COMMISSIONER OF INCOME TAX vs KESARIA TEA CO. LTD.

Arijit Pasayat, CJ.

Accepting prayer for reference in terms of section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ''the Act''), the Tribunal, Cochin Bench, has referred following question for opinion of this court:

"Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that Rs. 3,02,758 cannot be brought to tax and in deleting the addition of Rs. 3,02,758 sustained by the Commissioner (Appeals) ?"

Factual position as set out in the statement of case is as follows: The assessee, a company in which public are not substantially interested, is engaged in business of exporting tea, pepper and other spices. For the assessment year 1985-86 corresponding to previous year ending 31-3-1985, the assessee wrote back in its account a sum of Rs. 14,65,997 representing provision for purchase tax of earlier years, i.e., 1978-79 to 1980-81. Sum of Rs. 6,61,413 was brought to tax in reassessment for the assessment year 1980-81 by disallowing provision made in accounts. In assessment for the assessment year under consideration, i.e., 1985-86, the assessing officer added total sum of Rs. 14,65,997 as provision for purchase tax for earlier years written back during that year. Matter was carried in appeal before the Commissioner (Appeals), Cochin. He was of the view that since sum of Rs. 14,65,997 included two sums, i.e., Rs. 6,61,413 and Rs. 5,01,826 relatable to the assessment years 1980-81 and 1981-82, and have already been included in assessments for concerned years, only Rs. 3,02,758 relatable to the assessment year 1978-79 was to be included. For arriving at such a conclusion, the Commissioner (Appeals) referred to the fact that additions in reassessments for the assessment years 1980-81 and 1981-82 had since been confirmed in appeal by the Commissioner (Appeals) and matters for those years were pending before the Tribunal. It was further noticed that SLP filed by the Kerala Government against decision of this court in the case of Neroth Oil Mills, which was foundation of the claim, was rejected by the Apex Court in November 1984 and so it could be said that liability finally ceased during the year under appeal. Therefore, he also held that addition of Rs. 3,02,758 u/s 41(1) was warranted in the case of the assessee. Further, he observed that if the assessee succeeds in appeals relating to the assessment years 1980-81 and 1981-82 before the Tribunal, entire sum of Rs. 14,65,997 could be brought to tax. Matter was carried in appeal before the Tribunal. The Tribunal noticed that reassessment made for the assessment years 1980-81 and 1981-82 had been held to be bad in law and further it was held that provisions for purchase tax liability could not be allowed, as sales tax assessments were pending for those years. So far as finding of first appellate authority that in view of decision of the Apex Court in Neroth Oil Mills there was cessation of liability during the year ending 31-3-1985, the Tribunal noticed that for claiming exemption from payment of Central sales tax in terms of Central Sales tax Act, 1956 (hereinafter referred to as ''CST Act'') the assessee had to prove two conditions. In Neroth Oil Mills'' case, only first condition was the bone of contention before this court and second condition was not under consideration. Conditions are: (i) things purchased and things exported are one and the same commodity; and (ii) purchases were against firm orders for export. Finding of the Tribunal was that decision of this court in Neroth Oil Mills'' case has not resulted in cessation of liability for purchase tax. Referring to rejection of Special Leave Petition, it was observed that same did not amount to an adjudication on merits. It was further noticed that sales-tax department was pursuing the matter in respect of purchase tax for and from the assessment year 1974-75 and cases were pending before sales-tax authorities. It was, therefore, observed that unilateral action on the part of the assessee cannot extinguish statutory liability. The Tribunal was, therefore, of the view that no part of Rs. 14,65,997 could be brought to tax. Accordingly, addition sustained by the Commissioner (Appeals) was deleted. The revenue moved an application for reference u/s 256(1) which, as indicated above, has been accepted and question has been referred.

