MYSORE THERMO ELECTRIC (P.) LTD. VS COMMISSIONER OF INCOME-TAX, 1998 PTD-KARNATAKA-HIGH-COURT-INDIA 841 (1995)

(a) Income-tax---

----Income---Business income---Remission of liability---Refund of excise duty---Liability for taxes kept in separate account and no deduction claimed- Not relevant---Company paying excise duty under protest and keeping separate account for such liability---Deduction not claimed---Refund of excise duty in accounting year relating to assessment year 1983-84---Refund assessable under S.41(1)---Indian Income Tax Act, 1961, SAL

It is not the manner in which the record is presented but the totality of facts of the actual situation which the Court will have to take cognizance of. Even if for business convenience separate accounts are maintained with regard to the payment collection or reimbursement of taxes, if it has come to the notice of the Court that the transaction has in fact taken place, the Court would have to take that aspect of the matter into account. Irrespective of the procedure followed, the tax component forms an integral part of the value of goods. Where a certain amount of payment is made against taxes which undoubtedly qualifies for reduction, when the assessment is completed, it is on the basis that a benefit has accrued. It is this aspect of the matter that the law takes cognizance of. It is in this spirit that section 41(1) of the Income Tax Act, 1961, will have to be interpreted. What the section effectively seeks to check or control is a situation, whereby deductions under the head of payment of tax dues, allowances, etc., which are permissible under the provisions of the Income Tax Act and which consequently, therefore, deplete the overall income for purpose of remission, if subsequently reversed by order of a Court by virtue of refund, confer a benefit on the assessee. This is the clear and unambiguous intent of section 41 and if it is sought to be argued that in cases where because of convenience that head is neither added nor deducted physically at the time when the assessment is finalised, the refund would, therefore, not qualify for addition under section 41(1) it would be directly in conflict with the intention embodied by the Legislature in this section.

In the accounting years relevant to the assessment years 1976-77 ;o 1978-79, the assessee-company was engaged in the manufacture of battery separators. The excise authorities had levied certain dues on the assessees under the head of central excise, holding that they were liable to payment of this levy. According to assessees, they had paid these amounts under dispute and since it was the contention of the authorities that central excise was payable on the goods, they had maintained a separate account for purposes of tendering these payments which in turn they recovered from the dealers to whom they supplied goods. According to the accounting procedure maintained by them, they desired that these amounts should not be mixed with their receipts or costs. This separate account, therefore, did not form part of the balance-sheet or profit and loss account and was maintained as a separate and individual head. The assessees having contested their liability as far as the levy of central excise duty was concerned in the Court, and having been successful in their challenge, the authorities were directed to refund to them the aggregate amount paid under this head which the authorities did, by way of one lump sum repayment totalling Rs.9,11,618 and the refund in question was made during the assessment year 1983-84. The assessees contended that this amount related to a separate account altogether; that they had at no point of time earlier claimed any deductions or allowances in respect of this amount, and hence, the amount was not assessable in their hands.. The assessing authority accepted this position whereas, the Commissioner of Income-tax took the view that the provisions of section 41(1) of the Act would clearly apply and that, consequently, the amount was liable to be included in their taxable income. This was confirmed by the Tribunal. On a reference:

Held, that the Tribunal was justified in holding that the provisions of section 41(1) could be invoked to tax the refunds received during the accounting year relevant to the assessment year 1983-84 even when the part of excise duty was not claimed as expenditure in the profit and loss accounts of earlier years and the applicant had kept a separate account in respect of collection and payment of excise duty.

Motilal Ambaidas v. CIT (1977) 108 ITR 136 (Guj.) fol.

