Rajendra Nath Mittal, J.:— The facts relevant for the decision of the reference are as follows:

The assessment relates to the assessment year 1968-69, for which the accounting year is 1967-68. M/s. Punjab Oil Mills came into existence by deed of partnership on September 9, 1958, with eight partners. The business of the firm was crushing of oil seeds. The constitution of the firm underwent many changes either on account of death or inclusion or exclusion of partner/partners. That is, however, not relevant for the decision of this reference. The firm was assessed to an amount of Rs. 39,489 as purchase tax for the purchase of groundnuts. The amount was deposited by it. The respondent challenged the levy of purchase tax by a writ petition in this court. The levy of purchase tax was declared as invalid by the Supreme Court in Bhawani Cotton Mills Ltd. v. State of Punjab [1967] 20 STC 290 SC.. The writ petition of the respondent-firm was accepted on May 9, 1967. Shanti Swaroop Sharma, one of the partners of the respondent-firm, filed an application on May 31, 1967, for refund of the amount deposited by it in view of the order of this court, which was allowed. It was refunded to the respondent on August 5, 1967. A return was filed by the respondent-firm and exemption was claimed in respect of the amount of Rs. 39,489 on the ground that the liability to pay the aforesaid amount to the Punjab Government existed under the Punjab General Sales Tax (Amendment and Validation) Act, 1967, and, therefore, its receipt cannot be deemed to be income under section 41 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). The Income-tax Officer made an assessment on the dissolved firm and brought to tax the amount of Rs. 39,489 as the assessee's income under section 41 of the Act. The respondent went up in appeal before the Appellate Assistant Commissioner who accepted the same on July 15, 1970, and reduced the amount of Rs. 39,489 from the income of the assessee. The revenue filed an appeal against the order of the Appellate Assistant Commissioner to the Income-tax Appellate Tribunal, Chandigarh. It affirmed the order of the Appellate Assistant Commissioner and dismissed the appeal. On the application of the revenue, the Tribunal has referred the following question of law to this court for opinion:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 39,489 was not assessable in the hands of the firm under section 41(1) of the Act?”

2. In order to decide the above question it is necessary to find out whether the refund of amount falls within the purview of section 41(1) of the Act. The said sub-section is 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.”

3. A reading of the section shows that if deduction has been made in respect of expenditure or trading liability incurred by the assessee, and subsequently the assessee has obtained in cash any amount in respect of such expenditure, or benefit in respect of such liability by way of remission or cessation thereof, the amount obtained by him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax. Refund of amount to the assessee is income if the amount is taken by him by way of remission or cessation of the liability. In the present case, it is the common case of the parties that the amount has not been returned on account of remission of the liability. It is the contention of the learned counsel for the petitioner that the amount has been returned because of cessation of the liability of the petitioner to pay purchase tax and, as such, the respondent-firm is liable to pay income-tax on it. The sales tax was imposed on the purchase of groundnuts by the Punjab General Sales Tax Act, 1948, but the stage at which it was to be assessed was not prescribed by the Act. Its imposition was challenged. The Supreme Court in Bhawani Cotton Mills Ltd. decided the question and held that the provisions of the Punjab General Sales Tax Act, 1948, as they stood on April 1, 1960, levying purchase tax on declared goods specified in Schedule “C” contravene the provisions of section 15(a) of the Central Sales Tax Act, 1956, as the stage at which purchase tax was levied was neither definite nor ascertainable, and there was a possibility of the tax being levied at more than one stage. In view of the aforesaid observations, the imposition of purchase tax was struck down. The refund was taken by the respondent-firm on August 5, 1967. On September 28, 1967, the State of Punjab promulgated two Ordinances, namely, the Punjab General Sales Tax (Amendment) Ordinance, 1967 (Punjab Ordinance No. 1 of 1967), and the Punjab General Sales Tax (Amendment and Validation) Ordinance, 1967 (Ordinance No. 12 of 1967), by virtue of which the assessments made in the case of groundnuts under the provision of the Punjab General Sales Tax Act, 1948, before the commencement of the aforesaid Ordinances, became valid. Subsequently, the aforesaid Ordinances were replaced by the Punjab General Sales Tax (Amendment and Validation) Act, 1967 (hereinafter referred to as “the Amendment and Validation Act”). It came into force on December 30, 1967. Section 20 of the Amendment Validation Act relates to validation of assessments, etc., in the case of groundnuts. The said section is as follows:

