Commissioner of Income Tax vs Ancherry Pavoo Kakku

K.P. Radhakrishna Menon, J.—Pursuant to the directions issued by this court in O. P. No. 4216 of 1976-B, the Income Tax Appellate Tribunal, Cochin Bench, for short "the Appellate Tribunal", has referred the following questions for our opinion :

" 1. Whether, on the facts and in the circumstances of the case and on an interpretation of Section 41(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal is right in law in holding that the onus is on the Income Tax Officer to prove that the refund obtained by the assessee had been allowed as a deduction in the earlier years ?

If the answer to the above question is in the negative, whether, on the facts and in the circumstances of the case, the Income Tax Officer has not discharged the onus of proof ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in interfering with the order of the Appellate Assistant Commissioner who only directed the Income Tax Officer to examine the assessee''s claim and to tax only those amounts which have been debited in the accounts in the earlier years ? "

The Revenue is before us. The year of assessment is 1972-73 corresponding to the accounting period ended on December 31, 1971 (1146 M.E.).

The assessee is a registered firm. Amongst other businesses, the petitioner is doing business in cigarettes. During the year in question, the assessee received a sum of Rs. 51,400 by way of refund of the "Luxury tax collected in the form of a fee for licence for the vending and stocking of tobacco" (as seen from annexure-A, G.O. (MS) 14/71/RD dated January 27, 1971), it had paid to the Excise Department during the assessment years beginning from 1952-53 to 1959-60.

In the profit and loss account for the year in question, the assessee has shown the above refund of Rs. 51,400 as a credit. However, in the adjustment statement filed along with the return, the assessee included only a sum of Rs. 27,838 as profit assessable u/s 41(1) of the Income Tax Act, 1961, for short, "the Act". In respect of the balance amount, the assessee contended that the same was not liable to be treated as income of the previous year in question because the same had not been allowed as a deduction in the earlier years.

In proof of the above statements, the assessee produced before the assessing authority the trading and profit and loss statement for the assessment years 1953-54 to 1959-60 (annexure-C series).

The assessing authority enquired into this question and held as follows:

" The assessee had been paying licence fee right from the assessment year 1952-53. The assessee has claimed before the Excise Department that the amounts totalling to Rs. 52,570 related to the assessment years 1952-53 to 1959-60 and represented that, as finally, this amount was decided not payable, the entire sum should be, refunded. But as the assessee could produce evidence, viz., challan receipts, etc., for payment of Rs. 51,400 only, the actual amount refunded to the assessee is only Rs. 51,400. From these details, it is evident that the assessee had made payments to the extent of Rs. 51,400 during these years. It may be that only Rs. 27,838, as claimed by the assessee, must have been debited to the licence fee account......Admittedly, the assessee had paid Rs. 51,400 during these years and after having claimed and obtained the same from the Excise Department, the assessee could have proved by production of accounts that actually only Rs. 27,838 has been debited to the accounts, the balance being paid out of other funds. In the absence of evidence and the necessary accounts to prove the same, the natural presumption is that the assessee should have paid all these amounts and it might have debited the same to some other heads of account. By production of accounts, this could have been very well established. But the relevant accounts have not been produced. Under these circumstances, I am unable to accept the assessee''s contention that only Rs. 27,838 is assessable u/s 41(1). The entire amount of Rs. 51,400 is, therefore, treated as income assessable u/s 41(1)." (annexure-D)

The Appellate Assistant Commissioner before whom the assessee had challenged the above order of assessment, disposed of the appeal entering the following findings :

" There is no doubt about the fact that it is only the allowance or deduction which is found to have been made in the assessment for any year in respect of loss, expenditure or trading liability that may be brought to tax subsequently u/s 41(1). The Income Tax Officer is, however, entitled to examine whether an allowance or deduction has been made in an earlier year either directly by debit to the profit and loss account or indirectly by debit to any other account. The appellants are, therefore, directed to produce the books of account of the relevant years in order that the Income Tax Officer may be able to examine this question and the Income Tax Officer is directed to bring to tax only such amounts as is found to have been debited in the accounts for the payment of the licence fees which have been refunded to the appellants by the Excise Department." (annexure-F).

