Asst. Commissioner i.e., I.T.O. notice for reopening can be issued within four years provided the Deputy Commissioner is satisfied of the reasons recorded by the Assessing Officer for issuance of notice. c) After 1.4.1990 by implication, there is no embargo upon the assessing officer when he is in the rank of Asst. Commissioner or the Deputy Commissioner to reopen the assessment within the period of four years. But for the period beyond four years, the approval of the Chief Commissioner or Commissioner is necessary. d) Insofar as Sec. 151(2), the proposition of law remained unaltered and the said provision applies to non-scrutiny assessment. If the assessing officer is below the rank of Deputy Commissioner i.e., Asst. Commissioner or ITO , if notice for reopening to 10 be issued in case of non-scrutiny assessment beyond four years, the approval of Deputy Commissioner that he satisfied of the reasons given by the Assessing officer for reopening would be necessary. 12. The decision of the Rajasthan High Court (2007) 295 ITR is not applicable to the facts of the case, because the said case pertains to assessment year 1984-85. The said facts attract the provision of law in sec. 151 prior to 1.4.1990. Whereas, in this case the amended provisions w.e.f. 1.4.1990 would apply. However, the power of Asst. Commissioner and the Deputy Commissioner to issue notice for reopening of the Scrutiny assessment within the period of four years remains intact even after the amendment. The purport of the amendment appears to be that when the assessing officer is ITO, who is lesser rank to Asst. Commissioner, he can also move the Deputy Commissioner for permission to reopen the scrutiny assessment. Although there is no explicit provision in Sec. 151(1) declaring the Asst. Commissioner and the Deputy Commissioner’s power to reopen the assessment within period of four years, it is by implication such power of reopening the assessment on the 11 part of the Asst. Commissioner is inferable. Insofar as Deputy Commissioner is concerned, he being an approval authority, for reopening assessments by the Assessing officers below the rank of Asst. Commissioner he should necessarily have the power to reopen the assessment within the period of four years if he happens to be the assessing authority. 13. The provision of Sec. 151 has undergone a further amendment, wherein the Deputy Commissioner is also declared as an assessing authority and for reopening the assessments of assessing officer, who is below the rank of Asst. Commissioner or Deputy Commissioner, it is the joint commissioner declared as the approval authority to permit reopening of the assessments. In other words, the change in law is to the effect if the assessing officer is below the rank of Asst. Commissioner or Deputy Commissioner i.e. I.T.O. the Approval authority instead of Deputy Commissioner, it would be the Joint Commissioner w.e.f. 1.10.1998. 14. In the instant case, the Deputy Commissioner is the Assessing authority and the scrutiny assessments are being reopened after four years and without approval of the Chief 12 Commissioner or Commissioner as required under provision to Sec. 151 which stood after 1.4.1990 and prior to 1.10.1998. Therefore, the notice issued for reopening is bad in law and the first question of law is answered against the revenue. 15. Insofar as the second point regarding failure to disclose fully and truly all material facts, the learned counsel for the assessee has relied upon the decisions in (1985) ITR 155 748 (Kar) VIJAYALAKSHMI OIL INDUSTRIES V/S. INCOME TAX OFFICER, (1999) 240 ITR 77 (Gujrat) VARELI WEAVES PVT LTD., V/S.DEPUTY COMMISSIONER OF INCOME TAX, (2008)171 TAXMAN 379 (DELHI) COMMISSIONER OR INCOME TAX V/S. INDIAN FARMERS FERTILIZER CO-OP LTD; (2011) 335 ITR 234 (Gujrat) AAYOJAN DEVELOPERS V/S. INCOME TAX OFFICER and W.P.No.2786/2011 of the High Court of Bombay disposed off on 24-1-2012 to contend that the notice to be issued U/s. 148(2). Proviso to Section 147(1) mandates that in cases of escaped assessments, the Assessing Officer gets jurisdiction only when he is satisfied and records his reasons specifically to the effect that the assessee has failed to disclose fully and 13 truly all material facts. In the present case, notice issued U/s. 149 only makes a statement that the refund is a trade- in-receipt and hence the said income has not been disclosed in the returns is not sufficient to establish the requirements of non-disclosure of all material facts fully and truly. Learned counsel also submitted that in the returns filed under the current liabilities, a gross amount is shown which includes the disputed refund. When it is the contention of the assessee in the explanation to the notice issued by the Assessing Officer that refund amount is disputed and challenged in Court, the said amount cannot be considered as trade-in-receipt. Therefore, in the alternative, it was argued that assuming for a moment that there is no specific mention of this refund amount under the current liabilities, the assessee cannot be held to be guilty of failure to disclose all material facts fully and truly. 