1980 (10) TMI 33 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sales tax refund received during the year is assessable to income-tax.
2. Whether the provisions of section 41(1) of the Income-tax Act, 1961, can be invoked to tax the sales tax refund received during the accounting year relevant to the assessment year 1971-72.

Summary:

Issue 1: Assessability of Sales Tax Refund
The primary issue was whether the sum of Rs. 8,52,686 received by the assessee as a sales tax refund during the assessment year 1971-72 is assessable to income-tax. The Income-tax Officer (ITO) assessed this amount u/s 41(1) of the Income-tax Act, 1961, treating it as income since it was a refund of an expense previously paid. The assessee contended that since no expenditure had been allowed in the earlier years, the provisions of section 41(1) were not applicable. The Income-tax Appellate Tribunal (ITAT) upheld the assessee's contention, stating that the amount was not a trading receipt of that year and that no such expenditure was allowed by the ITO in the earlier years.

Issue 2: Applicability of Section 41(1)
The court examined whether section 41(1) could be invoked to tax the sales tax refund. The revenue argued that the refund received during the assessment year 1971-72 should be included in the taxable income for that year. The assessee argued that the refund represented amounts collected from customers as deposits towards "other charges" to cover sales tax liability during the accounting years 1958-59 to 1964-65, and thus could not be treated as income again in the year of refund.

The court referred to various precedents, including the Supreme Court decision in Keshav Mills' case and the Bombay High Court decision in Union Bank of Bijapur and Sholapur Ltd., to conclude that the refund of sales tax should be treated as a trading receipt in the year it was received. The court emphasized that the assessee had not treated these amounts as trading receipts in the profit and loss account during the years they were collected, nor had they claimed or obtained deductions for such payments in their income-tax returns or assessments.

Conclusion:
The court held that the sales tax refund received by the assessee during the assessment year 1971-72 is assessable to income-tax. The provisions of section 41(1) of the Income-tax Act, 1961, are applicable in this case. The court answered the question referred to it in I.T.Rs. Nos. 34 and 35 of 1980 in the negative, i.e., in favor of the revenue and against the assessee. Consequently, the question referred in I.T.Rs. Nos. 16 and 17 of 1977 was not answered. The parties were directed to bear their respective costs.