1968 PLP 708 (PTD)

A. C. Mitra and B. L. Pal for the Commissioner. RAY, J.‑The assessee‑company is resident and ordinarily resident in the taxable territories in India. An assessment under section 23(3) of the Indian Income‑tax' Act was made on the assessee‑company on January 22, 1954. By a letter dated February 19, 1954, the assessee‑company informed the Income‑tax Officer that the assessee received advice that a sum of Rs. 2,79,580 had been received by the assessee‑company in the United King dom during the accounting year ended March 31, 1953, and that the sum had not been brought into or remitted to the taxable territories. This sum received by the assessee in the United Kingdom represented the refund .by the United Kingdom Treasury .of payments made by the assessee‑company to the United Kingdom Revenue Authorities on account of excess profits tax in previous years under the English Finance Acts of 1941 and 1942. The assessee‑company requested the Income‑tax Officer that assessment be made treating the said refund as income arising without the taxable territories and, therefore, claimed that a deduction of Rs. 4,500 under the third proviso to clause (c) of section 4(1) of the Indian Income‑tax Act and appropriate relief allowable under section 49‑D of the said Act might be granted. The Income‑tax Officer made a fresh assessment under sec 4ion 23(3) read with section 34 of the Indian Income‑tax Act but treated the excess profits tax post‑war refund as income accruing or arising in India under section 11(14) of the Indian Finance Act, 1946, and refused to grant the claim under section 49‑D of the Indian Income‑tax Act. On these facts the question of law which has arisen is as follows: "Whether, on the facts and circumstances of the case, the amount received on account of the United Kingdom excess profits tax post‑war refund was an income arising outside the taxable territories and as such the claim under section 49‑D is admissible?" The relevant provisions of the Indian Finance Act, 1946, are contained ire section 11, subsections (11) to (14). Sub ‑section (11) enacts that any sum repaid in respect of any profits which are also assessable to excess profits tax under the law enforceable in the United Kingdom shall be treated for the purpose of assessment of income‑tax and super tax, as income of the previous year during which repayment is made. Subsection (14) enacts that where under the provisions of subsection (2) of section 12 of the Excess Profits Tax. Act, 1940 (Indian Act) excess profits tax payable under the law enforceable in the United Kingdom has been deducted in computing for the purposes of income‑tax and super tax the profits and gains of any business, the amount of any repayment under subsection (1) of section 28 of the Finance Act, 1941 (English Act) as amended by section 37 of the Finance Act; 1942 (English Act) in respect of those profits, shall be deemed to be income for the purposes of the Indian Income‑tax Act, 1922, and shall, for the purpose of assessment to income‑tax and super tax, be treated as income of the previous year during which the repayment is made. The Indian Excess Profits Tax Act, 1940, defines in section 2(9) deficiency of profits to mean profits which fall short of the standard profits or loss added to the amount of the standard profits. Loss is defined in section 2(16) of the said Act to mean a loss calculated in the same manner as for the purposes of the Act profits are to be computed. Profits are defined in section 2(19) of the said Act to mean profit as ‑determined in accordance with the First Schedule. Stan dard profits are defined in section 2(20) of the said Act to mean standard profits as computed in accordance with section 6 of the said Act of 1940. Taxable territories have been defined in section 2(21) (a) of the said 1940 Act to have the meaning assigned to that expression by clause (14‑A) of section 2 of the Indian Income‑tax Act, 1922. Section 4 of the said 1940 Act enacts charge of tax. Section 11 of the said 1940 Act enacts relief in respect of double excess profits taxation and section 12 of the 1940 Act provides for allowance of excess profits in computing income for income‑tax purposes. Section 11 of the said 1940 Act states that the Central Government may by notification make provisions for the granting of relief in cases where both excess profits tax under the said 1940 Act and excess profits tax under any law in force in the United Kingdom or in any other part of His Majesty's Dominions have been paid upon any profits of the business if it appears to the Central Government that the laws of the United Kingdom provide for corresponding relief in respect of excess profits tax charged on profits both in the United Kingdom and in the taxable territories. Section 12(2) of the 1940 Act enacts that there shall be deducted the amount of any excess profits tax pay able under any law in force in a country outside the tax able territories on the profits of the business in respect of any chargeable accounting period to the extent to which such profits are liable to excess profits tax under the said 1940 Act after diminishing such amount by any amount which is allowable by way of relief by repayment, set‑off or otherwise under any law in the country where the tax is payable providing for the granting of relief in that country where excess profits tax has also been charged in the taxable‑ territories. In the present case the admitted fact is that the assessee‑com pany carried on business in India and did not carry on any business in the United Kingdom. Under the law in force in the United Kingdom the assessee‑company had ‑to pay excess profits tax during the war years. It is also an admitted feature of the present case that the amounts which were paid by the assessee‑company were allowed to be deducted by the assessee‑company in its assessment during the years when such excess profits tax was paid to the revenue autho rities in the United Kingdom. The only question in the present case is whether the repayment or refund of the excess profits tax is an income which accrues or arises within or without the taxable terri tories. Counsel for the assessee contended that the refund by the United Kingdom Treasury was an income which accrues or arises without the taxable territories and which is not deemed to accrue or arise within the taxable territories and therefore the assessee shall be entitled to the deductions from the Indian income‑tax payable by him of a sum calculated on such double tax income at the Indian rate of tax or the rate of tax of the said country whichever