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Case Number

Case Refd. No. 68 of 1952.

Advocates

Messrs. M. Subharaya Aiyar, V. Sethuraman and S. Padhmanabhan for Appt.
Mr. C.S Rama Rao Sahib for Respt.

Judges

Rajagopalan
Rajagopala Ayyangar, JJ.

Acts

Section 66(1) of the Income-tax Act

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Smart Summary

Structured Summary of the Opinion (RAJAGOPALAN, J.)

Factual and Procedural Background

For the assessment year 1946-47 the accounting (chargeable) period in question was 16 August 1944 to 16 August 1945 (referred to as the year of account or 1944-45). The assessee was a firm trading in arecanut with head office at Virudhunagar. The firm imported arecanut from the Travancore State. In the year of account the imported arecanut was subject to excise duty imposed by both the Government of India and the Travancore State.

Up to 31 December 1944 the assessee paid excise duty totalling Rs. 36,094 to the Government of India and debited those payments in his accounts. The Government of India later issued executive instructions (annexures A and A-1) directing its excise authorities (1) not to enforce voluntary payments of excise duties by dealers on goods imported from Travancore after 14 November 1944 and (2) to refund any such duties voluntarily paid, if traders applied for refund. Those executive instructions were not communicated to the assessee or other dealers; they were internal instructions to departmental authorities.

The assessee applied to the Collector of Excise for repayment on 11 January 1945 (for amounts paid subsequent to 14 November 1944) and again on 31 March 1945 for refunds of duty paid earlier. The excise authorities ordered refunds of Rs. 22,743-13-0 on 27 November 1945 and a further Rs. 27,049-4-0 on 17 November 1946. These refunds included the Rs. 36,094 paid in the year of account but were received only in subsequent accounting years.

In computing the assessee's income for 1944-45 (assessment year 1946-47), the Department included Rs. 36,094 in the assessee's income even though (a) there were no credit entries for that sum in the assessee's books in the year of account and (b) the amounts were not actually received in that year. The Department's view was that the Government of India had definitely agreed in the year of account to refund the amount after necessary scrutiny. The Tribunal confirmed the assessment including the sum in the year of account. A question was referred to this Court under Section 66(1) of the Income-tax Act.

Legal Issues Presented

Whether the sum of Rs. 36,094, being the refund of Indian excise duty on betel-nuts (arecanut) imported from Travancore State, was assessable as profits of the accounting period (the year of account 16 August 1944 to 16 August 1945) for income-tax and excess profits tax.

Arguments of the Parties

Department / Revenue (as recorded)

The Department included Rs. 36,094 in the assessee's income for the year of account on the view that the Government of India had definitely agreed in the year of account itself to refund the amount after necessary scrutiny (i.e., that a right to the refund had arisen in that year).

Assessee (as represented in the opinion)

The assessee maintained accounts on a mercantile basis and had no credit entry for Rs. 36,094 in the year of account; the refunds were actually received only in subsequent years. (The opinion records that counsel Mr. Rama Rao Sahib relied on Newcastle Breweries Ltd. and Severne v. Dadswell to argue that the subsequent receipt should be related back to the year of account where the real profits of that year could be ascertained.)

Tribunal's Findings (as recorded)

The Tribunal recorded that the Government of India's notification (as the Tribunal understood it) cancelled collection of the excise duty with effect from 14 November 1944 and indicated an inclination to refund duties paid before that date. The Tribunal held that the assessee had thereby acquired a right on that date to receive payment for duty already paid and that the assessee "was fully aware of its rights."
The Tribunal further recorded that because these amounts had already been charged to trading account, the debt due from the Government was "clearly a trading surplus relating to the accounting year in question" and that the date of recovery was immaterial. It described the recovered amount as not damages but "an amount recovered by the Government in extortion which they agreed to refund of their own accord."

