D.R. Desai Vs. Thirteenth Income-tax Officer - Court Judgment

Excerpt:
1. this is an appeal by the assessee against an order of the commissioner of income-tax (appeals )-xix, bombay, pertaining to the assessment year 1984-85.2. the grievance of the assessee is that the commissioner of income-tax (appeals) erred in confirming the inclusion of rs. 10,99,024 in the income of assessee. on the basis of excise duty refund received by the assessee.3. the assessee was sanctioned, during the assessment year under consideration, refund of rs. 10,24,652 by the central excise department, bombay, vide letter dated december 20, 1982, which was encashed by the assessee. in addition to this amount, he also received another refund of rs. 74,371 during the year, which makes up to a total of rs. 10,99,024 received by the assessee in the entire year as refund from the excise.....

Judgment:
1. This is an appeal by the assessee against an order of the Commissioner of Income-tax (Appeals )-XIX, Bombay, pertaining to the assessment year 1984-85.

2. The grievance of the assessee is that the Commissioner of Income-tax (Appeals) erred in confirming the inclusion of Rs. 10,99,024 in the income of assessee. on the basis of excise duty refund received by the assessee.

3. The assessee was sanctioned, during the assessment year under consideration, refund of Rs. 10,24,652 by the Central Excise Department, Bombay, vide letter dated December 20, 1982, which was encashed by the assessee. In addition to this amount, he also received another refund of Rs. 74,371 during the year, which makes up to a total of Rs. 10,99,024 received by the assessee in the entire year as refund from the Excise Department. The Income-tax Officer observed that the assessee has shown refund of Rs. 10,99,024 as liability in the balance-sheet. On being asked to explain, the assessee has mentioned that he paid excise duty to the Government on the goods supplied to the clients from whom Central excise duty was recovered through the respective sales invoices. It was further submitted that since the items manufactured by the assessee were totally exempt from excise duty, the assessee submitted his claim for refund of excise duty which was granted by the Central Excise authorities. The assessee claimed before the Income-tax Officer that the refund received by him from the Excise Department has to be refunded back to the various customers from whom the assessee has recovered the excise duty. For example, he stated that the assessee had already paid Rs. 35,270 to the various customers and that he undertakes to pay the balance amount to the customers. The Income-tax Officer did not agree with the contention of the assessee on the ground that the assessee received the refund as a revenue receipt in the year under consideration, whereas the same is refunded to the customers in the subsequent year. The assessee's claim that the refund received during the year is repayable to the customers and hence, the same is exempt was also not accepted by the Income-tax Officer. On appeal, the Commissioner of Income-tax (Appeals) also rejected the contention of the assessee following the decisions of the Supreme Court in the cases of Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542 and Sinclair Murray and Co. P. Ltd. v. CIT [1974] 97 ITR 615. He treated the excise duty realised as income, chargeable to tax under Section 41(1) of the Act. He placed reliance on the decision of the Calcutta High Court in the case of CIT v. Partabmull Rameshwar [1977] 107 ITR 526 and on the decision of the Allahabad High Court in the case of CIT v. Bijli Cotton Mills (P.) Ltd. [1970] 76 ITR 625. The Commissioner of Income-tax (Appeals) further observed that the refund of excise duty stands on par with refund of sales tax. The refund of sales tax has been held to be profits chargeable to tax under Section 41(1) of the Income-tax Act, 1961, by the Allahabad High Court in the case CIT v. Taj Gas Service [1980] 122 ITR 1034 and by the Karnataka High Court in the case of CIT v. Kabbur Brothers [1981] 128 ITR 43. He also referred to the decisions of the Calcutta High Court in the case of Ikrahnandi Coal Co. v. CIT [1968] 69 ITR 486 and of the Patna High Court in the case of CIT v. Motipur Sugar Factory P. Ltd. [1985] 154 ITR 259, wherein it was held that sales tax refund received by the assessee and lying undisbursed with the assessee was a trading receipt.

The Commissioner of Income-tax (Appeals) also observed that the assessee, instead of making a debit to the trading and profit and loss account in respect of the expenditure, reduced the trading receipt by excluding from the gross sales, sales tax and excise duty, etc. This, according to the Commissioner of Income-tax (Appeals) tantamounts to excise duty having been allowed as expenditure and once the assessee had got the benefit of deduction, there is no reason to exclude from taxation refund of the same. The Commissioner of Income-tax (Appeals) did not accept the view taken by the Jaipur Bench of the Tribunal in the case of Wolkem Pvt. Ltd, v. ITO, relied upon by counsel for the assessee, and confirmed the action of the Income-tax Officer in treating the refund of excise duty as exigible to tax and adding the same to the income of the assessee for the purposes of assessment. The assessee, aggrieved by the order of the Commissioner of Income-tax (Appeals), has come in appeal before us.

4. Learned counsel for the assessee submitted that the provisions of Section 41(1) are not applicable in the given facts and circumstances of the present case. In this connection, our attention was invited to the provisions of Section 41(1) of the Act and it was pointed out that 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. It was pointed out that in this case when in respect of excise duty no concession or deduction was made in any assessment year, the question of applicability of Section 41(1) does not arise. It was also pointed out that the goods of the assessee were classified under excise tariff item No. 15A(2) and were being cleared without payment of duty as per the approved classification list under the Exemption Notification No. 68 of 1971, dated May 29, 1971, and subsequently the Excise Department took the stand that the items manufactured by the assessee were classifiable under tariff item No. 68 and hence were liable to duty. The assessee was accordingly compelled to pay the excise duty under protest. Thereafter, the assessee preferred an appeal, in which he succeeded and consequently the amount of excise duty of Rs. 10,99,024 paid by him was refunded to him. It was contended that this refunded amount of excise duty was in turn refundable by him to his customers, from whom it was initially collected and out of this a sum of Rs. 35,270 was paid in subsequent years to different customers. Thus, this amount of refund was in the nature of a contingent liability and that is why the assessee has not taken this amount into the trading and profit and loss account. According to him, the refund received by the assessee from the Excise Department was not a payment receivable by him in the course of trading and the same was received purely in a fiscal transaction and there was no business relationship of any kind between the assessee and the Excise Department. This amount was segregated from the sales credited to the trading account and was treated as a contingent deposit. Therefore, this cannot be equated with claiming deduction of excise duty so as to attract the provisions of Section 41(1). According to learned counsel for the assessee, the amount collected by the assessee was merely in the nature of a contingency deposit to safeguard him from financial loss and not excise duty and hence the question of taxability of such amount did not arise. It was submitted that the excise refund was repayable by the assessee to his customers in view of Section 64A of the Sale of Goods Act, according to which the customers of the assessee were entitled to remission of the amount upon the assessee having received the refund, and courts have held against the doctrine of unjust enrichment by achieving restitution to subserve the objective of Section 72 of the Contract Act and thereby the refund was embedded with an implicit condition that the amount of refund should be paid to customers, as held in the case of Union v. New India Industries Ltd. [1983] ELT 1763 (Guj). It was also pointed out that none of the customers had abandoned their claims against the assessee and, therefore, there was no remission of liability and the amount cannot be included in the taxable income of the assessee under Section 41(1).

Alternatively, it was pleaded that assuming without admitting that the refund was assessable as income, the same could not be assessed in the captioned year since the same accrued in the earlier year upon its notification (and not upon its receipt). Learned counsel for the assessee placed reliance on a plethora of decisions and tried to distinguish the cases referred to and relied upon by the Commissioner of Income-tax (Appeals) in his order from the facts and circumstances involved in the present case. He has further placed reliance on the decision of the Madras High Court in the case of CIT v. Thirumalaiswamy Naidu and Sons [1984] 147 ITR 657; on the decision of the Karnataka High Court in the case of Liquidator, Mysore Agencies Pvt. Ltd. v. CIT [1978] 114 ITR 853 ; on the decision of the Rajasthan High Court in the case of CIT v. Sadul Textiles Ltd. [1987] 167 ITR 634 ; on the decision of the Bombay High Court in the case of J.K. Chemicals Ltd. v. CIT [1966] 62 ITR 34 ; on the decision of the Madhya Pradesh High Court in the case of CIT v. Nathuabhai Desabhai [1981] 130 ITR 238 and on the decision of the Supreme Court in the case of Poona Electric Supply Co.