16. Per contra, Sri.K.V.Aravind, learned counsel appearing for the revenue with reference to the contention of notice issued U/s. 148(2) submitted that before issuance of notice U/s.148 (2), the Assessing Officer has recorded the reasons for reopening the assessment. The facts and reasons stated 14 by the Assessing Officer would categorically and by irresistible implications disclose the valid reasons as declared in law for reopening the assessment. Mere fact that there is no specific mention of the words “failure to disclose all material facts fully and truly” is only technical omission cannot defeat the validity of the order. The order if read in toto, it would disclose that all material facts and reasons for reopening the assessment are recorded. The counsel relying upon the decision of the Hon'ble Supreme Court in 1961 (41) ITR 191 in the case of CALCUTTA DISCOUNT COMPANY LIMITED., V/S. INCOME TAX OFFICER, COMPANIES DISTRICT, AND ANOTHER in para 5 (unnumbered), the following observations are made: 5. Before we proceed to consider the materials on record to see whether the appellant has succeeded, in showing that the Income tax Officer could have no reason, on the materials before him, to believe that there had been any omission to disclose materials facts, as mentioned in the section, it is necessary to examine the precise scope of disclosure which the section demands. The words used are “ omission or failure to disclose fully and truly all material facts necessary for his assessment for that year”. It postulates a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material, and necessary for assessment 15 will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his Possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise-the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable. Thus, when a question arises whether certain income received by an assessee is capital receipt, or revenue receipt, the assessing authority has to find out what primary facts have been proved, what other facts can be inferred from them, and taking all these together, to decide what the legal inference should be. There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet a possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the income-tax Officer might have discovered, the Legislature has put in the Explanation, which has been set out above. In view of the Explanation, it will not be open to the assessee to say, for example- “I have produced the account books and the documents: You, the assessing officer examine them, and find out the facts necessary for your purpose: My duty is done with disclosing these account-books and the documents”. His omission to bring to the 16 assessing authority’s attention these particular items in the account books, or the particular portions of the documents, which are relevant, amount to “omission to disclose fully and truly all material facts necessary for his assessment”. Nor will he be able to contend successfully that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed. The Explanation to the section, gives a quietus to all such contentions; and the position remains that so far as primary facts are concerned. It is the assessee’s duty to disclose all of them-including particular entries in account books, particular portions of documents and documents, and other evidence, which could have been discovered by the assessing authority, from the documents and other evidence disclosed. 6. Does the duty however extend beyond the full and truthful disclosure of all primary facts? In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure, it is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else-far less the assessee – to tell the assessing authority what inferences – whether of facts or law should be drawn. Indeed, when it is remembered that people often differ as regards what inference should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inference – whether of facts or law-he would draw from the primary 17 facts. If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicated if to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn? 7. It may be pointed out that the Explanation to the sub-section has nothing to do with “inferences” and deals only with the question whether primary material facts not disclosed could still be said to be constructively disclosed on the ground that with due diligence the income-tax Officer could have discovered them from the facts actually disclosed. The Explanation has not the effect of enlarging the section, by casting a duty on the assessee to disclose “ inferences ” - to draw the proper inferences being the duty imposing on the Income-tax Officer. 8. We have therefore come to the Conclusion that while the duty of the assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond this. 17. In the light of the said ratio, it is submitted that if the returns filed by the assessee is perused, the total current liability is shown as Rs.1,29,000 and odd. There is no specific mention with reference to refund amount. On perusal of the returns filed by the assessee, it was 18 impossible for any prudent Assessing Officer to make out that in the current liabilities, the amount of excise duty refund was included. In the decisions cited above, it is held that mere production of accounts books before the Assessing Officer is not sufficient to exonerate the liability of the assessee. It is imperative for the assessee to mention the specific items of the current liabilities and not to be stated by a gross amount as an omni bus figure. The return filed by the assessee would disclose that the order in question on the basis of which reopening is effected is also fully loaded with material facts and reasons. In that view, he argued that there is no legal fallacy on the part of the assessee in exercising his jurisdiction by due compliance of requirements of proviso to Section 148(2). 