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
E. D. Sassoon & Co. Ltd. v. Commissioner of Income-tax	Income accrues only when the assessee has acquired a right to receive it; there must be a debt owing to him (debitum in praesenti solvendum in futuro) — mere expectation is insufficient.	The Court applied this test and held that Rs. 36,094 did not represent income that accrued in the year of account because no legally enforceable right or debt existed in favour of the assessee during that year.
Commissioners of Inland Revenue v. Newcastle Breweries Ltd.	Where property was taken (rum) the right to some payment arose at once; although the amount was ascertained later, the right to payment as part of trade proceeds / trade debt arose in the year when the property was taken.	The Court considered this authority but distinguished it: there the right was a trade debt arising in the year of account; in the present case no trade debt or enforceable right against the Government existed because the sums were remissions of lawfully imposed tax.
Severne v. Dadswell	Extended Newcastle principle: if at cessation of trade payment for work already done had not been finally settled, subsequent receipts may be analogous to a trade debt and accounts can be reopened; but if there is no analogy to a trade debt or a final settlement then account cannot be reopened.	The Court treated Severne v. Dadswell as inapplicable: the refund was not remuneration for work done nor analogous to a trade debt; therefore the principle permitting reopening did not apply.
British Mexican Petroleum Co. Ltd. v. Jackson	A subsequent release of a previously stated liability (release of debt) does not permit reopening of a trading account for the earlier period; the account correctly reflected the liability as finally stated at that date.	The Court followed this principle, holding that the remission of the tax (a later release) could not be related back to the year of account and the earlier trading account need not be reopened to exclude the excise duty which had been lawfully paid and properly charged in that period.

Court's Reasoning and Analysis

The Court engaged in a step-by-step analysis, addressing first the Tribunal's conclusions and then the broader legal tests relevant to accrual and mercantile accounting.

Tribunal's characterisation was examined and rejected. The Court observed that the Government of India's measures were executive instructions to departmental authorities and had not been communicated to traders; they did not constitute a notification in the normal sense that would vest legally enforceable rights in the assessee during the year of account. The Court therefore rejected the Tribunal's statements that the Government had "cancelled" collection with effect from 14 November 1944 in a manner that conferred rights on the assessee, and rejected the Tribunal's description of the refunds as amounts recovered by the Government in "extortion."
The Court then turned to mercantile accounting principles. It noted that the assessee maintained accounts on the mercantile basis and that there was no credit entry in his books for Rs. 36,094 in the year of account. The Court recognised that if an ascertained liability existed at the balance date then omission from the accounts would not absolve the assessee; but the crucial question was whether there was an ascertained liability in the year of account in respect of the sum.
Applying the test from E. D. Sassoon & Co. Ltd., the Court held that income accrues only when a right to receive exists — in other words, when a debt is owing. The Court concluded that the remission instructions did not create in favour of the assessee any legally enforceable debt or right to the refund during the year of account; the remission was an exercise of governmental power to release a lawful tax obligation at a later date.
The Court considered the authorities relied upon by counsel (Newcastle Breweries Ltd. and Severne v. Dadswell). It accepted the principles in those cases where a right to payment (a trade debt or something analogous to a trade debt) arose in the accounting period even though the amount was ascertained later. It distinguished those authorities on the ground that the present case concerned a remission of a lawfully levied and collected tax rather than a trade debt or a payment for services rendered that was unsettled at the balance date.
Finally, the Court applied the rule from British Mexican Petroleum Co. Ltd. v. Jackson: a subsequent release of liability does not permit reopening the earlier accounts or relating the later release back to the earlier period. The Court viewed the Rs. 36,094 as a liability lawfully imposed and discharged in the year of account and later released; such subsequent release could not be treated as income accruing in the earlier period.
On these bases the Court concluded that the Department's addition of Rs. 36,094 to the assessee's income for the year of account could not be sustained.

Holding and Implications

Holding: The Court answered the question referred under Section 66(1) in the negative and in favour of the assessee: the sum of Rs. 36,094 (refund of Indian excise duty on arecanuts imported from Travancore State) was not assessable as profits of the accounting period in question.

Implications:

The direct effect is that Rs. 36,094 shall not be treated as income of the accounting period 16 August 1944 to 16 August 1945 for purposes of income-tax and excess profits tax; the Department's addition is set aside in respect of that amount for that year.
The Court awarded costs of the reference to the assessee including counsel's fee of Rs. 250 as stated in the opinion.
The Court's decision rests on applying existing authorities (as discussed) and distinguishing the present facts from cases where a trade debt or an analogous right to payment existed during the accounting period. The opinion applies those authorities to the present facts rather than announcing a novel principle beyond these applications.

Reference answered accordingly.

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T.M.M Mudalai Nadar And Co. Virudhunagar v. The Commissioner Of Income-Tax, Excess Profits Tax, Madras.

The Judgment of the Court was delivered by.

