PETITIONER: DONALD MIRANDA Vs. RESPONDENT: THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY-II(and,connected DATE OF JUDGMENT: 01/03/1961 BENCH: KAPUR, J.L. BENCH: KAPUR, J.L. HIDAYATULLAH, M. SHAH, J.C. CITATION: 1961 AIR 1233 1962 SCR (1) 133 CITATOR INFO : RF 1969 SC 572 (4,5) ACT: Income Tax-Refund of excess profits tax-Liability to income- tax-Discontinuance of business Profits for accounting year exempt from tax-Excess Profits Tax Act 1940 (15 of 1940), S. 12(1)-Indian Finance Act, 1946 (7 of 1946), S. 11(11)-India Income-tax Act, 1922 (11 of.1922), SS. 10, 12. HEADNOTE: The appellants were partners in a registered firm which was dissolved on March 24, 1945. A private limited company succeeded to the business of the firm from March 25, 1945. For the accounting period April 1, 1944, to March 24, 1945, the firm was assessed to excess profits tax under the Excess Profits Tax Act, 1940. It had deposited certain sums of money as required under s. 10 of the Indian Finance- Act, 1942, read with S. 2 Of the Excess Profits Tax Ordinance, 1943, and in accordance with those provisions became entitled to repayment of a portion of the excess profits tax. The appellant's claim before the Income. tax Officer under s. 25(4) of the 'Indian Income-tax Act, 1922, that no tax was payable on the profits of the firm for the period between April 1, 1944, to March 24, 1945, was allowed, but their plea that the amount of refund of the excess profits tax was business profit and therefore similarly exempt from tax, was rejected. The High Court, on a reference, took the view that the amount refunded was income from other sources taxable under s. 12 Of the Indian Income-tax Act, 1922, and that, therefore, the appellants were not entitled to the benefit of S. 25(4) Of that Act. Held, that in view of s. 12(1) of the Excess Profits Tax Act, 1940, and s. II(II) of the Indian Finance Act, 1946, the amount refunded was income from business for the purposes of the Indian Income-tax Act, 1922, and did not lose its character which it had before the deposit. It fell under s. 10 of the Indian Income-tax Act and was, therefore, exempt under S. 25(4) of that Act. Mc Gregor and Baljbur Ltd. v. Commissioner of Income-tax, Bengal, [1959] 36 I.T R. 65 and A. & W. Nesbitt Ltd. v. Mitchell, [1926] II T.C. 2II, relied on. JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 173 to 175
of 1960.
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Appeals from the judgment and orders dated March 11, 1958,
of the Bombay High Court in I. T. R. No. 36 of 1957.
of…A. V. ViSwanatha Sastri, S. M. Dubash and G.
Gopalakrishnan, for the appellants.
K. N. Rajagopal Sastri and D. Gupta, for respondents.
1961. March 1. The Judgment of the Court was delivered by
KAPUR, J.-These are three appeals pursuant to a certificate
under a. 66A(2) of the Indian Income-tax Act, 1922
(hereinafter called the ‘Act), against the judgment and
orders of the High Court of Bombay in Income-tax Reference
No. 36 of 1957.
The appeals though directed against the same order are three
in number because each partner of the firm has brought a
separate appeal. The firm was carrying on the business of
wine merchants at Bombay and came into existence prior to
April 1, 1939. The firm had been assessed to income-tax
under the provisions of the Income-tax Act of 1918. The
firm which was registered under the provisions of the
Income-tax Act of 1922 (hereinafter termed the Act) was
dissolved on March 24, 1945, and from the day following that
i.e. March 25, 1945, a Private limited company i.e. S. S.
Miranda and Co. Ltd. succeeded to the business of the firm.
A claim made under s. 25(4) of the Act to the effect that no
tax was payable on the profits of the registered firm for
the period between April 1, 1944, to March 24, 1945, was
allowed. In respect of the chargeable accounting period
April 1, 1944, to March 24, 1945, the registered firm was
taxed to excess profits tax under the Excess Profits Tax
Act, 1940. It also deposited as required certain sums of
money tinder s. 10 of the Finance Act, 1942, read with s. 2
of the Excess Profits Tax Ordinance, 1943. In accordance
with those provisions the firm became entitled to repayment
of a portion of the excess profits tax amounting to a sum of
Rs. 2,35,704. The shares of the three partners who are
respective appellants in
135
the three appeals were James Miranda Rs.. 58,926, Donald
Miranda Rs. 58,926 and Mrs. N. Q. Miranda Rs. 1,17,854. It
was submitted that the amount refunded, was business profit
and therefore exempt con from tax under s. 25(4) of the Act.