Abdul Quader (R.) & Co. v. STO (1964) 15 STC 403 (SC); B.V. Aswathiah & Bros. v. CIT (1992) 198 ITR 108 (Kar.); Cape Brandy Syndicate v. IRC (1920) 12 TC 358 (KB); Chatturam v. CIT (1947) 15 ITR 302 (FC); Chowringhee (Sales Bureau) (P.) Ltd. v. CIT (1973) 87 ITR 542; (1973) 31 STC 254 (SC); Chowringhee Sales Bureau (P.) Ltd. v. CIT (1977) 110 ITR 385 (Cal.); CIT v. Bharat Iron and Steel Industries (1993) 199 ITR 67 (Guj.); CIT v. Breach Candy Swimming Bath Trust (1955) 27 ITR 279 (Bom.); CIT v. Express Newspapers Ltd. (1964) 53 ITR 250 (SC); CIT v. Jug Sah Muni Lal Sah (1939) 7 ITR 522 (Pat.); CIT v. Kabbur Brothers (1981) 128 ITR 43 (Kar.); CIT v. Kumardhubi Engineering Works Ltd. (1978) 115 ITR 58 (Cal.); CIT v. Lakshmamma (1964) 52 ITR 789 (Mys.); CIT v. Mahaliram Ramjidas (1940) 8 ITR 442 (PC); CIT v. Nathuabhai Desabhai (1981) 130 ITR 238 (MP); CIT v. Poonam Chand Trilok Chand (1976) 105 ITR 618 (All.); CIT (Addl.) v. TI. Nagireddy & Co. (1976) 105 ITR 669 (AP); CIT v. Thirumalaiswamy Naidu & Sons (1984) 147 ITR 657 (Mad.); Fernandez (A.V.) v. State of Kerala (1957) 8 STC 561 (SC); George Oakes (Pvt.) Ltd. v. State of Madras (1961) 12 STC 476 (SC); Gursahai Saigal v. CIT (1963) 48 ITR (SC) 1; Ikrahnandi Coal Co. v. CIT (1968) 69 ITR 488; (1968) 22 STC 229 (Cal.); India United Mills Ltd. v. CEPT (1955) 27 ITR 20 (SC); Indian Motor Transport Co. v. CIT (1978) 114 ITR 677 (All.); Jagatnarain Durga Prasad v. CIT (1970) 76 ITR 214 (All.); Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363; (1971) 28 STC 672 (SC); Kesoram Industries and Cotton Mills Ltd. v. CWT (1966) 59 ITR 767 (SC); Laxmipat Singhanta v. CIT (1969) 72 ITR 291 (SC); Love v. Norman Wright (Builders) Ltd. (1944) 1 All ER 618 (CA); Maharajah of Pithapuram v. CIT (1945) 13 ITR 221 (PC); McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148; (1985) 59 STC 277 (SC); Mohsin Rehman Penkar v. CIT (1948) 16 ITR 183 (Bom.); Murarilal Mahabir Prasad v. Vad (B.R.) (1976) 37 STC 77 (SC); Nalinikant Ambalal Mody v. Narayan Row (S.A.L.), CIT (1966) 61 ITR 428 (SC); Paprika Ltd. v. Board of Trade (1944) 1 All ER 372 (KB); Punjab Distilling Industries Ltd. v. CIT (1959) 35 ITR 519 (SC); Sharma & Co. v. ITO (1972) 86 ITR 741 (All); Sinclair Murray & Co. (P.) Ltd. v. CIT (1974) 97 ITR 615 (SC); Subramanyam (K.G.) v. CIT (1992) 195 ITR 199 (Kar.); T.M.M. Madalai Nadar & Co. v. CIT (1956) 30 ITR 191 (Mad.); Tirunelveli Motor Bus Service Co. (P.) Ltd. v. CIT (1970) 78 ITR 55 (SC) and Union Bank of Bijapur and Sholapur Ltd.: In re (1942) 10 ITR 21 (Bom.) ref.

(b) Income-tax---

----General principles---Form and substance of transaction.

G. Sarangan with S. Parthasarathi for the Assessee.

M.V. Seshachala for the Commissioner.

JUDGMENT

M.F. SALDANHA, J. ---This is a reference under section 256(2) of the Income Tax Act, 1961, wherein the following two points have been referred to this Court for its opinion:

"(1)Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding the sum of Rs.9,11,618 central excise duty refund, can be brought to tax under section 41(1) of the Income Tax Act, 1961?

