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K.P.S.V. Rajarathina Nadar And Sons v. Commissioner Of Income Tax
Factual and Procedural Background
The reference to this Court arose under Section 66(1) of the Income-tax Act out of proceedings under Section 34 of the Income-tax Act and Section 15 of the Excess Profits Tax Act concerning a revised assessment for the year 1946–1947. The relevant previous year/chargeable accounting period ended 26-8-1945.
The assessee was a firm trading mainly in arecanuts, with head office at Virudhunagar. The firm paid excise duty to the Government of India amounting in the accounting year to (variously recorded in the record) Rs. 40174 and, in one passage, Rs. 40714. The Travancore State also imposed an excise duty in respect of the same goods amounting to Rs. 29748 for the assessee.
The Government of India ultimately decided to refund the excise duty it had collected. The refund order was made on 12-11-1945 and the amount was actually received in July 1946. The assessee maintained accounts on the mercantile basis and had debited himself (in the year of account) with the amount paid to Government of India.
In the Income-tax Officer's assessment completed in May 1946 the assessee claimed deduction of the whole sum paid to Government of India as revenue expenditure and contended that the subsequent refund should not affect the accounting-year assessment. The Income-tax Officer related the refund to the earlier period and sought to eliminate the debit, but after taking into account the Travancore liability of Rs. 29748 included Rs. 10426 as assessable (the difference between the refund and the Travancore liability). The assessee's appeals to the Assistant Commissioner and to the Tribunal were unsuccessful.
The assessee recorded an entry debiting Rs. 29748 on 28-8-1946 and credited the same amount on 4-9-1946, explaining that it had been sent to an agent for payment but then not paid. The Income-tax Officer initiated proceedings under Section 34 (as amended) and Section 15 of the Excess Profits Tax Act, issued a notice on 26-8-1949, and assessed the assessee on 12-12-1949 to include the sum of Rs. 29748. The Tribunal rejected the subsequent appeals, and questions were referred to this Court.
Legal Issues Presented
- Whether the proceedings under Section 34 as amended in 1948 of the Income-tax Act, 1922 and Section 15 of the Excess Profits Tax Act, 1940, were valid.
- Whether the sum of Rs. 29748 was includible in the re-assessment made under S. 34 of the Income-tax Act, 1922, and Section 15 of the Excess Profits Tax Act, 1940.
Arguments of the Parties
Assessee's Arguments
- The assessee maintained mercantile accounts and had debited himself in the accounting year with the excise duty paid to the Government of India (recorded as Rs. 40174 / Rs. 40714 in the record).
- The assessee claimed that the entire sum paid to the Government of India was a revenue expenditure of the accounting year and that the refund obtained in the succeeding year should not be taken into account in computing the accounting year's income-tax, profits and gains.
- The assessee represented that he had to pay Rs. 29748 to the Travancore State authorities; this representation formed part of the basis on which relief was granted in 1946.
- Regarding the 1946 accounting entries (debit on 28-8-1946 and credit on 4-9-1946), the assessee explained the amount had been sent for payment through an agent but ultimately he decided not to pay at that time.
- At the Tribunal the assessee avowed an intention not to discharge the Travancore liability (this fact was recorded in the proceedings before the Tribunal).
Revenue's / Income-tax Officer's Arguments
- The Income-tax Officer took the view that the Government of India's refund should be related back to the period when the duty was collected, effectively eliminating the earlier debit in the year of account.
- Having regard to the Travancore liability, the Income-tax Officer included Rs. 10426 in the assessment — the difference between the refund from the Government of India and the Travancore liability.
- On discovering the subsequent accounting entries and conduct of the assessee (the debit and credit entries and the fact that the amount was not paid), the Revenue invoked proceedings under Section 34 (as amended in 1948) and Section 15 of the Excess Profits Tax Act as constituting "definite information" leading to discovery of escaped income, and re-assessed the Rs. 29748 in 1949.
- The Tribunal accepted the Revenue's position that (a) after amendment in 1948 Section 34 did not even require definite information, and (b) in any event, in this case there was definite information constituted by the subsequent entries and conduct of the assessee.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Court analyzed the matters by comparing what the assessee actually represented at the time of the original assessment with the inferences drawn later by the Income-tax Officer and the Tribunal.