Ltd. v. CIT [1965] 57 ITR 521, wherein it was held that under the provisions of the Income-tax Act only real income shall be charged to tax and any amount received by the assessee in the course of business will be excluded from its income if such amount is payable by the assessee to some other party. He placed reliance on the decision of the Bombay High Court in the case of CIT v. Sadabhakti Prahashan Printing Press (P.) Ltd. [1980] 125 ITR 326 for the proposition that in order that an amount may be deemed to be income under Section 41(1) of the Income-tax Act, 1961, there must be a remission or cessation of liability in respect of the said amount. He also placed reliance on the decisions of the Income-tax Appellate Tribunal, Bombay Bench, in the cases of. India Coffee and Tea Distributing Co. Ltd, v. IAC (Asstt.) [1987] 29 TTJ 275 (Bom) and Raj Kamal Silk Mills v. Third ITO [1989] 35 TTJ 274 (Bom) and, lastly, on the decision of the Jaipur Bench of the Tribunal in the case of Wolkem Private Limited v. ITO, where similar facts and circumstances were involved.

5. As against this, the learned Departmental Representative supported the action of the Commissioner of Income-tax (Appeals) and placed reliance on the decision of the Kerala High Court in the case of CIT v.Marikar (Motors) Ltd. [1981] 129 ITR 1 and on the decision of the Gujarat. High Court in the case of Motilal Ambaidas v. CIT [1977] 108 ITR 136. He also relied on the latest decision of the Kerala High Court in the case of Travancore Cements Ltd. v. CIT [1989] 178 ITR 175 and it was canvassed that this is an income chargeable to tax under Section 41(1) of the Act, It was pointed out that the assessee had not shown the refund received in the trading and profit and loss account and, therefore, the same was rightly brought to tax by the Income-tax Officer.

6. We have considered the rival submissions. We are herewith concerned with the real character of the receipt as to whether it represents income or capital irrespective of the kind of treatment that has been given to it by the assessee in its accounts. It is a well known phenomenon that an item of receipt if it does not bear the character of income at that particular moment, then by efflux of time its character does not change to that of income. In order to appreciate the character of the income, it is better to examine the provisions of the Income-tax Act on this aspect, which are contained in Section 41(1) which read as under : "41. (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." 7. In the instant case, the contention of the assessee all through was that the product manufactured by it is not an excisable commodity. In view of the excise authorities demanding payment of excise duty holding the assessee to be covered by the excise provisions, the assessee was compelled to make the deposit under protest. The assessee while contesting the levy of excise duty made it clear to the parties that apart from the sale price as per the rate charged, the parties would be paying excise duty. The amount so collected was with a view to protect the assessee from financial loss in case at a subsequent point of time it is held that the product of the assessee was covered under the excise law.

8. Under the excise law, excise duty is payable by the manufacturer irrespective of whether he recovers the duty from the buyer or not.

Further, even if he disputes the duty, under the existing law and procedure, he has to pay the duty first and claim refund under the prescribed procedure. It is a common practice that invariably excise duty is passed on by the manufacturer to the buyer. Even if the manufacturer disputes the levy of duty as a practical measure, he collects it from the buyer, thereby suffering no loss. If he succeeds in his claim for refund, he can either keep the refunded amount at his option or refund it to the buyers. Since the assessee has collected the duty from various buyers and has paid it to the Excise Department under protest, the question that arises now is where a refund has been granted to the assessee, whether it represents the income of the assessee or not under the provisions of Section 41(1) of the Act and whether it is liable to be taxed or not. This matter has been the subject of judicial concern and in spite of pronouncements from the Supreme Court and several High Courts, no finality has been reached. In the case of CIT v. Nathuabhai Desabhai [1981] 130 ITR 238, their Lordships of the Madhya Pradesh High Court were confronted with a similar situation, where the assessee had to collect sales tax from the customers but contested the constitutional validity of levy of sales tax. Consequent to a finding that the levy was unconstitutional, the assessee received refund of sales tax. The question was whether such refund could be taxed under Section 41(1) or not. Their Lordships were of the view that the refund of sales tax could not be assessed as income under Section 41(1) at all.

9. In another case, in the matter of Bhagwat Prasad and Co. v. CIT [1975] 99 ITR 111, the Allahabad High Court held that where the advance received from the customers for goods which were not supplied was not refunded and in the meantime, the claim for repayment became time-barred, in such circumstances, this amount will not be treated as the assessee's income under Section 41 of the Income-tax Act, 1961. It was further observed in that case that the amount merely represented the amount of advances received by the assessee for supplying goods to its customers and in due course the assessee neither supplied these goods nor returned the advance received by him to its customers and with the passage of time the right of the customers to claim it back from the assessee became barred by time. But, in terms of Section 41 of the Income-tax Act, any benefit accruing to an assessee by remission or cessation of its trading liability is deemed to be its profits and gains of the assessee's business comes into play only if while computing its income for some assessment year an allowance or deduction in respect of the trading liability is made and subsequently the assessee acquires in respect of that trading liability some benefit whether in cash or in any other manner or it accrues to the assessee because of its ceasing to exist. In other words, the Revenue merely takes as income what it had earlier allowed as deduction. In that case, it was observed that the Tribunal applied the fiction created by Section 41(1) of the Act only because, in its opinion, as the right of the customers to recover the amount had become barred by time, the assessee's liability in respect of the amount ceased to exist. As stated earlier, in order to rely upon the fiction created by Section 41(1) of the Act, it was incumbent upon the Revenue to further show that an allowance or deduction in respect of that amount had been made while computing the assessee's income in some earlier year. The allowances and deductions which are to be made while computing the assessee's income in an assessment year are laid down in the various provisions of the Income-tax Act. It is only if while making an assessment such allowance or deduction is made and the amount is subsequently recouped in the circumstances mentioned in Section 41(1), that it is to be deemed to be the assessee's income. Merely because the amount of advance received by the assessee was not treated, and considering the method of accounting adopted by the assessee, could not be treated as its income for the assessment year in which the money was recovered, it cannot be said that an allowance or deduction in respect thereof had been made in the assessment for that year.

10. In another decision in the case of Indian Motor Transport Co. v.CIT [1978] 114 ITR 677, the Allahabad High Court held that unclaimed amounts of wages, etc., were not to be included in the total income of the assessee under Section 41 of the Income-tax Act. The tax planning aspect which is of importance in this context is that such items for which the assessee has not derived any benefit in the event of remission or cessation of its trading liability cannot be treated as income chargeable to tax under Section 41(1) of the Income-tax Act.

11. In the case of J. K. Synthetics Ltd. v. O.S. Bajpai, ITO [1971] 105 ITR 864 (All), the company was adopting the mercantile system of accounting and claimed excise duty payment as liability. It was held by the Hon'ble Delhi High Court that the excise duty was not payable, but, however, the Excise Department was still claiming the excise duty and the assessee had debited the duty in the accounts. The company filed a writ petition in the Delhi High Court challenging the claim for excise duty and the petition was allowed by the High Court. On this basis, the Income-tax Officer disallowed the claim and treated the same received on account of the past liability as income under Section 41(1) of the Act. It was held by the Hon'ble High Court in that case that the provisions of Section 41(1) could not be invoked.

12. In another case, in the matter of CIT v. P.K. Kaimal [1980] 123 ITR 755 (Mad), it was held that the provisions of Section 41 are applicable only in a case where the assessee obtains some benefit in cash or in kind in respect of a loss or expenditure or some benefit in respect of a trading liability, by way of remission, which was earlier allowed as deduction. It was further held that the provisions of Section 41 are applicable to the assessee who had taken the benefit or advantage of deduction and the intention was to take away an allowance granted. If the assessee did not get that benefit, he cannot be required to pay the tax. Realisation of a debt is not income. The provision enacts a fiction and would have to be construed strictly on its language. This is also, in a way, a charging provision and the charge must clearly be made out. It is not made out on the successor.

13. In the case of CIT v. Thirumalaiswamy Naidu and Sons [1984] 147 ITR 657, the Madras High Court was faced with the question whether jaggery, which was an item exempt from local sales tax, would be liable to tax under the Central Sales Tax Act. In this case, the assessee-firm was dealing in jaggery and it collected from its customers amounts towards the contingent liability account in order to protect itself from any possible future liability to sales tax at a future date and paid the same to the Sales Tax Department. The amounts collected on contingent liability account were not brought into the trading and profit and loss account on the credit side and the remittances of tax from those collections to the Sales Tax Department were also not brought into the debit side. In that case, the Income-tax Officer invoked the provisions of Section 41(1) of the Act and held that the amount collected by the assessee as contingent deposit was taxable. However, the Hon'ble High Court held that jaggery was exempt from the Central sales tax.