(2)Whether, on the facts and in the circumstances -of the case, the Appellate Tribunal was justified in holding that the provisions of section 41(1) can be invoked to tax the refunds received during the accounting year relevant to the assessment year 1983-84 even when the part of excise duty was not claimed as expenditure in the profit and loss accounts of earlier years and the applicant had kept a separate account in respect of collection and payment of excise duty?"

The case as given rise to a furious debate on points of law between the two learned Advocates who represent the assessee and the Revenue, the principal reason being that it concerns the interpretation of section 41(1) of the Income Tax Act. It is not for the first time that a relatively large amount has been received by an assessee by way of a refund in a particular assessment year and the tax authorities have sought to invoke the provisions of this section for purposes of treating it as income from business or profession for that year which position has been seriously disputed. The point has been the subject-matter of several decisions some of which we will refer to presently, including earlier decisions of this Court but the situation as often happens renders the decisions slightly inconclusive principally because of the fact that it is rarely that one finds an, absolutely identical set of facts. The learned Advocate, who appears on behalf of the assessee, submits that it is in this background that the reference has come up to this Court and that it cannot be said that the law is conclusive on the point which was why he has reargued the question. We do concede, on the special facts of this case, that there is hardly any parallel in any of the earlier reported decisions rendering that situation as being on all fours with the present one which was why the matter did require a de novo consideration.

The facts of this case are relatively clear but require to be stated briefly for purposes of deciding the issue. The assessees are a company, namely, a manufacturing unit and at the relevant time with which we are concerned, namely, the assessment years 1976-77 to 1978-79 they were manufacturing battery separators. The excise authorities had levied certain dues on the assessees under the head of central excise, holding that they were liable to payment of this levy. According to the assessees, they had paid these amounts under dispute and since it was the contention of the authorities that central excise was payable on the goods they had maintained a separate account for purposes of tendering these payments which in turn they recovered from the dealers to whom they supplied goods. It is their case that this had nothing to do with their trading business or for that matter with the price of the goods or their profits in so far as it was a separate and distinct head of tax payable to the Government in respect of various consignments for which they were reimbursed equivalent amounts when the goods were supplied by them. Therefore, according to the assessees, the exact equivalent of the amounts paid under the head of central excise dues was subsequently reimbursed to them and one amount set the other one and, therefore, as per the accounting procedure maintained by them, they desired that these amounts should not be mixed up with their receipts or costs. This separate account, therefore, did not form part of the balance-sheet or profit and loss account and was maintain as a separate and individual head. There are some small reflections for the three years in question which do find a place in the profit and loss account which are Rs.14J; Rs.76,047 and Rs.12,847 which aggregate to Rs.89,035, but we are not immediately concerned with that aggregate figure. What had subsequently happened was that pursuant to the assessees having contested their liability as far as the levy of central excise was concerned in the Court, and having been successful in their challenge, the authorities were directed to refund to them the aggregate amount paid under this head which the authorities did by way of one lump sum repayment totalling Rs.9,11,618 and the refund in question was made during the assessment year 1983-84. The assessees contended that this amount related to a separate account altogether; that they had at no point of time earlier claimed any deductions or allowances in respect of this amount in so far as it was neither reflected in their profit and loss account or for that matter in the assessments for the years in question and that, consequently, they were not liable to tax as far as this amount goes. The assessing authority accepted this position whereas when the matter went up higher, the Commissioner of Income-tax took the view that the provisions of section 41(1) of the Act would clearly apply and that, consequently, the amount was liable to be included in the taxable heads for that assessment year. The Commissioner relied on a number of judicial decisions principally the case reported in Motilal Ambaidas v. CIT (1977) 108 ITR 136 (Guj), which we will have occasion to refer to in some detail, and, therefore, included the amount as a taxable head. The matter was carried in appeal and the appellate authority confirmed the decision in question. The matter has thereafter come up by way of reference to this Court because, as indicated by us, both the assessee and the Department have canvassed diametrically opposite views and even though there are pronouncements of the different Courts on this point, the contention was that the matter is still capable of a fresh look. It is under these circumstances that we are required to consider the reference in some detail.