RAJAGOPALAN, J. - For the assessment year 1946-47, the period from 16th August, 1944, to 16th August, 1945, was the accounting year of the assessee for income-tax and was also the chargeable accounting period for excess profits tax. The assessee firm traded in arecanut, with its heads office at Virudhunagar within the taxable territories. The assessee obtained imports of arecanut from the Travancore State. That arecanut was subjected to excise duty in the year of account both by the Government of India and by the Travancore State. Up to 31st December, 1944, the assessee paid sums totalling Rs. 36,094, as excise duty to the Government of India and debited his account with those payments.

On the representation of the dealers in arecanuts, pointing out the difficulties in paying excise duty both to the Government of India issued certain executive instructions to its subordinates. On 29th December, 1944, the Government directed the excise authorities not to enforce the system of voluntary payment of excise duties by the dealers on goods imported from Travancore after 14th November, 1944, the date on which the Travancore State notified the imposition of excise duty on arecanuts (see annexure A). Under annexure A-I, dated 2nd June, 1945, the excise authorities were directed to refund to the traders the excise duty they had voluntarily paid to the Government of India on nuts imported from the Travancore State, if any trader applied for refund. Neither of these orders was communicated to the assessee or to any of the dealers. They were only executive instructions to the departmental authorities issued by the Government of India.

The assessee continued the payments of excise duty up to 31st December, 1944. On 11th January 1945, he applied to the Collector of Excise for repayment of the excise duty the assessee had paid on nuts imported from Travancore subsequent to 14th November, 1944, (annexure B). On 31st March, 1945, the assessee applied for refund of the duty he had paid to the Government of India between 1st April, 1944, and 13th November, 1944, (annexure B-2). On 27th November, 1945, the excise authorities ordered the refund of Rs. 22,743-13-0. On 17th November, 1946, a further sum of 27,049-4-0 was ordered to be refunded to the assessee. These amounts included Rs. 36,094 which the assessee had paid in his years of account 1944-45. The refunds were thus received only in the succeeding years of account.

In computing the assessees income for 1944-45 in the assessment year 1946-47, the Department authorities included this sum of Rs. 36,094 in the assessees income, though there were no credit entries in his accounts during the accounting year in question, and though the amounts had not actually been received by the assessee in that year. The Department was of the view, that the Government of India had definitely agreed in the year of account itself to refund the said amount to the assessee after the necessary scrutiny. When the assessee appealed to the Tribunal, it confirmed the assessment.

The question referred to this court under Section 66(1) of the Income-tax Act was :

Whether the sum of Rs. 36,094 being the refund of Indian excise duty on betel-nuts imported from Travancore State, was assessable as profits of the accounting period for income-tax and excess profits tax.

It was not disputed that the excise duty the assessee had paid in the year of account to the Government of India was reflected in the prices the assessee charged his customers. The Tribunal recorded :

"We find that the Government of Indias notification, collection of the excise duty in question has been cancelled with effect from the 14th November, 1944, onwards. Their inclination to refund the excise duty paid before that date from the inception of the duty has also been made clear by the same notification. The assessee has thereunder acquired right on that date to receive payment of the duty already paid by him till then................ it (the assessee) was fully aware of its rights."

The Tribunal recorded further :

"As these amounts have been already charged to the trading account the debt due from the Government in respect thereof is clearly a trading surplus relating to the accounting year in question. In this view, the date of recovery of this advance is immaterial. The amount recovered from the Government is not in the nature of damages for some wrongful act done to the assessee by the Government, but an amount recovered by the Government in extortion which they agreed to refund of their own accord."

We fail to understand how a levy of excise duty under a valid enactment can amount to extortion by the Government. The Tribunal, in our opinion, was also wrong in viewing the amount as a debt due to the assessee from the Government. Apart from the fact, that no notification as such, as that expression in normally understood, was issued by the Government of India as we pointed out, they only issued executive instructions to their subordinates without communicating them directly or even indirectly to the traders concerned - there was no question of the assessee acquiring any rights, any legally enforceable rights, against the Government even under the letters marked annexures A and A-1, which apparently the Tribunal regarded as notifications issued by the Government of India. Whether it was a case of an inclination to refund, which was the interpretation placed upon annexure A-1 by the Tribunal, or whether it was the interpretation placed upon annexure A-1 by the Tribunal, or whether it was a definite order by the Government communicated to its subordinates, it did not vest any rights in the assessee, legally enforceable against the Government. It was just a case of remission of tax, a tax which had been lawfully collected by the Government of India. The jural relationship between the assessee and the Government during the year of account based on that act of remission was certainly not that of creditor and debtor.