The Tribunal had held that (i) because Section 34 proceedings were taken after its 1948 amendment, definite information was not necessary for its application, and (ii) that, in any event, there was definite information in the form of the assessee's subsequent conduct and accounting entries which led to the discovery that income had escaped assessment.
The Court found that the Tribunal misdirected itself in its treatment of the assessee's representation. The only representation by the assessee in the original assessment was that he had to pay Rs. 29748 to the Travancore authorities; there was no representation at that stage that he would pay that amount immediately or shortly. The Income-tax Officer, in the later assessment order, recorded an inference that the assessee had represented that he would have to pay shortly a sum of Rs. 29748; the Court emphasized that this inference was not the same as the actual representation made by the assessee.
The Court observed that the mere availability to the Income-tax Officer of information that the assessee did not in fact pay the Travancore State did not, by itself, constitute a discovery that the assessee had obtained relief by making a representation known by him to be untrue. In other words, the presence of the information that payment was not made did not establish that the assessee had misrepresented facts at the relevant earlier stage to procure relief to which he was not entitled.
The Court further noted the accounting context: the assessee used the mercantile system, under which an ascertained liability with a corresponding accounting entry would suffice for treatment as a liability. The Assistant Commissioner had commented that a definitely ascertained liability to Travancore did exist though no specific entries were made by the appellants creating such a liability. The Court held that the absence of a specific separate entry for Rs. 29748 in the accounts in the accounting year was not the factual or legal basis upon which the later Section 34 proceedings could validly rest.
The Court reasoned that if, in the year of account, the assessee had closed the entry for the larger amount and debited himself only with Rs. 29748, then his later failure to pay in the succeeding year would not have justified resort to Section 34. The fact that no specific separate entry had been insisted upon in 1946 when relief was granted did not alter the legal position in 1949.
The Tribunal's assumption that the assessee had obtained relief in 1946 by making a representation which was not true had no basis in the contemporaneous records. The Court concluded that an ascertained liability to Travancore remained and was legally enforceable, and that the assessee's subsequent avowal of an intention not to discharge that liability before the Tribunal did not affect the legal liability or the assessee's rights under the Income-tax Act and the Excess Profits Tax Act. The Court noted that Section 10(2A) of the Income-tax Act would apply when its conditions were satisfied.
Holding and Implications
Holding: The Court answered the first referred question in the negative and in favour of the assessee. In view of that answer, the second question was held not to call for an answer; the Court added that if an answer to question 2 were necessary, it would also be negative and in favour of the assessee. The final notation in the record states: "Answer for assessee."
Implications:
- The direct effect is that the assessee succeeded in the reference and is entitled to costs (the Court awarded counsel's fee of Rs. 250).
- The Court held that the Revenue's reliance on the subsequent accounting entries and conduct did not establish the requisite misrepresentation or discovery to justify the impugned reassessment under the provisions invoked.
- The opinion does not purport to lay down any broader new legal principle beyond its application to the facts: it confines itself to the conclusions that (a) the Tribunal misdirected itself on the scope of the assessee's representation and (b) the ascertained Travancore liability remained enforceable. The opinion also notes that Section 10(2A) of the Income-tax Act would apply when its conditions are satisfied, but it does not elaborate broader precedent beyond the decision for the parties in this case.
Costs: The assessee was awarded costs; counsel's fee fixed at Rs. 250.
The Judgment of the Court was delivered by
Rajagopalan, J.:— The question referred to this Court under Section 66(1) of the Income-tax Act arose out of the proceedings under Section 34 of the Income-tax Act and Section 15 of the Excess Profits Tax Act with reference to the revised assessment for the assessment year 1946-1947. The previous year for income-tax and the chargeable accounting period for the excess profits tax ended with 26-8-1945.
