S.S. Sharma, J.@mdashThis judgment shall also govern the disposal of Misc. Civil Case No 72 of 1971 (Commissioner of Income Tax, M.P., Bhopal v. Vallabhbhai Bhikhabhai Ujjain). Both these references have been made by the Income Tax Appellate Tribunal u/s 256(1) of the Income Tax Act, 1961.
2. In Misc. Civil Case No. 46 of 1971 the facts as mentioned in the statement of case are as follows: --
The assessee M/S Somabhai Gelabhai of Ujjain is a registered firm and deals in tobacco. It follows the Diwali year and the accounts are based on mercantile system as against cash system. The assessment year involved is 1961-62 for which the accounting period ends on the Diwali of 1960. The State Government by a notification, dated 23-10-1953 levied Sales Tax on imported tobacco. The levy of the Sales Tax was challenged before this Court as being in contravention of Article 304(a) of the Constitution of India by this assessee as also by other tobacco dealers. In those petitions they also claimed a refund of the amount of Sales Tax which the dealers had paid to the State Government. These petitions including that of the assessee were allowed by a judgment dated 16-12-1959 of this Court and the State Government was directed to refund the amount of Sales Tax which was ilk gaily recovered. The amount to which the assessee was entitled for a refund was Rs. 28,758.
3. The original assessment u/s 23(3) of the Act was completed on 5-2-1962 on a total income of Rs. 33,909. Income Tax Officer subsequently felt that as a result of the direction of this Court in the Misc. Petition, filed by the assessee, the amount of refund of Sales Tax accrued to him during the year of account which was neither disclosed by the assessee nor included in the computation of the total income by the Department. Therefore, proceedings u/s 147 were initiated and after giving the assessee a reasonable opportunity, the amount of the Sales Tax refund was included in the income of the assessee for the assessment year 1961-62.
4. Against this order of the Income Tax Officer the assessee went in appeal before the Appellate Assistant Commissioner who agreed in conclusion with the Income Tax Officer but held that since the State of Madhya Pradesh went in appeal to the Supreme Court against the order, dated 16-12-1959 where the appeal was dismissed by order, dated 21-1-1964, hence two views being possible, the assessment would be protective one and further directed the. Income Tax Officer that this protective assessment is to be cancelled only if the substantive assessment becomes final.
5. Against this order the assessee went in appeal before the Tribunal and contended before it that since the State Government had not accepted the judgment, dated 16-12-1959 of the High Court it preferred an appeal to the Supreme Court hence the liability of the State Government to refund the amount of Sales Tax to the assessee actually arose on 20-1-1964 when the Supreme Court decided the appeals including that of the assessee. The Tribunal accepted this contention and so held that the amount of refund i.e. Rs. 28,758 cannot be included as the income of the assessee for the year under appeal. On this ground the order of the Appellate Assistant Commissioner was set aside and the appeal was allowed. The cross-objection filed by the department was also-dismissed by the Tribunal.
6. On an application submitted by the Commissioner of Income Tax, M.P., Bhopal the Tribunal has referred the following question for the opinion of this Court:--
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amount of Rs. 28,758 cannot be included as the income of the assessee for the previous year relevant to the year 1961-62.
7. In Miscellaneous Civil Case No. 72 of 1971 (Commissioner of Income Tax, M.P., Bhopal v. Ballabhbhai Bhikhabhai Ujjain) also the facts are more or less the same. This also relates to the assessment year 1961-62 for which the previous year ended in Diwali 1960. The assessee is a registered firm carrying on business in tobacco. The original assessment was completed on 31-7-1962 on a total income of Rs. 21,998. The assessee had also filed a Misc. Petition in this Court, challenging the imposition of the Sales Tax on the imported tobacco as being unconstitutional and void and had also claimed a refund of the amount that he had paid by way of Sales Tax, relating to the period from 1-5-1951 to 30-9-1957. His petition was also allowed by judgment dated 16-12-1959 and the imposition of the Sales Tax on the imported tobacco was held to be void and repugnant to Article 304(a) of the Constitution of India. The State Government was also directed to refund the amount of Sales Tax which was illegally recovered. The assessee in his accounts for the assessment year 1961-62 had not disclosed that any sum by way of refund of Sales Tax had accrued in view of the judgment of the High Courts. Consequently, the Income Tax Officer issued a notice u/s 148 of the Income Tax Act, 1961.