“20. (1) Notwithstanding anything contained in any judgment, decree or order of any court or other authority to the contrary, any assessment, reassessment, levy or collection of any tax on the purchase of groundnuts made or purporting to have been made, any action or thing taken or done in relation to such assessment, reassessment, levy or collection under the provisions of the principal Act before the commencement of the Punjab General Sales Tax (Amendment and Validation) Act, 1967, shall be deemed to be as valid and effective as if such assessment, reassesment, levy or collection or action or thing had been made, taken or done under the principal Act as amended by the Punjab General Sales Tax (Amendment and Validation) Act, 1967, and accordingly—

(a) all acts, proceedings or things done or action taken by the State Government or by any other officer of the State Government or by any other authority in connection with the assessment, reassessment, levy or collection of such tax shall, for all purposes, be deemed to be and to have always been done or taken in accordance with law;

(b) no suit or other proceeding shall be maintained or continued in any court or before any authority for the refund of any such tax; and

(c) no court shall enforce any decree or order directing the refund of any such tax.

(2) For the removal of doubts, it is hereby declared that nothing in sub-section (1) shall be construed as preventing any person—

(a) from questioning in accordance with the provisions of the principal Act and rules made thereunder, the assessment, reassessment, levy or collection of such tax for any period, or

(b) from claiming refund of any tax paid by him in excess of the amount due from him under the principal Act as amended by the Punjab General Sales Tax (Amendment and Validation) Act, 1967.”

4. A reading of the aforesaid section shows that the section has retrospective effect. According to the section, levy and collection of any tax on the purchase of groundnuts made under the Punjab General Sales Tax Act, 1948, before the commencement of the Amendment and Validation Act is to be deemed to be as valid and effective as if such assessment and collection had been taken or done under the principal Act as amended by the Amendment and Validation Act. It is provided in clause (a) of sub-section (1) of section 20 of the Amendment and Validation Act that all actions taken by the State Government or by any of its officers or by any authority in connection with assessment and collection of tax shall be deemed to be and to have always been done or taken in accordance with law. It is also stated that the court shall not enforce any decree or order directing the refund of any such tax. In the aforesaid Amendment and Validation Act, the stage at which the purchase tax was to be paid was also prescribed. By virtue of the aforesaid amendment, the liability of the respondent was created retrospectively. In view of the provisions of the Amendment and Validation Act, there was no cessation in the liability of the respondent-firm to pay the tax on the date when the tax was refunded to it. The Amendment and Validation Act came into force in the same assessment year in which the Supreme Court held the imposition of tax as invalid. It has been held in East End Dwellings Co. Ltd. v. Finsbury Borough Council, by Lord Asquith of Bishopstone, as follows:

“If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. One of these in this case is emancipation from the 1939 level of rents. The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.”

5. The above observations were noticed by the Supreme Court in State of Bombay v. Pandurang Vinayak. Mahajan J. (as he then was), speaking for the court, observed that when a statute enacts that something shall be deemed to have been done, which in fact and truth was not done, the court is entitled and bound to ascertain for what purpose and between what persons the statutory fiction is to be resorted to and full effect must be given to the statutory fiction and it should be carried to its logical conclusion. A similar question again came up before the Supreme Court in R.L Arora v. State of Uttar Pradesh AIR 1964 SC 1230. In that case, by virtue of section 7 of the Land Acquisition (Amendment) Act, 1962, certain acquisitions were validated. The section was couched in the same phraseology as is contained in section 20 of the Amendment and Validation Act. It was observed by the Supreme Court, while interpreting that section, as follows:

“It cannot be said that section 7 does not reopen decided cases and does not revive notifications and acquisitions actually struck down by courts. Section 7 opens with the words ‘notwithstanding any judgment, decree or order of any court’ and the validity conferred by it on acquisitions made before July 20, 1962, is thus notwithstanding any judgment, decree or order of any court. These are the usual words to be found in validating legislation where the intention is to validate some action which would otherwise be invalid and which may have been declared invalid by any court. The purpose of such words in a validating legislation is to declare valid what has been held invalid by courts and once the legislature declares such action valid all steps taken in connection therewith are validated to the extent of validation. The result of the validation is that notifications or other steps taken which may otherwise have been invalid become valid. Further, an acquisition also even though it may have been struck down by a court would be validated if it has been made in the sense that property in the land to be acquired has vested in Government either under section 16 or section 17(1) of the Land Acquisition Act.”

