S.M Ali Mohamed, J.:—By its reference under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), the Income-tax Appellate Tribunal, Madras Bench “D”, has referred at the instance of the Commissioner of Income-tax, the following question of law for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding and had valid and relevant materials to hold that the miscellaneous receipts amounting to Rs. 2,39,470 could not be brought to tax in the assessment year 1972-73?”

2. The material facts giving rise to the reference are as follows:

The assessee, East Asiatic Company India Private Limited, is a private limited company. For the assessment year 1972-73, it filed a return showing loss of Rs. 66,67,510 inclusive of carry forward loss of Rs. 63,53,460 from the earlier years. In the course of assessment proceedings, the Income-tax Officer found that the assessee-company had no income from any trading activity during the relevant previous year and that the income consisted of miscellaneous receipts of Rs. 2,56,997 and other receipts by way of interest, profit on sale of assets, income from investments, etc. The Income-tax Officer held that the assessee had not been carrying on any business and, therefore, he did not allow any administrative expenses though the assessee claimed a sum of Rs. 3,05,968 on this account. Aggrieved by such assessment, the assessee appealed to the Appellate Assistant Commissioner contending that the assessee had been carrying on business and that the losses of earlier years should have therefore been adjusted and that in any case, the Income-tax Officer was not correct in assessing Rs. 2,39,470 consisting of items Nos. (i) to (iii) out of the miscellaneous receipts of Rs. 2,56,997 brought to tax under the head “Sundry income” on the ground that there was no cessation of liability in respect thereof. The Appellate Assistant Commissioner did not accept the assessee's contentions and rejected the appeal. The matter was taken up in appeal to the Tribunal. The Tribunal, following its earlier order for the assessment year 1970-71, held that the assessee had not carried on any business during the relevant previous year and, therefore, the losses of the earlier years could not be set off. Regarding the assessment of miscellaneous receipts, it however, felt that the Appellate Assistant Commissioner had not considered the contention of the assessee that there was no cesser of liability and, therefore, it remanded the appeal to the Appellate Assistant Commissioner and directed him to reconsider the assessee's claim in respect thereof. The Appellate Assistant Commissioner in the remand proceedings considered each of the above three items of miscellaneous receipts and held that the above receipt of Rs. 2,39,470 could not be brought to tax. According to the Appellate Assistant Commissioner, the sum of Rs. 53,006 represented the aggregate of credit notes issued to various parties for the excess sales tax collections made in 1968 and 1969 and the assessee's liability to refund the same continued and, therefore, the §ame could not be taxed under section 41(1) of the Act. He further held that even assuming that the same was taxable, the same could not be brought to tax for the assessment year under consideration as the vouchers had been issued in the years 1968 and 1969. As regards the sum of Rs. 1,51,934, the Appellate Assistant Commissioner noted that out of the said sum of Rs. 1,51,934, a sum of Rs. 25,590 represented excess collection from the customers less payment and the balance of Rs. 1,26,344 represented sales tax refund. Regarding the sum of Rs. 25,590, he held that the same could not be brought to tax as there was no remission or cessation of liability. With regard to the sum of Rs. 1,26,344, he held that since these refunds were received in some other years, the same could not be treated as the assessee's income for the assessment year 1972-73. For the sum of Rs. 34,530 also, the Appellate Assistant Commissioner held that this income could not be brought to tax in the assessment year 1972-73. Thus, the Appellate Assistant Commissioner allowed the appeal of the assessee holding that the aforesaid sum of Rs. 2,39,470 could not be brought to tax in the assessment year 1972-73. The Department went on appeal to the Tribunal. The Tribunal confirmed the order of the Appellate Assistant Commissioner agreeing with the reasoning given by him and dismissed the Departmental appeal.

Aggrieved by the same, at the instance of the Commissioner of Income-tax, the above reference has been made before this court.

