1. This is an appeal, preferred by the assessee, Des Raj Chiranji Lal Steel Rolling Mills, a registered partnership firm, for the assessment year 1978-79 for which the relevant accounting year was 1-4-1977 to 31-3-1978. The only dispute raised by the assessee would be apparent from the following ground taken in this appeal : "That order under Section 250 is against law and facts on the file inasmuch as the learned Commissioner (Appeals) gravely erred in upholding the action of the ITO in bringing to tax a sum of Rs. 2,41,131 under Section 41(1) of the Income-tax Act, 1961 even though there was no cessation of liabilities. He failed to appreciate the facts and circumstances of the case and law applicable thereto. In any case, amount of Rs. 2,14,131 was wrongly held to be taxable during assessment year 1978-79".
2. The facts pertaining to the issue are that during the year under consideration, the assessee-firm received a sum of Rs. 1,89,571.73 and Rs. 24,559.53 by way of refund of central excise duty from the Assistant Collector, Central Excise Department, Patiala, but the said two refunds which were allowed on 7-5-1977, came to be questioned on 23-11-1977 and in consequence of this dispute raised by the Central Excise Department, the assessee elected to show the said two amounts as liability, pending final disposal of the dispute in respect of above stated two refunds. The ITO, in the course of assessment proceedings, subjected the amount of Rs. 2,14,131 (Rs. 1,89,571.73 plus Rs. 24,559.53) with the following observations : "REFUND FROM CENTRAL EXCISE DEPARTMENT - In the copy of the balance sheet, a note has been given that during the year under consideration the firm received a sum of Rs. 1,89,571.73 and Rs. 24,559.53 by way of refund of central excise duty from Central Asstt. Collector, Central Excise, Patiala. It has further been stated that vide show cause notice issued by the Central Excise Department, the validity of this refund has been questioned and in view of the disputed nature of such excise duty refund, the same have been shown as liability pending final assessment of the dispute in respect of the above stated refunds. During the assessment proceeding vide order-sheet entry dated 21-8-1978 and 26-10-1978 and finally on 15-2-1979 the counsel of the assessee was requested to establish the genuineness of the alleged liability but the assessee could not establish its alleged liability to the return of the refund in spite of repeated opportunities by the production of evidence in the form of provisions of law or any case law which may support the assessee's contention that refund had to be returned. As the assessee could not establish the genuineness of the claim with any case law or legal law provision that the assessee was entitled for such exemption, his attention was drawn to some other similar cases wherein such like refunds of central excise duty were received by the firm of Gobindgarh and they declared all such refunds suo motu in the relevant copy of profit and loss account. These cases are Saraswati Steel Rolling Mills, Gobindgarh, Rs. 78,678.76; Surindra Steel Rolling Mills, Gobindgarh, Rs. 48,059.73; and Panesar Steel Rolling Mills, Gobindgarh, Rs. 1,08,049.60.
Assessments in the first two cases have since been completed. It will not be out of place to mention that Shri Mohan Lal, advocate, is the counsel of Surindra Steel Rolling Mills who have suo motu declared the amount of the abovesaid refunds in the income and expenditure statement of this firm and no exemption has been claimed by him in this case. Although the the circumstances in all such like cases are the same, the counsel of the assessee could not make a causeway in this particular firm's case as he has claimed an exemption by showing this amount taxable under Section 41(1) of the Act and mere issue of notice by the excise department does not lead to the conclusion that the assessee-firm has actually returned the amount of refund to the said department. In fact, this amount of refund received by the assessee-firm is taxable in the hands of the firm. This has been done suo motu by other firms of the same town.
Considering all these facts, the alleged claim of the assessee for exemption and shown as liability pending till final settlement of the dispute is not acceptable and as such this amount being clearly taxable, is added (Rs. 2,14,131)." 3. When the assessee carried the matter before the Commissioner (Appeals), the Commissioner (Appeals), after taking into consideration the submissions made by the learned counsel, observing that the assessee has necessary evidence mentioned in show-cause notice which was already produced before the Assistant Collector, and the show-cause notice was barred by limitation, in view of rule 10 of the Central Excise Rules and as the excise department did not ask the assessee to repay the money back confirmed the finding of the ITO that the amount of Rs. 2,14,131 was clearly taxable under the provisions of Section 41(1) of the Income-tax Act, 1961 ('the Act').
4. It is this action of the Commissioner (Appeals) which is contested by the assessee before us. After narrating the above stated facts in brief, the learned counsel for the assessee, Sh. Mohan Lal, submitted that perusal of Section 41(1) has two important limits pertaining to liability -one being 'remission', and the other being 'cessation'.
Though the assessee got the refunds, it no more remained a case of cessation of trading liability, no sooner the show-cause notice dated 23-11-1977 came to be served on the assessee before the accounting year was over. He placed his reliance on the Punjab and Haryana High Court judgment in the case of CIT v. Punjab Oil Mills [1976] 102 ITR 332 and after arguing at length and taking us through the show-cause noticed and the assessee's reply to the same, he also drew our attention to an order of the Addl. Secretary to the Government of India in the case of Punjab Steel Rolling Mills wherein alike refunds, originally granted, were canceled and an order rejecting the claim came to be restored. He also drew our attention to the very recent correspondence between the assessee and the central excise which indicated that the issue is still under dispute and getting the attention of the concerned authorities.
In these circumstances, he vehemently argued that the action of both the lower authorities is against law.