We have next to consider whether, independent of the reasoning of the Tribunal and its findings, the addition of Rs. 36,094 to the assessees income in the year of account could be sustained. The assessee, it should be remembered, maintained his accounts on the mercantile basis. There was no credit entry in his books for this sum of Rs. 36,094 in the year of account. If, however, he was bound to credit himself with that amount in the year of account itself, his omission to make credit entires would not, of course, absolve him of his liability. An ascertained liability, whether or not it is discharged in the year of account, is sufficient to sustain an entry in the accounts maintained on the mercantile basis. Was there such an ascertained liability with reference to this sum of Rs. 36,094 is the question. We have already pointed out that it was a case of a remission of tax lawfully imposed on the assessee under a valid enactment. The tax was also paid by the assessee in the year of account. The direction to refund the tax so collected was issued by the Government to its subordinates. It still continued to be a case of a remission of tax, which was within the powers of the Government to grant. The direction given to its subordinates in annexures A and A-1 did not even amount to a promise of remission or refund communicated to the assessee. As we said, no rights legally enforceable against the Government vested in the assessee at any time during the year of account. He had no rights to get back this sum of Rs. 36,094 from the Government, though, of course, in the normal circumstances the excise authorities were bound to give effect to the instructions given to them in annexures A and A-1. Could it be said that under these circumstances it was an ascertained liability of the Government to pay this sum of Rs. 36,094 to the assessee, on the basis of which the assessee should have, in the normal course of maintaining his accounts, credited himself with that amount ? In our opinion, the answer to that question must be in the negative.

In E. D. Sassoon & Co. Ltd. v. Commissioner of Income-tax, the Supreme Court observed :

"It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him, though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti solvendum in futuro;.................. Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him."

Judged by that test, we have to hold that the amount of Rs. 36,094 did not represent the income that accrued to the assessee in the year of account in question.

Mr. Rama Rao Sahib relied on the decision of the House of Lords in Commissioners of Inland Revenue v. Newcastle Breweries Ltd. and also on the decision of Roxburgh, J., in Severne v. Dadswell in support of his contention, that though the sum of Rs. 36,094 was actually received by the assessee in the succeeding years of account, this sum should be included in the income of the year of account, when alone the real profits of the assessee in the year of account could be ascertained.

In the Newcastle Breweries Ltd. case a certain quantity of rum which belonged to that assessee was taken by the Crown and a sum of Pounds 10,300 was paid to the assessee in the year of account. Subsequently an additional sum of Pounds 5,300 was ascertained to be due to the assessee by the War Compensation Court, which was the tribunal competent to decide the question, what was the amount payable to the assessee for the rum that the Government had taken. The claim of the Department, that this sum of Pounds 5,300 was a business profit, receipt of which should be related back to the year of account 1917-18 was sustained. Viscount Cave, L.C., pointed out at page 953 :

"The rum was taken in 1918, and the right to some payment arose at once, though there was delay in ascertaining the amount to be paid...... The change of the tribunal which was to ascertain the amount and enforce payment did not create the right to payment, or alter the date when the right to payment in fact arose. An illustration was put in the course of the argument when it was asked whether, if a partner had been interested in the profits of the appellants business for the year 1918, he would have had a right to share in this sum. I think the answer should clearly be in the affirmative; and just as the sum was part of the profits of the year so as to entitle a partner to share in it, so it appears to me that it was profit of the year so as to entitle the Government to take a share in the form of Excess Profits Duty."

Thus the basis of the decision was that the right to the payment as part of the price of the rum seized arose in the year of account itself though its ascertainment and actual payment were deferred. It was a trade debt that arose, though it was the Crown that was liable to discharge it.

The principle laid down in that case was extended in Severne v. Dadswell. In that case Mr. Dadswell, as a licensed flour miller, was entitled to certain rebates. He was what was called a non-pool miller. The pool millers were entitled to certain further sums by way of compensation payable by the Ministry of Food. These amounts were comprehensively called "remuneration." The concession given to the pool millers was extended to non-pool millers, of whom Mr. Dadswell was one, and he eventually received a further sum of Pounds 3,289. That payment was in December, 1949. Mr. Dadswell had meanwhile ceased to trade on 30th September, 1945. Roxburgh, J., pointed out at page 656 :

"It is common ground that when Mr. Dadswell ceased to trade on 30th September, 1945, he had no legal or equitable right to any further payment from the Ministry, and that he had no asset which could then have been properly entered in a final account as a book debt............... the relevant question is not whether at the date of retirement there was any outstanding book debt or any contingent or deferred legal or equitable right, but whether any work had been done in the course of trade in respect of which the reward had not been finally settled, or, in other words, anything outstanding in the nature of, or analogous to, a book debt."