Consequently, the amount paid by the assessee to the Sales Tax Department as Central sales tax on inter-State sales of jaggery came to be refunded to the assessee resulting in the assessee being obliged to refund the amount to its customers. The hon'ble High Court was of the view that the refund received by the assessee from the Sales Tax Department was not a payment receivable by the assessee in its trading transaction, but was received purely in a fiscal transaction. There was no business relationship of any kind between the assessee and the Sales Tax Department in the refund granted. Section 41(1} could not, therefore, be invoked to assess the sales tax refund. Nor could it be brought to tax de hors this section under any other valid principle of taxation of income. The hon'ble High Court has considered the decision of the hon'ble Kerala High Court in the case of CIT v. Marikar (Motors) Ltd. [1981] 129 ITR 1 and distinguished the facts of the same. The question of the nature of the receipt was examined by the Bombay High Court in the case of J. K. Chemicals Ltd. v. CIT [1966] 62 ITR 34. In that case, the assessee-company kept its accounts on the mercantile system and debited the accounts as and when it incurred any liability on account of wages, salary or bonus due to its employees even though the amounts were not disbursed in cash to the employees, and obtained deduction of the amounts so debited in the respective years in computing its total income. A certain portion of the wages, salary and bonus so debited was in fact not drawn by the employees. On June 30, 1957, a sum of Rs. 5,929 which had remained undrawn but had been allowed to be deducted during the accounting years 1945 to 1953 was credited to the profit and loss account of the said year. The Department included this amount in the total income of the accounting year on the ground that the trading liability in respect of which deduction had been allowed had ceased to exist, and under Section 10(2A) (of the Act of 1922), the amount in question should be deemed to be income. The hon'ble Bombay High Court observed that even where a debit was allowed as an expenditure, the same cannot be taxed under Section 41(1) or Section 10(2A) in the year in which such debit became time-barred, even if such amount was credited to the profit and loss account. It may be mentioned here that the hon'ble Bombay High Court while giving its decision in this case has referred to the decisions in the cases of Bombay Gas Co. Ltd. v. Gopal Bhiva [1963-64] 25 FJR 179 ; [1964] 3 SCR 709 ; Kohinoor Mills Co. Ltd. v. CIT [1963] 49 ITR 578 (Bom) and Ramkumar Kedarnath v. CIT [1937] 5 ITR 261 (Bom).

14. In the case of ITC Ltd. v. Chipkar [1985] 22 ELT 334, the assessee-company applied for refund of excise duty paid under mistake of law. It was held by the Bombay High Court that the claim for refund of duty cannot be denied on the grounds that (a) the manufacturer has recovered the duty from the customer ; and (b) it would result in unjust enrichment to the manufacturer. In that case, the Bombay High Court has also considered the decisions of the Supreme Court in the case of Newabganj Sugar Mills Co. Ltd., AIR 1976 SC 152, and in the case of Shiv Shanker Dal Mills, AIR 1980 SC 1037 and observed that : "It does not lay down that in every case the claim for refund of amounts illegally collected should be refused on the ground that the petitioner has or must have passed on his burden to the consumer.

It will be noted that in the opinion of the High Court, the decisions of the Supreme Court in Newabganj Sugar Mills Co. Ltd., AIR 1976 SC 1152 and Shiv Shanker Dal Mills, AIR 1980 SC 1037, are based on the facts of those cases and do not suggest that refund of duty wrongly collected should be denied. The relevant para of the Supreme Court judgment in D. Cawasji and Co., AIR 1975 SC 813, quoted by the hon'ble Court 'nor is there any provision under which the court could deny refund of tax even if the person who paid it has collected it from his customers and has no subsisting liability or intention to refund it to them, or, for any reason, it is impracticable to do so.'" 15. In another case before the Calcutta High Court, in the matter of CIT v. Karam Chand Thaper and Bros. (Coal Sales) Ltd. [1979] 117 ITR 621, the facts were that the assessee was the del credere agent of the collieries and also the agent of the customers. It collected from the consignees only the sale price of the coal which was despatched by the collieries to the customers, the freight being paid by the customers to the railways. As the freight was not charged on the actual weight of the coal despatched but on the carrying capacity of the wagon, the assessee claimed from the colliery the extra freight incurred where the freight was charged on a weight more than that of the actual coal despatched. The assessee collected the under-loading charges from the colliery, independent and irrespective of any demand from the consignees. There were cases where the consignees demanded the under-charges and the assessee passed on the amounts received by it.

But there were also cases where the amounts were not demanded. The collieries had to pay these under-loading charges only out of the price of coal supplied by them as there was no way of making any recoveries from the railways. On these facts, considering the question whether the amounts collected by way of under-loading charges and remaining with the assessee were assessable in its hands, the Hon'ble High Court held that the amounts collected by way of under-loading charges had been received by the assessee as an agent and, therefore, in a fiduciary capacity vis-a-vis the consignees. Such amounts did not constitute trading receipts and accordingly neither the surplus of the receipts remaining unpaid nor the amounts transferred by the assessee to the profit and loss account could be assessed as income of the assessee.

While deciding this issue in the above manner, the hon'ble High Court has followed the decisions in the cases of Moreley (H. M. Inspector of Taxes) v. Tattersall [1938] 22 TC 51 ; [1939] 7 ITR 316 (CA) and CIT v.Sandersons and Morgans [1970] 75 ITR 433 (Cal).

16. In the case of CIT v. Saddabhakti Prakashan Printing Press (P) Ltd. [1980] 125 ITR 326, the hon'ble Bombay High Court has laid down the principle that in order that an amount may be deemed to be income under Section 41(1) of the Income-tax Act, there must be a remission or cessation of a liability in respect of the said amount. A benefit contemplated by the section must be by way of remission or cessation of liability and no other benefit is contemplated.

17. In its latest decision in the case of CIT v. Chase Bright Steel Ltd. (No. 2) [1989] 177 ITR 128, the hon'ble Bombay High Court observed that for application of Sub-section (1) of Section 41 of the Income-tax Act, 1961, it is necessary that (i) 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 (ii) in a subsequent year, the assessee has obtained a benefit in respect of the amount so allowed by way of remission or cessation of liability. The liability of an assessee does not cease merely because the liability has become barred by limitation. The liability ceases when it has become barred by limitation and the assessee has unequivocally expressed its intention not to honour the liability even when demanded. Essentially, therefore, it will always be a question of fact whether or not the assessee has expressed unequivocally his intention not to honour the liability after it has become barred by limitation. In a given set of facts, a finding either way may be possible. The court further observed that a unilateral act on the part of the debtor cannot bring about cessation of his liability. The cessation of liability may occur either by way of operation of law, i.e., on the liability being unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor, or by discharge of the debt, the debtor making payment thereof to his creditor.

18. In another case before the Punjab and Haryana High Court in the matter of CIT v. Lal Textile Finishing Mills (P) Ltd. [1989] 180 ITR 45, a question arose whether an amount credited, representing the total of unclaimed liability written back in its profit and loss account can be brought to tax by the Income-tax Officer under the provisions of Section 41(1). The Hon'ble High Court held that an amount can be brought to tax under Section 41(1) of the Act, if two conditions are satisfied, namely, that the amount has been allowed as deduction in some earlier year and that during the assessment year in question, the assessee has received the benefit representing the amount in question by way of cessation or remission of the liability in regard to the said amount.

19. Before the Rajasthan High Court in the case of CIT v. Sadul Textiles Ltd. [1987] 167 ITR 634, the facts involved were that the assessee was allowed deduction towards wages and bonus in earlier years, which remained unclaimed by workmen. The question that arose on these facts was whether these unclaimed wages and bonus were taxable in the year under consideration under Section 41(1) of the Income-tax Act.

The Hon'ble Rajasthan High Court held that where amounts represent time-barred trading liability of the assessee, there is neither remission nor cessation of the trading liability inasmuch as the law of limitation merely bars the remedy but does not wipe out the liability.

There is neither remission nor cessation of the trading liability of the assessee, since there is neither any unilateral act of the creditor amounting to remission nor any bilateral act of the parties resulting in the liability ceasing to exist in law, merely because the recovery of the same has become time-barred. It was thus held that the provisions of Section 41(1) of the Income-tax Act are not attracted.

20. The theory of real income was accepted by the hon'ble Supreme Court in the case of Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521, wherein it was observed as under (headnote) : "There is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits.