Section 41 of the Income Tax Act reads as follows:

"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. "

(We have refrained from reproducing the Explanation and the rest of the section which are not relevant for the purpose of the controversy before us).

The basic submission canvassed by the assessee's learned Advocate is that since the section uses the words "where an allowance or deduction has been made in the assessment for any year in respect of.. . "the first and most necessary ingredient that must be present before section 41(1) is applied is that the allowance or deduction must be reflected in the previous assessment. The argument proceeds on the footing that the Court or authority is required to scrutinise the assessments for the previous assessment years during which the allowance or deduction was in fact allowed and the learned Advocate emphasises two aspects, the first of them being that the allowance or deduction must actually have been made while computing the taxable income in the process of the assessment proceedings and secondly that the assessment records must in fact indicate that such a deduction has taken place during the assessment year as an item. His submission is that undoubtedly the intention behind this provision having been placed on the statute book is that if a party is permitted to reduce the taxable income by a certain percentage on the ground that an allowance or deduction is permissible under the Act such as payment of central excise, etc., the party has already derived a tax benefit during that year and it is, therefore, considered only logical that if the party were to thereafter, receive a refund of this amount which in other words clearly indicates that the amount was not deductible, the same when received as a refund, will have to be added on to the income in the corresponding year when it has been received as otherwise it would create an unfair advantage to the assessee. The learned Advocate draws a distinction between such a situation and the one present before us in this case because he contends that since a separate account was maintained in respect of the various sundry payments under the head of central excise which were paid and thereafter, reimbursed, these did not make any difference to the overall status of the case as far as the computation of the total assessable income was concerned and that consequently there was no question of the first ingredient being present, namely, that the assessee has secured any advantage whatsoever in that assessment year. It is, therefore, argued that if the amount is received as a refund, that there is no question of undoing or off-setting the advantage that was earlier received and in this view of the matter, the operation of the corrective action as contemplated by section 41 of the Act, would not arise. The learned Advocate for the assessee emphasised at great detail that the payment of central excise is a separate component which is in no way connected or inter-related or mixed up with the trading aspect of the assessee and in this view of the matter he submitted that where the law contemplated only a tax on the income or profits, the aspect of assessing a tax refund would be totally foreign. He, however, submitted that this is a larger aspect of the matter which is not before this Court for determination and that, therefore, this Court must necessarily refrain from making any observations or findings in this regard. The learned Advocate relies on a decision of a Division Bench of the Madhya Pradesh High Court in CIT v. Nathuabhai Desabhai (1981) 130 ITR 238, wherein while considering an income-tax reference under section 256(1) of the Act, a contention was raised on behalf of the Department that even if the amount would not come within the ambit of taxation on the points referred by the Tribunal to the High Court the Department was still entitled to justify such a levy on the ground that it is permissible under certain other provisions of the Act. The Division Bench was quick to point out that the jurisdiction of the High Court in a reference is only advisory and that the question of law has to be answered within the ambit of its jurisdiction. In particular, the Court had occasion to observe that the basic frame of the questions posed in the reference cannot be altered nor can the Court embark on an interpretation of the other provisions of the Act to justify the chargeability or otherwise of particular items of income. This proposition of law is well-settled and the assessee's learned Advocate is justified in his request to the Court that the decision must be confined strictly to the two points under reference and we do not propose to enlarge that scope.

The assessee's learned Advocate initially drew our attention to a passage from the Commentary on the Income Tax Act by the well-known authors Kanga and Palkivala and referred to page 720 in the Eighth edition of their book. The learned authors have observed while dealing with this provision which corresponded to section 10(2-A) of the 1922 Act, that subsection (1) fastens a liability only on the assessee who had been granted a deduction, i.e., if the remission or other benefit referred to in the subsection is obtained by the assessee in the course of assessment proceedings that had been completed in an earlier year. The learned authors have emphasised the fact that a liability to tax is created only in cases where an allowance has been actually granted.