Mr. N.V Balasubramaniam, learned counsel for the Revenue, submitted that the miscellaneous receipts amounting to Rs. 2,39,470 received by the assessee-company by way of refund of sales tax ought to be brought to tax for the assessment year 1972-73. In support of the said contention, learned counsel for the Revenue referred to the following rulings:

(i) It was held by the Madhya Pradesh High Court, in Addl. CIT v. Chandrakant, D. Patel, [1983] 139 ITR 233, as follows (at page 237):

“…the amount of sales tax was deposited by the assessee in the years in which it was realised by him from the purchasers. Thereafter, he filed a suit for refund of the said amount paid contending that the levy of sales tax was invalid. Eventually, the Supreme Court by its decision on April 5, 1968, held that the levy of sales tax was invalid and the decree passed by the trial court for refund of the sales tax was restored after setting aside the decree passed by the High Court. In these circumstances, as the assessee followed the mercantile system of accounting, the amount of refund became due on April 5, 1968, when the Supreme Court delivered its judgment. Thus, the amount became due in the accounting year in question. In our opinion, the refund of sales tax was in the nature of a revenue receipt in the year in which the Supreme Court eventually upheld the claim of the assessee and it did not constitute any receipt, much less a revenue receipt, in the years in which the amount of sales tax was recovered by the assessee from the purchasers because in those years the amount so recovered by the assessee was deposited by him as sales tax in the State Treasury and nothing remained with him which may be called as receipt. We are, therefore, of the opinion that the Tribunal erred in law in holding that the amount of refund of sales tax in question was not liable to be taxed in the assessment year in question.”

(ii) in CIT v. Kabbur Brothers, [1981] 128 ITR 43, the Karnataka High Court, upon the facts and circumstances of the case, held that the refund of sales tax was received by the assessee in its character as a trader and constituted its trading receipts and shall be includible be in computing its total income and that the amount fell within the purview of section 41 of the Act. The liability to make payments to its constituents was not a statutory liability. The amount was not refunded on condition that it should be returned to the customer. There was no contract between the assessee and its customers for the return of such amount. The assessee had not treated it as a present liability to be met in future. Only a part of the amount of refund had been actually returned to its constituents. The entire amount of refund was, therefore, assessable.

(iii) In the case of State Bank Of Travancore v. Commissioner Of Income Tax, Kerala , [1986] 158 ITR 102, the Supreme Court held as follows (headnote):

“The appellant, a subsidiary of the State Bank of India, maintained its accounts on the mercantile system of accounting. In the course of its banking business, it used to charge interest on advances, including interest on advances which had become extremely doubtful of recovery and which it termed as ‘sticky’ advances, by debiting the concerned parties. In the case of interest on ‘sticky’ advances, instead of carrying it to the profit and loss account, the appellant credited the interest to a separate account called ‘the Interest Suspense Account’. The appellant claimed that, having regard to the bad and deteriorating financial condition of the parties concerned as well as the history of their accounts, the recovery of even the principal amounts of the debts had become improbable and doubtful and as such the interest thereon, though debited to the respective debtors, was taken to the ‘Interest Suspense Account’ to avoid showing inflated profits by including hypothetical and unreal income, and such interest on ‘sticky’ advances was not real income and was not taxable in its hands…. The concept of real income could not be so read as to defeat the object and the provision of the statutory enactment. Even if in a given circumstance, the amount might be taken to the interest suspense account for accounting purposes, that would not affect its taxability as such. The interest on ‘sticky’ advances was rightly treated as income which had accrued to the appellant.”

3. On the other hand, learned counsel for the assessee-company submitted that there is no error of law in the order of the Appellate Tribunal holding that the miscellaneous receipts amounting to Rs. 2,56,997 should not be brought to tax for the assessment year 1972-75 and in support of the said contention, learned counsel for the assessee-company referred to the following rulings

(i) In the case of Commissioner Of Income-Tax v. Pre-Stressed Concrete Co. (S.I) P. Ltd., [1986] 162 ITR 314 (Mad), this court held that with reference to royalty payable to a foreign company, it was shown in the balance-sheet as royalty due to the foreign company and the same was not claimed by the foreign company within the period of three years, the Income-tax Officer took the view that the outstanding liability had, for all intents and purposes, ceased, added the amount under section 41(1) of the Act and completed the assessment. The Appellate Assistant Commissioner held that there was no remission or cessation of a trading liability and hence deleted the addition. The Tribunal took the view that the acknowledgment of the liability in the balance-sheet would suffice to treat it as a liability and, hence the amount could not be added back under section 41(1) of the Income-tax Act, 1961. On a reference, this court held that there was a cessation of trading liability because of the fact that the foreign company had not taken any steps to recover the amount. The only basis for the inference of cessation of the liability was that between the last payment made on April 24, 1964, and the end of the relevant accounting year, that is, March 31, 1970, either the amount had not been paid or that no payment had been made to the foreign company. On this circumstance alone, an inference of cessation of liability could not be drawn. The assessee had been treating the royalty amount as a liability outstanding against it and this was reflected in the balance-sheet. Merely because the period of limitation of three years provided under the Indian law for the recovery of an amount due had passed, the indebtedness did not cease. The expiry of the limitation period only deprived the creditor of his remedy to institute a suit in a court of law to recover the debt, but the indebtedness nevertheless continued. Therefore, the Tribunal was justified in taking the view that there was no cessation of liability and the amount of Rs. 2,09,993 could not be brought to tax under section 41(1) of the Act.

