K.S. Hegde, J.
1. At the instance of Commissioner of Income-tax, Mysore, Bangalore, the Income-tax Appellate Tribunal, Hyderabad Bench, in I.T.A. No. 5488 of 1958-59 on its file, referred to this court the question 'whether the sum of Rs. 1,87,630 is, by is nature, taxable sum under the Indian Income-tax Act, 1922?' under section 66(1) of the Indian Income-tax Act, 1922 (to be referred to hereinafter as the 'Act').
2. It would be appropriate to recast this question as follow :
'Whether on the facts and circumstances of this case the sum of Rs. 1,87,630 refunded by the Government to the assessee by adjustment is, by its nature, a taxable sum under the Indian Income-tax Act, 1922?'
3. The relevant facts as found by the Tribunal and set out in the statement of the case and the fuller statement of the case submitted to this court are as follow :
The assessee was an excise contractor. He had liquor shops at Mahabubnagar, Macherala, Raichur and Narayanpettah. The kist due from him for Faslis 1357 and 1358 was O.S. 10,75,629. Out of this amount, the assessee paid O.S. 9,81,308 and claimed deduction of the same as revenue expenditure in the assessment years 1949-50 and 1950-51. Because of the Razakar troubles and the police action in the then Hyderabad State at the material time, the assessee could not tap all the trees allotted to him. On representation by the assessee, the Government agreed to refund a portion of the kist paid. The assessee claimed O.S. 4,26,122 as being refundable to him. The Government determined the refund due at O.S. 3,19,541. The refund order was passed in June, 1953. Out of this amount O.S. 1,00,689 was set off towards the amount due from the assessee (according to the assessee, it was only O.S. 94,384). The balance of O.S. 2,18,852 (the rupee equivalent being Rs. 1,87,577) was adjusted towards the kist due from the assessee for the months of June and July, 1953. The assessee credited this amount in his accounts which were maintained on cash-credit basis.
4. Now the question for decision is whether this amount of Rs. 1,87,630 is a taxable sum under the 'Act'? If that sum can be considered as a trading receipt, then the same will be liable to tax. But, on the other hand, if it is considered as a casual receipt, it will be exempt from taxation. While deciding the question referred to us, we must remember the fact that the sum paid as excise kist had been deducted as revenue expenditure in the relevant assessment years. It must also be remembered that this is not a case of remission but one of refund and the amount refunded was taken as a credit entry in the assessee's accounts maintained on cash-credit basis, for the assessment year 1954-55.
5. A case that bears on the question of law under consideration came up before a Bench of the Bombay High Court in Union Bank of Bijapur and Sholapur Limited, In re. In that case the assessee bank claimed in the assessment year 1955-56, under 10(2)(ix) of the 'Act' a certain amount as loss by reason of embezzlement on the part of an employee and the income-tax authorities treating it as a business loss allowed it to be set off against the profits; in the accounting year 1937-38, the assessee recovered from the heirs of the employee a sum of Rs. 8,790 from the amount embezzled and the income-tax authorities, after deducting the law charges and certain other deductions from Rs. 8,790 included a sum of Rs. 4,737 in the total income of the assessee for the assessment year 1938-39 on the ground that the assessee having treated the loss as a revenue loss and obtained relief on that basis, any recovery made in respect of that loss must be regarded as a revenue gain as and when it occurred. When that question was referred to the High Court, the High Court held that in the circumstances of that case, the sum of Rs. 4,737, out of the sum of Rs. 8,790 recovered from the heirs of the employee being part of the amount embezzled by the assessee's employee the same was a revenue gain and was assessable to tax as part of the total income of the assessee for the assessment year 1938-39. Though the judgment of the court is very brief one, the principle underlying the decision appears to be that the assessee having treated the loss as a revenue loss and obtained relief on that basis cannot later turn round and say that the receipt is not a revenue receipt when that amount or a portion thereof is recouped.
