Case: M/S Polyflex (India) Pvt. Ltd Vs. Commissioner Of Income Tax, Karnataka

(2) For the assessment yeara sum of Rs. 9,64,206.00 which is the amount of excise duty refunded by the department was brought to tax by invoking S. 41(1) of theAct (for short Act). It appears that the excise duty was paid in the year 1986. On appeal, the first Appellate Authority as well as CEGAT held that the goods were not liable to duty. Onthe excise duty was refunded. On appeal filed to the High Court, it was dismissed. Thereafter, the Excise Department filed SLP in this Court. The fate of the SLP is not known. The appellant contended before the first Appellate Authority that there was no remission or cessation of trading liability within the meaning of S. 41(1) so long as the issue was pending determination by the Supreme Court. That contention was accepted and the appeal was allowed. The appeal filed by theDepartment against the said order was also dismissed. On a reference application filed by the Commissioner ofthe Tribunal referred the following question of law for the opinion of the High Court of Karnatakaon the facts and in the circumstances of the case the Tribunal is right in law in holding that excise duty refund is not assessable under S. 41(1) of the I.e High Court held that the Tribunal was not right in holding that the refunded amount was not assessable under S. 41(1) of the Act. However, the High Court observed that the Tribunal may consider the question whether the excise duty was actually refunded to the assessee or not and pass appropriate orders in the light of its finding. This observation was made after referring to the argument of the assessees counsel that the amount has not been received by the assessee. In coming to the conclusion that the excise duty refunded was liable to be taxed under S. 41(1) of the Act, the High Court relied on the decision of this Court in C.I.T. v. Thirumalaiswamy Naidu and Sons (230 ITR 534) . This view of the High Court has been questioned in this appeal.

Court's reasoning:
(4) It is true that in Thirumalaiswamy Naidus case the question of interpretation or applicability of any particular limb of S. 41(1) of the Act did not specifically fall for consideration. However, this Court did make it clear that when the assessee actually made payment towards statutory levy (sales tax) and later got back the amount by way of refund as a sequel to the judgment of the High Court, it becomes a revenue receipt and in such a situation, S. 41(1) is clearlyWe are of the view, apart from what has been laid down in Thirumalaiswamy Naidus case (supra), that the ingredients of S. 41(1) are satisfied in the instant case and, therefore, the amount of excise duty refunded becomes taxable during the year in question. This is a case in which the assessee can be said to have obtained the amount by way of refund in respect of the business expenditure incurred by it during an earlier year, for which the assessee had the benefit of deduction or allowance. Normally, the payment of certain amount to discharge the statutory levy such as sales tax, excise duty in the course of carrying on business is ane the assessee gets back the amount which was claimed and allowed as business expenditure during the earlier year, the deeming provision in S. 41(1) of the Act comes into play and it is not necessary that the Revenue should await the verdict of higher Court or Tribunal. If the Court or Tribunal upholds the levy at a later date, the assessee will not be without remedy to get back the relief.(8) True, expenditure and trading liability may be overlapping concepts; but theapparently intended to deal with allied concepts separately and specifically so as to make the provision as comprehensive as possible in order to effectuate the objective underlying the provision. The anatomy of the section and the collocation of the words employed therein would suggest that the test of cessation or remission of liability has to be appliedtrading liability and it cannot be projected into the previous clause.The High Court correctly appreciated the scope of S. 41(1) and applied the second limb of theto the fact situation. It may be noted that the assessee did neither pay the excise duty to the Government nor did it get refund of duty from the concerned authority. Notwithstanding the High Courts judgment in favour of the petitioner, the stage had not yet reached when it can be said that the liability for which allowance was given earlier ceased. The view taken by the High Court in substance is that the benefit in respect of the trading liability would accrue only when the liability definitely ceased after the termination of the proceedings in the Apex Court in favour of the petitioner. This very decision of the Allahabad High Court was relied upon by the Tribunal without appreciating the correct ratio of theThough, the conclusion of the High Court which was affirmed by this Court cannot be legally faulted, we cannot however approve of the following analysis of the section occurring in the judgment "in short, what this provision means is that if an assessee has been allowed a deduction in the computation of its total income of any liability on account of loss or expenditure and if, subsequently, the liability of the assessee on account of such loss or expenditure is remitted or ceases, that part of the liability which is remitted or ceases shall be treated to be the income of the assessee of the previous year in which such remission or cessation takes place." The High Court proceeded on the assumption that the words, remission and cessation thereof could be transposed into the first clause which speaks of obtaining any amount in respect of loss or expenditure. The High Court could have merely said that the trading liability provided for in the books of account and for which deduction was allowed earlier did not cease in view of the pendency of the dispute. Instead, the High Court referred to the expression "loss or expenditure" occurring in the first limb. As thedid not obtain any amount by way of refund on excise duty account, the first clause of S. 41(1) will not be applicable; it is only the latter part that applies in which case the remission or cessation of liability would assume importance. However, in the present case, as discussed above,it is the first clause that squarely applies but not the second one. Whether there was cessation or remission of liability would be an irrelevant time of enquiry here. The correct way of understanding S. 41(1) would be to read the latter clause"some benefit in respect of such trading liability by way of remission or cessation thereof" as a distinct andprovision. To read the phrase "by way of remission or cessation thereof" as governing the previous clause as well, i.e. "obtained any amount in respect of such loss or expenditure," would be doing violence to the language and structure of the provision. That apart, the operation of the provision which is designed to have widest amplitude will get constricted and truncated by reason of such interpretation.The Full Bench was of the view that the assessees claim for refund of excise duty was in jeopardy in view of the pending revisional proceeding although the assessee obtained refund. The assessee received the refund of excise duty onThe High Court took the view that the assessee obtained the refund only onwhen the proposed revision was withdrawn. It was, therefore, held that the refunded amount became includible in the assessees total income for the assessment yearunder S. 41(1) of the Act, but not for the assessment yearThe expression obtained any amount was virtually given an interpretation which is contrary to its plain meaning. However, it must be noted that the High Court rightly avoided reference to the expression remission or cessation thereof.(16) With respect, we are unable to accept the view taken by Gujarat High Court in the two decisions aforementioned as correct.(17) The decision of Karnataka High Court in K. G. Subramanyam v. C.I.T. (195 ITR 199) is quite opposite in the context of present case. The State of Karnataka levied litre fee which is in the nature of a duty of excise. The levy was challenged by the assessee. Pending such challenge, the assessee paid the litre fee which was allowed as deduction while computing the assessees income. Later on the levy of litre fee was declared as unconstitutional and the fee collected was refunded to the assessee. Relying on S. 41(1), the refunded amount was subjected to tax treating it as income of the year during which refund was obtained. The Tribunal and the High Court held that S. 41(1) was attracted and the Revenue was well justified in assessing the same. The High Court held that the payment in discharge of statutory liability incurred while earning the income is an expenditure and even if it is possible in some cases that such payment is liable to be excluded from the income as a liability incurred in the course of trade, it does not detract from its character as expenditure. It was, therefore, held : "We have no hesitation that the deduction given to the assessee in respect of the litre fee paid by him was by way of an expenditure; therefore, the amounts refunded on the levy being held unconstitutional were the amounts received by him in respect of the said expenditure and such receipts are liable to be taxed under S. 41(1)." The High Court observed that on the facts of that case, the question of cessation or remission of liability did not arise for consideration at all. We are in agreement with the view expressed by the Karnataka High Court.