There is a distinction between real profits ascertained on commercial principles and profits fixed by the statute for a specified purpose.

Under Section 10(1) of the Indian Income-tax Act, 1922, profits and gains of a business carried on by an assessee are not profits regulated by any statute, but profits in a business computed on commercial principles. They are business profits and not statutory profits. They are real profits and not notional profits. The real profits of a businessman under Section 10(1) cannot obviously include the amounts returned by him by way of rebate under statutory compulsion." 21. In the case of Murlidhar Himatsinghka v. CIT [1966] 62 ITR 323, the hon'ble Supreme Court held that if certain income is diverted to others at source, such income will not be charged to tax in the hands of the recipient.

22. We may mention here that the facts of the cases before the Supreme Court in the matters of Sinclair Murray and Co. P. Ltd. [1974] 97 ITR 615 and Chowinghee Sales Bureau P. Ltd. [1973] 87 ITR 542 are distinct from the facts of the present case before us. In those matters, sales tax was collected from the buyers by the auctioneers, but the same was neither paid to the State, nor to the owner, nor was it deposited in the State exchequer. In those circumstances, the hon'ble Supreme Court held the receipt of sales tax by the assessee as a trading receipt.

23. We are aware that contrary decisions were also taken by the two High Courts referred to by the learned Departmental Representative. In the matter of Motilal Ambaidas v. CIT [1977] 108 ITR 136 before the Gujarat High Court, the assessee had effected some sales in Madhya Pradesh. The Madhya Pradesh Government imposed sales tax on tobacco imported from other States. The assessee was charging sales tax separately in respect of such tobacco sold in the Madhya Pradesh, but the sales tax was not credited to the trading account. It was taken to a separate sales tax account and the sales tax was paid to the State Government by debiting this account. During the relevant assessment year, the assessee received refund from the Madhya Pradesh Government.

The Income-tax Officer brought to tax the tax refund amount received by the assessee from the Government. On these facts, the question before the hon'ble Gujarat High Court was whether the amount of refund of sales tax received by the assessee was taxable under the provisions of Section 41(1) of the Income-tax Act or not. The hon'ble Gujarat High Court in that case held that the provisions of Section 41(1) are attracted.

24. In the case before the Kerala High Court in the matter of CIT v.Marikar (Motors) Ltd. [1981] 129 ITR 1, the facts of the case were that the assessee had sold motor lorry chassis on a hire purchase system.

Under that system the assessee entered into an agreement with the customer who made an initial deposit and the balance consideration was paid in instalments over a number of months. When all the instalments were paid off, the customer got the option of buying the vehicle. On his exercising that option the sale became completed and the property passed to him. Though the taxable event occurred only when the last instalment was paid and the sale was completed in practice, the assessee collected in advance an amount equal to the sales tax liability on the entire price of the lorry from the customers. The amount equal to sales tax liability collected from the customers as aforesaid was credited in an account called "deposit against contingent liability" without it being credited to the profit and loss account. So also, the payment to the Sales Tax Department was not debited to the profit and loss account and instead it was debited to an account styled "general sales tax account". On these facts, when the Honb'le Kerala High Court was faced with the question whether the sales tax collected in advance from the customers is a trading receipt under the provisions of Section 41(1) of the Income-tax Act, the Kerala High Court held that it is taxable under the head "Other sources".

25. This decision was followed by the Kerala High Court in another decision in the case of Travancore Cements Ltd. [1989] 178 ITR 175.

26. From the above discussions, it is clear that the majority of the High Courts are of the view that for the applicability of the fiction of deemed income under the provisions of Section 41(1) of the Income-tax Act, 1961, it is essential that two important conditions must be satisfied. They are that an allowance or deduction has been made in the assessment for any year in respect of loss or expenditure or trading liability incurred by the assessee; and, secondly, in a subsequent year, the assessee has obtained a benefit in respect of the amount so allowed by way of complete remission or cessation of liability. The majority of the High Courts have held that the benefit contemplated by this section must be by way of complete remission or cessation of liability and no other benefit. If the assessee is obliged to return the amount to the customers, it is collected by him in a fiduciary capacity vis-a-vis the customers and, as such, such amounts do not constitute trading receipts. To apply (sic) the liability of the assessee to excise duty must be said to have ceased, there must be no possibility of the liability being revived in future. If there is such a possibility, then cessation of liability is not complete and as such the provisions of Section 41(1) are not attracted. The hon'ble Calcutta High Court has gone to the extent of observing that it will always be a question of fact whether or not the assessee has expressed, unequivocally its intention not to honour the liability. The above ratio was laid down by the High Courts of Allahabad, Madras, Madhya Pradesh, Calcutta, Punjab and Haryana, Rajasthan and Bombay. It is noteworthy that the cases before the Madhya Pradesh High Court and the Madras High Court involved refund of sales tax, whereas the case before the Allahabad High Court involved refund of excise duty.

27. As against this, there is another school of thought followed by the Gujarat High Court and the Kerala High Court, where the view is that it cannot he said that Section 41(1) is a charging section and, therefore, should be strictly construed. They lay stress on the wording of Section 41(1) and say that the words at the commencement of Section 41(1) "Where an allowance or deduction has been made in the assessment for any year" should be read as "where an allowance or deduction ought to have been made in the assessment for any year" and where the assessee obtains benefit whether in cash or in any other manner whatsoever in respect of such loss, expenditure or liability, such amount of benefit clearly falls within the provisions of Section 41(1). As stated above, the Gujarat and Kerala High Courts hold this view.

28. It is useful to refer once again to the decision of the Madras High Court in the case of CIT v. Thirumalaiswamy Naidu and Sons [1984] 147 ITR 657 and it may be mentioned at this juncture that the Hon'ble Madras High Court while deciding the matter in that case has considered the decision of the Kerala High Court in the case of CIT v. Marikar (Motors) Ltd. [1984] 129 ITR 1 and a distinction was drawn, in the matter cited above.

29. In the case of India Coffee and Tea Distributing Co. Ltd. v. IAC (Asst.) [1987] 29 TTJ 275, the Bombay Bench "C" of the Tribunal was concerned with the refund of excise duty where refund was received from the Collector of Central Excise, consequent upon an order of the Bombay High Court (sic), has accepted the ratio that a receipt can be brought to tax within the scope of Section 41(1) only when there is a final cessation of liability and it was held that receipt of refund by the assessee during the accounting year cannot be considered as money received on cessation of liability for the earlier years and, therefore, cannot come within the ambit of Section 41(1). In another case, before the Jaipur Bench of the Tribunal in the matter of Wolkem Pvt. Ltd., identical facts and circumstances, as in the present case, were involved. In that case also, the assessee received refund of excise duty from the Government. In that case also, the Tribunal after considering several decisions cited by the Commissioner of Income-tax (Appeals) in his order, including those in the cases of CIT v. Bijli Cotton Mills (P.) Ltd. [1970] 76 ITR 625 (All), CIT v. Thirumalaiswamy Naidu and Sons [1984] 147 ITR 657 (Mad), CIT v. Sandersons and Morgans [1970] 75 ITR 433 (Cal), held that the refund is not taxable under the provisions of Section 41(1) of the Act.

30. Applying the ratio laid down by the majority of the High Courts to the facts of the present case, we find that in this case, the assessee has not received any allowance or deduction in any earlier assessment year, which can be said to be a benefit contemplated under Section 41(1) of the Income-tax Act, 1961. The assessee is under an obligation to return the amount to its customers and in fact, the assessee has already returned an amount of Rs. 35,270 in the subsequent assessment year. The assessee also undertook to refund to the customers the balance amount. In these circumstances, there is no benefit to the assessee as contemplated by Section 41(1) of the Act, by way of complete remission or cessation of the liability, as laid down by the High Courts of Allahabad, Madras, Madhya Pradesh, Calcutta, Punjab and Haryana, Rajasthan and Bombay, in the cases cited above. In these circumstances, it cannot be said that there is any complete cessation of liability and as held by the Hon'ble Supreme Court in the cases of Poona Electric Supply Co. Ltd. [1965] 57 ITR 521 and Murlidhar Himatsingka [1966] 62 ITR 323, there is no real income or profit to the assessee on account of the refund of the excise duty. Considering these facts, the ratio laid down by the Tribunal in the case of Wolkem Pvt.