6. The decision of the Patna High Court in Sheik Rahamat Ali v. Commissioner of Income-tax does, in our opinion, completely cover the point under discussion. Therein, the assessee who was an excise contractor, deducted from profits of his business, some out-goings including the licence fee of Rs. 2,47,560 during the assessment year 1947-48. The deduction claimed in this regard was allowed, while computing his income, profits and gains for the year in question. But during the accounting year ending March 31, 1950, the assessee received back a sum of Rs. 26,328 from the Government, on his representation that during the accounting year ending March 31, 1947 (assessment year 1947-48 referred to above), certain liquor shops of his were closed on account of communal riots. This amount was received in the accounting year 1949-50. This amount represented a part of the licence fee paid by the assessee during the said year. In the assessment year 1950-51, the Income-tax Officer included that amount as revenue receipt. The question for decision wa :
'Whether on the facts and circumstances of the case, the receipt of Rs. 26,328 by the assessee in the accounting year 1949-50 out of the licence fee paid during the accounting year 1946-47 is a capital receipt or taxable income?'
7. The court held that that amount is a revenue receipt and, therefore, liable to be taxed.
8. It is not clear that judgment whether the assessee was maintaining accounts on the mercantile basis or on cash-credit basis.
9. In the case before us, as mentioned earlier, there is the additional circumstance that the assessee's accounts were maintained on cash credit basis.
10. We may next refer to the decision of the Madras High Court in A. Gajapathi Naidu v. Commissioner of Income-tax. Therein, the assessee, who owned a bakery and a provision shop and ran a restaurant, during the accounting year ending March 31, 1949, supplied bread to a Government hospital on contract at certain rates; as the rates were found to be uneconomical, representations were made to the Government after the close of the year; in November, 1950, the Government passed an order directing payment of compensation for the loss sustained by the assessee in the supply of bread in the year ending March, 31, 1949; the assessee submitted a bill in December, 1950, and received a sum of Rs. 12,447 in the accounting year relevant to the assessment year 1951-52; the department sought to include this amount as income taxable for the assessment year 1951-52, but the assessee contend : (i) that the receipt was in the nature of a windfall and (ii) that, since his accounts were maintained in the mercantile system, the receipt related to the accounting year ending March 31, 1949, and hence the same could not be included in the assessment for the year 1951-52. The court held, (i) that although the payment of Rs. 12,447 was an act of grace on the part of the Government, it was directly related to the business of the assessee and the receipt was one arising out of his business; and, therefore, the receipt was not of a casual nature but was a trade receipt liable to tax; and (ii) that the payment was made with the specific object of compensating the loss which the assessee sustained in the supply of bread during the accounting year and relief was based on the quantity supplied during that year by increasing the rate per loaf of bread; the relief was definitely referable to a trading contract, even though the payment was not the result of any contract but was the outcome of a unilateral act of the Government exgratia, it was analogous to the payment of a trade debt. The court held that the principle of the decision in Severne v. Dadswell applied to the facts of the case. Therefore it was held that the assessee's accounts for the accounting year ending March 31, 1949, had to be reopened and the receipt credited therein. According to their Lordships the receipt had properly to go in to the year of transaction, viz., the accounting year ending March 31, 1949, and that the department had no option in the matter. They held that the amount could not be included in the assessment for the year 1951-52. With this second answer we are not concerned in this case.
11. Some assistance may be taken from the decision of the King's Bench in A.W. Nesbitt Ltd. v. Mitchell. Therein, the appellant company having sustained having losses in the accounting period, 1st May to 24th November, 1920 (on which date it went into liquidation and ceased trading) became entitled to repayment of the whole of the excess profits duty paid by it for the four years ended the 30th April, 1919; the excess profits duty applicable to each year had been deducted from the profits of that year for the purpose of arriving at the company's income-tax liability on a three years' average basis for the years 1917-18, 1918-19, 1919-20 and 1920-21. The King's Bench held that the company had been rightly assessed to income-tax in respect of the excess profits duty repayment. Dealing with the point in controversy, this is what Lord Hanworth M.R. observed at page 21 :
'What happened in this case is this. The company, A.W. Nesbitt, Limited, traded and they became liable to pay excess profits duty, and it appears that they paid that excess profits duty over a period and the amount that they paid was taken into account in the assessment for income-tax over a period of years. But on the 25th November, 1920, the appellant company went into liquidation and thereupon ceased to trade; so that for a period of approaching six years the company has not been trading at all. It has been found possible by the liquidator to make a demand for repayment of the excess profits duty under section 38, sub-section (3), of the Act of 1915, and a sum of Rs. 63,009 was repaid to the appellant company on the 22nd April, 1924.