8. Before the Income Tax Officer it was urged on behalf of the assessee that against the judgment, dated 16-12-1959 of the High Court the State had preferred an appeal to the Supreme Court which was decided on 20-1 1964 i.e. subsequent to the previous year. The Income Tax Officer overruling the objections, raised by the assessee held that a sum of Rs. 62,940 which was the amount of the Sales Tax refund to which the assessee was entitled, constituted his income in that year.
9. On an appeal by the assessee the Appellate Assistant Commissioner held that the amount of the Sales Tax refund constituted a taxable income and that "possibly the amount in question might be taxable in the year in which the Supreme Court delivered the judgment" as the assessee had only a disputed claim so long as the High Court''s order was being disputed before the Supreme Court in appeal. He, however, upheld the assessment as a "protective assessment order".
10. Aggrieved by this the assessee preferred an appeal to the Tribunal and the Department also filed cross-objection. Different objections raised by the assessee before the Tribunal need not be dealt with in view of the question referred to us for opinion. The Tribunal, however, held that "even on the assumption that the sum of Rs. 62,839 constituted income it did not accrue in the accounting period and as such could not be assessed in this year." The Tribunal while deciding this pointed out certain facts. In the assessment year 1962-63 the State Government on 29-9-1961 deposited Rs. 51,072 in a fixed deposit account and in the assessment year 1963-64 deposited the balance amount of Rs. 11,767 on 24-11-1961. It further observed that the papers on record did not clarify as to on what date the bank guarantee given by the assessee against the State Government was withdrawn and when did the assessee acquire a full control over the fixed deposit account.
11. Thus the Tribunal pointed out that the amount of the Sales Tax refund i.e. Rs. 62,839 was received by the assessee in two different instalments subsequent to the previous year relevant for the assessment year 1961-62. As regards the assessee''s right to receive the amount of Sales Tax refund the Tribunal observed that the judgment of the High Court was not final and an appeal against that was pending before the Supreme Court. Thus according to it this amount did not crystalize into a debt owed to the assessee, at least till the Supreme Court decided the appeal on 20-1-1964. Accordingly the Tribunal took the view that both on accrual and receipt basis the sum of Rs. 62,839 did not form part of the assessee''s total income for the assessment year 1961-62.
12. On an application by the Commissioner of Income Tax the Tribunal has referred the following question for opinion of this Court:--
Whether on the facts and in the circumstances of the case the Tribunal was correct in holding that the sum of Rs. 62,839 did not represent any receipt or amount accrued due to the assessee in the previous year for the assessment year 1961-62.
13. u/s 145 of the Income Tax Act, 1961 income chargeable under the head "Profits and gains of business or profession" or "income from other sources" has to be computed in accordance with the method of accounting regularly employed by the assessee. In view of the fact that the assessee admittedly maintains his account according to mercantile system profits have to be computed and taxed on the accrual basis. The distinguishing feature of maintaining books of account according to mercantile system is that it brings into credit what is due immediately it becomes legally due and before it is actually received, and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. The distinction between maintaining the account books according to the cash system and the mercantile system has been discussed in several decisions of their Lordships of the Supreme Court. We may, however, refer to a decision in Keshav Mills Ltd. v. Commissioner of Income Tax, Bombay (1953) 23 ITR 23 -249 wherein their Lordships of the Supreme Court have explained the mercantile system of accounting as follows:--
The mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of book-keeping under which a record is kept of actual cash receipt and actual cash payments, entries being made only when money is actually collected or disbursed. That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. The profits or gains of the business which are thus credited are not realised but have been earned are treated as received though in fact there is nothing more than an accrual or arising of the profits at that stage. They are book profits. Receipt being not the sole test of chargeability and profits and gains that have accrued or arisen or are deemed to have accrued or arisen being also liable to be charged for income tax the assessability of these profits which are thus credited in the books of account arises not because they are received but because they have accrued or arise.
