JUDGMENT
R.K. Abichandani, J.
1. The Income-tax Appellate Tribunal, Ahmedabad Bench “B”, has referred to us the following questions under section 256(1) of the Income-tax Act, 1961 :
1. By the assessee :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal’s finding that the deduction of expenditure has been clearly granted to the assessee in the earlier years is without evidence and/or perverse ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that section 41(1) covered the case and that Rs. 5,00,000 was a benefit to the assessee taxable as income under that section ?”
2. By the Commissioner :
“3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that a sum of Rs. 1,06,879 was not liable to tax under section 41(1) of the Act ?”
2. After hearing learned counsel for the parties, with a view to focus the real controversy involved, question No. 2 is split into questions Nos. 2A and 2B as under :
“(2A) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that section 41(1) covered the case ?
(2B) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that Rs. 5,00,000 was taxable as income in the hands of the assessee ?”
3. The relevant assessment year is 1976-77. The assessee is a limited company carrying on the business of manufacture and sale of electrical domestic grinding machines. Under rule 9 of the Central Excise Act, 1944, the company had been collecting excise duty from the customers in respect of the grinding machines sold. As a manufacturer, the assessee was required to pay excise duty under section 3 of the Central Excises and Salt Act, 1944, and it was recovered by it from the customers. The amount paid as excise duty was accounted for in a separate account called “Central Excise Duty Account”. The assessee did not treat the amounts recovered from the customers as a trading receipt by including it in the sale price and thereby in the profit and loss account. It appears that in connection with levy of central excise for the years 1971-72 onwards, the assessee had approached the Gujarat High Court by filing Special Civil Application No. 1465 of 1974, challenging the levy of excise duty on the ground that electric grinders were not subjected to such duty. It also appears that at the hearing of this petition, the Excise Department conceded that domestic grinders such as manufactured by the assessee were not liable to duty and agreed to refund the duty already collected. The assessee thus, during the year of account, received a sum of Rs. 6,06,879 by way of refund of excise duty. The amount represented refunds of excise duty paid over the years 1971 to 1975 by the assessee. The Income-tax Officer, in an order approved under section 144B by the Inspecting Assistant Commissioner, brought to tax the above amount under section 41(1) of the Income-tax Act. According to the income-tax Officer, the amount was recovered from the customers as part of the price of grinders sold to them and the excise duty paid had already been allowed as a deduction to the assessee. Since the assessee had already got the benefit of deduction and the allowed amounts were refunded, the entire amount of Rs. 6,06,879 was held to be taxable under section 41(1) by the Income-tax Officer. The assessee had contended that the said amount of excise duty belonged to various customers to whom it was repayable and some of them had collected the amount by way of adjustment against service charges due to the company and some had filed suits for recovery, which were compromised by the assessee accepting the liability. The assessee’s case was that the entire amount refunded belonged to the customers, who had been apprised of the position regarding the amounts kept in deposit in their behalf, which they way either collect in cash or adjust against future sales services and, therefore, there was no taxable income under section 41(1) of the Act. The Income-tax Officer, however, held that the assessee had no intention of refunding these amounts to the customers, bringing to tax the sum of Rs. 6,06,879 as aforesaid.
4. The Commissioner (Appeals) before whom the order of the Income-tax Officer was challenged, found that the important fact that the excise duty was not claimed and allowed as a trading liability in the profit and loss account of the earlier year which was relevant for the application of section 41(1) had been completely ignored by the Income-tax Officer and the Inspecting Assistant Commissioner. According to the Commissioner (Appeals), the conclusion of the Inspecting Assistant Commissioner that excise duty was claimed as a deduction in the past and was allowed, was not correct in view of the fact that the duty was never debited to the profit and loss account nor the collection entered as sale price. The Commissioner (Appeals), therefore, allowed the claim of the assessee, deleting the addition of Rs. 6,06,879 holding that the sum was not taxable.
5. The Department preferred an appeal before the Tribunal. The Tribunal held that during the years 1971 to 1975, the assessee had collected from the customers a total amount of Rs. 6,06,879 as central excise duty in respect of the domestic grinders sold to them and though indicated as a separate amount, it was included in the same bill issued to the customer. The Tribunal held that the assessee neither took credit for these receipts as its income nor claimed deduction for the amounts paid under the mistaken notion that it was liable, to pay the same to the Department as a deduction. The Tribunal found that the assessee was bound to include the receipts as its income. It was held that both the assessee and the Revenue knew the fact of the collection and the payment of the entire collection through the “Central Excise PLA Account” to the Department. The Income-tax Officer did not treat the assessee as having concealed the receipts being income. This was because the Income-tax Officer knew that the amount had to be deducted from the total amount of payment. It was held that the conduct clearly proves that there was a tacit understanding on both the sides about the assessability of the receipts and the allowability of the payments. Deduction of the expenditure, therefore, had been clearly granted to the assessee in the respective years and the provisions of section 41(1) were attracted. It was held that whether the assessee collected a consolidated figure of price increasing the same to include the excise duty or any other imposition he had to face or by preparing a bill giving the bifurcation therein amongst price – Central excise, or even for that matter of freight paid by him or his overriding cost cost per piece – as far as the customer was concerned, he was paying the entire amount as the price of the grinder. On the question whether the assessee was bound to part with these amounts to the customers, the Tribunal noted that out of the total amount of Rs. 6,06,879, a sum of Rs. 1,16,898 was collected during the previous year, paid during the year and also refunded during the year by the assessee. The Tribunal held that there could not be any dispute as to the applicability of section 41(1) with regard to the said amount subject to any overriding claim by the customers and the position as regards the balance also would depend only on the claim of the customers. The Tribunal, in terms, held that the assessee could not abdicate its responsibility to repay the amounts to its customers, but taking stock of the fact that the assessee had paid on an average Rs. 10,000 per year and the refunds to the customers were small, fixed the figure for which the assessee would benefit at Rs. 5 lakhs, set aside the order of the Commissioner of Income-tax (Appeals) and restored the order of the Income-tax Officer substituting Rs. 5 lakhs for Rs. 6,06,879.