is lower. This relief is sought by the assessee under section 49‑D of the Indian Income‑tax Act. Counsel for the assessee relied on the decision of this Court in the case of McGregor & Balfour Ltd. v. Commissioner of Income‑tax ((1955) 27 I T R 389), in support of the‑ proposition that such refund of excess profits tax is not an income which accrues or arises within the taxable territories. In McGregor's case it was contended first that the amount of repayment of excess profits tax was not chargeable to tax at all and, secondly, that in any event the amount could not be taken into account for the purpose of section 4‑A (c) (b) inasmuch as it was not an income arising in India as required by that section but only an amount deemed to be an income for the purpose of the Indian Income‑tax Act and treated as an income of the year in which the repayment is made. It is beyond any controversy that the repayment is liable to be taxed as an income and it has not been contended to the contrary in the present case. As to the second contention in McGregor's case that the repayment in England was not an income arising in India, Chakravarti, C. J, said that the income is sui generis and further that it was only related as to the time to the year in which the repayment was received but otherwise it stood alone unrelated to any place as the place of its accrual and unrelated to any place or manner in which it' accrued or arose. Counsel for the assessee in the present case also contended that it has been held in McGregor's case that this is not an income arising in India and it is, therefore, in the present case an income accruing or arising without the taxable territories. In McGregor's case the company traded both in India and in England and, therefore, Chakravartti, C. J. held that it could not be said that the whole of the amount was income which had arisen in India because it was quite possible that the profits from which it was deducted were composed partly of income arising in India and partly of income arising outside India. This observation was made to repel the contention of the department in that case that the amount of repayment would determine the residence of the company in that case. Under section 4‑A(c)(b) the income arising in India should exceed the income arising outside India in order to fix the residence of such a company in India. Chakravartti, C. J. said that amount of repayment could not in view of the language of section 11(14) of the Finance Act be treated as income arisen in India or for utilising the repayment for the purpose of determining the residence of the company in that case. McGregor's case went up on appeal to the Supreme Court as will appear from the decision reported as McGregor & Balfour Ltd. v. Commissioner of Income‑tax. It was contended on behalf of the assessee in the Supreme Court that the amount would have to be treated as income received outside the taxable territory because the Indian Finance Act, 1946, treated it only as income but did not treat it as income within the taxable territories in express and clear language. This contention was negatived and it was held that the amount when paid as excess profits would have been taxable income but for the provisions of section 12(2) of the Excess Profits Tax Act. The Supreme Court further said: "The income character of the receipt is restored by the fiction and it is to be brought under assessment without any further proof than this that it has been received as repayment of the United Kingdom tax, in respect of which a deduction was made in the earlier years. The distinction between incomes within and without taxable territories is made unnecessary by demanding that this amount by way of repayment shall be brought to tax and `treated' as income within the previous year. The effect thus is that the subsection charges the said amount with a liability to tax by its own force or to borrow the words of Lord Sumner, is apt to impose a charge." In McGregor's case the Supreme Court considered the charac ter of the money which was refunded to the company in the United Kingdom. At the time when excess profits tax was paid in the United Kingdom it was neither known as to when repayment would be made nor whether the business of which the profit was assessed to excess profits duty would be in the same hands when repayment came to be made. The business which paid excess profits might cease to be in existence at the time when repayment will be made. That is why the Supreme Court said that the amount repaid did not lose its character of original trading profits. In the English Act the amount repaid to any person was to be treated as profit for the year in which the repayment was received. The word "treated" shows that though it was not the actual trading profits for such year it is treated to be so. In the case of Eglinton Silica Brick Co. Ltd v. Marrian ((1924) 9 Tax Cas. 92) it is stated at page 98 of the report that the amount repaid or refunded does not lose its original character of trading profits. Hence by artificial rule the amount repaid is treated as profit for the year in which the repayment is received. Again in the, case' of Nesbitt Limited v. Mitchell ((1926) 11 Tax Cas. 211) it is said that the repayment of excess profits duty is a sum which is repaid because there was too large a sum paid by the Company to the revenue authorities over the whole period during which excess profits duty was paid and that sum is intended to represent a repay ment of a sum which was paid by them in respect of the duty charged upon the excess profits of their trading. When there is repayment of such excess profits the moneys do not lose their character but are a sum taken out of the profits which were made by the company in the course of its trading and profits which at the time they were made were subject to income‑tax and subject to excess profits duty and, therefore, that is the character of the repayment. Because a repayment or refund of excess profits is impressed with that character it is treated as a profit for the year in which the repayment is received. In the case of Kirke's Trustees v. Commissioners of Inland Revenue ((1926) 11 Tax Cas. 323) Lord Sumner said: "Something which is not a profit, but is only a money repayment, something which may not result in a profit, because although trading goes on there is so great a loss on the year that this repayment does not make up the deficit, something which may not be a trading profit, because trading has ceased altogether, nevertheless is to be treated as profit and as profit for the year. `Treated' is