The assessee's learned Advocate has placed very heavy reliance on the decision of the Supreme Court reported in Trunelveli Motor Bus Service Co. (P.) Ltd. v. CIT (1970) 78 ITR 55. The Supreme Court had occasion to consider a situation more or less similar to the present one, wherein the assessees were sought to be charged tax in respect of a certain excess amount for which provision had been made for payment of bonus in an earlier year which had in fact not been paid. Though the High Court took the view that section 10(2-A) would apply to this case, the Supreme Court reversed that decision and held that since the Department was not able to identify items as had already been allowed as a deduction in an earlier assessment conclusively, section 10(2-A) was not available for recoupment. The learned Advocate elaborated on his earlier submission and contended that on the basis of this principle, the reference must be answered in favour of the assessee in so far as the admitted position is that this deduction is not reflected in the earlier assessment, and that it would not be available for being added on to tax by virtue of the provisions of section 41(1) of the Act.

The next decision relied on by the learned Advocate for the assessee is the decision of the Allahabad High Court in Sharma & Co. v. ITO (1972) 86ITR 741. The Court had occasion to consider the legal import of section 10(2-A) of the 1922 Act in relation to certain assessment proceeding, and held that unless it was demonstrated that a benefit had accrued to the assessee by virtue of a deduction of the corresponding amount in the earlier assessment years it was not open to the Department to seek to reverse that situation by adding on that amount in a subsequent assessment. Our attention was also invited by the learned Advocate to a decision of the Madras High Court in CIT v. Thirumalaiswamy Naidu & Sons, (1984) 147 ITR 657. The Madras High Court once again while interpreting section 41 of the Income tax Act reiterated the principle while dealing with a case relating to an amount received by way of a subsequent refund that two conditions are necessary the first being that a benefit ought to have been derived in the earlier year by virtue of the deduction and that it is only under these circumstances that the Department would be justified in insisting that the benefit must be undone by way of adding on the corresponding refund amount to taxation. In sum and substance, the assessee's learned Advocate, therefore, contended that the Courts have consistently taken the view that a clear cut interpretation of section 41(1) could lead to only one conclusion, namely, that the basic requirement of that section was a prior deduction in the earlier assessment proceedings without which the provisions of this section cannot be called into operation.

This position has been vehemently disputed by learned counsel who represents the Revenue. The respondent's learned Advocate has placed very strong reliance on the decision of the Gujarat High Court in Motilal Ambaidas v. CIT (1977) 108 ITR 136. We shall refer to this decision in some detail because the appellate authority in this case has relied on it and so had the Tribunal at an earlier point of time. Briefly stated, in that case, a refund of Rs.42,263 was received by way of a refund on the levy of sales tax by the assessee-firm. The firm had followed a similar practice to the one in the present case namely, that when the earlier tax payments had been made by it, these had been on the basis of a separate account which was not reflected in the balance-sheet or profit and loss account of the firm in so far as their contention was that it had nothing to do with their profits or trading liability. The same argument was advanced that in so far as no deduction had been claimed by the firm in the earlier assessment year that it was impermissible to invoke the provisions of section 41(1) in respect of the refund and that consequently it was not amenable to tax. The Gujarat High Court had occasion to examine the law on the point in considerable detail and we are reproducing for ready reference the entire set of cases that the Court had occasion to consider which are as follows:

"Cape Brandy Syndicate v. IRC (1920) 12 TC 358; (1921) 1 KB 64 (KB);

Chatturam v. CIT (1947) 15 ITR 302 (FC);

Chowringhee Sales Bureau (P.) Ltd. v. CIT (1973) 87 ITR 542 (SC);

CIT v. Breach Candy Swimming Bath Trust (1955) 27 ITR 279 (Born.);

CIT v. Express Newspapers Ltd. (1964) 53 ITR 250 (SC);

CIT v. Lashmamma (1964) 52 ITR 789 (Mys);

CIT v. Mahaltram Ramjidas (1940) 8 ITR 442 (PC);