That sum having been repaid, is it to be the subject of taxation to income-tax? It is said on behalf of the company that at the time when it was received it formed no part of the profits, for the company were not trading and had not been trading for four years. It is said also that if one is to treat this as a repayment and to consider it as liable to income-tax, it works some hardship, because as a matter of fact the company enjoyed only a certain portion of their right to deduct the excess profits duty that they paid, because that was averaged over some years and not a sufficient number of years to give them the full immunity to which they were entitled. That may be so; I do not say that it is and I do not inquire too closely into what is the pounds, shillings and pence of the case. What we have to do is to take the fact that Rs. 63,009 has been repaid to a liquidator in the year 1924, at a time when the company is not carrying on its business. 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 intended 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 out of the profits which were made by the company in the course of its trading, profits 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...'
12. Though the above observations are apposite for our present purpose, it must be stated that the question turned on the interpretation of the relevant English statute.
13. The decision in Gray v. Lord Penrhyn also supports the revenue. The facts of that case as set out in the decision are as follow :
'In 1934 it was discovered that officials employed at a slate quarry owned by Lord Penrhyn (the respondent therein) had misappropriated money from 1928 to 1934 by falsifying the wages accounts. The respondent's auditors admitted negligence on the part of their staff in not making certain enquiries and paid over to him in November, 1934, a sum equal to the amount misappropriated since their first audit after the defalcations commenced. The amount so paid was credited in the quarry accounts for the year ended 31st December, 1934, as to part as recovery in respect of wages defalcations for all years to 31st December, 1933, and as to the balance by reducing the wages debit for 1934, by the amount misappropriated in that year.
The respondent was assessee to income-tax under Schedule D for the year 1935-36, in respect of the profits of the quarry in a sum which included the full amount received from his auditors, and, on an alternative basis, additional assessments were raised on him for the years 1930-31 to 1934-35 inclusive to disallow that part of the deductions allowed for wages which represented misappropriations in those years.'
14. The court held that the whole amount paid by the auditors was a trading receipt of the respondent to be taken into account in the computation of the assessment for the year 1935-36. Therein, there was no dispute that the amount paid by the auditors was a trading receipt but the only controversy was whether it should be credited towards the income, profits and gains of the accounting years 1930-31 to 1934-35 or of the year 1935-36. Finlay J. who delivered the judgment of the King's Bench in that case in the course of his judgment observe :
'The substance of the view which I take here is that this was simply a business payment and a business receipt. I put to Mr. Talbot, who so skilfully argued the case for Lord Penrhyn here, the question whether the Rs. 5,000 odd paid by the chartered accountants would form, except so far as it was covered by insurance, a good deduction from their profits, and he frankly said, as I anticipated indeed that he would, that certainly it would form a good deduction simply because it was an outgoing of the business.
It seems to me that, looking at it from the point of view of the recipient, it is equally a business receipt, something which comes in the course of the business. The substance of my view can be quite consciously put by saying that I think that there is a strong presumption that the two things, so to speak, balance; that is to say, looking at it first from the point of view of Lord Penrhyn, that since as an outgoing to these fraudulent people it was allowed, so, when that outgoing is made good, the thing ought to be cancelled out and that ought to be done, if not by the reopening of previous years, then, as I prefer because it is simpler, by the bringing in of the receipt when it comes in. Looked at from the point of view of chartered accountants and Lord Penrhyn, it seems to me that as the sum is an outgoing of the chartered accountants, so, looking at it from the other side, it is a receipt on the part of Lord Penrhyn.'