a fresh word free from legal technicality. It is the widest word that could be chosen. The Legislature avoided saying `shall be assessed as' or `shall be brought into the computation of profit and loss', and simply says that something which is not profit but mere payment shall be treated as profit, which it may or may not be, and as profit for the year. I think, therefore, that the word `treated' is an apt word to impose a charge." The effect of the provisions of the Indian Finance Act, 1946, on the refund of excess profits tax is that since the assessee paid excess profits tax in the United Kingdom he had an equivalent sum removed from the taxable profits and not assessed then thereon and, therefore, when any part of the excess, profits ‑tax was refunded to him the assessee was not to escape Indian Income-tax on that sum. Consequently, the Finance Act provided for the taxation of such amount. Under the provisions of the Finance Act, it must be remembered that the amount of repay ment is not only an income but an assessable income. The words "for the purpose of assessment of income‑tax and super tax" in the Finance Act undoubtedly, show that the amount of repayment has the character of assessability. In the case of Commissioner of Income‑tax v. Donald Miranda ((1959) 35 I T R 103) the question was whether the repayment of the amount was profits of the business within the meaning of section 10 of the Income‑tax Act. 'The contention of the assessee there was that it was a business income and, therefore, not liable to any tax by reason of section 25 (4) of the Act. It was held that the income was to be treated as a statutory income and the necessary consequences thereof follow In the Bombay case the character of the repayment was discussed. The assessee contended there that since the Finance Act treated the repayment as income this would fall within the meaning of business income under section 10 of the Income‑tax Act. It was observed that when the amount was paid as excess profits tax it was paid out of business income. It constituted a deduction under section 12 of the Income‑tax Act and the character of business income attached to it. It was said in the Bombay case that when the assessee got back the deposit of excess profits the repayment was a statutory concession in consideration of the deposit made by the assessee. Whether the deposit is voluntary or compulsory it is a concession inasmuch as the State has taken from the assessee a deposit which under the law of taxation it is not entitled to and the State in return pays interest and refunds a part of the tax. The taxation and assessment is under‑ the Income‑tax Act and the Excess Profits Tax Act has noth ing to do with 'the assessment of excess profits. The Finance Act treats the repayment as an income arid allows the Income‑tax Act to deal with the income. It was thus held in the Bombay case that such income fell under section 12 of the Indian Income‑tax Act as a residuary income and as it was a special type of income created by the statute it could not fall under any of the recognised heads of the Income‑tax Act and thus fell under the residuary head under section 12 of the Indian Income‑tax Act. The assessee is repaid part of the excess profits not because on a proper assessment he is not liable to pay a particular portion of the tax but because the State provided for the concession of repayment inasmuch as the State has the use of deposits made by the assessee. The Bombay decision in Donald Miranda's case went on appeal to the Supreme Court and the decision will be found reported as Donald Miranda v. Commissioner of Income‑tax ((1961) 42 I T R 166 (S C)). The Supreme Court said that when the excess profits tax was deposited it was a portion of the profits of the business and that its nature did not change merely because it was refunded as a consequence of some provisions of the Finance Act or the Excess. Profits Tax Act. It is apparent that when excess profits tax was paid the deposit was taken from the business profits. The Government found that larger amount had been deposited and therefore returned or repaid a part of the deposit. The Excess Profits Tax Act is a tax imposed on profits arising out of certain business. Therefore the Supreme Court said that the amount deposited came back without losing its character. It is thus manifest that the refund is first treated as income and, secondly, it is assessable to income‑tax and super tax. In McGregor's case it was contended in the Supreme Court that the statute by fiction treated it as income but did not carry the fiction to treat it as income within the taxable territory for the statute does not say so and, therefore, it was to be treated as income received outside the taxable territory. This contention was not accepted. The decision of the Supreme Court, therefore, is an authority for the proposition that such refund of excess profits tax in the United Kingdom is not an income received outside the taxable territory. In the present case the contentions on behalf of the Commissioner of Income‑tax were first that the amount of repayment‑or refund was carved out of the profits in India at the time when the amount was paid by the excess profits and, therefore, there was deduction obtained by the assessee during the year of payment of excess profits tax. The authorities referred to hereinbefore show that the refund does not lose its original character of trading profits. Therefore, the conclusion in the facts and circumstances of the present case where the assessee company traded only in India is that the amount when refunded. is restored to its original character of profits. The second contention on behalf of the Commissioner of Income‑tax was that the question of situs was not germane by reason of the character of the income and its assessability to income‑tax and super tax. It is true that this Court held in McGregor's case, on the facts and circumstances of that case, that the refund could not be said to have been received in India. There the company carried on trade both in India and in England. The Supreme Court; however, on appeal of the same case clearly held that the amount of refund was not an income received outside the taxable territory. The conclusion therefore in the facts and circumstances of this case is that the amount of refund is not an income received outside the taxable territory. The question referred to us is answered in the negative. The Commissioner of Income‑tax is entitled to the costs. Certificate for two counsel. G. K. MITTER, J.‑I agree. Question answered in the negative.