5. The learned departmental representative, Shri M. P. Singh, on the other hand, beside relying on the orders of the two lower authorities, highlighted the fact that in response to show-cause notice the assessee came to challenge the same being time-barred, there cannot be a stronger case of cessation of trade liability. So far as remission is concerned, it is clear that the said amount came in the assessee's covers. He submitted that in identical three cases which have been relied upon by the ITO, challenge of audit department was accepted and he placed his reliance on the Allahabad High Court judgment in the case of CIT v. Taj Gas Service [1980] 122 ITR 1034. He stoutly argued that except show cause notice there was nothing and that alone could not be that fatal to the revenue's case.
6. The learned counsel for the assessee submitted that reliance of the learned departmental representative in the case of Taj Gas Service (supra) is not only misplaced but deserves to be ignored, when we have the Punjab and Haryana High Court judgment available on the issue, which supports the assessee's contention.
7. After taking into consideration the rival submissions, we are unable to confirm the finding of the Commissioner (Appeals). There is no controversy about the following facts : (i) the assessee got the two refunds on 7-5-1977 from the Central Excise Department which amounted to Rs. 2,14,131; (ii) the assessee got show-cause notices dated 23-11-1977 from the Assistant Collector in respect of both the refunds during the year under consideration; and (iii) the said show-cause notices are undoubtedly disputed but the dispute is not laid at rest till date and the Damocles' sword is still on.
8. When above facts are the uncontroverted facts, we look to Section 41(1) which reads as under : "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." From perusal of above Section, it is apparent that it applies only if (i) an allowance or deduction has been made in computation of profits and gains of business or profession in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee; and (ii) 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. When we apply the above limbs to the instant case, we find there is no dispute about the first parts of it. But when we take into consideration the last twelve words, viz., 'in respect of such trading liability by way of remission or cessation thereof', we find that it no more remained a case of cessation of such trading liability, the moment the show-cause notice was served on the assessee. If, for a moment, we ignore Section 41(1) and go to allowability of an expenditure, in respect of which a demand, rightly or wrongly, was created by the central excise, it would have been a clear case for admissibility of such an expenditure though the assessee may have come forward with a dispute in respect of the same. On the same principle, we are afraid we do not find that trade liability regarding payment of excise duty resulted into a cessation. Though the assessee got a refund, but was immediately followed by a show-cause notice in consequence of the audit objection.
9. The Punjab and Haryana High Court decision in the case of Punjab Oil Mills (supra) may not be applicable in the instant case on all fours because in that case, it was in view of the provisions of the Amendment and Validation Act that their Lordships came to the conclusion that there was no cessation in the liability of the assessee-firm to pay the tax on the date when the tax was refunded to it. Whereas, in the instant case, there is no Act of that type promulgated but if we look to the principles laid down by their Lordships in the said case, as a consequence of show-cause notice for calling back the refunds, it cannot be said that the trading liability came to cease. When we look to the Madras High Court decision in the case of CIT v. India Cements Ltd. [1975] 98 ITR 69, we find that their Lordships had occasion to deal with Section 10(2A) of the Indian Income-tax Act, 1922, which was identical to Section 41(1).
"... The allowance or deductions shall have been made in the assessment in respect of any loss, expenditure or trading liability in accordance with the Act and the assessee must have received in the subsequent year any amount in respect of such loss or expenditure in order to attract the provisions of Section 10(2A). It does not cover a mistaken payment or mistake in calculation. The allowance, which was legally made, to the extent the assessee was able to reimburse himself, was added on to the assessee's income in the years in which the assessee was able to reimburse himself ..." (p. 75) In the instant case, undoubtedly the assessee got a refund in respect of the excise duty which was earlier paid by the assessee but there cannot be greater proof in respect of the said refund that that it was a mistaken one in the presence of the show-cause notice from the excise authorities themselves and in as the refund was mistaken it was not a cessation of such trading liability which is envisaged in Section 41(1).
10. When we peruse the assessee's compilation, we come across an order in the case of Punjab Steel Rolling Mills (supra) placed at pages 12 and 13, which indicate that alike refund granted to that mill came to be canceled The mere fact that the assessee has taken issues that the original evidence on the basis of which refund was granted was enough and the show-cause notice was barred by time would not make the said refund undisputed and free from mistake.
11. Reliance of the learned departmental representative on the the case of Taj Gas Service (supra) is misplaced, because the facts of that case were quite different. That was a case where payment of sales tax was allowed as expenditure and on its refund as a consequence of appeal, which then held the field, their Lordships came to a conclusion that the same could be subjected to tax under Section 41(1) though the sales tax department did not acquiesces to this order and filed a revision before the Judge Revisions, Sales Tax, Agra. In the instant case, it is not that the grant of refund is disputed in appeal, but the refund granting authority itself has observed that the said refund was granted under a mistaken belief or on the basis of evidence which would not have entitled the assessee to any refund. under these circumstances, it cannot be said that this was a cessation of liability and as such the assessee's claim deserves to be accepted.
12. Before we part, we may observe that identical show-cause notices were accepted by three more parties, may be that in one of them the lawyer representing in the instant case was arguing for the assessee, cannot lend any assistance to the case of the revenue because, to our mind, that is hardly of any relevance and action of those three parties can neither be precedent nor binding in the instant case.
13. As we have reversed the finding of the Commissioner (Appeals), the assessee's appeal is allowed.