2. The assessee, a firm which traded mainly in arecanuts, had its head office at Virudhunagar, in what was then known as Rritish India. The assessee had to pay the excise duty imposed by the Government of India on arecanuts, even on those which he had bought in Travancore and brought into the taxable territories. In the accounting year he was assessed to an excise duty which amounted to Rs. 40174. He also paid it during the accounting year. In the year of account, the Travancore State also imposed an excise duty on arecanuts, which amounted in the case of the assessee to Rs. 29748. On the representations of the dealers in arecanuts, the Government of India ultimately decided to refund the excise duty paid to it by the dealers, who had also been subjected to excise duty by the Travancore State.
3. The assessee maintained his accounts on the mercantile basis. He debited himself with Rs. 40714 in the year of account. That was the amount paid to the Government of India. That amount was ordered to be refunded to the assessee on 12-11-1945, in the succeeding accounting period, and the amount was actually received in July 1946.
4. Before the Income-tax Officer, who completed the assessment in May 1946, the assessee claimed that he was entitled to deduct the entire sum of Rs. 40174 as revenue expenditure incurred in the accounting year, and that the refund obtained by him in the succeeding year ought not to be taken into account in calculating his income-tax, profits and gains for the accounting year. The question however, was whether this sum, which had been ordered to be refunded to the assessee should not be taken to wipe out the debit in the year of account.
5. The Income-tax Officer took the view that the refund order received by the assessee in November 1945 should be related back to the period when this duty was collected, and this meant the elimination of the entire debit. The assessee however produced the demand for payment of Rs. 29748 issued by the Travancore Government for the excise duty payable to that State.
6. Taking this liability into account, the Income-tax Officer included in the assessment the sum of Rs. 10426, being the difference between the refund obtained from the Government of India and the liability of the assessee to the Government of Travancore. Against this order, the assessee appealed without success to the Assistant Commissioner and to the Tribunal.
7. Though the assessee was granted relief on the basis that he would have to pay Rs. 29748 to the Travancore State, he has not so far paid the amount. On 28-8-1946 the assessee debited his account with this sum of Rs. 29748. His accounts were credited again with that amount on 4-9-1946. The explanation of the assessee was that he had sent that amount for payment to the Travancore State through his agent Manickam, but eventually he decided not to pay it then.
8. When these entries were seen by the Income-tax Officer he took proceedings under Section 34 of the Income-tax Act and Section 15 of the Excess Profits Tax Act, and he issued a notice to the assessee on 26-8-1949. On 12-12-1949 the assessee was assessed for 1946-1947, on this additional sum of Rs. 29748 both to income-tax and excess profits tax. The Tribunal finally rejected the appeals preferred by the assessee.
9. The questions that were referred to this Court under Section 61(1) of the Income-tax Act, were:
1. Whether the proceedings under Section 34 as amended in 1948 of the Income-tax Act, 1922 and Section 15 of the Excess Profits Tax Act, 1940, were valid.
2. Whether the sum of Rs. 29748 was includible in the re-assessment made under S. 34 of the Income-tax Act, 1922, and Section 15 of the Excess Profits Tax Act, 1940.
10. In its order on the appeals the Tribunal recorded:
“In any case as S. 34 proceedings were taken under the section after its amendment in 1948, it is not even necessary that there should have been any definite information leading to a discovery before the section can be applied. It is true that Section 15 of the Excess Profits Tax Act has not been similarly amended, but in view of our finding that there was definite information which led to a discovery, it is not possible to draw any distinction in respect of the two appeals.”
11. What constituted definite information, in the opinion of the Tribunal, was “the subsequent conduct of the assessee and the entries in the account which were not in existence at the time of the original assessment, constituting definite information leading to the discovery that income had escaped assessment.” The Tribunal also recorded:
“It is manifest that the item in dispute was left out of the original assessment on the understanding that this amount was due to the Travancore State Government and it was bona fide going to be paid. The subsequent entries in the account books, however, conclusively prove that it was not denied that the assessee had no intention whatsoever of paying the said excise duty to Travancore State Government….At the time of the original assessment, one representation was made to the Income-tax Officer which however was subsequently found to be definitely incorrect.”