14. Section 5 of the Income Tax Act, 1961 deals with the scope of total income. Section 5(1)(b) of the Act is as follows :--
Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which--
(a) ... ... ... ...
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
15. In
In Pope The King Match Factory v. Commissioner of Income Tax, a demand for excise duty was served on the assessee and though he was objecting to it and seeking to get the order of the Collector of Excise reversed, he debited that amount in his accounts on the last day of his accounting year and claimed that amount as a deductible allowance on the ground that he was keeping his accounts on the mercantile basis The Madras High Court had no difficulty in holding that the assessee had incurred an enforceable legal liability on and from the date on which he received the Collector''s demand for payment and that his endeavour to get out of that liability by preferring appeals could not in any way detract from or retard the efficacy of the liability which had been imposed upon him by the competent excise authority. In our judgment, the above decision lays down the law correctly.
16. A similar question came up for consideration before the Mysore High Court in
The direction of the District Judge for the payment of interest on the enhanced compensation, which, his decree made on February 28, 1951, incorporated, produced the right to recover such interest at least on the date of that decree. Then again, when compensation was further enhanced by the former High Court of Mysore which made a similar direction for the payment of interest on such enhanced compensation, all that interest which that amount so earned from February 19, 1949 became immediately due and payable under an executable decree.
It is difficult to understand how the pendency of the appeal before the Supreme Court could arrest the accrual of that income. It did not. It is admitted that during the pendency of the appeals before the Supreme Court, there was no stay of execution. Even if there was, its impact on accrual is debatable.
17. During the course of hearing a judgment of the Punjab High Court in
18. In
It is a fundamental rule of the law of taxation that, unless otherwise expressly-provided, income cannot be taxed twice. It is not open to the Income Tax Officer, if income has accrued to the assessee and is liable to be included in the total income of a particular year, to ignore the accrual and thereafter to tax it as income of another year on the basis of receipt.
19. The effect of the judgment of the High Court, declaring the imposition of Sales Tax on imported tobacco to be ultra vires the Constitution of India would be that the assessment of Sales Tax against the assessee on such tobacco as also the recovery thereof became wholly illegal and void. The High Court even gave a direction for the refund to the assessee of such amount of tax. This obviously gave an immediate right to the assessee to recover the money for which a direction had been given by the High Court. In neither of the two cases is there anything on record to show that the Supreme Court had granted any stay. As against that, in Misc. Civil Case No. 72/71 the statement of case shows that even before the appeal was decided by the Supreme Court, the State Government had to deposit the amount. We may observe that mere filing of an appeal does not operate as a stay of the order, judgment or decree against which appeal has been preferred. We do not have the least of doubt that the assessee had a right immediately after when the judgment of the High Court was delivered to take proceedings for the recovery of the money for which the direction had been given by the High Court.
20. As a result of the aforesaid discussion it follows that since the assessee was following the mercantile system of accountancy, hence the amount for which the High Court gave a direction for refund, will, u/s 5(1)(b) of Income Tax Act, 1961, be deemed to have accrued to the assessee on 16-12-1959 when the High Court gave its decision.
21. That being so we shall answer the question in Misc. Civil Case No. 46 of 1971 (The Commissioner of Income Tax, Madhya Pradesh, Bhopal v. M/s. Somabhai Gelabhai, Ujjain) as follows: --
On the facts and in the circumstances of the case the Tribunal was not justified in law in holding that the amount of Rs. 28,758 cannot be included as the income of the assessee for the previous year relevant to the year 1961-62.
22. Our answer to the question referred to us in Misc. Civil Case No. 72/71 (The Commissioner of Income Tax, Madhya Pradesh, Bhopal v. Vallabhbhai Bhikhabhai, Ujjain) is as follows:--
On the facts and in the circumstances of the case the Tribunal was not correct in holding that the sum of Rs. 62,839 did not represent any receipt or amount accrued due to the assessee in the previous year for the assessment year, 1961-62.
23. As required by section 260 of the Income Tax Act, 1961, a copy of this judgment be sent to the Appellate Tribunal, which shall pass necessary orders in conformity with this judgment.
24. In each one of these references the costs excluding the fee for making the reference, shall be borne by the respective respondent-assessee. Counsel''s fee shall be Rs. 100 in each case.
