Appeal No 270 of 1960
Appeal from the judgment and order dated February 21 1956 of the Andhra Pradesh High Court in Case Reference No 4 of 1955
K N Rajagopal Sastri and D Gupta for the appellant
H J Umrigar Thiyagaraja and G Gopalakrishnan for the respondents
March 10
The Judgment of the Court was delivered by 30 234 SHAH J
The assessees are a firm carrying on business at Kurnool of manufacturing ground nut oil and cake
Under the Madras General Sales Tax Act IX of 1939 the assessees were entitled to a rebate of sales tax paid on goods purchased by them and used in the manufacturing process
The assessees maintained their books of account according to the Samvat Year ending with Diwali
The system of accounting was a mixture of mercantile and cash
Purchases and sales of goods on credit were duly entered in the books of account
The sales tax actually recovered by the tax authorities was debited when paid and amounts if any refunded were credited when received
The assessees had adopted the system which was permitted by the Act of paying tax calculated on the turnover of the previous year of account
Under this system tax was provisionally assessed by the Sales Tax Officer on the basis of the turnover of the previous year and thereafter the liability was adjusted at the end of the year of account in the light of the actual turnover of that year and of rebate allowed in respect of groundnuts pressed into oil
As a result of the final adjustment made by the sales tax authorities in some years the assessees were assessed to pay tax in excess of the amount provisionally assessed and in others they obtained refund of the excess tax paid under the provisional assessment
The following tabular statement shows the official years for sales tax provisional demands made by the sales tax authorities the final demands and the adjustments made in that behalf
Official Provi Filial Adjustment Year sional RefundAddi ended
demand
demand
tional levy
Rs Rs Rs Rs 31 3 1942 2679 1 872 807 31 3 1943 3046 2863 183 31 3 1944 14509 18402 3893 31 3 1945 47276 20037 27239 31 3 1946 45315 13379 31936 For the assessment year 1946 47 corresponding to the year of account October 18 1944 to November 41945 the assessees claimed in their assessment to 235 income tax to deduct Rs 49633 being the amount of sales tax paid under a provisional assessment
In the year ending 31 3 1945 the assessees had paid Rs 47276 as sales tax provisionally assessed
They also had paid in that year Rs 3894 in adjustment of the liability for the previous year towards sales tax due
After giving credit for Rs 1537 received as rebate the total sales tax liability under the provisional assessment was Rs 49633
The Income tax Officer accepted this claim and debited it from the income in the assessment year 1946 47 in assessing the taxable income of the assessees
Deduction of salestax actually paid under provisional assessment less rebates was permitted by the Income tax Officer not only in the assessment year 1946 47 but also in the earlier years
The Excess Profits Tax Officer had also adopted for the chargeable accounting period prior to October 18 1944 the same method of computation but for the chargeable accounting period October 181944 to November 4 1945 the Excess Profits Tax Officer allowed out of the amount of Rs 47276 debited to sales tax only Rs 17055 as properly attributable to that period in computing the Excess Profits Tax liability
According to the Excess Profits Tax Officer the excess amount paid under he provisional assessment ie Rs 30221 could not be taken into account because under r 12 of Sch 1 of the Excess Profits Tax Act expenditure in excess of the amount reasonable and necessary for the business was not a permissible deduction
In appeal against the order of the Excess Profits Tax Officer the Tribunal affirmed the order
Against the order passed by the Tribunal confirming the order of the Excess Profits Tax Officer the assessees applied for and obtained an order referring the following question to the High Court of Judicature of Andhra Pradesh Whether there are materials for the Tribunal to hold that the aforesaid sales tax payments of Rs 30221 were unreasonable and unnecessary having due regard to the requirements of the business and not consequently deductible under r 12 of Sch
1 of the Excess Profits Tax Act 236 The High Court answered the question in the negative and against the order of the High Court this appeal is preferred with leave under section 66A2 and 3 of the Income Tax Act read with section 21 of the Excess Profits Tax Act
It is manifest that the assessees had not altered the method according to which their accounts were maintain Id
Year after year they were paying tax provisionally assessed by the Sales tax Officer on the turnover of the previous year subject to adjustment at the close of the year of account
This system of payment of tax under provisional assessments was not adopted with a view to evade tax liability
Nor was recovery of the amounts ordered to be refunded to the assessees delayed because of any deliberate inaction on the part of the assessees
It is not found that excess tax on inflated returns was paid in anticipation of the repeal of the Excess Profits Tax Act
The assessees for reasons of convenience adopted as they were entitled under the Madras General Sales Tax Act a system of payment of tax on provisional assessment based on the turnover of the previous year subject to final adjustment to be made at the end of the year