6. There is no dispute about the fact that the assessee has been following the mercantile method of accounting. The concept of the mercantile method of accounting is explained by the Supreme Court in the case of Keshav Mills Ltd. v. CIT [1953] 23 ITR 230. The said system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. In the case of Metal Box Co. of India Limited v. Their Workmen [1969] 73 ITR 53, the Supreme Court held that just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business.
7. The facts on record clearly disclose that refund of excise duty received by the assessee as aforesaid was taken to the balance-sheet in an account described as “Excise duty refundable to customers retained as deposit against free services to be rendered”. Thus, the assessee had acknowledged the balance owed to its customers. It has come on record that the assessee had written letters to all the customers intimating them the fact that the amount of excise duty was refunded by the Government in view of the proceedings before the High Court. The customers were informed that the amounts were credited by way of deposits in their accounts from the date they were received. The assessee undertook that they would adjust the amount towards service charges which may become payable by the customers. The fact that service cards were issued to the customers is also borne out from the record. It would also be noticed, that earlier, when excise duty was collected from the customers, it was separately mentioned in the bills which were issued to the customers. Thus, the customers were in a position to know that the amounts of excise duty which were refunded to the assessee stood credited to their accounts by way of deposit and that they could get them adjusted by getting the servicing of grinders done by the assessee. Since the assessee was maintaining the accounts as per the mercantile system, on its getting the excise duty refunded and crediting the amounts in the accounts of the respective customers, it had acknowledged the liability as aforesaid. Even the Tribunal has found that it was liable to refund the amounts to the customers. Since the liability had been incurred for refunding the amounts to the customers, the assessee was entitled to deduction of that amount. The Tribunal has resorted to conjecture when it held that the amounts could not be actually paid to the customers and that an amount of Rs. 5 lakhs should be treated as income in the hands of the assessee. Since the assessee had incurred the liability to refund the amounts to the customers, he was entitled to the deductions as claimed and there was no valid reason for the finding that an amount of Rs. 5 lakhs should be taxed as income in the hands of the assessee. In view of the above, question No. 2B is answered in the negative, in favour of the assessee and against the Revenue.
8. Question No. 1 referred to us is not pressed by learned counsel appearing for the assessee and is, therefore, left answered.
9. As regards question No. 2A, while dealing with a similar contention, this High Court has in Motilal Ambaidas v. CIT [1977] 108 ITR 136, held that assessee who was maintaining its accounts on the mercantile basis, was bound to show as trading receipts, all the amounts which accrued due to it which were collected by it as sales tax and it was bound to show on the debit side of the accounts, the amounts which it paid by way of sales tax. The fact that no such entries showing credits and debits in respect of the sales tax collected and sales tax paid, were made by the assessee-firm, does not alter the real substance of the transaction nor does it alter the real character of what was required to be done by the assessee.
10. It was held that what has been enacted in section 41(1) is that if a deduction has been made in a previous year and the assessee has been benefited by such deduction in the past, if any chance some amount is refunded to him or comes back to him, the amount so got back should be brought to tax and in case he has to refund the sales tax to the original purchasers who purchased the goods from him, then the amount so refunded would also be a deduction which he can claim and it must be granted to him, that being a deduction on the expenditure side. Dealing with a similar question, the Supreme Court in Jonnalla Narashimharao and Co. v. CIT [1993] 200 ITR 588, held as under (at page 590) :
‘The questions raised in these appeals are whether the collection of the said amount in the name of ‘rusum’ constitutes his business receipt and secondly whether it is a deductible expenditure for the assessment year 1968-69 notwithstanding the fact that he did not actually remit the tax during that assessment year. So far as the first question is concerned, there can hardly be any doubt. It constitutes his business receipt, though collected under the name ‘rusum’ (see Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542 (SC)). The only question is whether it is deductible in that assessment year though it was not actually remitted. It is not disputed that the assessee maintained his accounts on the mercantile basis. Section 43B was not there during the relevant assessment year ; it came into force much later. In these circumstances, it cannot be disputed in view of the decision of this court in Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363 that it is a deductible expenditure.”
11. Thus, the amounts of excise duty collected by the assessee from the customers would form part of its trading receipts. Where the amount of the excise duty is required to be refunded to the customers, such amount will also be a deduction which the assessee can claim.
12. In view of the above discussion and our answer to question No. 2B, question No. 3 is answered in the affirmative, in favour of the assessee and against the Revenue.
13. The reference stands disposed of accordingly, with no order as to costs.