The learned counsel for the revenue submitted that the legal issues have not been properly considered. After decision of this court and Apex Court, the matter had attained finality and this aspect was lost sight of by the Tribunal. The learned counsel for the assessee submitted that order assessed by the Tribunal for earlier assessment years 1980-81 and 1981-82 and hearing notices issued by sales-tax authorities clearly indicate that matter had not attained finality. The Tribunal had in earlier orders held that reassessments were bad and further held that provision for purchase tax liability cannot be disallowed as sales-tax assessments were pending. Reference applications were also rejected. Petitions filed by the revenue against order of the Tribunal striking down reassessment orders for previous two assessment years, i.e., 1980-81 and 1981-82 and also striking down disallowance made in respect of provisions for purchase tax were dismissed in O.P. Nos. 1064 and 2955 of 1994. Factual position as indicated above was also analysed. The learned counsel for the assessee submitted copies of several assessment orders which relate to the assessment year 1979-80 under the Kerala General Sales Tax Act, 1959 (''hereinafter referred to as the `State Act'') and the assessment years 1980-81 and 1981-82 under the aforesaid Acts and the order of assessment dated 28-12-1997 for perusal. According to him, they are clearly indicative of the fact that the matter had not reached finality and there was no cessation of liability as contended by the revenue.

Section 41 deals with `profits chargeable to tax''. Section 41(1) deals with cessation of liability. Said provision has application only if (1) an allowance or deduction had been made in computation of profit and gains of a business or profession, in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee; and (2) 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 by way of remission or cessation thereof. it is, therefore, clear that following conditions must be fulfilled before section 41(1) can be held to be applicable: (i) in the assessment of an assessee, an allowance or deduction has been made in respect of any loss, expenditure or trading liability incurred by him; and (ii)(a) any amount is obtained in respect of such loss or expenditure; or (ii)(b) any benefit is obtained in respect of such trading liability by way of remission or cessation thereof; (iii) such amount or benefit is obtained by the assessee; and (iv) such amount of benefit is obtained in a subsequent year. Where the provisions of section 41(1) are attracted, the sub-section enacts two fictions where under-

(a) the amount obtained by the assessee or the value of benefit accruing to him is deemed to be profits and gains of business or profession which otherwise would not be income, and

(b) such amount or value of benefit is made chargeable to Income Tax as the income of the previous year wherein such amount or benefit was obtained, and, that is so irrespective of the fact whether the business or profession in respect of which the allowance or deduction had been made is in existence in that year or not.

In other words, the deeming provisions of section 41(1) have, thus, two effects, namely :

(i) that although ordinarily the amount of remission or cessation, etc., ,would not be profits and gains, it has to be regarded as such profits and gains, and

(ii) such an amount so forgiven by way of remission or cessation, etc., has to be regarded as profits and gains of business or profession accruing or arising in the previous year wherein it is obtained.

It is apparent on a bare reading of section 41(1) that it consists of two parts. The first part contemplates loss, expenditure or trading liability in some former year for which allowance or deduction had been made in any previous assessment year. The second part contemplates recoupment of `such'' loss or expenditure or benefit in respect of ''such'' trading liability by way of remission or cessation thereof in some subsequent year. The word `such'' appearing in the second part is significant. It signifies that the recoupment or benefit must be in respect of loss, expenditure or trading liability mentioned in the first part. For section 41(1) to be invoked, concerned liability of the assessee must have ceased finally. There must be no possibility of liability reviving in any future time. If there is any such possibility, then cessation is not complete and section 41(1) is not attracted. Under all sales-tax laws, the moment a dealer makes a sale or purchase where statute makes purchase taxable in the hands of purchaser, an obligation to pay tax arises and taxability is attracted. Sales-tax is a compulsory levy under sanction of Legislature and there is no discretion left to the assessee as regards extent of payment. The direct purpose for which money is laid out is not for the benefit of business, and payment goes for the benefit of State. It is payable irrespective of any profit being earned. But without such payment, business of buying and selling cannot be carried on. Therefore, sales-tax payment is deductible as a business expense.

If legal principles as set out are applied to factual position highlighted above, inevitable conclusion is that the Tribunal was justified in its conclusion.

Reference is, accordingly, answered in the affirmative in favour of the assessee and against the revenue.