12. It was on the last point that in our opinion, a the Tribunal misdirected itself. The Tribunal apparently failed to examine the precise scope of the representation of the assessee, on the basis of which he was granted relief. In the original assessment proceedings for 1946-1947, in his assessment order dated 18-5-1946 the Income-tax Officer recorded:
“It is, however, claimed that duty has to be paid in respect of nuts to the Travancore State authorities at Re. 0-2-6 per lb. According to a notice sent by the Travancore authorities it is seen that the amount of duty payable by the assessee is Rs. 29748.”
13. That we take it was the representation made by the assessee at that stage. The only representation made by the assessee was that he had to pay Rs. 29748 to the Travancore State.
14. There was apparently no further representation at that stage, that he would pay that amount immediately to the Travancore State authorities. In his Assessment order dated 12-12-1949, in proceedings under Section 34 of the Income-tax Act and Section 15 of the Excess Profits Tax Act, the Income-tax Officer re-corded:
“It was represented by the firm that out of the sum of Rs. 40174, they had to pay to the Travancore Excise authorities a sum of Rs. 29748. Since it appeared from the assessee's representation that they would have to pay shortly to the Government of Travancore a sum of Rs. 29748, this amount was allowed in the assessment.”
15. What inference the Income-tax Officer drew either in 1946 or in 1949 from the facts placed before him by the assessee was not what the assessee himself represented. That distinction was obviously lost sight of by the Tribunal when it recorded:
“At the time of the original assessment one representation was made to the Income-tax Officer which however was subsequently found to be definitely incorrect.”
16. The information that the assessee did not pay the Travancore State was no doubt available to the Income-tax Officer, but that by itself did not lead to any discovery, that by a representation which the Income-tax Officer believed to be true while the assessee knew it was not true, the assessee obtained a relief to which he was not entitled.
17. The assessee, it should be remembered, maintained his accounts on mercantile basis. An ascertained liability with a corresponding entry in his accounts would have been sufficient. The Assistant Commissioner was aware of this position. In his order on appeal he pointed out:
“Therefore, definitely ascertained liability did exist in respect of export duty payable to Travancore Government though such a liability was not discharged either during the previous year or upto this date. No entries were, however, made by the appellants in their books creating any such liability for excise duty payable to the Travancore State.”
18. That there was no specific entry for Rs. 29748 in the assessee's accounts in the accounting year was not the basis, on which this sum was subsequently assessed in proceedings under Section 34 of the Income-tax Act and Section 15 of the Excess Profits Tax Act.
19. Whether with the mercantile system of account adopted by the assessee, the authorities and the Tribunal were right or not in disallowing the relief claimed on the basis of an ascertained liability of Rs. 40174, which was also discharged, does not arise for consideration now. Apparently, the Income-tax Officer treated Rs. 29748 as included in the sum of Rs. 40174, with which the assessee had debited himself when the Income-tax Officer granted the relief to the assessee in 1946.
20. Had the assessee closed the entry of Rs. 40174 in the year of account and debited himself only with Rs. 29748, the fact that he did not pay the amount in the succeeding year would not have justified recourse to Section 34 of the Income-tax Act. That no such specific entry was insisted upon when the relief was granted in 1946 did not really alter the position in 1949.
21. The Tribunal really proceeded on the assumption, that the assessee had obtained relief in 1946 on a representation which was not true. For that there was no basis in the records before the Tribunal. An ascertained liability is still there. It is still legally enforceable against the assessee. That the assessee avowed his intention in the proceedings before the Tribunal not to discharge that ascertained liability will not alter his legal liability to the Travancore State nor affect his legal rights under the Income-tax Act and the Excess Profits Tax Act. It is Section 10(2A) of the Income-tax Act that would apply, when the required conditions were satisfied. Our answer to the first question is in the negative and in favour of the assessee. In view of that answer to question 1, question 2 does not call for an answer. Should, however, an answer to question 2 be necessary, we would be of the view, that independently of our answer to question 1, then answer to question 2 should be in the negative and in favour of the assessee.
22. Since the assessee has succeeded, he will be entitled to the costs of this reference. Counsel's fee Rs. 250.
V.S.B
23. Answer for assessee.
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