Ltd., wherein exactly same facts and circumstances were involved, and in the case of India Coffee and Tea Distributing Co. Ltd. [1987] 29 TTJ 275 (Bom), where the facts were identical, squarely apply to the present case. Respectfully following these decisions, we are of the view that the refund received by the assessee from the Government on account of excise duty is not liable to tax under the provisions of Section 41(1) of the Income-tax Act. We, therefore, set aside the order of the Commissioner of Income-tax (Appeals) and direct the Income-tax Officer to delete the addition made in that behalf and reframe the assessment.

32. I have had the benefit of reading the order proposed by my learned brother, the Judicial Member. However, I have not been able to persuade myself to agree to the view taken in that order. Hence, I proceed to write this dissenting order.

33. The assessee is an individual. The previous year relevant to this appeal ended on Samvat year 2039, i.e., Diwali day of 1983. He was running a manufacturing unit as a sole proprietor in the name of Jyoti Plastic Works. There was some dispute between the assessee and the Central excise authorities in regard to the classification of the goods manufactured by him and hence there was a dispute about the exigibility of Central excise duty. The assessee received a refund of Rs. 10,24,682 from the Central Excise Department in pursuance of letter No.V(68)18-15/82, dated December 20, 1982, from the Assistant Collector of Central Excise, Division-P, Bombay. He received yet another amount of refund of Rs. 74,371 during the relevant previous year. Thus, the total refund of Central excise duty received came to Rs. 10,99,024. The dispute is whether this amount of Rs. 10,99,024 is liable to be included in the total income of the assessee. It was claimed by the assessee that the amounts of Central excise duty were not claimed by the assessee in the respective years as deduction and, therefore, there was no question of refund being treated as part of the income. It was further claimed that at any rate the Central excise duty refund was, in turn, payable by the assessee to the customers and hence the assessee continued to be liable to pay the appropriate amounts to its customers.

The claim was rejected by the Income-tax Officer and the position was confirmed by the Commissioner of Income-tax (Appeals). The assessee is, therefore, in appeal before us.

34. In regard to the assessee's claim that the amount of Central excise duty was not claimed as deduction in the profit and loss accounts of the respective years, let us first have a look at the figures given on page 7 of the order of the Commissioner of Income-tax (Appeals) which are as follows : 35. With reference to this chart when I look at the profit and loss account of the respective years I find that the assessee's system of accounting was that from the gross sales recorded he had deducted the items of sales-tax, Central excise and goods returned. Thus, the assessee's system was that gross sales were booked and from there, inter alia, the amounts of Central excise duty paid were deducted. On the basis of this system followed, there is no substance in the assessee's claim that the Central excise was collected from the customers either as a deposit or purely in a fiduciary capacity. In the course of hearing before us, at our request, four sample sale bills were also produced. In all the four the Central excise duty has been shown and made part of the gross sale price. Thus, it is clear that in the assessee's books the gross sale price inclusive of Central excise duty charged is first computed and totalled. At the end of the year, the Central excise duty actually paid during the year has been deducted from the gross figure of sales. Therefore, it is clearly a case of Central excise duty having been treated and charged as part of the sale price. Then at the end of the year in place of putting it on the debit side of the trading or profit and loss account the assessee has deducted it from the total figure of sales but obviously the effect is exactly the same. Therefore, there is no substance in the assessee's claim that the Central excise duty is not claimed as deduction in the respective years.

36. Coming to the aspect of receipt of refund, I find that, vide letter dated December 20, 1982, from the Assistant Collector of Central Excise, the refund was in respect of Central excise duty paid by the assessee from May 2, 1979, to January 30, 1982, and this represented the finality of Central excise proceedings. In other words, the refund granted was not subject to any other revision or appeal in the assessee's matter of Central excise liability. In this view of the matter, the refund received by the assessee represented cessation of liability in respect of which deduction had been allowed in the preceding years.

37. Many High Court decisions and Tribunal decisions have been cited on behalf of the assessee. It would be better to first have a close look at the Tribunal's decisions which according to the assessee support his case. The first decision is of the Bombay Bench "C" in ITA No.4657(Bom) of 1986 dated April 10, 1989 (sic), in the case of India Coffee and Tea Distributing Co. Ltd. for the assessment year 1983-84 [1987] 29 TTJ (Bom) 275. Actually that case is clearly distinguishable because in the cited case though the refund was received by the assessee in pursuance of a High Court order the assessee had to furnish a bank guarantee for the like amount. That the assessee was made to furnish that bank guarantee because grant of refund of Central excise duty was by way of interim relief but the final decision on the merits of the exigibility of Central excise duty was still sub judice. The Tribunal held that there was no final cessation of liability to Central excise duty and hence the refund receipt was not liable to be taxed.

38. In the case before me, as already mentioned the refund was received on finalisation of the proceedings in regard to the Central excise liability. There were no other proceedings of revision or appeal, etc., in pursuance of which there could have been any chance in this case of the revival of the liability for the Central excise duty for which the refund was received by the assessee.

39. In the second case of Wolkem Pvt. Ltd. in ITA No. 977(JP) of 1983 decided by the Jaipur Bench on September 6, 1985, the assessment year involved was the assessment year 1981-82. In para 3, on page 9 of the reports, the factual position is recorded as follows : "The second issue in the instant case is regarding the nature of refund of Rs. 1,61,316 received from the Central excise authorities . . . However, the assessee along with its rate chart mentioned the terms and conditions for the sale that 'the applicable excise duty and sales tax will be charged extra'. The excise duty was recovered along with the sale value of the merchandise. The excise duty so collected was credited to an account titled 'Central excise duty deposit account'. All amounts that were paid to the excise authorities under protest were debited to this account. This kind of treatment was started some time March 1, 1976, and continued till December, 1978. In the year under review, the excise authorities came to the conclusion that the products dealt in by the assessee are exempted from the excise levy and consequently refunded the excise duty so collected. While refunding the amount, they had refunded an amount of Rs. 2,453.13 directly to the various parties from whom the amount was collected. The amount so refunded excluding the amount refunded directly to the customers by excise authorities (sic). The assessee received Rs. 1,61,316. . . ." 40. The Tribunal after taking note of the arguments and a plethora of cited decisions held in para 5, inter alia, as follows : "... In the instant case, the contention of the assessee all through was that the product manufactured by it is not an excisable commodity. In view of the excise authorities demanding payment of excise duty holding the assessee to be covered by the excise provisions, the assessee was compelled to make the deposit under protest. The assessee while contesting the levy of excise duty made it clear to its parties that apart from the sale price as per the rate chart, the parties would be paying excise duty. The amount so collected was with a view to protect the assessee from financial loss in case at the subsequent point of time it is held that the product of the assessee was covered under the excise laws. In view of these contentions of the assessee, the amount collected and paid were credited to the separate account titled 'E.D. Deposit Account'.

The amount deposited was always in excess of the amount collected from the parties and the amount so paid in excess was shown in the assets side of the balance-sheet under the head 'Advances receivable in cash or hind'." 41. The Tribunal then considered a few High Court decisions in detail and in particular the Bombay High Court decision in the case of J. K.Chemicals Ltd. v. CIT[1966] 62 ITR 34 (Bom) and then proceeded to record in para 9 as follows : "In view of the above observations, it is apparently clear that the amount so collected from customers and deposited with the Government, of which refund is received subsequently is clearly a liability repayable to the various customers. Certain customers as already observed have claimed the refund directly from the excise authorities and certain others have already preferred claims on the assessee. . . ." 42. Thus, in this cited case, the assessee had made it abundantly clear to his customers from whom Central excise duty was taken as a deposit that it would be refundable to them in case the assessee gets refund of Central excise duty ; so much so that some of the customers had directly claimed it and got it from the Central Excise Department.

