{"id":10381,"date":"2002-09-06T00:00:00","date_gmt":"2002-09-05T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/polyflex-india-pvt-ltd-vs-commissioner-of-income-tax-on-6-september-2002"},"modified":"2017-12-16T03:04:41","modified_gmt":"2017-12-15T21:34:41","slug":"polyflex-india-pvt-ltd-vs-commissioner-of-income-tax-on-6-september-2002","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/polyflex-india-pvt-ltd-vs-commissioner-of-income-tax-on-6-september-2002","title":{"rendered":"Polyflex (India) Pvt. Ltd vs Commissioner Of Income Tax, … on 6 September, 2002"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Polyflex (India) Pvt. Ltd vs Commissioner Of Income Tax, … on 6 September, 2002<\/div>\n
Bench: S. Rajendra Babu, K.G. Balakrishnan, P. Venkatarama Reddi<\/div>\n
           CASE NO.:\nAppeal (civil)  823 of 2001\n\nPETITIONER:\nPOLYFLEX (INDIA) PVT. LTD.\n\nRESPONDENT:\nCOMMISSIONER OF INCOME TAX, KARNATAKA\n\nDATE OF JUDGMENT: 06\/09\/2002\n\nBENCH:\nS. RAJENDRA BABU & K.G. BALAKRISHNAN & P. VENKATARAMA REDDI\n\nJUDGMENT:\n<\/pre>\n
JUDGMENT<\/p>\n
2002 Supp(2) SCR 123<\/p>\n
The Judgment of the Court was delivered by<\/p>\n
P. VENKATARAMA REDDI, J. In this appeal by Special Leave, the question of
\napplicability of Section 41(1) of the Income Tax Act to the case on hand
\narises for consideration.\n<\/p>\n
For the assessment year 1989-1990, a sum of Rs. 9,64,206 which is the
\namount of excise duty refunded by the department was brought to tax by
\ninvoking Section 41(1) of the Income Tax Act (for short ‘Act’). It appears
\nthat the excise duty was paid in the year 1986. On appeal, the first
\nAppellate Authority as well as CEGAT held that the goods were not liable to
\nduty. On 20.9.1988, the excise duty was refunded. On appeal filed to the
\nHigh Court, it was dismissed. Thereafter, the Excise Department filed SLP
\nin this Court. The fate of the SLP is not known. The appellant contended
\nbefore the first Appellate Authority that there was no remission or
\ncessation of trading liability within the meaning of Section 41(1) so long
\nas the issue was pending determination by the Supreme Court. That
\ncontention was accepted and the appeal was allowed. The appeal filed by the
\nIncome Tax Department against the said order was also dismissed. On a
\nreference application filed by the Commissioner of Income Tax, the Tribunal
\nreferred the following question of law for the opinion of the High Court of
\nKarnataka:\n<\/p>\n
“Whether on the facts and in the circumstances of the case the Tribunal is
\nright in law in holding that excise duty refund is not assessable under
\nSection 41(1) of the I.T. Act.”\n<\/p>\n
The High Court held that the Tribunal was not right in holding that the
\nrefunded amount was not assessable under Section 41(1) of the Act. However,
\nthe High Court observed that the Tribunal may consider the question whether
\nthe excise duty was actually refunded to the assessee or not and pass
\nappropriate orders in the light of its finding. This observation was made
\nafter referring to the argument of the assessee’s counsel that the amount
\nhas not been received by the assessee. In coming to the conclusion that the
\nexcise duty refunded was liable to be taxed under Section 41(1) of the Act,
\nthe High Court relied on the decision of this Court in C\/T. v.
\nThirumalaiswamy Naidu and Sons, 230 ITR 534. This view of the High Court
\nhas been questioned in this appeal.\n<\/p>\n
The learned counsel for the appellant – assessee submits that the ratio of
\ndecision of this Court in Thirumalaswamy Naidu’ case, on which the opinion
\nof the High Court rests, has no application to the present case. As the
\nquestion of liability to pay excise duty on the goods has not been settled
\nfinally during the assessment year in which the refund was obtained,
\nSection 41(1) is not attracted, according to the learned counsel. It is
\ncontended, as was contended before the Appellate Authorities and the High
\nCourt, that there was no cessation of liability as per Section 41(1) as the
\nissue was pending final adjudication and, therefore, the refunded amount
\ndoes not form part of the deemed income of the year 1989-90.\n<\/p>\n
It is true that in Thirumalaiswamy Naidu’s case the question of
\ninterpretation or applicability of any particular limb of Section 41(1) of
\nthe Act did not specifically fall for consideration. However, this Court
\ndid make it clear that when the assessee actually made payment towards
\nstatutory levy (sales tax) and later got back the amount by way of refund
\nas a sequel to the judgment of the High Court, it becomes a revenue receipt
\nand in such a situation, Section 41(1) is clearly attracted. The following
\nare the crucial observations in the judgment:\n<\/p>\n
“The entire amount of sale turnover of the assessee inclusive of the amount
\nof tax collected was clearly includible in the assessee’s taxable income.