The Income-tax Officer rejected that submission and the
share of each of the appellants was assessed to income-tax
and super tax and the balance after deducting the same he
repaid to each of the partners but he computed the rate
applicable to the tax by including the appellants’ total
business income which was exempt under s;. 25(4) of the Act.
On appeal this assessment was confirmed but on further
appeal the Income-tax, Appellate Tribunal held that the sum
which was refunded was income from business and was
therefore, exempt from income-tax under s. 25(4) of the Act.
At the instance of the Commissioner of Income-tax, the
Tribunal referred the following question of law for the
opinion of the High Court:
“Whether the repayment of excess profits tax
made by the Central Government in pursuance of
Section 10 of the Indian Finance Act, 1942, or
Section 2 of the Excess Profits Tax Ordinance,
1943, is profits from business for the
purposes of Section 25(4) of the Indian
Income-tax Act?”
The High Court held that the amount so refunded was income
from other sources taxable under s. 12 of the Act and the
appellants were therefore not entitled to the benefit of s.
25(4) of the Act. In dealing with the nature of the tax the
learned Chief Justice said:-
.lm15
“Clearly the view of the Legislature was that this income
should be treated as a statutory income with the
consequences that must necessarily follow by reason of its
being a statutory income.”
It was argued on behalf of the appellants that the amount
refunded was income, profits and gains from business and
fell under s. 10 of the Act and was therefore exempt under
s. 25(4) of the Act. For the determination of this question
it is necessary to refer to the relevant provisions of the
Excess Profits Tax Act, 1940, and the Finance Act, 1946.
Section 12(1) of the Excess Profits Tax Act was as follows:-
136
.lm15
S….12(1) “The amount of the excess profits tax payable in
respect of a business for any chargeable accounting period
diminished by any amount allowable by way of relief under
the provisions of section 11 or section 11-A shall, in
computing for the purposes of income-tax or super tax the
profits and gains of that business, be allowed to be
deducted as an expense incurred in that period.”,
The relevant part of s. 11(11) of the Indian Finance Act,
1946, provided:–
“Any sum being excess profits tax repaid in
respect of any chargeable accounting period
under the provision; of section 10 of the
Indian Finance Act, 1942, or of section 2 of
the Excess Profits Tax Ordinance, 1943, shall
be deemed to be income for the purposes of the
Indian Income-tax Act 192 2, and shall,
notwithstanding the provisions of section 34
of that Act, be treated as income of the
previous year which constitutes or includes
the chargeable accounting period in respect of
which the said sum is repayable:
Provided that any such sum repaid in respect
of any profits which are. also assessable to
excess profits tax under the law in force in
the United Kingdom shall be treated, for the
purpose of assessment to income-tax and super
tax, as income of the previous year during.
which the repayment is made.”
It is not necessary to quote s. 10(1) of the Finance Act,
1942, or the relevant provisions of the Excess Profits Tax
Ordinance, 1943. Section 12(1) of the Excess Profits Tax
Act shows that the amount of excess profits tax payable ,in
respect of a business for any chargeable accounting period
was an allowable expenditure. Under s. ll(ll) of the Indian
Finance Act, 1946, any excess profits refunded under the
provisions of Indian Finance Act, 1942, or of s. 2 of the
Excess Profits Tax Ordinance, 1943, were deemed to be income
and were to be treated as income of the previous year which
constituted or which included the chargeable accounting
period in respect of ‘which the said sum was repayable.
Thus the sum repaid was
137
to be treated as income for the purposes of the Act for the
previous year, notwithstanding s. 34 of the Act.
The preamble of the Excess Profits Tax Act shows that the
object of that Act was to impose a tax on profits arising
out of certain businesses. Therefore when any portion of
the tax collected on excess profits tax was refunded under
the provisions of the Finance Act, 1942 or the Excess
Profits Tail, Ordinance,’1943, it necessarily had the same
quality which it had before the amount which was charged
with the payment of tax had under the provisions of those
Acts. In a, judgment of this Court, Mc Gregor. and Balfour
Ltd. v. Commissioner of Income Tax, West Bengal (1), the
amount received as a refund by the assessee was held to be
income for the purpose of the Act and for assessment it was
treated as income of the previous year. After reference in
that case to R. 4(1) of the Rules applicable to oases I and
II of Schedule ‘D’. of the English Income Tax Act, 1918 (8
and 9 Geo. V, c. 40), it was observed
“The object and purpose of the legislation in
each case is the same, and though the two
provisions are not ipsissima verba, they are
substantially in the same words and also in
pari materia.
