Rameshwar Prasad Kishan Gopal v. V.K Arora, Income-Tax Officer And Another.

Rastogi, J.:— This petition under art. 226 of the Constitution challenges the initiation of proceedings under s. 148 of the I.T Act, 1961 (hereinafter “the Act”). The petitioner, M/s. Rameshwar Prasad Kishan Gopal, Kanpur, is a partnership firm consisting of three partners, namely, Rameshwar Prasad, Kishan Gopal and Smt. Sarju Devi. It is registered under the Act and carries on business in poppy heads as wholesale dealer. The State of Uttar Pradesh by a notification issued under r. 42A of the U.P Poppy Heads (Amendment) Rules, 1969, had imposed an excise duty of 50 paise per kg. on poppy heads with effect from 1st of July, 1969. The petitioner along with other dealers in poppy heads challenged that levy before the Lucknow Bench of this court by means of a writ petition. The petition was admitted and an interim order staying the realisation of excise duty was granted. Subsequently on the application of the Excise Dept. the petitioner was directed by the court to deposit the excise duty in the court each month and the petitioner complied with the same. The petition was allowed on 12th April, 1973, and s. 5 of the Opium Act and the relevant Rules framed by the Uttar Pradesh Govt. were held to be ultra vires. The petitioner was held not liable to pay any duty imposed under those Rules.

2. After the decision a sum of Rs. 2,58,983, which the petitioner had deposited in the court, was refunded to it. The petitioner showed that amount in the balance-sheet of the previous year (ended October 25, 1973), relevant to the assessment year 1974-75 on the liabilities side. The petitioner filed a copy of the P & L a/c and the balance-sheet along with the return for that year. The assessment was completed on September 17, 1974, wherein the petitioner's return except for some minor additions on account of some inadmissible expenses was accepted and the aforesaid amount of Rs. 2,58,983 was not treated as an item of income. It has further been stated in the writ petition that later on the audit section of the I.T Dept. raised an objection to the effect that the aforesaid sum of Rs. 2,58,983 received by the petitioner as refund from the High Court was liable to be treated as its taxable income for the assessment year 1974-75. The decision in the writ petition had not been accepted by the State of Uttar Pradesh or by the Central Govt. and both filed appeals against the same before the Supreme Court and on an application moved by the Excise Dept. the petitioner was required by the Supreme Court to furnish security for the amount of excise duty refunded to it. The petitioner furnished a bank guarantee which has been accepted. On the basis of the audit objection, the ITO, Circle I(7), Kanpur, respondent No. 1, issued a notice under s. 148 of the Act to the petitioner on January 8, 1979. A similar notice was issued for the assessment year 1975-76 also. Despite the petitioner's request respondent No. 1 did not inform it of the reasons for reopening the assessment or whether the assessment had been reopened under cl. (a) or cl. (b) of s. 147 of the Act. The petitioner submitted its. returns for the assessment years 1974-75 and 1975-76 on March 5, 1979, with a note that no income had escaped assessment and s. 41(1) of the Act was not applicable. It has been further alleged that the petitioner was ultimately informed by respondent No. 1 that the assessment had been reopened under s. 147(b) of the Act. The petitioner filed objections to the same contending that s. 41 of the Act was not applicable and, secondly, that the audit objection could not constitute an information within the meaning of s. 147(b) so as to justify the reopening of the assessments. The ITO repelled those objections and sent a draft assessment order which was received by the petitioner on November 29, 1979, in which he treated the aforesaid amount of refund as also another sum of Rs. 39,171.50, which also appeared on the liabilities side of the balance-sheet as Duty Khata Jama Excise, as income liable to tax, and proposed to initiate penalty proceedings under s. 271(1)(c) of the Act for concealment of these two items.

3. The petitioner filed objection to the proposed assessment order in accordance with s. 144B(2) of the Act before the IAC, A-Range, Kanpur, respondent No. 2. The petitioner now challenges the reopening of the assessments for the aforesaid assessment years mainly on the ground that the aforesaid two items did not constitute its income and s. 41(1) of the Act is not applicable and that the action taken was without jurisdiction because it was based on an opinion expressed by the audit party which does not constitute an information within the meaning of s. 147(b) of the Act. The petitioner prays for the issue of a writ, order or direction in the nature of certiorari quashing the notices issued under s. 148 of the Act on January 8, 1979, as also the subsequent proceedings taken in pursuance thereof including the proposed draft assessment order and the notice issued by respondent No. 2 dated December 10, 1979. There is also a prayer for a writ in the nature of mandamus directing the respondents not to initiate proceedings against the petitioner under s. 271(1)(c) of the Act.

