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SUPREME COURT OF INDIA
1st March, 1961
J.L. KAPUR, M. HIDAYATULLAH and J.C. SHAH, JJ.
Donald Miranda, etc. Appellants
Versus
The Commissioner of Income-tax, Bombay City II, Bombay (In all the Appeals), Respondent.
Civil Appeals Nos. 173 to 175 of 1960.
AIR 1959 Bom 33, Reversed. (Paras 9, 12)
Advocates appeared
Mr. A. V. Viswanatha Sastri, Senior Advocate (M/s. S. M. Dubhash and G. Gopalakrishnan, Advocates of M/s. Gagrat and Co., with him), for Appellants (In all the Appeals); Mr. K. N. Rajagopal Sastri, Senior Advocate (Mr. D. Gupta, Advocate, with him), for Respondent (In all the Appeals).
INCOME TAX - Excess Profits Tax - Refund - Whether income from business - S. 25(4) of the Indian Income-tax Act, 1922.
Fact of the Case:
The assessee firm, which was carrying on the business of wine merchants, was dissolved on March 24, 1945, and a private limited company succeeded to its business from the following day. The firm had been assessed to Excess Profits Tax under the Excess Profits Tax Act, 1940, for the chargeable accounting period April 1, 1944 to March 24, 1945. A portion of the Excess Profits Tax paid by the firm was refunded to it under the provisions of the Finance Act, 1942, and the Excess Profits Tax Ordinance, 1943. The Income-tax Officer assessed the share of each of the partners in the refunded amount to income-tax and super-tax, holding that it was income from other sources taxable under S. 12 of the Indian Income-tax Act, 1922. On appeal, the Income-tax Appellate Tribunal held that the refunded amount was income from business and was therefore exempt from income-tax under S. 25(4) of the Act. On a reference to the High Court, it held that the refunded amount was income from other sources taxable under S. 12 of the Act.
Finding of the Court:
The Supreme Court held that the refunded amount was income from business and was therefore exempt from income-tax under S. 25(4) of the Act. The Court held that the amount of Excess Profits Tax paid by the firm was an allowable deduction for the purpose of computation of the business profits of the assessee under S. 12(1) of the Excess Profits Tax Act and when it or a portion of it was refunded it had to be treated as income of the assessee. The Court further held that the amount deposited with the Central Government under the Excess Profits Tax Act was a portion of the profits of the business of the assessee and when it was returned to the assessee it must be restored to its character of being apart of the profits of a business.
Issues: Whether the amount of Excess Profits Tax refunded to the assessee firm was income from business and therefore exempt from income-tax under S. 25(4) of the Indian Income-tax Act, 1922.
Ratio Decidendi: The Court held that the amount of Excess Profits Tax refunded to the assessee firm was income from business and therefore exempt from income-tax under S. 25(4) of the Indian Income-tax Act, 1922. The Court held that the amount of Excess Profits Tax paid by the firm was an allowable deduction for the purpose of computation of the business profits of the assessee under S. 12(1) of the Excess Profits Tax Act and when it or a portion of it was refunded it had to be treated as income of the assessee. The Court further held that the amount deposited with the Central Government under the Excess Profits Tax Act was a portion of the profits of the business of the assessee and when it was returned to the assessee it must be restored to its character of being apart of the profits of a business.
Final Decision: The appeals were allowed with costs.
Judgment
KAPUR, J. : These are three appeals pursuant to a certificate under S. 66A(2) of the Indian Income-tax Act (hereinafter called the Act ) against the judgment and order of the High Court of Bombay in Income-tax Reference No. 36 of 1957.
2. The appeals though directed against the same order are three in number because each partner of the firm has brought a separate appeal. The firm was carrying on the business of wine merchants at Bombay and came into existence prior to April 1, 1939. The firm had been assessed to income-tax under the provisions of the Income-tax Act of 1918. The firm which was registered under the provisions of the Income-tax Act of 1922 (hereinafter termed the Act) was dissolved on March 24, 1945, and from the day following that, i.e., March 25, 1945, a private limited company i.e., S. S. Miranda & Co. Ltd. succeeded to the business of the firm. A claim made under S. 25(4) of the Act to the effect that no tax was payable on the profits of the registered firm for the period between April 1, 1944 to March 24, 1945, was allowed. In respect of the chargeable accounting period April 1, 1944 to March 24, 1945, the registered firm was taxed to Excess Profits Tax under the Excess Profits Tax Act, 1940. It also deposited as required certain sums of money under S. 10 of the Finance Act, 1942, read with S. 2 of the Excess Profits Tax Ordinance, 1943. In accordance with those provisions the firm became entitled to repayment of a portion of the Excess Profits Tax amounting to a sum of Rs. 2,35,704/- The shares of the three partners who are respective appellants in the three appeals were James Miranda Rs. 58,926/-, Donald Miranda Rs. 58,926/- and Mrs. N. Q. Miranda Rs. 1,17,854/-. It was submitted that the amount refunded was business profit and therefore exempt from tax under S. 25(4) of the Act. The Income-tax Officer rejected that submission and the share of each of the appellants was assessed to income-tax and super-tax and the balance after deducting the same he repaid to each of the partners but he computed the rate applicable to the tax by including the appellants total business income which was exempt under S. 25(4) of the Act. On appeal this assessment was confirmed but on further appeal the Income-tax Appellate Tribunal held that the sum which was refunded was income from business and was therefore exempt from income-tax under S, 25(4) of the Act. At the instance of the Commissioner of Income-tax, the Tribunal referred the following question of law for the opinion of the High Court.
"Whether the repayment of excess profits tax made by the Central Government in pursuance of S. 10 of the Indian Finance Act 1942, or S. 2 of the Excess Profits Tax Ordinance, 1943, is profits from business for the purposes of S. 25(4) of the Indian Income-tax Act?"
3. The High Court held that the amount so refunded was income from other sources taxable under S. 12 of the Act and the appellants were, therefore, not entitled to the benefit of S. 25(4) of the Act. In dealing with the nature of the tax the learned Chief Justice said :--
"Clearly the view of the Legislature was that this income should be treated as a statutory income with the consequence that must necessarily follow by reason of its being a statutory income."
4. It was argued on behalf of the appellants that the amount refunded was income, profits and gains from business and fell under S. 10 of the Act and was therefore exempt under S. 25(4) of the Act. For the determination of this question it is necessary to refer to the relevant provisions of the Excess Profits Tax Act, 1940, and the Finance Act, 1946. Section 12(1) of the Excess Profits Tax Act was as follows :--
S. 12 (1) "The amount of the excess profits tax payable in respect of a business for any chargeable accounting period diminished by any amount allowable by way of relief under the provisions of S. 11 or S. 11-A shall, in computing for the purposes of income-tax or super-tax the profits and gains of that bus
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