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Commissioner Of Income-Tax, M.P-I v. Nathuabhai Desabhai
Structured Summary of the Opinion
Factual and Procedural Background
The assessee was a registered firm engaged in wholesale tobacco business. The assessment year in issue was 1970-71 (accounting period ended 9 November 1969). The assessee had imported tobacco from outside the State of Madhya Pradesh and sold it within the State during a past series of years (the opinion records the sales as occurring between "S.Y. 2007-8 to 2014-15, relevant to the A.Ys. 1952-53 to 1959-60" as stated in the provided text). The assessee collected sales tax from its purchasers, paid a total of Rs. 76,578 to the State Government and later sued the State seeking a refund on the ground that the tax recovery was illegal and unconstitutional. The High Court of Madhya Pradesh decreed the refund claim and the State's appeal to the Supreme Court was dismissed.
In the accounting period relevant to A.Y. 1970-71 the assessee credited its sales tax reserve account by Rs. 76,578 following the High Court judgment. The Income Tax Officer (ITO) assessed the credited amount as income under Section 41(1) of the Income-tax Act, 1961 on the stated basis that "These sales tax amounts were, duly allowed as a deduction in its income-tax assessment in the past."
On appeal, the Appellate Assistant Commissioner (AAC) examined the accounts and concluded that the assessee had not claimed or been allowed deductions for those sales tax payments in the earlier years, and thus held Section 41(1) inapplicable. The Appellate Tribunal accepted the AAC's factual findings after examining documents and held Section 41(1) not applicable. The department applied under Section 256(1) of the I.T. Act for a reference; the Tribunal refused, viewing the issue as purely factual. The department then sought a direction under Section 256(2) that the Tribunal state a question for the High Court's opinion; this court directed the Tribunal to refer the specific question about the taxability of Rs. 76,578 under Section 41(1).
Legal Issues Presented
- Whether, on the facts found by the Tribunal, Section 41(1) of the Income-tax Act would be applicable and the amount of Rs. 76,578 as sales tax refund is taxable?
- Whether the Tribunal was justified in holding that the sales tax refund of Rs. 76,578 is not taxable in the hands of the assessee under Section 41(1) of the Income-tax Act?
Arguments of the Parties
Department / Appellant (referred to in the opinion)
- The ITO contended that the sales tax amounts had been "duly allowed as a deduction in its income-tax assessment in the past" and therefore any refund should be taxable under Section 41(1).
- The department argued before the Appellate Tribunal that deductions for sales tax had been claimed and allowed in assessment years 1952-53 to 1958-59 and that the AAC erred in finding otherwise; it sought a remand to the AAC for verification.
- As an alternative (after accepting the weakness under Section 41(1)), the department's counsel (Shri Bagadiya) urged that, even if Section 41(1) did not strictly apply, the sales tax refund could still be charged to tax by the court de hors (outside) Section 41(1). He relied on two decisions (Addl. CIT v. M.P. Rungta and CIT v. Assam Co. Ltd.) to support the proposition that the court could decide chargeability on the facts before it.
Assessee / Respondent (as reflected in the opinion)
- The assessee maintained that it had not claimed and had not been allowed any deduction for the sales tax paid during the earlier years; therefore Section 41(1) did not in terms apply to make the refund taxable.