\nIf any deduction was given from that income and later the same was refunded
\nback to the assessee, the refund will have the character of revenue
\nreceipt. It has to be treated as a receipt on the revenue account and has
\nto be assessed as such. The position has been placed beyond doubt by the
\nexpress provisions of section 41(1) of the Income-tax Act. ”\n<\/p>\n
(Emphasis supplied)<\/p>\n
Though there is no elaborate discussion as regards applicability of Section
\n41(1) of the Act the Court did refer to and rely on that provision in
\nsupport of its conclusion.\n<\/p>\n
Section 41(1), as it stood at the relevant time reads as follows:\n<\/p>\n
“41(1) Profits chargeable to tax: Where an allowance or deduction has been
\nmade in the assessment for any year in respect of loss, expenditure or
\ntrading liability incurred by the assessee, and subsequently during any
\nprevious year the assessee has obtained, whether in cash or in any other
\nmanner whatsoever, any amount in respect of such loss or expenditure or
\nsome benefit in respect of such trading liability by way of remission or
\ncessation thereof, the amount obtained by him or the value of benefit
\naccruing to him, shall be deemed to be profits and gains of business or
\nprofession and accordingly chargeable to income-tax as the income of that
\nprevious year, whether the business or profession in respect of which the
\nallowance or deduction has been made is in existence in that year or not.”\n<\/p>\n
Section 41(1) applies if the following conditions and circumstances are
\nsatisfied:\n<\/p>\n
In the assessment for the relevant year an allowance or deduction has been
\nmade in respect of any loss, expenditure or trading liability incurred by
\nthe assessee. This is the first step. Corning to the next step the assessee
\nmust have subsequently (i) obtained any amount in respect of such loss or
\nexpenditure or (ii) obtained any benefit in respect of such trading
\nliability by way of remission or cessation thereof. In case either of these
\nevents happen, the deeming provision enacted in the closing part of sub-
\nsection (1) comes into play. Accordingly, the amount obtained by the
\nassessee or the value of benefit accruing to him is deemed to be profits
\nand gains of business or profession and it becomes chargeable to income-tax
\nas the income of that previous year.\n<\/p>\n
We are of the view, apart from what has been laid down in Thirumalaiswamy
\nNaidu’s case (supra), that the ingredients of Section 41(1) are satisfied
\nin the instant case and, therefore, the amount of excise duty refunded
\nbecomes taxable during the year in question. This is a case in which the
\nassessee can be said to have obtained the amount by way of refund in
\nrespect of the business expenditure incurred by it during an earlier year,
\nfor which the assessee had the benefit of deduction or allowance. Normally,
\nthe payment of certain amount to discharge the statutory levy such as sales
\ntax, excise duty in the course of carrying on business is an expenditure.
\nIf authority is needed, we may refer to Kedar Nath Jute Manufacturing Co.
\nv. C.I.T., 82 ITR 363 wherein this Court held that the amount of sales tax
\npaid or payable by the assessee is an expenditure within the meaning of
\nSection 10(ii)(xv) of the Act.\n<\/p>\n
We are inclined to think that in a case where a statutory levy in respect
\nof goods dealt in by the assessee is discharged and subsequently the amount
\npaid is refunded, it is the first clause that more appropriately applies. U
\nwill not be a case of benefit accruing to him on account of cessation or
\nremission of trading liability. U will be a case which squarely falls under
\nthe earlier clause, namely, “obtained any amount in respect of such
\nexpenditure”. In other words, where expenditure is actually incurred by
\nreason of payment of duty on goods and the deduction or allowance had been
\ngiven in the assessment for earlier period, the assessee is liable to
\ndisgorge that benefit as and when he obtains refund of the amount so paid.