6. All the aforesaid observations clearly show that the liability to pay tax by the respondent did not cease on the date when the judgment was pronounced by the Supreme Court. The tax which had become invalid on account of the judgment of the Supreme Court became valid after enforce ment of the Amendment and Validation Act. The learned counsel for the petitioner has argued that the position is to be seen as on April 10, 1967, when the decision in Bhawani Cotton Mills was given by the court and on August 5, 1967, when the refund was taken by the respondent. He submits that the Amendment and Validation Act will not make any difference when the amount of tax had already been taken by the respondent. He further argues that in such a situation the amount is to be deemed to be refunded on account of cessation of the liability of the respondent. He has referred to section 9 of the Amendment and Validation Act by which section 11-A under which powers had been given to review certain assessments has been introduced. We express our inability to accept the contention of the learned counsel for the revenue. A specific provision has been made regarding validation of assessments in the case of groundnuts. The general provision of review of the assessments as contained in section 9 of the Amendment and Validation Act will not be applicable to the present case. On account of the deeming provisions contained in section 20, the assessment of purchase tax on groundnuts became valid on April 10, 1967. In the circumstances, the effect of the Amendment and Validation Act cannot be overlooked. The learned counsel for the petitioner has placed reliance on a Division Bench judgment of the Calcutta High Court in Commissioner of Income-tax v. Chowringhee Sales Bureau P. Ltd. In that case, the assessee carried on the business of auctioneers and collected from the purchasers in auction, in addition to the price of goods, the sales tax payable to the State under the Bengal Sales Tax Act. The amount collected as sales tax was shown separately in the memo granted to the purchasers and was also credited to a separate account in the books, pending a decision of the Supreme Court as to whether an auctioneer was a dealer and was liable to collect and pay sales tax over to the State. It was held that the amounts collected as sales tax were an integral part of the commercial transaction of sales by auction carried on by the assessee and when they were received, they were the moneys of the assessee and remained, thereafter, the moneys of the assessee as its trading receipts and the Income-tax Officer was justified in bringing the amounts to tax. The liability to return the money was not the criterion for determining the question whether the amount received was a trading receipt or not. It was also held that what was important was whether these amounts were relatable to the trading activities. The learned counsel for the petitioner has further submitted that the aforesaid judgment was affirmed by the Supreme Court in Chowringhee Sales Bureau P. Ltd. v. Commissioner of Income-tax. The facts of the above case are distinguishable. In that case, the question was whether the amount recovered was a trading receipt or not. In the case before us, the question involved is regarding the interpretation of section 41 of the Act. In our view, Mr. Awasthy cannot derive any benefit from the aforesaid observations. He has then referred to a Division Bench judgment of the Allahabad High Court in Jagatnarain Durga Prasad v. Commissioner of Income-tax. In this case, the assessee collected sales tax believing that sales tax was leviable on forward contracts and deposited the amount in the treasury. Subsequently, in view of a decision of the High Court that such sales tax was not leviable, the State Government refunded the amount deposited by him. The Income-tax Officer included the amount in the assessee's income for that assessment year. This view was confirmed on appeals. In reference, the High Court observed that as the amount had previously been allowed as a deduction in computing its business income and as the amount had been refunded to the assessee, such amount was deemed to be profits and gains of business under sub-section (2A) of section 10 of the Indian Income-tax Act, 1922, and the assessee was liable to pay tax on the same. The above-said subsection is equivalent to sub-section (1) of section 41 of the Act. The facts of the above case are also distinguishable from the present one. In that case, the contention raised was that the amount refunded to the assessee would later be refunded by the assessee to the respective constituents. The learned Bench observed that it was not sure that the assessee will refund the amount to its constituents. In the circumstances, it was observed that the amount which was received by the assessee was not income in the strict sense. In the present case, the liability of the assessee has been created by the statute for payment of the amount which was refunded to it. In such a situation, it cannot be held that there was cessation of liability of the dealer for payment of the amount of purchase tax to the Government. In this view, we get support from Kohinoor Mills Co. v. Commissioner of Income-tax [1963] 49 ITR 578 Bom.. In that case, the wages were payable by the mill but were not claimed. Their recovery had become barred by limitation. It was observed by the learned Division Bench that the debt subsisted notwithstanding that its recovery was barred by limitation. It was further observed that there was in such a case no cessation of trading liability within the meaning of section 19(2A) and that the amount of such wages cannot be added to the income.

7. In view of the aforesaid reasons, we hold that, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that a sum of Rs. 39,489 was not assessable in the hands of the firm under section 41(1) of the Act. Thus we decide the reference in favour of the assessee and against the revenue. In the circumstances of this case, however, we leave the parties to bear their own costs.

Man Mohan Singh Gujral, J.:— I agree.