18. On thorough consideration of the rival submissions, we find that in the light of the decision of the Hon'ble Supreme Court reported in 47 ITR 191 in the case of CALCUTTA DISCOUNT CO. v/s INCOME TAX OFFICER referred to above, the initial burden is on the assessee to mention all the material facts truly and fully in the returns filed. On perusal of the returns, it is impossible to make out 19 the distinct heads of deduction sought. It cannot be said that the Assessing Officer has taken note of the escaped amount. In the present case, the assessee had shown the gross figure under current liabilities, he has not distinctly stated different types of deductions he is claiming under the Head of Current Liabilities. Therefore, there is no disclosure of all the material fully and truthfully as required under law. The order of the Assessing Officer passed under proviso to Section 147, which reads as under: “During the year assessee was in receipt of refund from Central Excise Authorities being excess paid. Total amount received was Rs.1,29,00,924/-. Later, Excise Authorities called back the refund 0amount from assessee, but assessee contested and got stay from Karnataka High Court. It paid part amount and Rs.1,01,24,971/-is with assessee. Unless and until the amount/refund from Excise Authorities paid back or distributed to ultimate beneficiaries, the amount is trading receipt in the hands of assessee. Assessee would get deduction as and when the same is paid. The refund of Excise Duty was not shown as income during the year. Hence, income escaped assessment. Accordingly, notice u/s.148 issued to reopen the assessment u/s.147”. 19. The Assessing Officer has set out all the material facts relating to the refund. He has specifically stated that the 20 said amount is a trade-in-receipt in the hands of the assessee and that unless and until the amount if refunded to the Excise Authorities or distributed to the ultimate beneficiaries, it would be an income of the assessee during the assessment year in question and non-disclosure is said to be the “income escaped from assessment.” The words “income escaped from assessment” has definite legal connote in the provisions of Section 147. Failure of the Assessing Officer in not specifically employing the words “failure to disclose the all the material facts fully or truly”, and the verbatim in the order as recorded in the proviso to Section does not appear to be fatal and it cannot be said that there is no compliance of requirement of law for reopening the assessment. The contra view taken by the Tribunal in this regard is bad in law. The decisions cited by the counsel for the appellant no-doubt lays down the salutary and broad principles of law as to the nature and requirement of an order to be passed for reopening the assessment. But with reference to peculiar facts and the order in question if considered, we are of the view that there is no error in the order of the Asst. Commissioner for reopening assessment as 21 undisclosed income U/s.148(2). The second question of law is answered in favour of the revenue. 20. With regard to 3rd question, it was argued that the amount of excise duty has become the subject matter of the dispute in the writ petition. Therefore, until the liability of refund was finally and conclusively adjudicated, the amount should not be considered as an income. In that regard, the counsel relied upon the decision of the Allahabad High Court in the case of the UNION OF INDIA AND ANOTHER v/s J.K.SYNTHETICS reported in 105 ITR 864 and the decision rendered by the Hon'ble Supreme Court in the said case against the judgment of Allahabad High Court reported in 199 ITR 14. With reference to the facts, for the purpose of law laid down it is submitted that in the cited case, the liability to pay excise duty was the bone of contention. The assessee in the previous about six returns filed has shown the disputed liability as expenditure and deductions were accordingly allowed. However, for the assessment years 1972-1973, Allahabad High Court held that the amount in dispute pending in litigation before the court cannot be considered as an income in the hand of the assessee for tax. 22 Besides, for the past several years in the previous returns the said amount was allowed as deduction. Therefore, a sudden divergent stand on the part of the Assessing Authority was held to be not correct. The Hon'ble Supreme Court had disposed of the appeal with the following observations in J.K.SYNTHETIC’s case, which reads as follows: So far as the third question is concerned, it is not pressed before us on behalf of the Department in view of the fact that the concerned authority has approved of the Institution under section 35(3) of the Act. So far as the second question is concerned, it is obvious that the liability to tax under section 41 of the Act will depend on the outcome of the appeal before this court. It is also stated that, as regards another part of the liability, the issue is pending before the Tribunal. It would, therefore, appear that no cessation of liability can be postulated until the Tribunal has decided the matter. There is no prejudice to the Department if the assessment is modified depending upon the outcome of the decision of this court as well as the final outcome of the proceedings, which are not pending before the Tribunal. This leaves only the first question for consideration. 21. Sri.K.V.Aravind, learned counsel appearing for the revenue relied upon the decision of this court and the decision of the Hon'ble Supreme Court in the case of 23 COMMISSIONER OF INCOME TAX v/s THIRUMALASWAMY NAIDU & SONS reported 230 ITR 534 in paragraph 2 and 3, the following observations are made: 2. The assessee in the course of sale of its products, collected sales-tax from the purchasers. The assessee, in its turn, was assessed under the Central Sales- tax Act and paid the tax. The sales-tax collected by the assessee has to be treated as its income, according to the ruling of this Court in the case of Chowringhee Sales Bureau Pvt. Ltd. vs. CIT 1973 CTR (SC) 44: (1973) 87 ITR 542 (SC): TC 13R.326. Any payment of sales- tax made by the assessee was equally liable to be deducted from the profits made by the assessee. In this case, the assessee had actually made the payment of sales-tax under the provisions of the central Sales-tax Act. Those provisions were under challenge and ultimately were struck down by the Madras High Court. The assessee got back an amount of Rs.1,37,379/- as refund. The entire amount of sales turnover of the assessee inclusive of the amount of tax collected was clearly includible in the assessee’s taxable income. If any deduction was given from that income and later the same was refunded back to the assessee, the refund will have the character of revenue receipt. It has to be treated as a receipt on the revenue account and has to be assessed as such. The position has been placed beyond doubt by the express provisions of s.41(1) of the IT Act. 3. The next question is, if the assessee returns any portion of the amount to its 24 customers, will it still be liable to pay tax on the entire amount. Admittedly, the assessee had not refunded any part of this amount of Rs.1,37,379/- to any one of its customers in the year of account. As and when such refund is made, the assessee will be entitled to claim deduction. 