There can be no doubt that the intention
underlying the two provisions is the same and
the language is substantially similar.”
Thus this Court was of the opinion that the intention of the
legislature ins. 11(14), of the Indian Finance Act, 1946,
which was the section applicable in that case and of R. 4(1)
of the English Income Tax Act was the same. The operative
words of s. 11(11) of the Finance Act, 1946, and of s.
11(14) of that Act are almost identical.
It would, thus appear that the amount of excess profits tax
was an allowable deduction for the purpose of computation of
the business profits of an, assessee under s. 12(1) of the
Excess Profits Tax Act and when it or a portion of it wag
refunded it had to be treated as income of the assessee.
When it was deposited with
138
the Central Government it was a portion of the profits of
the business of the assessee and when it was returned to the
assessee it must be restored to its character of being a
part of the profits of a business. It cannot be said that
its nature changes merely because it is refunded as ‘a
consequence of some provisions in the Finance Act or the
Excess Profits Tax Ordinance. Its nature remains the same.
The effect of the deposit under the Acts above-mentioned,
was as if a slice of the business profit was taken and
deposited with the Central Government Treasury and then when
it was found that a larger amount had been deposited than
was exigible a portion of it was returned. By being put in
a Government Treasury it does not cease to be what it was
before i.e. profits of a business. As we have said it is
significantly clear from the very preamble of the Excess
Profits Tax Act i.e., it was a tax imposed on profits
arising out of certain businesses. An argument was raised
on behalf of the Commissioner that the tax was not paid out
of the profits of the business, but in respect of the
profits. That is immaterial; it was charged, levied and
paid on the amount by which the profits during any
chargeable accounting period exceeded the standard profits.
It would be mere quibbling with words if one were to say
that it was not a slice taken out of the profits of a
business.
In the cage Mc Gregor and Balfour Ltd. v. Commissioner,of
Income Tax (1) this Court quoted with approval the
observation, of the Master of the Rolls in
A. & W. Nesbitt Ltd. v. Mitchell (1) where it was said:-
“But in respect of what is that payment made?
It is not a legacy, it is not a sum which has
fallen from the skies;-it is a sum which is
repaid because there was too large a sum paid
by the company to the revenue authorities over
the whole period ‘during which Excess Profits
Duty was paid, and that sum, means and is
intend to represent a repayment of a sum which
was paid by them in respect of the duty
charged upon the excess profits of their
trading. It comes back,, therefore, not
having lost its character but being still the
repayment of a sum too much, it is true-but a
sum taken
(1) [1959] 36 I.T.R. 65.
(2) (1926) 11 T.C. 211, 217, 218-
139
out of the profits which were made by the
company in the course of its trading, profit,;
which at the time they were made were subject
to income-tax and subject to excess profits
duty, and that is the character of the
repayment that has been made.”
The amount deposited comes back without losing its
character. No doubt the words in the English Rule are
“shall be treated as profits for the year in which the
payment is received”, and in B 11(11) of the Indian Finance
Act, 1946, such sum has to be treated as income of the
previous year but as pointed out by this Court in Balfour
and Mc Gregor case (1), the intention underlying the two
provisions is the same and even the language used in the two
provisions is substantially the same.
Counsel for the Commissioner drew our attention to Kirke’s
Trustees v. Commissioners of Inland Revenue (2), and it was
submitted that the Lord Chancellor held at p. 329 that for
the amount so received the assessment falls to be made under
Case VI of Schedule ‘D’. Lord Shaw of Dunfermline at p. 332
said that the repayment was to be treated as trading profits
for the year of repayment and therefore assessable as such
under Schedule ‘D’. He was also of the opinion that the
charge was to be one under Case VI. Lord Sumner said that
it became a minor matter to decide whether the charge was to
be made under Case I or Case VI but this is little
consolation to the respondent (the Commissioner of Income-
tax) because Case VI was also dealing with taxes in respect
of annual profits and gains which do not fall in one of the
other cases.
In our opinion the amount refunded did not lose its
character which it had before the deposit and therefore it
is an erroneous view to take that the income was assessable
under s. 12 of the Act and not under B. 10. If it was
income falling under s. 10, as in our opinion it was, then
the appellants were entitled to get the benefit of s. 25(4)
of the Act and the amount was not liable to taxation.
The appeals are therefore allowed with costs. One hearing
fee.
Appeals allowed.
(1)..[1959] 36 I.T.R. 65.
(2)..(1926) 11 T.C. 323.
140