Fernandez (A.V.) v. State of Kerala (1957) 8 STC 561 (SC);

George Oakes (P.) Ltd. v. State of Madras (1961) 12 STC 476 (SC);

Gursahai Saigal v. CIT (1963) 48 ITR (SC) 1;

India United Mills Ltd. v. CEPT (1955) 27 ITR 20 (SC);

Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC);

Kesoram Industries and Cotton Mills Ltd. v. CWT (1966) 59 ITR 767 (SC);

Love v. Norman Wright (Builders) Ltd. (1944) 1 All ER 618 (CA);

Maharajah of Pithapuram v. CIT (1945) 13 ITR 221 (PC);

Mohsin Rehman Penkar v. CIT (1948) 16 ITR 183 (Born.);

Murarilal Mahabir Prasad v. Vad (B.R.) (1976) 37 STC 77 (SC);

Nalinikant Ambalal Mody v. Narayan Row (S.A.L.), CIT (1966) 61 ITR 428 (SC);

Paprika Ltd. v. Board of Trade (1944) 1 All ER 372 (KB);

Punjab Distilling Industries Ltd. v. CIT (1959) 35 ITR 519 (SC);

Sinclair Murray & Co. (P.) Ltd. v. CIT (1974) 97 ITR 615 (SC);

Union Bank of Bijapur and Sholapur Ltd., In re (1942) 10 ITR 21 (Born.).

Income-tax Reference No. 157 of 1974. "

After considering the law on the point in great detail the Court held that one aspect of the matter which was of consequence and which needed to be looked into was that by virtue of not having shown the deductions in the earlier assessment years under the head of payment of tax, the assessee cannot claim that no deduction had been made because the Court would have to proceed on the footing that these amounts ought to have been shown and that they are deemed to have been deducted and if that is the position, then the Court would have to read the provisions of section 41(1) to mean "where an allowance or deduction ought to have been made in the assessment for any year". In the light of this conclusion, the assessee was held liable to tax in respect of that amount. Whereas the respondent's learned Advocate submits that this is virtually the leading case on the point and that it concludes the entire issue, the assessee's learned Advocate has pointed out two things, the first of them being that the Full Bench of the Gujarat High Court in a subsequent decision reported in CIT v. Bharat Iron and Steel Industries (1993) 199 ITR 67 had occasion to reconsider this decision, that the Court had observed that the fiction is an indivisible one and that it cannot be enlarged by importing another fiction. The Full Bench decision indicates that the dispute before the Court was as regards the point of time when the refund was assessable and that as far as the earlier findings in Motilal Amabaidas' case (1977) 108 ITR 136 (Guj) and the scope of section 10(2-A) and the applicability of that section are concerned, the same have remained undisturbed. The assessee's teamed Advocate, however, submitted that the deeming provision of section 41(1) is something that is sacrosannet and that therefore, the Court cannot go beyond what has been clearly provided for by the Legislature by altering it or enlarging its scope. More importantly, the learned Advocate submits that it is impermissible for a Court to change the wording of a section by holding that it should read otherwise. As far as his last submission is concerned, we are considerably in agreement with the learned Advocate in so far as the rules of interpretation of statutes will permit a Court in case of ambiguity to ensure that the legislative intent is not only found out but that it is given effect to but beyond this, the rules do prohibit a Court from rewriting a section.