4. A counter-affidavit has been filed on behalf of the respondents in which, inter alia, it has been averred that the assessment for the year 1974-75 had been made under s. 143(1) of the Act and the return had been accepted. That being so, the Explanation to s. 147 was attracted to the case. Apart from this, in para. 13 it has been stated that the monthly payments made to the credit of the High Court were included by the petitioner in the trading account of the poppy heads as cost for purchase of the same and not as deposits with the court. It was only in October, 1973, when the refund was received from the High Court, that the amount was mentioned on the liabilities side and it was credited to the bank account and a bank guarantee of an equal amount was furnished before the Supreme Court. It has been averred that accordingly it was a revenue receipt in the year of refund. Further, it has been stated that only on February 17, 1978, when the assessee filed the copy of the order of the Supreme Court dated February 10, 1978, in Civil Misc. Writ Petition No. 1555 of 1978, that this concealment came to light and then action was taken.

5. The facts which now transpire from the record do not admit of any doubt. The petitioner along with other dealers in poppy heads had challenged the levy of excise duty on poppy heads which levy had been made effective from 1st of July, 1969. The challenge ultimately succeeded and the impugned provisions were held ultra vires. This decision was given on 12th of April, 1973. Aggrieved, the State of Uttar Pradesh and the Central Govt. filed appeals by special leave before the Supreme Court. The petitioner had deposited a total amount of Rs. 2,58,983 by way of excise duty in the court. This was done in pursuance of an order passed by the court on May 7, 1970, a copy of which is annex. 13 to the supplementary affidavit filed by the petitioner. That amount was directed to be refunded to it when the writ petition was allowed on April 12, 1973. The date of refund fell in the previous year relevant to the assessment year 1974-75. In pursuance of an interim order passed by the Supreme Court the petitioner furnished a bank guarantee for the amount of excise duty refunded to it. The appeals are still pending. The action has been taken under s. 148 of the Act to reopen assessments for the years 1974-75 and 1975-76 on the basis of an audit objection. The question whether the IPO had jurisdiction to do so would depend on the interpretation of sub-s. (1) of s. 41 of the Act. This provision reads as under:

“41. (1) 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.”

6. Section 41. enumerates receipts which are deemed to be the income under the head “Business or profession”. Sub-section (1) provides that where an allowance is granted in any year in respect of any loss, expenditure or trading liability and subsequently during any previous year the assessee receives, 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 of the trading liability, the amount received or the amount of the liability which is extinguished is chargeable as business profits of that previous year. The sub-section speaks of an allowance or deduction in respect of loss, expenditure or trading liability. In the present case the allowance or deduction was not in respect of an expenditure or a trading liability. If it was in respect of an expenditure and it is a case of reimbursement subsequently received, then certainly it would be deemed to be the income under the head “Business or profession” in the year of receipt. If it was an allowance or deduction in respect of a trading liability and subsequently the assessee has been benefited by the remission or cessation of the trading liability then the amount of the liability which is extinguished will be deemed to be the income chargeable as business profits of that previous year. If that is so, then unless the liability is finally extinguished and there is no possibility of its revival in future there will neither be a remission nor a cessation of the liability.

7. It was observed by this court in J.K Synthetics Ltd. v. O.S Bajpai, ITO, [1976] 105 ITR 864, 881:

“A cessation of liability for the purposes of section 41(1) of the Act would mean irrevocable cessation so that there is no possibility of the liability being revived in future. If there is such a possibility then the cessation is not complete and section 41(1) is not attracted.”

8. In that case also the petitioner-company, which had its registered office at Kanpur, was engaged in the manufacture of synthetic fibre, such as nylon filament yarn, metallic cops, nylon staple fibre, etc. In its assessment to tax for the assessment year 1972-73, it claimed a deduction on account of excise duty payable on one of its products called “polymer chips”. The Excise Dept. had been demanding a duty on these products under item No. 15A(iii) of Sch. I of the Central Excises and Salt Act, 1944, and the assessee had been making provision for payment of the same every year since 1964-65. This claim had been constantly disallowed by the ITO but had been allowed on appeal by the AAC and as a result a total sum of Rs. 2,87,60,109 had been allowed to the assessee as a deduction for the assessment years 1964-65 to 1971-72. On similar basis the assessee had made a provision of Rs. 2,08,29,486 in respect of its liability to excise duty for the previous year in question. The assessee had been contesting this demand and on 1st February, 1964, filed a writ petition under art. 226 of the Constitution before the High Court at Delhi. This petition was allowed by a learned single judge on 28th August, 1970, and on the basis of the same the ITO disallowed the deduction claimed by the assessee in respect of the current liability and treated the amount of deduction in respect of the past liability as income under s. 41 of the Act and added those two amounts to the income of the assessee. The view taken by the court was that since a Letter's Patent Appeal had been admitted and was pending, there was a likelihood of the decision of the learned single judge to be reversed and hence it could not be said that the liability ceased. Indeed, there may be a further appeal to the Supreme Court. Thus, a decision liable to appeal, may be final until the appeal is not preferred, but once an appeal is filed, the decision looses its character of finality and becomes sub judice, that is, a matter under judicial enquiry. In these circumstances, the ITO was held not competent to invoke the provisions of s. 41(1) of the Act.

