The assessee is entitled to claim deduction for the amount of excise duty refunded to the customers because the assessee had incurred the liability to refund the amounts to the customers.

JUDGMENT :

R.K. Abichandani, J.

The Income-tax Appellate Tribunal, Ahmedabad Bench "B", has referred to us the following questions under section 256(1) of the Income-tax Act, 1961 :

1. By the assessee :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal's finding that the deduction of expenditure has been clearly granted to the assessee in the earlier years is without evidence and/or perverse ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that section 41(1) covered the case and that Rs. 5,00,000 was a benefit to the assessee taxable as income under that section ?"

2. By the Commissioner :

"3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that a sum of Rs. 1,06,879 was not liable to tax under section 41(1) of the Act ? "

After hearing learned counsel for the parties, with a view to focus the real controversy involved, question No. 2 is split into questions Nos. 2A and 2B as under :

"(2A) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that section 41(1) covered the case ?

(2B) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that Rs. 5,00,000 was taxable as income in the hands of the assessee ?"

2. The relevant assessment year is 1976-77. The assessee is a limited company carrying on the business of manufacture and sale of electrical domestic grinding machines. Under rule 9 of the Central Excise Act, 1944, the company had been collecting excise duty from the customers in respect of the grinding machines sold. As a manufacturer, the assessee was required to pay excise duty under section 3 of the Central Excises and Salt Act, 1944, and it was recovered by it from the customers. The amount paid as excise duty was accounted for in a separate account called "Central Excise Duty Account". The assessee did the years 1971-72 onwards, the assessee had approached the Gujarat High Court by filing Special Civil Application No. 1465 of 1974, challenging the levy of excise duty on the ground that electric grinders were not subjected to such duty. It also appears that at the hearing of this petition, the Excise Department conceded that domestic grinders such as manufactured by the assessee were not liable to duty and agreed to refund the duty already collected. The assessee thus, during the year of account, received a sum of Rs. 6,06,879 by way of refund of excise duty. The amount represented refunds of excise duty paid over the years 1971 to 1975 by the assessee. The Income-tax Officer, in an order approved under section 144B by the Inspecting Assistant Commissioner, brought to tax the above amount under section 41(1) of the Income-tax Act. According to the Income-tax Officer, the amount was recovered from the customers as part of the price of grinders sold to them and the excise duty paid had already been allowed as a deduction to the assessee. Since the assessee had already got the benefit of deduction and the allowed amounts were refunded, the entire amount of Rs. 6,06,879 was held to be taxable under section 41(1) by the Income-tax Officer. The assessee had contended that the said amount of excise duty belonged to various customers to whom it was repayable and some of them had collected the amount by way of adjustment against service charges due to the company and some had filed suits for recovery, which were compromised by the assessee accepting the liability. The assessee's case was that the entire amount refunded belonged to the customers, who had been apprised of the position regarding the amounts kept in deposit in their behalf, which they may either collect in cash or adjust against future sales services and, therefore, there was no taxable income under section 41(1) of the Act. The Income-tax Officer, however, held that the assessee had no intention of refunding these amounts to the customers, bringing to tax the sum of Rs. 6,06,87