\nThe consideration whether there is a possibility of the refund being set at
\nnaught on a future date will not be a relevant consideration. Once the
\nassessee gets back the amount which was claimed and allowed as business
\nexpenditure during the earlier year, the deeming provision in Section 41(1)
\nof the Act comes into play and it is not necessary that the Revenue should
\nawait the verdict of higher Court or Tribunal. If the Court or Tribunal
\nupholds the levy at a later date, the assessee will not be without remedy
\nto get back the relief.\n<\/p>\n
True expenditure and trading liability may be over-lapping concepts, but
\nthe law- makers apparently intended to deal with allied concepts separately
\nand specifically so as to make the provision as comprehensive as possible
\nin order to effectuate the objective underlying the provision. The anatomy
\nof the Section and the collocation of the words employed therein would
\nsuggest that the test of cessation or remission of liability has to be
\napplied vis-a-vis trading liability and it cannot be projected into the
\nprevious clause.\n<\/p>\n
The typical example of remission or cessation of trading liability is to be
\nfound in the recent decision rendered by us in Chief Commissioner of Income
\nTax v. Kesaria Tea Co. Ltd,<\/a> [2002] 3 SCC 684. In that case the assessee
\nmade a provision in the books of account towards purchase tax liability
\nwhich was in dispute. Under the impression that the dispute was finally
\nsettled with the dismissal of SLP in some other case, the assessee thought
\nit fit to reverse the provision made earlier and accordingly ‘wrote back’
\nin its accounts the sums for which the provision was made during earlier
\nyears towards purchase tax. It was sought to be taxed by the Income-tax
\ndepartment treating the same as the income of the year during which such
\nreversal of entries was made. However, the Tribunal (with which the High
\nCourt agreed) held on facts that the issue regarding the exigibility of
\npurchase tax still remained notwithstanding the holding of the High Court
\non a part of the controversy relevant to the issue. Even reassessment
\nproceedings were pending. It was, therefore, held that the liability did
\nnot cease during the year in question. This Court affirmed the view taken
\nby the High Court of Kerala. It may be seen that unlike the present case,
\nthere was no actual refund as no amount towards purchase tax was paid but
\nonly a provision towards liability was made in the books of account.
\nAnother case which is illustrative of the point is the decision of
\nAllahabad High Court in Rameshwar Prasad v. V.K. Arora, 141 1TR 763. In
\nthat case the assessee, who was following the mercantile system of
\naccounting was allowed deduction in respect of its liability towards excise
\nduty. The assessee, however, filed writ petition disputing its liability to
\npay the duty. During the pendency of the writ petition, the excise duty
\namount was deposited with the Court, The writ petition was ultimately
\nallowed and the amount deposited by way of security was refunded to the
\npetitioner. However, that decision of the High Court did not become final
\nas the State went in appeal to the Supreme Court. Therefore, the assessee
\nstill treated the security deposit amount received from the Court as a
\npossible liability and objected to its inclusion in the taxable income
\nunder Section 41 (1). The High Court held as follows:\n<\/p>\n
“The excise duty had been deposited by the petitioner in the court itself
\nand that amount was directed to be refunded to it. The amount, therefore
\nwas refunded to the petitioner by the court and not by the State Govt. It
\nis also not correct for the ITO to state that there is no present liability
\nexisting against the assessee. It is clear, therefore, that since the
\nassessee followed the mercantile system of accounting, it was allowed
\ndeduction in respect of its liability to excise duty. The petitioner
\nchallenged its liability to pay the excise duty and during the pendency of
\nthe writ petition deposited the excise duty in the court. That payment was
\nnot by way of discharge of the liability but was only by way of security
\nand when the writ petition was allowed by the court the amount was refunded
\nto the petitioner. It was not, therefore, a case where an allowance had
\nbeen made in respect of any expenditure incurred by it or reimbursement of
\nthe expenditure subsequently. It was an allowance in respect of a trading
\nliability and in view of the fact that the decision of this court has not
\nbecome final and is the subject-matter of appeals before the Supreme Court,
\nthere has been no remission or cessation of the liability so as to attract
\ns.41 (1) of the Act”\n<\/p>\n
The High Court correctly appreciated the scope of Section 41 (I) and
\napplied the second limb of the sub-section to the fact situation. It may be
\nnoted that assessee did neither pay the excise duty to the Government nor
\ndid it get refund of duty from the concerned authority. Notwithstanding the
\nHigh Court ‘s judgment in favour of the petitioner, the stage had not yet
\nreached when it can be said that the liability for which allowance was
\ngiven earlier ceased. The view taken by the High Court in substance is that
\nthe benefit in respect of the trading liability would accrue only when the
\nliability definitely ceased after the termination of the proceedings in the
\nApex Court in favour of the petitioner. This very decision of the Allahabad