- On the matters of fact, the AAC and the Tribunal, after examining the accounts and documents, concluded that the assessee did not claim any deduction in respect of those sales tax payments in the relevant earlier years.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Nathuabhai Desabhai (Misc. Civil Case No. 465 of 1976) [quoted] | Demonstrating that where factual findings by the AAC were accepted by the Tribunal, the remaining question was whether Section 41(1) applied to those accepted facts; used to frame the precise question referred under Section 256(2). | The Court relied on this earlier order to show that the only point to be considered was whether Section 41(1) applied to the facts found by the Tribunal and ACC; this justified restricting the reference to that question. |
| Addl. CIT v. M.P. Rungta [1979] 116 ITR 245 (MP) | Cited by counsel for the department to support the proposition that the court could determine chargeability of an item of receipt even if Section 41(1) did not strictly apply (i.e., to allow inquiry de hors Section 41(1)). | The Court held this precedent was not in point on the facts because, unlike the present case, the Tribunal's order in that case had referred all necessary facts; therefore Rungta did not permit expanding the question beyond the Tribunal's reference here. |
| CIT v. Assam Co. Ltd. [1980] 124 ITR 711 (Cal) | Similarly cited by the department's counsel to show circumstances where the court could decide chargeability beyond the provision relied on by the Tribunal. | The Court held Assam Co. Ltd. was not applicable for the same reason: in that case the necessary facts had been referred to the court by the Tribunal, which is not so in the present matter. |
Court's Reasoning and Analysis
The Court proceeded by first setting out the text of Section 41(1) of the Income-tax Act, 1961 and identifying the statutory condition for its application. The statutory condition emphasized by the Court is that Section 41(1) applies "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..." (quoted in the opinion).
The Court's step-by-step analysis was:
- Establish that the Tribunal and the AAC had made a factual finding — after examining accounts and documents — that the assessee did not claim, and was not allowed, any deduction in respect of the sales tax payments in the earlier years. The Tribunal accepted the AAC's factual conclusions.
- Apply the statutory condition in Section 41(1): because the prerequisite ("an allowance or deduction has been made in the assessment for any year") was not satisfied on the facts found by the Tribunal, Section 41(1) could not be invoked to tax the refund.
- Address the department's alternative contention that the Court could examine chargeability outside Section 41(1). The Court rejected this on jurisdictional and procedural grounds: a reference under Section 256 is advisory and must answer the question as referred by the Tribunal. While the Court may decide an aspect of the same question even if not directly referred, the Court cannot alter the basic frame of the question or "embark on other provisions of the i.t. act" where the necessary facts for such an inquiry were not placed before the Tribunal.
- Distinguish the authorities relied on by the department (Rungta and Assam Co. Ltd.) on the ground that, in those cases, the Tribunal had referred all necessary facts, whereas in the present case the Tribunal's order did not contain facts that would permit a wider inquiry or determination de hors Section 41(1).
- Conclude that, confined to the facts found by the Tribunal and the question posed, Section 41(1) did not apply and the refund could not be taxed under that provision.
Holding and Implications
Holding: On the facts found by the Tribunal, Section 41(1) of the Income-tax Act was not applicable and the amount of Rs. 76,578 as sales tax refund could not be brought to tax under that provision.
Implications:
- Direct effect: The department cannot tax the Rs. 76,578 sales tax refund under Section 41(1) on the basis of the factual findings accepted by the Tribunal (that no deduction or allowance was made in the earlier assessments for the sales tax payments).
- Procedural and jurisdictional implication: In a reference under Section 256, the court's opinion is advisory and must remain within the ambit of the question referred by the Tribunal; the court will not broaden the inquiry to other provisions of the Income-tax Act or decide chargeability on grounds and facts not placed before the Tribunal. The Court distinguished prior cases relied upon by the department on that basis.
- No costs were awarded by the Court ("There will be no order as to costs").
This summary has been prepared exclusively from the text of the provided opinion. No information has been inferred or added beyond what the opinion itself contains.
1. Pursuant to the direction of this court, the Income-tax Appellate Tribunal, Indore, has referred the following question for our opinion :
"Whether, on the facts found by the Tribunal, Section 41(1) of the Income-tax Act would be applicable and the amount of Rs. 76,578 as sales tax refund is taxable ?"