At page 659 the learned Judge recorded :

"Authority in my view establishes the proposition that if it can be said at the moment of discontinuance that the payment for some work already done has not been finally settled, even though there is no legal claim for any more, then if a further payment is made afterwards, even though it is wholly gratuitous, the account can be reopened so as to let in what is analogous to a trade debt at the figure actually received. If on the other hand, the item is not analogous to a trade debt, or if there has been a final settlement, the account has been finally closed."

In the Newcastle Breweriers Ltd. case it was a trade debt itself. In Dadswells case, it was treated as analogous to a trade debt, a remuneration for services rendered by Dadswell as a flour miller, "analogous" because there was no legal basis for a claim. Roxburgh, J., himself made it clear that if an item was not analogous to a trade debt, there could be no justification for reopening a closed account and to relate back the subsequent receipt to the year of account.

The question is, can the principle laid down in the Newcastle Breweries Ltd. case and extended in Dadswells case be further extended to a case of a remission of a tax by the Government. We have already pointed out that it could not be called a debt payable by the Government to the assessee. Nor could it be treated as something analogous to a trade debt. No doubt the tax was imposed originally in the year of account on the basis of the trade activities of the assessee. But it is equally true that it was for a tax that was eventually remitted and paid to the assessee, paid not in the year of account but in the succeeding years of account. But it was not payment by way of remuneration, as in the case of Mr. Dadswell, for anything done by the assessee in the course of his trading activities in the year of account. Once again we have to point out that the tax was lawfully levied and lawfully collected. The Government decided to remit the tax, and payment was made much later. It is difficult to find any basis for bringing the assessees receipt of Rs. 36,094 within the scope of the ruling in Severne v. Dadswell and treat it as income to which he was entitled in the relevant year of account.

In our opinion it is the principle laid down by the House of Lords in British Mexican Petroleum Co. Ltd. v. Jackson that should apply to the case of the assessee. In that case by 30th June, 1921, the assessee company owed a sum of Pounds 1,073,281 to Huasteca Company for the purchase of petrol etc. Subsequently the Huasteca Company remitted a sum of Pounds 9,45,232. The question was whether this sum of Pounds 9,45,232 had to be brought into account for purposes of computing the profits of the assessee company. Lord Thankerton observed at page 591 :

"The main argument for the appellant was that the amount of Pounds 1,073,281 owing to the Huasteca Company had been treated as an expense of the trade deductible from gross receipts in the trading account to 30th June, 1921, but that, to the extent to which it was subsequently released, it was in fact never expended; that the original price for the goods having been reduced by agreement, the price actually paid and not the original price was the amount of the deduction allowable for income-tax purposes; and that the account to 30th June, 1921, should be opened up and the deduction should be brought into conformity with the amount actually paid."

That contention was negatived. At page 592 Lord Thankerton observed :

"I am of opinion, in the present case, that the account to 30th June, 1921, cannot be reopened, as the amount of the liability there stated was correctly stated as the finally agreed amount of the liability and the subsequent release of the respondents proceeds on the footing of the correctness of that statement."

Lord Macmillan observed at page 594 :

"Now it may be that where during the currency of an accounting period a trading debt is incurred, and the creditor agrees during the currency of the same period to accept less than the full amount of the debt due to him, it is only the balance of the debt as exacted or agreed to be exacted, which ought to enter, as a debit, the debtors accounts for the period. As to this, I say nothing, for the present case has been argued by the Crown on the footing that the whole sum of Pounds 9,45,232 ought either to be dealt with in a reopened account for the year to 30th June, 1921, or credited in the eighteen months account to 31st December, 1922, and as, in my opinion, neither of these contentions is admissible, I concur in the motion that the appeal be dismissed."

The assessee in the present case was liable to pay Rs. 36,094 as excise duty to the Government of India in the year of account. There was no dispute about that liability. It was also discharged in the year of account. Subsequently there was a total remission of that liability. None the less, it was only a release from the obligations lawfully imposed on the assessee in the year of account. That remission was not in the year of account. Subsequent releases cannot be related back to the year of account itself.

Our answer to the question referred to this Court is in the negative and in favour of the assessee. The assessee will be entitled to the costs of this reference. Counsels fee Rs. 250.