\nHigh Court was relied upon by the Tribunal without appreciating the correct
\nratio of decision.\n<\/p>\n
Our attention has been drawn by the learned counsel for the appellant to
\nthe case of Union of India v. J.K. Synthetics Ltd.,<\/a> 199 ITR 14. One of the
\npoints urged before the Court was whether the assessee’s liability towards
\nexcise duty had ceased justifying action under Section 41 (1). This Court,
\nwhile affirming the view taken by the High Court .observed thus:\n<\/p>\n
“So far as the second question is concerned, it is obvious that the
\nliability to tax under section 41 of the Act will depend on the outcome of
\nthe appeal before this court. It is also stated that, as regards another
\npart of the liability, the issue is pending before the Tribunal. It would,
\ntherefore, appear that no cessation of liability can be postulated until
\nthe tribunal has decided the matter”\n<\/p>\n
The relevant facts are not mentioned in the judgment. The question whether
\nthe latter or earlier clause of section 41(1) applies did not arise for
\nconsideration in that case. The decision of the High Court which was the
\nsubject matter of appeal 4n this Court is reported in J.K. Synthetics Ltd.,
\nv. I.T.O., AH 105 ITR 684. From the facts stated therein it appears that
\nthere was no actual payment of duty nor any refund obtained by the
\nassessee. The assessee-company was making provision in the books of account
\nin respect of excise duty payable while disputing the liability to pay
\nduty. Deduction was allowed for various assessment years. The writ petition
\nfiled by the assessee-company contesting the demands relating to excise
\nduty was allowed by the High Court However, the Excise Department preferred
\nLetters Patent Appeal against the order in the writ petition. While so,
\nbased on the decision of the writ petition, the I.T.O. took steps to
\ndisallow the deduction allowed earlier and further disallowed the claim for
\nthe current year. Questioning the addition to the income of the relevant
\nprevious year, the assessee company filed writ petition which was allowed
\nby the High Court. The facts of the case are quite close to Remeshwar
\nPrasad’s case (supra). The following observations in the judgment may be
\nnoted as they clearly reveal the fact situation in that case:\n<\/p>\n
“The company, no doubt, is still resisting the claim of the excise
\nauthorities, but this fact does not debar the company from claiming
\ndeduction on account of the excise duty being demanded from it and for
\nwhich the company had made provision in its books of accounts. The company
\nis following the mercantile system of accounting and it can legitimately
\nclaim deduction in respect of a business liability even if such liability
\nhas not been quantified or paid.”\n<\/p>\n
The High Court then held that the liability of the assessee as regards the
\npayment of excise duty can no t be said to have ceased because the judgment
\nof the Single Judge of the High Court did not attain finality.\n<\/p>\n
Though, the conclusion of the High Court which was affirmed by this Court
\ncannot be legally faulted, we cannot however approve of the following
\nanalysis of the Section occurring in the judgment: “in short, what this
\nprovision means is that if an assesee has been allowed a deduction in the
\ncomputation of its total income of any liability on account of loss or
\nexpenditure and if, subsequently, the liability of the assessee on account
\nof such loss or expenditure is remitted or ceases, that part of the
\nliability which is remitted or ceases shall be treated to be the income of
\nthe assessee of the previous year in which such remission or cessation
\ntakes place.” The High Court proceeded on the assumption that the words
\n‘remission and cessation thereof could be transposed into the first clause
\nwhich speaks of obtaining any amount in respect of loss or expenditure. The
\nHigh Court could have merely said that the trading liability provided for
\nin the books of account and for which deduction was allowed earlier did not
\ncease in view of the pendency of the dispute. Instead, the High Court
\nreferred to the expression “loss or expenditure” occurring in the first
\nlimb’. As the assessee company did not obtain any amount by way of refund
\non excise duty account, the first clause of Section 41(1) will not be
\napplicable; it is only the latter part that applies in which case the
\nremission or cessation of liability would assume importance. However, in
\nthe present case, as discussed above, it is the first clause that squarely
\napplies but not the second one. Whether there was cessation or remission of
\nliability would be an irrelevant line of enquiry here. The correct way of
\nunderstanding Section 41(1) would be to read the latter clause -“some
\nbenefit in respect of such trading liability by way of remission or
\ncessation thereof as a distinct and self-contained provision. To read the
\nphrase “by way of remission or cessation thereof as governing the previous
\nclause as well, i.e. “obtained any amount in respect of such loss or
\nexpenditure”, would be doing violence to the language and structure of the
\nprovision. That apart, the operation of the provision which is designed to
\nhave widest amplitude will get constricted and truncated by reason of such
\ninterpretation. Learned counsel for the appellant has also relied on a
\ndecision of the Gujarat High Court V.T. Audyogik Sahakari Mandi Ltd. v.