The Appellate Tribunal who heard the second appeal, which the assessee had filed against the order of the Appellate Assistant Commissioner (annexure-F), held as follows :

" The assessee having made it clear that the character of the amount is only refund of licence fees, unless all the conditions of Section 41(1) are satisfied, it cannot be taxed. The Income Tax Officer has to prove that the claim for deduction had been allowed in the earlier years. For this purpose, the circumstances referred to would not be sufficient. It may be that the balance of the amount had not been claimed as a deduction. We find that the writ matter is a prolonged affair and perhaps the assessee had paid the amount under protest and had not debited to the profit and loss account but had debited to some other suspense account. In such a case, it would not have been claimed as a deduction. It is true that the assessee was not able to produce the books of account and, in the normal circumstances, an adverse inference could be drawn. But evidence had been produced that the books were destroyed and it is not possible for them to produce those books. Added to this we are asking in 1973, the books of account of early fifties, i.e., books which are more than 20 years old. If the assessee expresses inability to produce such old books, it cannot be treated as a matter of adverse inference. We, therefore, will conclude that the onus being on the Department to show that these amounts were claimed as deduction in the earlier years, the onus had not been discharged and, therefore, the balance cannot be brought to tax u/s 41(1). The addition will be deleted." (annexure-H) .

The questions mentioned above arise out of the above order of the Tribunal.

Before we deal with the various aspects of the case placed before us by the counsel on both sides, we shall consider the scope of Section 41(1) of the Act under which the receipt in question has been brought to tax. Section 41(1) reads:

" 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. "

This section provides that where an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability and subsequently during any previous year, the assessee has received whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure, or the assessee is benefited by the remission or cessation thereof, the amount thus obtained by him from the value of the benefit thus accrued 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 in respect of which the allowance or deduction had been made is in existence in the year in which the liability arises or not. This sub-section enables the Revenue to tax as income what it had allowed as a deduction in the earlier years. This receipt, however, can be taxed only in the previous year in which the assessee received it. It should, therefore, be established that the receipt sought to be assessed represented the allowance or deduction granted or the remission or cessation of the trading liability allowed to be deducted in any year prior to the previous year in which the amount was received.

The section, however, does not warrant a detailed enquiry whereby an assessee can be called upon to produce his books of account and other documents to establish his case, as in the case of a regular assessment. The allowance or deduction made in the assessment for any year can be ascertained from the order of assessment of that year. If that be so, the Revenue is not justified in directing the assessee to produce the accounts and other documents relating to the years in which he had been allowed the "Luxury tax collected in the form of a fee for licence for the vending and stocking of tobacco" as an item of expenditure which, subsequently, was refunded by the Excise Department in the previous year.

For the reasons stated above, we are of the view that the assessing authority was not justified in rejecting the plea of the assessee that out of Rs. 51,400 refunded to it by the Excise Department, only Rs. 27,838 is liable to be taxed by invoking Section 41(1) of the Act, on the ground that the assessee failed to produce the accounts relating to the years of assessment 1951-52 1959-60. For the same reason, the Appellate Assistant Commissioner is not justified in issuing the following directions to the assessee, namely, "to produce the books of account of the relevant years in order that the Income Tax Officer may be able to examine this question and the Income Tax Officer is directed to bring to tax only such amounts as is found to have been debited in the accounts for the payment of the licence fees which have been refunded to the appellants by the Excise Department ".

In the light of what is stated above, we are of the opinion that the question on whom the onus lies to show that the refund in question had been allowed as a deduction in the earlier years, does not arise at all. As already stated, the investigation envisaged u/s 41(1) is only the verification of the orders of assessment for the earlier years in which the assessee had been granted the deduction or allowance. The assessing authority, therefore, can even now verify the orders of assessment for the said years and determine the profit liable to be taxed u/s 41. We are, therefore, of the view that the questions aforesaid do not require to be answered and accordingly we decline to answer them.

A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.