Further, in that case, the assessee maintained in respect of each and every sale a separate deposit account for Central excise duty and the excess of the total of that collection which he deposited with the Central Excise Department was shown separately on the assets side of the balance-sheet. On the other hand, in the case before me, the Central excise duty have been charged as part and parcel of the sale price and it has been first booked in the account books as part and parcel of the sale price. If and when the assessee paid some Central excise duty that was deducted from the gross figure of sales. There is, of course, no material to show that the assessee's customers knew that on receipt of the refund of the Central excise duty by the assessee, the customers would become entitled to receive back the corresponding amounts from the assessee. I may note here that out of a total refund of Rs. 10,99,024 received by the assessee he has paid in the immediately succeeding year, i.e., the year ending Diwali 1984, Rs. 35,270 to some of its customers. For the remaining sum of more than Rs. 10,63,000 no refund has been granted by the assessee to his customers till the date of hearing in March, 1990. Further, the assessee has not been able to show that the customers were even aware of their right to receive this sum. Actually, it was the assessee's duty to show how, why and when he refunded to the customers Rs. 35,270. Further, for staking a claim that he was liable to pay the remaining sum of more than Rs. 10,63,000 to his customers it was the assessee's duty to show how and why the said refund was not made. It was further his duty to show the distinguishing features of the cases of customers to whom Rs. 35,270 was refunded from those of the other customers to whom the assessee claimed that the remaining sum of more than Rs. 10,63,000 was refundable. None of these things has been done by the assessee and only a bald claim has been made that there subsisted a duty on the part of the assessee to pass on the remaining sum of more than Rs. 10,63,000 to his customers. I may also note that they covered the sales effected from Samvat year 2032 onwards corresponding to the year ending Diwali 1976. I may further note that at the time of hearing before the Tribunal the assessee has furnished information dated March 19, 1990, of the year-wise break-up of the Central excise duty paid under protest in the following form : 43. Obviously, in regard to the split up of amounts for different periods, there are wide variations in the figures extracted hereinabove (in para 3 from the order of the Commissioner of Income-tax (Appeals)) and the figures now furnished by the assessee. But reconciliation thereof is not available. If the period-wise figures now given by the assessee on March 19, 1990, and extracted (in para 6 on pages 29 and 30) above pertain to the Central excise duty payable with reference to the sales and the figures in column 5, in para 3, at page 25 above as per the order of the Commissioner of Income-tax (Appeals) pertain to the Central excise duty actually paid, the natural inference would be that the amounts of the Central excise duty payable are not shown in the assessee's books of account but actual payments made only are shown. This would strengthen the inference that the Central excise duty actually paid--irrespective of the period and amount payable--is deducted from the gross sales. This, in turn, would confirm the inference that the assessee has not even in his accounts put the Central excise duty collected from the customers in a separate account, He has treated it as part of the sale price and from the figures of gross sales he has deducted the excise duty actually paid in the respective years.

44. Obviously, the Tribunal's decision in the case of Wolkem Pvt. Ltd. relied on by the assessee is clearly distinguishable on very material aspects and the ratio of that decision does not help the assessee at all.

45. Let me now refer to the assessee's reliance on the Bombay High Court decision in the case of CIT v. Chase Bright Steel Ltd. (No. 2) [1989] 177 ITR 128 and also on the Bombay High Court decision in J. K.Chemicals Ltd. [1966] 62 ITR 34. Both these cases are undoubtedly in favour of the assessee. But in both of them, the factual background was that some items were written back by the assessees to the credit side of the profit and loss account and it was held that merely a unilateral act of any assessee to write back part of amounts allowed as deduction in past years would not result in cessation of liability. Obviously, the case before me is one of refund actually received and not where some deduction allowed in the past is being written back unilaterally to the credit side of the profit and loss account. So on the factual basis these two cases are distinguishable from the instant case. This apart, there is a Bombay High Court decision which is against the assessee even on the question of the writing back of some items to the credit side of the profit and loss account in the case of CIT v.Batliboi and Co. P. Ltd. [1984] 149 ITR 604 (Bom). The point is that even in regard to the writing back of the amounts to the credit side of the profit and loss account, the Bombay High Court has rendered decisions for and against the assessee on the basis of the factual background. So none of the decisions, i.e., of the Bombay High Court, namely, Chase Bright Steel Ltd. (No. 2) [1989] 177 ITR 128 and J. K.Chemicals Ltd. [1966] 62 ITR 34 would help the assessee.

46. I may now have a quick look at the other decisions relied on by the assessee which seem to be favourable to him at a cursory glance.

Actually, on a detailed analysis, they do not help the assessee as the factual background on material aspects is distinguishable. Those cases are as follows: (i) The M. P. High Court decision in CIT v. Nathuabhai Desabhai [1981] 130 ITR 238 : the decision was rendered on the facts and circumstances of the case and in particular it was noted that the jurisdiction of the High Court was merely advisory on the basis of facts found by the Tribunal and the High Court would not examine the chargeability of the amount to tax de hors Section 41(1). Further, it was found in that case that the assessee had collected sales tax from its customers and paid the same to the State Government. As already mentioned in the instant case before me, the Central excise duty was collected as part of the sale price and only the Central excise duty paid was deducted from the gross figure of sales. There was no correlation between the Central excise duty charged from the customers in different periods and the corresponding figures of the Central excise duty actually paid.

(ii) In the case of Bhagwat Prasad and Co. [1975] 99 ITR 111 (All), the assessee had received an advance of Rs. 5,408 for goods to be supplied. But the assessee neither supplied the goods nor returned the advance to the customers. It was held that the amount had not been allowed as a deduction and at any rate only the remedy of the customers was barred. There was another item of Rs. 1,071 for interest in yet another account. But the High Court held that it was taxable in the preceding year when interest was charged and was debited to the debtor's account. Obviously, the facts in the instant case are totally different in so far as the refund of excise duty is actually received and it is not a case of mere book entry being passed in respect of some earlier years' liability.

(iii) In Indian Motor Transport Co. v. CIT [1978] 114 ITR 677 (All) also the position was similar before the Allahabad High Court as a sum of Rs. 24,869 was transferred to the profit and loss account in respect of unclaimed wages, etc. But even then the Allahabad High Court held that the Tribunal was justified in holding that the amounts were taxable under Section 41(1). Obviously, this decision is totally against the assessee and can never be relied on even indirectly for supporting the assessee's case.

(iv) In the case of J. K. Synthetics Ltd. v. O. S. Bajpai, ITO [1976] 105 ITR 864 (All) refund of excise duty was not allowed to be treated as profit under Section 41(1) because the High Court decision in the Central excise matter which was in favour of the assessee had not become final and a Letters Patent Appeal had been preferred and was pending and there was a possibility of an appeal to the Supreme Court also. In the case before us, in regard to the Central excise duty liability of the assessee, the matter had become final on receipt of the refund by the assessee. Therefore, that decision does not help him.

(v) The assessee's reliance on the Madras High Court decision in the case of CIT v. P.K. Kaimal [1980] 123 ITR 755 is totally misplaced because in that case a bad debt was allowed as deduction in the case of a firm and recovery was effected after the dissolution of the firm by the partner who took over the assets and liabilities of that firm. It was held that the bad debt was not allowed as deduction in the hands of the partner but it was allowed in the hands of the firm. Therefore, on recovery of some part of that by the partner the amount did not become taxable in the hands of the recipient-partner.

Obviously, there was a change of status of the taxpayer in that case. I have the same assessee and in the same status, namely, individual.

(vi) The assessee's reliance on the Madras High Court decision in CIT v. Thirumalaiswamy Naidu and Sons [1984] 147 ITR 657 is also not correct. In that case, the amounts of sales tax collected on contingent liability account were not brought into the trading and profit and loss account on the credit side and the remittances of tax from those collections to the Sales Tax Department were not also brought into the debit side. It was, therefore, held that the collections of sales tax or the payments thereof to the State Government did not form part of the trading receipts and trading disbursements, respectively. In the case before us, I have noted that Central excise duty was collected and booked in the books as part of the gross sale proceeds. Only the excise duty actually deposited was deducted from the gross amount of sale proceeds and the Central excise duty so deposited was not the same amount as was collected by the assessee in the relevant period.

(vii) In the case of CIT V. Karam Chand Thaper and Bros. (Coal Sales) Ltd. [1979] 117 ITR 621 (Cal), the question was of under-loading charges remaining with the assessee. It was held that the amounts collected by way of under-loading charges had been received by the assessee as an agent, and, therefore, in a fiduciary capacity vis-a-vis the consignees. It was further held that such amounts did not constitute trading receipts and accordingly neither the surplus of the receipts remaining unpaid nor the amounts transferred to the profit and loss account could be assessed as income of the assessee. Obviously, the amounts in question were found on facts to have been collected in a fiduciary capacity. It was also found in that case that some of the consignees had demanded under-charges from the assessee and the latter had passed on the amounts to them. In the instant case, I have already held that, on the facts, the assessee collected the Central excise duty as part of the gross amount of sale proceeds. There was no fiduciary capacity involved in this particular case.

(viii) In CIT v. Sadabhakti Prahashan Printing Press (P) Ltd, [1980] 125 ITR 326 (Bom), the facts again were of a transfer entry being passed in the account's unilaterally and it was held that mere passing of such an entry does not give rise to profit under Section 41(1). In the case before me, it is a question of refund actually received on final cessation of liability to Central excise duty.