Another aspect of the matter referred to by the respondent's learned Advocate is that the Court cannot lese sight of the character of the refund amount that is in the hands of the assessee and in this regard, he drew the attention of this Court to a decision of the Supreme Court reported in Chowringhee Sales Bureau (P.) Ltd. v. CIT (1973) 87 ITR 542. In that case, as has happened in the present one, the assessee had maintained a separate account called sales tax collection account and had disputed the payment of certain sales tax items which the assessee had collected and not refunded to its customers and a dispute had arisen as to whether this was a trading or business receipt. The Court held that the amount formed part of its trade or business receipt and that, consequently, it was liable to tax as far as that balance was concerned. The limited reason by the respondent's learned Advocate has relied on this decision is because he contends that irrespective of whether the tax payments were shown as a deduction in the earlier assessment years, they formed an integral part of the trading business of the assessee as has been conclusively held by the Supreme Court and that therefore, the depletion by way of payment of this amount will have to be taken cognizance of by the Court since it has physically occurred and since the assessments have been finalised pursuant to such depletion. The respondent's learned Advocate also relied on an earlier Division Bench decision of this Court in B.V. Aswathiah & Bros. v. CIT (1992) 198 ITR 108, wherein this Court relying on Motilal Ambaidas' case (1977) 108 ITR 136 (Guj) referred to by us (supra) held that the provision of section 41(1) are clearly attracted in cases where there is a refund of -central excise. The respondent's learned Advocate also relied on an earlier Division Bench decision in CIT v. Kabbur Brothers (1981) 128 ITR 43 (Kar). wherein the Division Bench of this Court once again reiterated the position that the refund amount falls within the purview of section 41 as the amount was received by the assessee in its character as a profit and constituted its trading receipt and was includible in computing its total income. The aforesaid conclusion was arrived at by the Court after once again examining the various contentions that have been canvassed at earlier points of time in the following decisions (page 45);

"Abdul Quader (R.) & Co. v. STO (1964) 15 STC 403 (SC);

Chowringhee Sales Bureau (P.) Ltd. v. CIT (1977) 110 ITR 385 (Cal);

CIT v. Kumardhubi Engineering Works Ltd. (1978) 115 ITR 58 (Cal.);

CIT v. Jug Sah Muni Lal Sah (1939) 7 ITR 522 (Patna);

CIT v. Poonam Chand Trilok Chand (1976) 105 ITR 618 (All.);

CIT v. Lakshmamma (1964) 52 ITR 789 (Mys.);

CIT (Addl.) v. Nagireddy (T.) & Co. (1976) 105 1TR 669 (A.P.);

Ikrahnandi Coal Co. v. CIT (1968) 69 ITR 488 (Cal.)-

Indian Motor Transport Co. v. CIT (1978) 114 ITR 677 (All.);

Jagatnarain Durga Prasad v. CIT (1970) 76 ITR 214 (All.);

Kedarnath Jute Mfg: Co. Ltd. v. CIT (1971) 82 ITR 363 (SC);

Laxmipat Singhania v. CIT (1969) 72 ITR 291 (SC);

Madalai Nadar (T.M.M.) & Co. v. CIT (1956) 30 ITR 191 (Mad.);

Motilal Ambaidas v. CIT (1977) 108 ITR 136 (Guj.)".

Reliance was also placed on another decision of this Court in K.G,

Subramanyam v. CIT (1992) 195 ITR 199, while interpreting section 41(1), the Division Bench of this Court emphasised the fact that wherever an allowance or deduction in respect of loss, expenditure or trading liability has in fact taken place, the provisions of section 41(1) would apply it that benefit has thereafter, been offset by way of a refund.

The last decision cited by the respondent's learned Advocate is the case in McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC). The respondent's learned Advocate submitted that there are certain principles which a Court will have to bear in mind while interpreting these provisions and that the Supreme Court has very clearly laid down what precisely these are. The apex Court had occasion to consider several of the English decisions and finally made the following observations in that case which the respondent's learned Advocate relies on strongly. We reproduce the same as these are salutary principles which are required to be taken cognizance of while interpreting these statutes (headnote):

"Tax planning may be legitimate provided it is within the frame work of the law; Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.

There is behind taxation laws as much moral sanction as is behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. The proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it. It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the Court to take stock to determine the nature of the new sophisticated legal devices to avoid tax and to expose the devices for what they really are and to refuse to give judicial, benediction.

By the Court; The evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next, there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is the large hidden loss' to the community by some of the best brains in the country being involved in the perpetual war waged between the tax avoider and its expert team of advisers, lawyers and accountants on one side and the tax gatherer and his, perhaps not so skilful, advisers, on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it'. Last, but not the least, is the ethics of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the artful dodgers'..