15. The learned counsel for the revenue tried to take support from the decision of the Supreme Court in McGregor and Balfour Ltd. v. Commissioner of Income-tax. But that decision turned on the interpretation of section 11(14) of the Finance Act, 1946. During the relevant period we had no provision similar to the said section 11(14). Hence, no assistance can be taken from that decision.
16. Sri Srinivasan, the learned counsel for the assessee, strenuously contendd that till the introduction of section 10(2A), which was introduced into the 'Act' on April 1, 1955, the revenue was not entitled to levy tax on receipts similar to the one that is under consideration. According to him, it is for that reason Parliament thought it necessary to amend the 'Act' and introduce section 10(2A) which say :
'Where for the purpose of computing profits or gains under this section, an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee and, subsequently during any previous year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or has obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the amount received by him or the value of the benefit accruing to him shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen during that previous year.'
17. It is true that in the view of section 10(2A), at present, there is no room for controversy as regards receipts similar to the one that we are considering in this case. At present it is immaterial whether there is remission or refund or whether the system of accounting adopted by the assessee is the cash-credit system or the mercantile system. But, that is not the case herein. In this case the revenue cannot have the benefit of section 10(2A). Here we are concerned with the law as it stood during the relevant assessment year. From the decided cases, earlier noticed, it is seen that receipts similar to the receipt with which we are concerned in this case were held to be exigible to tax even before section 10(2A) was introduced into the 'Act'. Why then the legislature introduced section 10(2A)? That section, as contended on behalf of the assessee, cannot be considered as a legislative superfluity. It was strenuously urged that if the legislature thought fit to amend the 'Act' and introduce section 10(2A) it means that up-till then, there was no power to tax receipts similar to the one with which we are concerned in this case. On the other hand, it was urged on behalf of the revenue that the amendment in question was necessitated by certain decisions rendered by some of the High Courts, which dealt with the effect of remissions, but while amending the law, the legislature thought it desirable to cover the the whole field. Therefore, it was said that while section 10(2A) is an amendment in so far it deals with remission and methods of accounting are concerned, it is a mere declaration of the law in the case of refunds. Let us now examine the correctness of these rival submissions.
18. In Mohsin Rehman Penkar v. Commissioner of Income-tax the court was called upon to consider the effect of maintaining accounts accordingly to the mercantile system of accounts-keeping. In that case, the assessee mortgaged certain properties to secure payment of Rs. 17,500 found due and owing to his mortgagee; the assessee kept his accounts on accrual basis and in the returns submitted by him from 1932 onwards he claimed, as a permissible deduction, interest which was payable by him on this sum of Rs. 17,500 and those deduction were allowed to him by the income-tax department; the total amount due to the mortgagee on the foot of the mortgage was found to be Rs. 29,059-6-6; in the accounting year the assessee paid a sum of Rs. 15,000 to the mortgagee who accepted that amount in full settlement of his claim against the assessee; in other words the mortgagee remitted the balance of Rs. 14,059-6-6 and gave up his claim for that amount. The question was whether Rs. 14,059-6-6 remitted was assessable to tax? The court held that once the income-tax department accepts the mercantile system of accounts-keeping and taxes an assessee on the accrual and not on the payment basis, the department is not concerned as to how the liability incurred by the assessee is in fact discharged; he may discharge that liability by actual payment or he may discharge it by getting a remission from him creditor; but that is a question entirely for the debtor to determine; a mere remission which leads to the discharge of the liability of the debtor can never become income for the purpose of taxation. It may be noticed that in this case there was a remission and not a refund. Secondly, the system of accounts adopted and accepted by the taxing authorities in that case was the mercantile system of accounting. Therefore, this decision can be of no assistance in deciding the question referred to us. But, this decision and some other decisions to which reference will be made presently did hold that if there is only a remission and the assessee has been maintaining accounts according to the mercantile system of accounting, the taxing authorities could not levy tax on the sums remitted during the subsequent years.