\nC.I.T., 242 ITR 627. That decision prima fade supports the appellant. The
\nlearned Judges proceeded on the basis that in all situations falling under
\nsection 41(1) the test whether there was remission or cessation of trading
\nliability has to be applied, and therefore, concluded that even if the
\namount of refund is received, section 41(1) cannot be invoked so long as
\nthere is no final decision on the question of legality of levy. To reach
\nsuch a conclusion, the decision in J. K. Synthetics’s case (supra) and
\nRameshwar Prasad’s case (supra) were relied upon. We have already explained
\nthe ratio of those decisions. Another case on which strong reliance was
\nplaced by the learned Judges is the judgment of the Full Bench in C.I.T. v.
\nBharat Iron and Steel Industries, 199 ITR 67. In the said Full Bench
\ndecision, though the discussion by and large proceeded on right lines, we
\nfind that the actual decision reached in the concluding para is based on a
\nwrong interpretation of the provision. The Full Bench was of the view that
\nthe assessee’s claim for refund of excise duty was in jeopardy in view of
\nthe pending revisional proceeding although the assessee obtained refund.
\nThe assessee received the refund of excise duty on 8.8.1975. The High Court
\ntook the view that the assessee obtained the refund only on 30.4.1976 when
\nthe proposed revision was withdrawn. It was therefore held that the
\nrefunded amount became includible in the assessee’ s total income for the
\nassessment year 1976-1977 under section 41(1) of the Act, but not for the
\nassessment year 1974-1975. The expression obtained any amount’ was
\nvirtually given an interpretation which is contrary to its plain meaning.
\nHowever, it must be noted that the High Court rightly avoided reference to
\nthe expression’ remission or cessation thereof.\n<\/p>\n
With respect, we are unable to accept the view taken by Gujarat High Court
\nin the two decisions afore- mentioned as correct.\n<\/p>\n
The decision of Karnataka High Court in K.G. Subramanyam v. C.l.T., 195 ITR
\n199 is quite apposite in the context of present case. The State of
\nKarnataka levied ‘litre fee’ which is in the nature of a duty of excise.
\nThe levy was challenged by the assessee. Pending such challenge, the
\nassessee paid the litre fee which was allowed as deduction while computing
\nthe assessee’ s income. Later on the levy of litre fee was declared as
\nunconstitutional and the fee collected was refunded to the assessee.
\nRelying on Section 41 (1), the refunded amount was subjected to tax
\ntreating it as income of the year during which refund was obtained. The
\nTribunal and the High Court held that Section 41 (I) was attracted and the
\nRevenue was well justified in assessing the same. The High Court held that
\nthe payment in discharge of statutory liability incurred while earning the
\nincome is an expenditure and even if it is possible in some cases that such
\npayment is liable to be excluded from the income as a liability incurred in
\nthe course of trade, it does not detract from its character as expenditure.
\nIt was, therefore, held, “We have no hesitation that the deduction given to
\nthe assessee in respect of the litre fee paid by him was by way of an
\nexpenditure, therefore, the amounts refunded on the levy being held
\nunconstitutional were the amounts received by him in respect of the said
\nexpenditure and such receipts are liable to be taxed under section 41 (1)”
\nThe High Court observed that on the facts of that case, the question of
\ncessation or remission of liability did not arise for consideration at all.
\nWe are in agreement with the view expressed by the Karnataka High Court.\n<\/p>\n
In the light of the above discussion we find no merit in the appeal, though
\nwe must say that the order under appeal is cryptic and the short reasoning
\nrecorded therein is inaccurate. The appeal is dismissed without costs.<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Polyflex (India) Pvt. Ltd vs Commissioner Of Income Tax, … on 6 September, 2002 Bench: S. Rajendra Babu, K.G. Balakrishnan, P. Venkatarama Reddi CASE NO.: Appeal (civil) 823 of 2001 PETITIONER: POLYFLEX (INDIA) PVT. LTD. RESPONDENT: COMMISSIONER OF INCOME TAX, KARNATAKA DATE OF JUDGMENT: 06\/09\/2002 BENCH: S. RAJENDRA BABU & K.G. […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-10381","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nPolyflex (India) Pvt. 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