As indicated by us earlier the short point that falls for consideration in this case is as to whether despite the factual position that admittedly the earlier assessment orders do not physically reflect the deductions in question in any of the earlier years whether it would still be permissible having regard to the position in law that can be called out from the aforesaid decisions to hold that section 41(1) would apply on these facts. We have very carefully considered the decisions of the various Courts including the earlier Division Bench decisions of this Court and we are of the view that the Courts have consistently laid down one principle and that is the one which would have to guide the Court as far as the interpretation of this section is concerned. That principle basically proceeds on the footing that it is not the manner of accounting that is followed by the assessee but the Court will have to take cognizance of the total situation, and that no delicate hair splitting can be done with regard to the technical wording of the section. In the first instance what the Courts have consistently held is that it is not the manner in which the record is presented but the totality of facts of the actual situation which the Court will have to take cognizance of. We have referred to some of the earlier, decisions where in the Courts have conclusively held that even if for business convenience separate accounts are maintained with regard to the payment, collection or reimbursement of taxes that this would not make any difference in so far as if it has come to the notice of the Court that the transaction has in fact taken place, the Court would have to take that aspect of the matter 'into account. The Courts have very clearly held that irrespective of the procedure followed the tax component forms an integral part of the value of the goods and that, therefore, irrespective of its having been separated for purposes of convenience the Court will have to take notice of that fact that it did form part of the overall receipts as against delivery or sale of those goods. Under these circumstances, irrespective of the manner in which the Gujarat High Court virtually rewrote the section in Motilal's case (1977) 108 ITR 136, the position that obtains and which has been emphasised by the Courts over the years is that where a certain amount of payment is made against taxes and which undoubtedly qualifies for a reduction or deduction, when the assessment is completed, it is on the basis that a benefit has accrued. It is this aspect of the matter that the law takes cognizance of. It is in this spirit that section 41(1) will have to be interpreted. This is very essential in so far as if section 41(1) is sought to be given the narrow technical interpretation which the assessee's learned Advocate has listed upon, the consequences of the same would be not only against the legislative intent but would in fact defeat it. For this purpose, we need to emphasise that a reading of section 41 very clearly indicates that an assessee in certain circumstances cannot get a double benefit. In other words, what the section effectively seeks to check or control is a situation whereby deductions under the head of payment of tax dues, allowances, etc., which are permissible under the provisions of the Income-tax Act and which consequently, therefore, deplete the overall income for purpose of remission if subsequently reversed by order of a Court by virtue of refund confer a benefit on the assessee which is not permissible in so far as but for the deduction in the earlier assessment years that amount would have been added on to tax. It is, therefore, virtually a postponement of that event or in other words, the amount that has in fact been reduced or the benefit gained in the previous year that will have to be necessarily offset. This is the clear and unmbiguous intendment of section 41 and if it is sought to be argued that in cases where because of convenience that head is neither added nor deducted basically at the time when the assessment is finalised, the refund would, therefore, not qualify for addition under section 41(1) it would be directly in conflict with the intention embodied by the Legislature in this section. We need to add here that when the Legislature referred to deductions in respect of assessments it did not only take into account what happened at the time when the officer finalised the assessment order but it took into account the fact that if the assessment order is finalised on the basis of a situation whereby the amount so depleted or deducted is accepted, it would still come within the ambit and scope of the section. In our considered view, this is the only correct way that section 41(1) can be interpreted if the legislative intent is required to be enforced. We have also taken note of the fact that such a view has by and large found favour by various Courts including the two earlier Division Bench decisions of this Court.

Having regard to the aforesaid position in law the reference that has been made to us by the authorities is answered in the affirmative on both counts. The reference is accordingly disposed of.

Before parting with this judgment we desire to place on record our deep appreciation particularly to the learned senior counsel, Sri Sarangan, for the immense research and excellent presentation as also to the Department's learned Advocate, Mr. Seshachala, who has admirably assisted this Court.

M.B.A./1280/FCOrder accordingly.