9. According to the petitioner it was a case of an allowance or deduction in respect of a trading liability and since that liability has not finally extinguished inasmuch as the appeals are still pending before the Supreme Court and in pursuance of an interim order passed by that court the petitioner has furnished a bank guarantee in respect of the same, it cannot be said that there has been a remission or cessation of the trading liability so as to bring the benefit received by the assessee as income liable to tax.

10. After hearing counsel for parties, we find merit in this contention. We have already mentioned above that in pursuance of the interim order passed by this court the petitioner had deposited the amount of excise duty payable by it under the impugned provisions in the court itself. The averment made to the contrary in the reasons recorded by respondent No. 1 for initiating the impugned proceedings are not correct. It would be useful to reproduce the reasons recorded at this place. They are contained in annex. CA-1 to the counter affidavit. It is as under:

“The scrutiny of balance-sheet for the assessment year 1974-75 showed that the assessee credited a sum of Rs. 2,58,983.68 towards the refund of excise duty on liabilities side (CR) of balance-sheet. The levy of excise duty was challenged by the assessee by way of writ petition filed in the Allahabad High Court, Lucknow. The High Court allowed the writ petition and directed the State Government to refund excise duty amounting to Rs. 2,58,984 by their order dated 12-4-1973, in Civil Misc. Writ Petition No. 935 of 1969. Accordingly, the amount was refunded to the assessee.

Later on, the State Government of U.P and the Union of India both filed special leave petitions in the Supreme Court of India, S.L.P No. 1216 of 1975 and 2009 of 1975, respectively, and permission was granted by the Supreme Court by Appeals Nos. 1658 and 1659 of 1975, respectively. The appeals are pending. The Supreme Court asked the assessee to furnish a security of Rs. 2,58,984 to the satisfaction of the Registrar of High Court. The assessee followed the direction and the bank guarantee of the Central Bank of India, Naya Ganj, Kanpur, was furnished.

Thus, it would appear that the matter as it stands today is that the judgment of the Allahabad High Court is favourable to the assessee against which appeals are pending in the Supreme Court of India. Since there is no present liability existing against the assessee, the amount of excise duty refunded, in my opinion, is taxable for the assessment year 1974-75. As the money was refunded in the previous year relevant to the assessment year 1974-75, therefore, in consequence of information in my possession I have reason to believe that the income chargeable has escaped assessment for the assessment year 1974-75 within the meaning of section 147(b).”

11. It would appear that the ITO was conscious of the fact that both the Govt. of Uttar Pradesh and the Central Govt. had filed appeals by special leave before the Supreme Court, that these appeals were admitted and the court directed the petitioner to furnish security for the sum of Rs. 2,58,984 to the satisfaction of the Registrar of the court and that the assessee complied with that direction. It is not correct on the part of the ITO to state that the High Court allowed the writ petition and directed the State Govt. to refund the excise duty. The excise duty had been deposited by the petitioner in the court itself and that amount was directed to be refunded to it. The amount, therefore, was refunded to the petitioner by the court and not by the State Govt. It is also not correct for the ITO to state that there is no present liability existing against the assessee. It is clear, therefore, that since the assessee followed the mercantile system of accounting, it was allowed deduction in respect of its liability to excise duty. The petitioner challenged its liability to pay the excise duty and during the pendency of the writ petition deposited the excise duty in the court. That payment was not by way of discharge of the liability but was only by way of security and when the writ petition was allowed by the court the amount was refunded to the petitioner. It was not, therefore, a case where an allowance had been made in respect of any expenditure incurred by it or reimbursement of the expenditure subsequently. It was an allowance in respect of a trading liability and in view of the fact that the decision of this court has not become final and is the subject-matter of appeals before the Supreme Court, there has been no remission or cessation of the liability so as to attract s. 41(1) of the Act. We may mention at this place that according to Sri Katju, learned counsel for the Revenue, we cannot go into the merits of the question and we can address ourselves only to the validity of the notice. There is merit in this contention. In the present case, however, for reasons which we have mentioned above, in order to decide as to whether the respondent No. 1 had jurisdiction to initiate the impugned proceedings, it became necessary for us to advert to the question of the applicability of s. 41(1) of the Act to the facts of the present case.

12. We are thus of the opinion that the initiation of proceedings under s. 148 of the Act for the assessment years 1974-75 and 1975-76 was without jurisdiction and the notice as also the proceedings taken in pursuance thereof are liable to be quashed. Consequently, the writ petition succeeds and is allowed with costs and the impugned notices and the proceedings taken in pursuance thereof are quashed.