1984 (4) TMI 107 - AT - Income Tax

Appellate Authority, Business Expenditure, Mercantile System, Sales Tax Act, Sales Tax Authorities, Trading Liability

Summary

Issues Involved:
1. Disallowance of legal and professional expenses.
2. Disallowance of unrecovered sales tax.
3. Taxability of sales tax refund under section 41(1) of the Income-tax Act, 1961.
4. Deductibility of the sales tax refund amount repayable to DGSD.

Detailed Analysis:

1. Disallowance of Legal and Professional Expenses:
The assessee did not press grounds 2 and 3 at the time of the hearing, which pertained to the disallowance of legal and professional expenses amounting to Rs. 12,451. The Tribunal upheld the Commissioner (Appeals)'s order on these points, agreeing with the reasons stated by the Commissioner.

2. Disallowance of Unrecovered Sales Tax:
Similarly, the assessee did not press the issue regarding the disallowance of unrecovered sales tax of Rs. 5,150. The Tribunal agreed with the Commissioner (Appeals) and upheld his order on this point as well.

3. Taxability of Sales Tax Refund under Section 41(1):
The primary issue in both the assessee's and the revenue's appeals was the taxability of a sales tax refund of Rs. 2,32,090 received by the assessee. The Income Tax Officer (ITO) had taxed this amount under section 41(1) of the Income-tax Act, 1961, which the Commissioner (Appeals) upheld. However, the Commissioner also concluded that the amount had to be refunded to the Director General, Supplies and Disposal (DGSD) under section 72 of the Indian Contract Act, 1872, and thus allowed a deduction for the same amount.

Arguments by the Assessee:
- The learned counsel for the assessee argued that the conditions for applying section 41(1) were not satisfied. Specifically, the refund did not result in the cessation of a trading liability, as the liability could still be revived under section 57 of the Bombay Sales Tax Act, 1959.
- The counsel cited the Allahabad High Court decision in J.K. Synthetics Ltd. v. O.S. Bajpai, ITO [1976] 105 ITR 864, which held that a cessation of liability must be irrevocable for section 41(1) to apply.

Arguments by the Revenue:
- The departmental representative argued that the Commissioner (Appeals) erred in deleting the sum of Rs. 2,32,090 from the assessee's total income, even though he upheld the ITO's finding that the amount was taxable under section 41(1).

Tribunal's Analysis:
- The Tribunal noted that section 41(1) requires two conditions: an allowance or deduction must have been made in a previous year, and the assessee must subsequently obtain a benefit in respect of such trading liability by way of remission or cessation.
- The Tribunal observed that the refund did not constitute an irrevocable cessation of liability, as the Commissioner of Sales Tax could still revise the order under section 57(1) of the Bombay Sales Tax Act within three years.
- Therefore, the condition for cessation of liability under section 41(1) was not satisfied, and the amount could not be taxed under this section.

4. Deductibility of the Sales Tax Refund Amount Repayable to DGSD:
Assuming the amount could be taxed under section 41(1), the Tribunal examined whether the assessee was entitled to a deduction for the amount repayable to DGSD.

Arguments by the Assessee:
- The counsel referred to the contract with DGSD, which stipulated that prices were exclusive of sales tax, payable only if legally leviable.
- The sales tax was initially paid by DGSD based on the STO's assessment but was later refunded after the Assistant Commissioner of Sales Tax (Appeals) found it was not legally leviable.
- Under section 72 of the Indian Contract Act, the amount paid by mistake must be repaid, and the assessee had expressed its intention to refund the amount to DGSD.

Tribunal's Analysis:
- The Tribunal agreed with the Commissioner (Appeals) that the assessee was entitled to a deduction for the amount repayable to DGSD, as the liability was admitted and the assessee followed the mercantile system of accounting.
- The Tribunal cited the decision of the Calcutta High Court in Corporation of Calcutta v. Hindusthan Constructions Co. Ltd. AIR 1972 Cal. 420, supporting the legal entitlement of DGSD to the refund.

Conclusion:
- The appeal by the assessee was partly allowed, and the appeal by the revenue was dismissed.
- The sales tax refund of Rs. 2,32,090 could not be taxed under section 41(1) due to the non-irrevocable cessation of liability.
- Even if taxable, the amount was deductible as it was repayable to DGSD under section 72 of the Indian Contract Act.