22. The decision of the Hon'ble Supreme Court in the case of POLYFLEX (INDIA) (P) LIMITED V/S COMMISSIONER OF INCOME TAX reported in 257 ITR 344 in paragraphs 7 and 12 had made the following observations: 7. We are inclined to think that in a case where a statutory levy in respect of goods dealt in by the assessee is discharged and subsequently the amount paid is refunded, it is the first clause that more appropriately applies. It will not be a case of benefit accruing to him on account of cessation or remission of trading liability. It will be a case which squarely falls under the earlier clause, namely, “obtained any amount in respect of such expenditure”. In other words, where expenditure is actually incurred by reason of payment of duty on goods and the deduction or allowance had been given in the assessment for earlier period, the assessee is liable to disgorge that benefit as and when he obtains refund of the amount so paid. The consideration whether there is a possibility of the refund being set as naught on a future date will not be a relevant consideration. Once the assessee gets back the amount which was claimed and allowed as business expenditure during the earlier year, the deeming provision in s. 41(1) of the Act comes into play and it is not necessary that the Revenue should await the 25 verdict of higher Court or Tribunal. If the Court or Tribunal upholds the levy at a later date, the assessee will not be without remedy to get back the relief. 12. Though, the conclusion of the High Court which was affirmed by this Court cannot be legally faulted, we cannot, however, approve of the following analysis of the section occurring in the judgment, “in short, what this provision means is that if an assessee has been allowed a deduction in the computation of its total income of any liability on account of loss or expenditure and if, subsequently, the liability of the assessee on account of such loss or expenditure is remitted or ceases, that part of the liability which is remitted or ceases shall be treated to be the income of the assessee of the previous year in which such remission or cessation takes place.” The High Court proceeded on the assumption that the words ‘remission and cessation thereof ’ could be transposed into the first clause which speaks of obtaining any amount in respect of loss or expenditure. The High Court could have merely said that the trading liability provided for in the books of account and for which deduction was allowed earlier did not cease in view of the pendency of the dispute. Instead, the High Court referred to the expression “loss or expenditure” occurring in the first limb. As the assessee- company did not obtain any amount by way of refund on excise duty account, the first clause of s.41(1) will not be applicable; it is only the latter part that applies in which case the remission or cessation of liability would assume importance. However, in present case, as discussed above, it is the first clause that squarely applies but not the second one. Whether there was cessation or remission of liability would be an irrelevant line of enquiry here. The correct way of understanding s.41(1) would be to read the latter clause – “ some benefit in respect of such trading liability by way 26 of remission or cessation thereof ” as a distinct and self-contained provision. To read the phrase “by way of remission or cessation thereof ” as governing the previous clause as well, i.e., “obtained any amount in respect of such loss or expenditure”, would be doing violence to the language and structure of the provision. That apart, the operation of the provision which is designed to have widest amplitude will get constricted and truncated by reason of such interpretation. 23. In the first place, when the J.K.SYNTHETIC’s case was decided, Mercantile system of accounting was accepted in law. The legal liabilities whether remitted or not could have been claimed as deductions. But with the incorporation of sections 41 to 43(B), the proposition has undergone a thorough change insofar as legal liability is payable to Statutory Authority or the Government. No deduction was permitted until the said amounts are actually paid and remitted, and the accounting on annual basis in Mercantile system in respect of the said liabilities stood expressly excluded by law. In the instant case, for the assessment year in question, Section 43(B) applies. The ratio laid down by the Hon'ble Supreme Court in THIRUMALASWAMY NAIDU’ and POLYFLEX cases would justify the act of the Assessing Officer in assessing the refund of amount in the 27 hands of the assessee as trade-in-receipts until it was paid back to the Government or distributed to the beneficiaries. In the present case, it appears that the assessee after dismissal of the writ petition has remitted the refund amount to the Excise Department as per law. The fact that the assessee had refunded the amount does not exonerate his accountability under charging Section 41(1) and 43(B) read with Section 147 of the I.T. Act. Therefore, the third question of law is answered in favour of the revenue. In the light of the above discussions and in view of the first question of law being answered against the revenue, the appeal is dismissed. Sd/- JUDGE Sd/- JUDGE VGR/NM/MPK/-* "