(ix) In CIT v. Lal Textile Finishing Mills (P) Ltd. [1989] 180 ITR 45 (P&H), there was no finding or material to show that the amount written back to the profit and loss account totalling Rs. 48,610 was allowed as a deduction in any of the earlier assessment years.

Before me, I have a case in which the Central excise duty paid was allowed as deduction by way of reduction of the gross amount of sale price and the said Central excise duty was received as refund in the previous year relevant to this appeal.

(x) In CIT v. Sadul Textiles Ltd. [1987] 167 ITR 634 (Raj), the point involved again was that of writing back of unclaimed bonus and unclaimed wages on the remedy having become time-barred. It was held that a limitation bars only the remedy and does not result in a cessation of liability. In the case before me, it is not a question of anything becoming time-barred by limitation. But I have a case of actual refund being received by the assessee.

47. Thus, a quick analysis of the cases relied on in support of the assessee's contention shows that most of them are of trading liabilities of past years having become either time-barred and having been written back to the credit side of the profit and loss account.

Even on this aspect as already indicated, there are decisions available for and against the assessee. The Hon'ble Bombay High Court itself has held against the assessee in the case of Batliboi and Co. P. Ltd. [1984] 149 ITR 604 and in favour of the assessee in the case of Chase Bright Steel Ltd. (No. 2) [1989] 177 ITR 128 (Bom). The point is that it depends on the facts and circumstances of the case. Then I have the Allahabad High Court decision in Indian Motor Transport Co. [1978] 114 ITR 677 which is against the assessee. I also have the Kerala High Court decision in CIT v. Marikar (Motors) Ltd. [1981] 129 ITR 1 followed in Travancore Cements Ltd. v. CIT [1989] 178 ITR 175 (Ker).

Actually, the assessee's case stands on a different footing because it is a case of actual receipt of the refund rather than passing of any book entry to the credit side of the profit and loss account in respect of past years' liabilities. Then I have another category of decisions in which sales tax collected and Central excise duty collected is allowed as deduction in preceding years, and the amounts are received as refund on the basis of some High Court decisions. On this aspect, the decisions favourable to the assessee are those in which the dispute between the assessee and the Central excise or sales tax authorities had not been finally decided. In the case of J. K. Synthetics Ltd. [1976] 105 ITR 864 (All), the Letters Patent Appeal against the single judge decision of the Delhi High Court had been preferred. Similarly, in the Tribunal's decision in the case of Indian Coffee and Tea Distributing Co. Ltd. [1987] 29 TTJ 275 (Bom), the refund was granted subject to the assessee filing a bank guarantee because the dispute between the assessee and the Central Excise Department had not been finally settled though the refund of the Central excise duty was received by the assessee. Therefore, on the basis of the information brought on record by the assessee, the said sum of Rs. 10,99,024 received by the assessee as refund on final settlement with the Central Excise Department cannot be treated as exempt from tax. I may further mention that there is no evidence brought on record by the assessee to show that even the sums of Rs. 72,795 and Rs. 54,478 were paid in Samvat years 2032 and 2033, respectively, under protest, The point is that the letter dated December 20, 1982, of the Assistant Collector of Central Excise talks of actual payments made under protest from May 2, 1979, to January 30, 1982, while Samvat years 2032 and 2033 ended much earlier on Diwali days of 1976 and 1977, respectively. These two amounts cannot be covered even by the other item of actual refund receipt of Rs. 74,371 ; obviously, because these Hems totalled much more-being Rs. 72,795 and Rs. 54,478 totalling Rs. 1,27,273.

48. I may refer also to the Supreme Court decisions in Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 and Murlidhar Himatsingka v.CIT [1966] 62 ITR 323 cited in favour of the assessee's case. Actually, these decisions are on altogether different aspects. The assessee has actually received the refund of the Central excise duty which was claimed and allowed on the basis of actual payments. It was the assessee's real income and there was no overriding title involved.

49. There are High Court decisions against the assessee and in favour of the Department which have been relied on by the Commissioner of Income-tax (Appeals) and some of which have been enumerated in clauses (i) and (ii) of the assessee's ground of appeal No. 1 before the Tribunal. For the sake of brevity, I need not refer to all those decisions. I may, however, mention that the assessee has sought to distinguish the following four decisions : primarily on the footing that on those cases the sales tax collected was not paid to the Sales Tax Department. In my opinion, that was not the position in all the four cases and in the cases in which it existed the distinction does not make a difference. The point is that in the assessee's case the Central excise duty has been collected as part of the gross sale price if and when some Central excise duty is paid it is deducted from the gross sales. It is not a case in which Central excise duty collected from the customers is separately computed. Actually, there is no correlation shown between the Central excise duty collected from the customers and the Central excise duty actually paid for any period. Therefore, the above mentioned four decisions which are against the assessee are not distinguishable the way the assessee wants to distinguish them.

50. For all these reasons, I am inclined to think that the assessee has not made out a case for the sum of Rs. 10,99,024 received by him being exempt from tax in his hands. Since the refund of Central excise duty was actually received in the previous year relevant to this appeal and even the letter of the Assistant Collector of Central Excise was of December, 1982, which fell in the previous year relevant to this appeal there cannot be any justification for the assessee's case that it is not taxable in this year. I would like to dismiss the assessee's appeal.

51. We, the members of the Bombay Bench "A", have differed in our orders passed in I.T.A. No. 6554/Bom of 1989 for the assessment year 1984-85, in the matter of Mr. D.R. Desai, Bombay v. 13th Income-tax Officer, BSD(N), Bombay. The following question on which we have differed is referred to the Hon'ble President for resolution under Section 255(4) of the Act : "Whether, on the facts and circumstances of the case, the amount of excise duty refund of Rs. 10,24,652 or any part thereof received from the Central Excise Department, Bombay, is taxable in the hands of the assessee under Section 41(1) of the Income-tax Act, 1961 ?" 52. In this appeal, which was heard by the Bombay Bench "A", a point of difference of opinion arose as to whether the amount of excise duty refund or any part thereof received by the assessee from the Central Excise Department is taxable in the hands of the assessee under Section 41(1) of the Income-tax Act, 1961.

53. After hearing the parties, going through the facts and perusing the orders of my learned brothers, I did not encounter difficulty of any kind in arriving at the conclusion that the sum in question was not taxable at all under Section 41(1) of the Income-tax Act, 1961. This was based upon two basic factors, one was that the sum in question was never allowed as a deduction in any of the earlier assessment years by the Department nor was it ever claimed by the assessee as a deduction.

Section 41(1) would be attracted only in a case where an allowance or deduction was 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 had 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 either by way of remission or cessation thereof, the amount so obtained by him or the value of benefit accruing to him shall be deemed to be the profits and gains of business or profession and chargeable to income-tax as the income of that previous year, irrespective of the fact whether the business or profession in respect of which the allowance or deduction was made is in existence in that year or not. Thus, the basic jurisdictional fact for Section 41(1) to apply is that allowance or deduction must have been made in the assessment for any year in respect of excise duty. It is now an agreed fact that neither the assessee claimed this amount as a deduction in any of the previous years nor was it allowed as a deduction in any of the previous years. The Department wanted to treat the sum of the refund as income by invoking the provisions of Section 41(1) on the premises that the sum in question must be deemed to have been allowed as a deduction in some unspecified previous year, though not claimed by the assessee as a deduction. In other words, the method of accounting employed by the assessee was so interpreted as to supply a ground for the view that allowance for excise duty was allowed in some of the earlier previous years.

54. At this stage, it may be pertinent to point out that the assessee, who was running a manufacturing unit as a sole proprietor in the name of Jyoti Plastic Works, was contending that he was not liable to pay any excise duty on the manufacture of his goods. This claim was not accepted by the Excise Department. It compelled the assessee to pay the excise duty which it paid under protest. The assessee also collected the money from his customers who are specified, identifiable and continued to be so even today. Thus, this amount was included in the sale bills. For the purpose of accounting in the books of account of the assessee, the amount of excise duty, sales tax collected and the goods returned, if there were any, were deducted from the sales and the net sales were credited to the trading account, the excise duty, sales tax and the goods returned being credited to their respective accounts.