19. The next decision read to us on behalf of the assessee is the one in Agarchand Chunnilal v. Commissioner of Income-tax. In that case, the assessee who was heavily indebted to a creditor was granted a remission of certain amount of the debt by the creditor during the accounting year; in the previous years the assessee had been allowed to deduct the interest paid on this debt from his profits for purposes of income-tax; the question was whether this remission could be treated as a revenue receipt. The court held following the decision in Mohsin Rehman Penkar's case that in the circumstances of the case that the amount of remission of debt granted by the creditor to the debtor could not be treated as a revenue receipt of the year of account. This decision also does not advance the case of the assessee.
20. Then we come to the decision in Orient Corporation, Bombay. Therein the assessee, who kept his accounts on the mercantile basis, incurred a loss in forward share dealings which was allowed to be deducted by the income-tax authorities from the business receipts of that year; in the subsequent year the assessee settled this liability by paying a certain sum and the creditor agreed to forego his claim for the balance; the income-tax authorities treated the sum remitted by the creditor as income of the assessee liable to tax. The court held that it could not be said that the sum remitted by the creditor had been received by the assessee as income and it was not, therefore, liable to income-tax. This decision followed the decision in Mohsin Rehman Penkar's case and the decision in Agarchand Chunnilal's case referred to earlier. The learned Chief Justice who delivered the judgment of the court distinguished the decision of that very High Court in Union Bank of Bijapur and Sholapur's case thu : 'That was a decision of Sir John Beaumont, and in that case the bank claimed a certain amount as loss by reason of embezzlement on the part of an employee and the loss claimed was allowed. In a subsequent year the bank recovered a portion of the sum embezzled and the income-tax authorities included the net sum realised thereby in the total income of the assessee for that year urging that the assessee having treated the loss as a revenue loss and obtained relief on that basis, any recovery made in respect of that loss must be regarded as a revenue gain as and when it occurred. Sir John Beaumont accepted that contention stating that the assessee having alleged that the embezzlement was an embezzlement of income, which could properly be set off against income in a previous year, could not affirm in another year that it was not income and that a recovery in respect of it was casual appreciation of capital. Now it will be noticed that in the case before Sir John Beaumont the assessee actually received part of the money embezzled. His contention was that it was a capital accretion and not income. But as what was embezzled was part of the income and some of that part came back to the assessee, it could not possibly change its complexion and become capital accretion. The case, therefore, before Sir John Beaumont is clearly distinguishable and all that the learned Chief Justice laid down there was that it a part of the income is lost, and subsequently it comes back to the assessee, it is liable to be taxed.
21. In the case before us it cannot be said that the sum of Rs. 16,544 which is remitted by the creditor has been received by the assessee as income which is liable to tax.'
22. This decision clearly brings out the distinction between the line of cases, Union Bank of Bijapur and Sholapur, In re, Gajapathi Naidu v. Commissioner of Income-tax, Sheikh Rehmat Ali v. Commissioner of Income-tax and Mohsin Rehman Penkar v. Commissioner of Income-tax, Agarchand Chunnilal v. Commissioner of Income-tax, Orient Corporation, Bombay v. Commissioner of Income-tax. In the former class of cases there were receipts actual or constructive. In the latter class of cases there were no receipts and only remissions.