The assessees could opt for the system of paying sales tax on provisional assessment but the liability to pay tax imposed was on that account not voluntarily incurred
This system produced no direct benefit to the business and adjudged in retrospect it undoubtedly reduced the taxable income but if otherwise the payment was reasonable and necessary having regard to the requirements of the business it was not liable to be ignored in assessing the Excess Profits Tax liability of the assessees
By r 12 of Sch 1 of the Excess Profits Tax Act it is provided that in computing the profits of any chargeable accounting period no deduction shall be allowed in respect of expenses in excess of the amount which the Excess Profits Tax Officer considers reasonable and necessary having regard to the requirements of the business 
It is for the Excess Profits Tax Officer to decide whether the deductions claimed are reasonable and necessary having regard to the requirements of the 237 business
But the reasonableness and necessity of the expenditure sought to be deducted in assessing Excess Profits Tax liability must be adjudged in the light of commercial expediency
The payments made by the assessees were in discharge of obligation imposed lawfully and were necessary for the proper conduct of the business
By section 10 of the Madras General Sales Tax Act the assessees were obliged within 15 days from the date of service of the notice of assessment to pay tax and in default the amount was liable to be recovered as if it were an arrear of land revenue
Again by section 15 if the assessees failed to submit the return as required by the provisions of the Act or the rules made thereunder or failed to pay the tax within the time prescribed they were liable to be penalised
Payments made in satisfaction of liability which arises by virtue of the assessment made by the Sales Tax Officer cannot be called unreasonable
Payment of sales tax as assessed being obligatory and necessary for the purpose of carrying on the business it must in our opinion be deemed to satisfy the requirements of r 12 of Sch
1 of the Excess Profits Tax Act
The Excess Profits Tax Officer was in our opinion in error in thinking that the tax paid was in excess of the requirements of the business
We are also of the view that the Tribunal was in error in holding that by seeking to deduct only the tax properly attributable to the actual turnover during the chargeable accounting period the Excess Profits Tax Officer was not seeking to disturb the method of accounting which was followed by the assessees and was accepted by the taxing authorities for many years
Counsel for the Commissioner submitted that the rules relating to advance provisional assessment and levy of tax framed under the Madras General Sales Tax Act 1939 were inconsistent with the provisions of the Act and the assessees should have raised this contention and have obtained a decision from the court before paying tax on provisional assessment and not having done so payments made cannot be regarded as either reasonable or necessary
Counsel says that in In re M P Kumraswami Raja 1 the Madras High 1 1955 6 Sales Tax Cases 113 238 Court has declared this scheme of taxation on provisional assessment ultra Vires
But the reasonableness or the necessity of payments under r 12 Sch 1 of the Excess Profits Tax Act must be ascertained in the light of what may be regarded as commercially expedient and not on any legalistic considerations
It would not be expected of a businessman to start a litigation in respect of a tax which the Legislature of the State was competent to levy on the ground that the method devised for computing the tax liability was ultra vires
The tax was duly assessed and paid and the reasonableness and necessity must be adjudged in the light of the circumstances then prevailing and not in the light of subsequent developments
It may also be noticed that since the Madras High Court s decision in In re Kumaraswami Raja s case 1 the Madras Legislature by the Madras General Sales Tax Amendment Act VIII of 1955 retrospectively validated the levy
By virtue of this Act assessments made provisionally and the levy of the tax were to be regarded as valid notwithstanding any initial incon sistency between the provisions of the Act and the Rules framed thereunder
It may also be pointed out that no such question was referred to the High Court and not even an argument appears to have been raised in the High Court on this question
We are of the view that the High Court was right in answering the question in the negative
The appeal therefore fails and is dismissed with costs
Appeal dismissed
1 1955 6 Sales Tax Cases 118


Summary:
The appellants exchanged their property in Pakistan with the property of an evacuee in India
They applied for confir mation of the transaction which was granted by the Deputy Custodian
Later the Custodian revised the order and set aside the confirmation and ordered the ejectment of the appellants from the properties which were the subject of exchange
He further ordered that they should render accounts of the rents and profits realised by them from this property
The appellants contended that the Custodian bad no jurisdiction to pass any order requiring them to render accounts of the rents and profits
Held that the Custodian bad no power under the Adminis tration of Evacuee Property Act to direct a person in unauthorised possession of evacuee property to render accounts of rents and profits thereof without resorting to the ordinary remedy provided by law that is by way of suit