2. The assessee is a registered firm deriving income from wholesale business in tobacco. The assessment year in question is 1970-71, for which the accounting period ended on November 9, 1969. The assessee had imported tobacco from outside the State of Madhya Pradesh and sold the same within the State between S.Y. 2007-8 to 2014-15, relevant to the A.Ys. 1952-53 to 1959-60. The assessee had collected sales tax from its constituents on the sales of tobacco and paid the same to the State Govt. The total amount so paid during these years was Rs. 76,578. Later, the assessee brought a suit against the State Govt. claiming refund of this amount on the ground that the recovery was illegal and unconstitutional. The claim was decreed by the High Court of Madhya Pradesh during the previous year relevant to the assessment year 1970-71 and the State appeal against the judgment of the High Court was dismissed by the Supreme Court. In view of the judgment of the High Court, the assessee during the accounting period credited its sales tax reserve account by Rs. 76,578. The ITO brought this amount to tax under Section 41(1) of the I.T. Act, 1961, the ITO observed :
"These sales tax amounts were, duly allowed as a deduction in its income-tax assessment in the past."
3. On the basis of this finding of fact, the ITO held that under Section 41(1) of the I.T. Act, 1961, the amount refunded or accruing to the assessee during the previous year relevant to the assessment year in question was taxable as the income of that previous year.
4. The assessee went in appeal before the AAC challenging the finding of fact recorded by the ITO to the effect that deductions were allowed to the assessee in respect of sales tax paid by it between the years 1952-53 to 1959-60. The assessee claimed before the AAC that no such deductions were ever claimed or allowed by the department during those years and, therefore, Section 41(1) of the I.T. Act did not in terms apply to enable the department to treat the refund of sales tax as income of the previous year. This argument prevailed with the AAC, who, after examining the accounts, held as a fact that the assessee was not allowed any deduction in respect of sales tax paid by it during the earlier years and, therefore, Section 41(1) of the I.T. Act could not be resorted to.
5. When the matter came before the Appellate Tribunal, the department reiterated its contention that the assessee had claimed and was allowed deduction of sales tax during the assessment years 1952-53. to 1958-59, and the AAC had erred in holding that, in fact, no such deduction was claimed and allowed during those years. The prayer on behalf of the department before the Appellate Tribunal was that:
"The matter should be sent back to the AAC for making proper verification."
6. The Appellate Tribunal observed as follows :
"The question involved in this appeal is purely a factual one about the verification of facts by the AAC."
7. After posing this question and after examining the documents filed before the AAC by the assessee, the Tribunal observed:
"This clearly shows that the assessee did not claim any deduction in respect of sales tax payment in its trading and profit and loss accounts of the relevant years in respect of which it got a refund as a result of the order of the Madhya Pradesh High Court."
8. After recording this finding, the Appellate Tribunal held that on those facts Section 41(1) of the I.T. Act was not applicable.
9. The department then filed an application under Section 256(1) of the I.T. Act for referring the question about the taxability of the amount of sales tax refund under Section 41(1) of the I.T. Act. The Appellate Tribunal rejected the application holding that no question of law arose out of the order of the Tribunal as the issue was purely one of fact.
10. The department then applied under Section 256(2) of the I.T. Act that the High Court direct the Appellate Tribunal to state the following question for opinion:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of sales tax refund of Rs, 76,578 is not taxable in the hands of the assessee under Section 41(1) of the Income-tax Act, 1961 ?"
11. The order of this court directing the Tribunal to state the case and refer the question for the opinion of this court shows clearly that the only point raised at all stages was whether the amount of sales tax refund was taxable in the assessment year 1970-71, under Section 41(1) of the I.T. Act or not. To highlight this contention, we may reproduce the following passage from this court's order under Section 256(2) of the Act in Miscellaneous Civil Case No. 465 of 1976 (CIT v. Nathuabhai Desabhai):
"It was contended by the learned counsel for the petitioner (i.e., the Commissioner of Income-tax) that on these as to whether Section 41(1) of the Act would be applicable......