23. The learned counsel for the assessee next read to us the decision in T.M.M. Madalai Nadar & Co. v. Commissioner of Income-tax and Excess Profits Tax. In that case, the assessee firm, which maintained its accounts on the mercantile basis, imported are counts from the Travancore State which were subject to excise duty of the Travancore State and of the Government of India; in the accounting year 16th August, 1944, to 16th August, 1945, the assessee paid sums of excise duty to the Government of India amounting to Rs. 36,094 and debited its accounts with those payments; on December 29, 1944, the Government of India, by certain executive instructions, directed the excise authorities not to enforce payment of excise duty on are counts imported from Travancore and on June 2, 1945, directed them to refund such excise duty paid by the traders; on November 27, 1945, and November 17, 1946 (viz., in the succeeding accounting year of the assessee) certain amounts were ordered to be refunded to the assessee; these amounts included Rs. 36,094 which the assessee had paid in his accounting year 1944-45; the department included this amount in the assessee's income for 1944-45 though there were no credit entries in its accounts for that year; the Tribunal, on appeal, confirmed the assessment holding that the assessee had acquired a right to refund of the duties on the dates of the executive instructions and that they were debts due from the Government. On a reference, it was held that the excise duty of Rs. 36,094 was lawfully imposed under a valid enactment and the direction to refund the duty so collected was a remission of tax; the assessee did not acquire any legally enforceable right against the Government under the executive instructions at any time during the year of account; nor could the remission of tax be treated as a debt payable by the Government to the assessee or as something analogous to a trade debt; therefore, there was no ascertained liability of the Government to pay the amount to the assessee on the basis of which the assessee should have, in the normal course of maintaining his accounts, credited himself with that amount and that, therefore, the amount should not be included in the income of the assessee for the year of accounts. We fail to see what assistance the assessee can take from this decision. That decision dealt with the question whether exgratia payment order but not paid, should be taken as a receipt in the year of accounting.
24. The last case read to us by the learned counsel for the assessee is that of the House of Lords in British Mexican Petroleum Company Limited v. Jackson. Briefly stated the facts of that case are as follow : In 1919 the appellant company entered into a contract with an oil-producing company for the purchase of petroleum for a minimum period of twenty years; the appellant company was adversely affected by the slump in the petroleum business in 1921 and was unable to meet its liability under the contract for oil supplied etc.; accounts of the appellant company's business were made up for the year ended the 30th June, 1921, and for the eighteen months ended the 31st December, 1922; at the 30th June, 1921, the agreed amount owing to the oil-producing company under the contract was Pounds 1,073,281; at the 30th September, 1921, the amounts was Pounds 1,270,232; under the terms of an agreement dated the 25th November, 1921, the appellant company paid to the producing company the sum of Pounds 325,000 was released by the producing company from its liability to pay the balance remaining due, viz., Pounds 945,232; the amount so released was carried direct to the appellant company's balance-sheet and was shown as a separate item under the head 'reserve' at the 31st December, 1922; the Crown contended that the amount released should be brought into account in computing the appellant company's profits for purposes of income-tax and corporation profits tax, either in the account for the eighteen months to the 31st December, 1922, or, alternatively, in the account for the year to the 30th June, 1921, that account being re-opened for the purpose; the Special Commissioners held that the amount released should be brought into the profit and loss account of the company for the eighteen months to the 31st December, 1922.
25. The House of Lords held that the amount remitted should not be included as a receipt in the account for the eighteen months to the 31st December, 1922, and that the account for the year to the 30th June, 1921, should not be reopened and adjusted by reference to the remission.
26. This decision lays down the very principle enunciated by the Bombay High Court in Mohsin Rehman Penkar's case. We have earlier seen how that case is distinguishable from the facts of the present case.
27. In our judgment, none of the decisions cited by Sri Srinivasan, the learned counsel for the assessee, is apposite for our present purpose. They deal with a different branch of the law.
28. Now we can easily find out the reason for enacting section 10(2A) of the 'Act'. Evidently, the legislature wanted to get over the effect of the decision in Mohsin Rehman Penkar's case and the cases that followed it. At that stage, evidently, it was thought advisable to make the provision self-contained by bringing within its ambit the amounts refunded as well as those remitted and at the same time remove the difficulties created by the two systems of accounts-keeping permitted by law.
29. Therefore, we have to hold that section 10(2A) in so far as it covers cases similar to the one before us did not introduce any new principle of law; either it is declaratory in character or it is a measure introduced out of abundant caution.
30. For the reasons mentioned above, our answer to the question referred to us in the affirmative and in favour of the revenue. In other words, we are of the opinion that the sum of Rs. 1,87,630 mentioned in the question referred to by its very nature is a taxable sum under the 'Act'.
31. Assessee to pay the costs. Advocates' fee Rs. 250.
32. Question answered in the affirmative.