1961 (3) TMI 1 - SC - Income Tax

Whether the repayment of excess profits tax made by the Central Government in pursuance of section 10 of the Indian Finance Act, 1942, or section 2 of the Excess Profits Tax Ordinance, 1943, is profits from business for the purposes of section 25(4) of the Indian Income-tax Act ? Held that - The amount refunded did not lose its character which it had before the deposit and, therefore, it is an erroneous view to take that the income was assessable under section 12 of the Act and not under section 10. If it was income failing under section 10, as in our opinion it was, then the appellants were entitled to get the benefit of section 25(4) of the Act and the amount was not liable to taxation. Appeal allowed.

Summary

Issues:
1. Interpretation of whether the repayment of excess profits tax constitutes profits from business for the purpose of section 25(4) of the Indian Income-tax Act.
2. Determination of the tax treatment of the refunded excess profits tax amount under relevant provisions of the Excess Profits Tax Act, the Finance Act, and the Excess Profits Tax Ordinance.
3. Analysis of the legislative intent behind the treatment of refunded excess profits tax as income and its impact on the taxation of the assessee.
4. Comparison with relevant case laws and interpretation of whether the refunded amount retains its character as business profits for taxation purposes.

Detailed Analysis:
The judgment involves three appeals challenging the High Court of Bombay's decision regarding the tax treatment of a refunded excess profits tax amount. The firm, which was dissolved and succeeded by a private limited company, received a refund of excess profits tax, claimed as business profit exempt from tax under section 25(4) of the Act. The Income-tax Officer assessed the partners' shares to income tax, including the exempt business income. The Income-tax Appellate Tribunal later ruled the refunded amount as income from business, exempt from tax under section 25(4) of the Act.

The High Court held that the refunded amount constituted income from other sources taxable under section 12 of the Act, denying the benefit of section 25(4) to the appellants. The legislative intent behind the tax treatment was emphasized, indicating that the refunded amount should be treated as statutory income. The court analyzed relevant provisions of the Excess Profits Tax Act and the Finance Act to determine the nature of the refunded excess profits tax amount.

The judgment extensively discussed the provisions of the Excess Profits Tax Act and the Finance Act, emphasizing that the refunded excess profits tax amount should be treated as income of the assessee for the previous year, despite being exempt under section 25(4) of the Act. The court cited the McGregor & Balfour Ltd. case to support the view that the refunded amount retains its character as business profit, even after being refunded. The comparison with English Income Tax Act provisions further supported the interpretation that the refunded amount remains business profit.

By analyzing the Kirke's Trustees case, the court rejected the argument that the refunded amount should be assessed under section 12 of the Act, asserting that it falls under section 10 as business income. Therefore, the court allowed the appeals, concluding that the refunded amount retained its character as business profit and was not liable to taxation under section 25(4) of the Act. The decision was made in favor of the appellants, granting them the benefit of the Act and exempting the amount from taxation.