The amount of excise duty and sales tax, as and when paid, was debited to their respective accounts and the balance in those accounts was being carried forward in the balance-sheet either as credit balance or as debit balance, as the case may be. From the method of accounting employed by the assessee, the inference drawn by the Department was that since the excise duty collected by the assessee formed a part of turnover, which amount should have been credited to the trading account as goods sale value, and since only that amount was credited to the trading account deducting therefrom the excise duty, sales tax, etc., the amount so deducted should be deemed to have been allowed as a deduction by the Department. The underlying postulate was that if the full value of the sales was credited to the trading account and excise duty was debited to the trading account, the net effect would have been as if the amount of excise was claimed and was allowed as a deduction.

Since the same effect was achieved in the way the accounts were maintained by crediting the net sales to the trading account, the assessee must be deemed to have been allowed the deduction and the deemed deduction was also covered by Section 41(1) of the Income-tax Act, This was the argument of the Department which was accepted by the learned Accountant Member in his detailed and elaborate order, whereas the learned Judicial Member was of the opinion that there must be a conscious claim made by the assessee for the deduction and a conscious allowance by the Department for it, and in the absence of both, there could never be a claim of its allowance. Both the Members have relied upon several decisions of the High Courts in respect of their respective views. But, I am of the opinion, as I mentioned in the beginning of the order, that there must be a claim made by the assessee for the allowance of this sum and the allowance by the Department of the sum under Section 41(1) never spoke of a deemed allowance or a deemed deduction. The intention of enacting Section 41(1) was that if an allowance or deduction was made to an assessee of any loss, trading liability, expenditure as a deduction in computing his income from business or profession and the assessee gets any benefit in whatsoever manner subsequently, that benefit, to that extent, has to be recouped and brought to tax as income of the same business or profession the underlying object being that to the extent the benefit was so obtained out of the loss, expenditure, trading liability, albeit in the subsequent year, the allowance made earlier must be deemed to have been made in excess of the business needs. This is the basic philosophy in enacting Section 41(1), i.e., the benefit given earlier must be taken by the Department by way of recoupment. There was a controversy at one time whether the allowance or deduction given to one assessee can be assessed to tax in the hands of another assessee. Almost all the High Courts have been unanimous in the view that the assessee must be the same, and if there is any change in the assessee, the allowance or deduction so made could not be brought to tax. Even after this judicial opinion expressed, the Legislature never changed the position, implying thereby that the benefit given to one assessee cannot be brought to tax in the hands of another assessee. This supports the view of recoupment of excess benefit given in earlier assessment years. There is, therefore, no scope for a deemed allowance or a deemed deduction to invoke the provisions of Section 41(1) of the Income-tax Act. If such a thing is permitted, it would amount to bringing to tax any receipt irrespective of whether it falls within the four corners of the definition of "income" or the concept of "income".

55. The second aspect is that there is a direct decision of the jurisdictional High Court in the case of CIT v. Nathuabhai Desaibhai [1981] 130 ITR 238, where, under almost identical circumstances, the Madhya Pradesh High Court held that such refund would not be taxed under Section 41(1) of the Income-tax Act. While the case before me was a case of refund of excise duty, the case before the Madhya Pradesh High Court was a case of refund of sales tax. The relevant facts of that case are that the assessee there collected sales tax from its constituents during the assessment years 1952-53 to 1959-60 and paid the same to the State Government. Later, the amount was refunded to the assessee during the previous year relevant to the assessment year 1970-71 as the levy was found to be illegal and unconstitutional. The Income-tax Officer assessed the amounts of refund of sales, tax as income from the business under Section 41(1), in the assessment year 1970-71, on the ground that the amounts were allowed as deduction in the assessments of the assessee in the past. On appeal, the Appellate Assistant Commissioner held that no deduction was ever claimed by the assessee or allowed by the Revenue during the assessment years 1952-53 to 1959-60 and, therefore, Section 41(1) did not apply and the refund of sales tax could not be treated as income in the previous year On further appeal, the Tribunal affirmed the order of the Appellate Assistant Commissioner. On a reference, at the instance of the Revenue, it was held by the High Court of Madhya Pradesh that (i) the refund of sales tax could not be assessed as income under Section 41(1) as in the previous year no allowance or deduction was allowed in the assessment in any previous year ; and (ii) the Department contended that even if Section 41(1) was not applicable, the sales tax refund would be charged to tax as income of the assessee for the relevant previous year and the High Court had power to examine the chargeability of the amount to tax de hors Section 41(1). Repelling this argument, the High Court held that if such a contention was required to be accepted, the High Court would have to enquire into not only the taxability of the receipt but also about the year or years in which various amounts paid in numerous instalments could be chargeable to tax. There was no factual foundation for such an enquiry ; the High Court could not make a general enquiry.

The High Court further held that unless it is proved that an allowance or deduction has been made in any previous year, it is not open to the Revenue to refer to Section 41(1), for charging tax on receipt by the assessee of a refund in a subsequent year. Referring to Section 41(1} of the Income-tax Act, the High Court held that the condition prescribed for charging to tax was "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... ." This shows that that it must be proved that an allowance or deduction has been made in any previous year, only then it will be open to the Department to invoke Section 41(1) for bringing to tax the receipt by the assessee of any refund or any other benefit out of such expenditure in a subsequent year. This legal position was not challenged by the Department before the Madhya Pradesh High Court as is made clear from the following observation of the High Court at page 242 of its report : "This clear legal position, indeed, could not be challenged before us." 56. The same is the position in the case before me also except that it is excise duty here and sales tax there. Otherwise the facts are identical. When there is a decision of the jurisdictional High Court explaining the legal position in a particular way, it is binding upon the Income-tax Appellate Tribunal and the Income-tax Appellate Tribunal has no option except to follow it and apply it. Not only the Income-tax Appellate Tribunal, even the Revenue is bound by the decision pf the High Court functioning Within the jurisdiction of the High Court. This is very clear from the provisions pf article 227 of the Constitution.

The judicial opinion on this issue is never to the contrary. Therefore, when there is a decision pf the jurisdictional High Court, that should have been followed. The learned Accountant Member, not only noticed the decision of the jurisdictional High Court, hut made an attempt to distinguish it with reference to the decisions given by some other High Courts. Apart from the fact that this attempt in a judicial body like ours is not proper and warranted, the decisions given by the other High Courts were not cases where deductions Were allowed. Here, an interpretation is being placed upon the method of accounting employed by the assessee to suggest that the deduction was allowed by the Department, while making the assessment is not so (sic). Take the case of a truck operator. There, the Department estimates the income per truck at a particular figure net of depreciation. When the truck was sold, questions arose whether depreciation could be deemed to have been allowed for the purpose pf bringing the depreciation to charge as income under Section 41(1) of the Income-tax Act, 1961, or Section 10(2)(vii) of the Indian Income-tax Act, 1922, which is in pari materia with Section 41(1) of the Income-tax Act, 1961. The High Courts have held that unless the depreciation was shown to have been allowed as a deduction, a mere assumption that depreciation was deemed to have been allowed in arriving at the net income was not sufficient to attract the provisions of Section 41(1) of the Income-tax Act, 1961. The Departmental Representative also struggled hard to wriggle out of this factual and legal position, but could not suggest a way put of the impasse.

57. Without, therefore, making a reference to the cases referred to by my learned brothers in their orders, and following respectfully the decision of the jurisdictional High Court which, without dispute, is binding on us, I am of the view that the sum in question cannot be brought to tax as income under Section 41(1) pf the Income-tax Act, 1961.

58. What is more, the nature pf the amount pf excise duty collected by the assessee was more by way pf a deposit from the customers as the assessee was contesting the very levy of excise duty. The amount refunded to it by the Central Excise Department was also with a direction to refund it to the customers. The assessee did refund amounts to the customers, the details pf which were available on record. Those who claimed the refund got it and those who did not claim did not get it. But, the liability to refund persists. The character pf the amount collected by way pf deposit does not undergo any change with the passage of time. This is also the settled position of law. It is not as if the customers are not indentifiable. It is admitted that all the customers from whom excise duty was collected continued to remain with the assessee but they were not claiming the refund as they have regular running accounts with the assessee and also for a variety of business considerations. It cannot, therefore, be said that the assessee had appropriated the money or that the liability to refund has ceased.

59. For all these reasons, I am inclined to agree with the view expressed by the learned Judicial Member.

60. The matter will now go before the regular Bench for disposing of the appeal in accordance with the opinion of the majority on this point.

61. Before I part with this matter, I would like to mention that while the order of the Judicial Member shows that the amount in question was Rs. 10,99,024, the amount mentioned in the point of difference of opinion was Rs. 10,24,652. The Bench, I hope, will look into this matter at the time of disposal of the appeal.