Admittedly, the learned Members of the Tribunal also held that as no deduction was sought specifically in the years 1953-54 to 1958-59, Section 41 of the Act will not be applicable. The order, therefore, clearly indicates that the learned Members of the Tribunal accepted the findings of fact arrived at by the Appellate Assistant Commissioner. The only question which remained to be considered was as to whether Section 41(1) of the Act could be applicable to the facts of the present case,"
12. Then, in para. 7, this court proceeded to remark :
"It is apparent that the facts found by the Appellate Assistant Commissioner having been accepted by the Tribunal, the only question that deserved consideration was as to whether Section 41(1) of the Act would be applicable or not to the facts found by the Tribunal and the Appellate Assistant Commissioner."(underlined* by us).
13. On the basis of this finding this court directed the Tribunal to refer the question mentioned earlier for our opinion. We have given in some detail the resume of the facts and circumstances so that the entire picture leading to the present question may be clearly brought out in the proper perspective. This became necessary because the learned counsel for the' department, Shri Bagadiya, after realising the weakness of the department's case under Section 41(1) of the I.T. Act, attempted to raise an alternative argument that even if Section 41(1) was not in terms applicable, the sales tax refund could still be charged to tax as income of the assessee for the previous year.
14. It is not necessary for us to discuss in detail the applicability of Section 41(1) of the I.T. Act to the facts found by the Appellate Tribunal. Section 41(1) of the I.T. Act, 1961, is as follows ;
"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."
15. The condition prescribed for charging profits to tax under Section 41(1) of the Act is:
"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..."
16. Unless it is proved that an allowance or deduction has been made in any previous year, it is not open to the department to refer to Section 41(1) for charging tax on receipt by the assessee by refund or otherwise of such expenditure in a subsequent year. This clear legal position, indeed, could not be challenged before us. Our answer to the question referred to us will be in the negative and against the department.
17. However, Shri Bagadiya contended that even though, the amount in question could not be charged to tax under the (provisions of Section 41(1) of the I.T. Act, this court had the power to examine the chargeability of the amount to tax de hors Section 41(1). According to him, the main question was whether this amount could be charged to tax and all the necessary facts were before the court on the basis of which this question could be answered. He referred to two decisions : Addl. CIT v. M.P. Rungta [1979] 116 ITR 245 (MP) and CIT v. Assam Co. Ltd. [1980] 124 ITR 711 (Cal). We are unable to accept Shri Bagadiya's contention. It is clear that the jurisdiction of the court in a reference under Section 256 is only advisory and a question of law has to be answered within the ambit of this jurisdiction. True, a departure is allowed within certain permissible limits, inasmuch as, an aspect of the same question can be decided by the court even if that aspect is not directly referred by the Tribunal. However, the basic frame of the question cannot be altered nor the court can embark on other provisions of the i.t. act to justify chargeability or otherwise of a particular item of income. It is imperative that the question itself arises out of the Tribunal's order, This is possible only if all the necessary facts on which the order is based have been placed before the Tribunal. If those facts are not present, the Tribunal naturally cannot refer to them and in such a case no question outside the perimeter of the case as presented before the Tribunal can be enquired into.
18. If Shri Bagadiya's contention is accepted, we will have to enquire not only about, the taxability of this receipt, but also about the year or years in which various amounts paid in numerous instalments could be chargeable. There is no factual foundation for such an inquiry and, therefore, within the limited jurisdiction of this court under Section 256 of the Act, we cannot make a general inquiry and answer the question in a way different from the one which has been posed and referred to us by the Tribunal.
19. The cases cited by Shri Bagadiya are not in point because in both the above cases all the necessary facts had already been referred to in the Tribunal's order and the court had merely to decide the law applicable which incidentally had been misquoted by the Tribunal in the questions referred to the court. That is not the case here and, therefore, we are constrained to confine our opinion to the facts and circumstances mentioned in the Tribunal's order and the question arising therefrom as referred to us.
20. Our answer to the question, as already observed, is that on the facts found by the Tribunal, Section 41(1) of the I.T. Act was not applicable and the amount of Rs. 76,578 as sales tax refund could not be brought to tax under the above provision.
21. There will be no order as to costs.
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