(ii) In Pioneer Consolidated Company of India Ltd. v. CIT, [1976] 104 ITR 686 (All), the Allahabad High Court held that in case an assessee transferred an amount to its profit and loss account in the previous year relevant to the assessment year and that though the amount was not income when it was realised, when it was not claimed by the customers and the assessee chose to treat the items as its income, it could not be said that the income-tax authorities committed an error in accepting the statement of the assessee.

(iii) In CIT v. Combined Transport Co. Pvt, Ltd., [1988] 174 ITR 528 (MP), the Madhya Pradesh High Court held as follows (headnote):

“While making the assessment for the assessment year 1974-75, the Income-tax Officer found that the assessee had written off a certain amount on account of salary which was claimed and allowed as a deduction in the earlier years. The Income-tax Officer held that there was a cessation of the liability and the benefit which accrued was liable to tax under section 41(1) of the Income-tax Act, 1961. The Tribunal held that the Income-tax Officer was not justified in adding the amount on account of salary written off and allowed the appeal of the assessee. On a reference:

Held, affirming the decision of the Tribunal, that the amount was written off as a result of an unilateral act and, therefore, it was not assessable as income under section 41(1).”

4. section 41(1) of the Income-tax Act, 1961, reads as follows:

“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.”

5. From a reading of section 41(1) of the Act, it is clear that the said section treats as income what had been earlier allowed as deduction, if, in the assessment year in question, the assessee receives some benefit by way of cessation or remission of liberty.

6. In the case of CIT v. Sugauli Sugar Works P. Ltd., [1983] 140 ITR 286 (Cal), the Calcutta High Court, interpreting section 41(1) of the Income-tax Act, held as follows (at page 288):

“This sub-section applies: (i) to sums received in cash or in any other manner whatsoever in respect of loss or expenditure which had once been allowed or deducted in the computed profits in any previous year, (ii) to the benefits obtained by a remission of debts or a cessation of liability, if the debt or liability has once been allowed or deducted. Such conditions for the application of section 41 were also laid down in the case of Bhagwat Prasad & Co. v. Commissioner Of Income-Tax, Lucknow., [1975] 99 ITR 111 (All). In that case, it was held that section 41 of the Income-tax Act would apply if two conditions were specified: (i) that the amount must have been allowed as a deduction in some earlier year, and (ii) that during the assessment year in question the assessee must receive some benefit by way of a cessation or remission of liability.”

7. The Supreme Court, in Orissa Cement Ltd. v. State of Orissa, 1991 Supp (1) SCC 430 : AIR 1991 SC 1676, at page 1717, has observed thus:

“We are inclined to accept the view urged on behalf of the State that a finding regarding the invalidity of a levy need not automatically result in a direction for a refund of all collections thereof made earlier. The declaration regarding the invalidity of a provision and the determination of the relief that should be granted in consequence thereof are two different things and, in the latter sphere, the court has, and must be held to have, a certain amount of discretion. It is a well-settled proposition that it is open to the court to grant, mould or restrict the relief in a manner most appropriate to the situation before it in such a way as to, advance the interests of justice.

In the instant case, the octroi duty paid by the petitioner company would naturally have been passed on to the consumers. Therefore, there is no justification to claim the same at this distance of time and the court in its discretion can reject the same.”

8. In the instant case, the findings of the Appellate Assistant Commissioner and as confirmed by the Appellate Tribunal are that, the excess sales tax collection is made in the years 1968 and 1969, the assessees' liability to refund continues even though the amount of refund of sales tax has not been passed on to the customers, and, therefore, the same could not be taxed. In view of the above, we are of the opinion that section 41(1) of the Act is not attracted upon the facts and circumstances of the case. Further, the State Government has also not filed any appeal against the order of refund of sales tax in favour of the assessee-company and the same has become final.

9. In view of the above peculiar facts and circumstances of the case, we are of the view that the miscellaneous receipts amounting to Rs. 2,39,470 could not be brought to tax in the assessment year 1972-73. Accordingly, the reference is answered in the affirmative against the Revenue. Ordered accordingly. No order as to costs.