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PETITIONER: THE COMMISSIONER OF EXCESS PROFITS  TAX, HYDERABAD

       Vs.

RESPONDENT: M/S.  S. R. V. G. PRESS COMPANY, KURNOOL

DATE OF JUDGMENT: 10/03/1961

BENCH: SHAH, J.C. BENCH: SHAH, J.C. KAPUR, J.L.

CITATION:  1961 AIR 1274            1962 SCR  (1) 232

ACT: Excess   Profits  Tax--Sales  Tax--Provisional  payment   in advance,  if permissible deduction--Excess Profits Tax  Act, 1940 (XV of 1940), r. 12, SCh.  1.

HEADNOTE: The  respondents were entitled to a rebate of sales  tax  on goods  purchased  by them and used  in  their  manufacturing process.  They had adopted the system which was  permissible under law, 233 of paying sales tax provisionally assessed by the Sales  Tax Officer  on the basis of turnover of the previous year,  the liability  being adjusted at the end of the year of  account in  the light the actual turnover of that year, as a  result of which, in some years the respondents were assessed to pay tax  in  excess  of the amount  provisionally  assessed,  in others they obtained refund of the excess tax paid under the provisional  assessment.  The Income Tax Officer  recognised the  system  and permitted deduction of sales  tax  actually paid  under the provisional assessment.  The Excess  Profits Tax Officer had in assessing liability to excess profits tax for previous periods adopted the same method of computation, but  for the chargeable accounting period, he did not  allow the  deduction  of  the full  amount  of  tax  provisionally debited  to  the sales tax, because in his view it  was  not reasonable   and  necessary  expenditure  and  thus  not   a permissible deduction. The  question  was  whether  the  sales  tax  payments  were unreasonable  and  unnecessary  having  due  regard  to  the requirements of the business and consequently not deductible under r.  12 Sch. 1 of the Excess Profits Tax Act. Held,  that  it  is for the Excess Profits  Tax  Officer  to decide  whether  the deductions claimed are  reasonable  and necessary having regard to the requirements of the business. But  the  reasonableness and necessity  of  the  expenditure sought  to  be  deducted under r. 12 Sch. 1  of  the  Excess Profits  Tax Act in assessing excess profits  tax  liability must be adjudged in the light of commercial expediency,  and not  on  any  legalistic consideration.   Payments  made  in satisfaction   of  liability  which  arises  by  virtue   of assessment  made by the Sales Tax Officer cannot  be  called

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unreasonable.   Payment  of  sales  tax  as  assessed  being obligatory and necessary for the purpose of carrying on  the business,  it must be deemed to satisfy the requirements  of r. 12 of Sch. 1 of the Excess Profits Tax Act. In re M. P. Kumaraswami Raja, (1955) 6 Sales Tax Cases 113, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 270 of 1960. Appeal from the judgment and order dated February 21,  1956, of the Andhra Pradesh High Court in Case Reference No. 4  of 1955. K.   N. Rajagopal Sastri and D.. Gupta, for the appellant. H.   J. Umrigar, Thiyagaraja and G. Gopalakrishnan, for  the respondents. 1961.  March 10.  The Judgment of the Court was delivered by 30 234 SHAH,  J.-The assessees are a firm carrying on  business  at Kurnool,  of manufacturing ground-nut oil and  cake.   Under the  Madras General Sales Tax Act IX of 1939, the  assessees were  entitled  to  a  rebate of sales  tax  paid  on  goods purchased  by  them and used in the  manufacturing  process. The assessees maintained their books of account according to the   Samvat  Year  ending  with  Diwali.   The  system   of accounting was a mixture of mercantile and cash.   Purchases and sales of goods on credit were duly entered in the  books of  account.   The sales tax actually recovered by  the  tax authorities  was  debited  when  paid  and  amounts  if  any refunded  were  credited when received.  The  assessees  had adopted the system which was permitted by the Act of  paying tax  calculated  on  the turnover of the  previous  year  of account.  Under this system, tax was provisionally  assessed by the Sales Tax Officer on the basis of the turnover of the previous year, and thereafter the liability was adjusted  at the  end of the year of account in the light of  the  actual turnover  of that year, and of rebate allowed in respect  of groundnuts  pressed  into  oil.  As a result  of  the  final adjustment made by the sales tax authorities, in some  years the  assessees  were assessed to ’pay tax in excess  of  the amount   provisionally assessed and in others they  obtained refund  of  the  excess  tax  paid  under  the   provisional assessment.   The  following  tabular  statement  shows  the official  years for sales tax, provisional demands  made  by the  sales  tax  authorities,  the  final  demands  and  the adjustments made in that behalf. Official      Provi-       Filial       Adjustment Year          sional                       Refund/Addi- ended.        demand.     demand.        tional levy.                Rs.         Rs.         Rs.         Rs. 31-3-1942      2,679      1 872       807 31-3-1943      3,046       2,863       183 31-3-1944      14,509      18,402               3,893 31-3-1945      47,276      20,037      27,239 31-3-1946      45,315      13,379      31,936 For  the assessment year 1946-47 (corresponding to the  year of  account  October  18,  1944  to  November  4,1945),  the assessees claimed in their assessment to 235 income-tax  to deduct Rs. 49,633 being the amount of  sales- tax paid under a provisional assessment.  In the year ending 31-3-1945,  the assessees had paid Rs. 47,276  as  sales-tax provisionally assessed.  They also had paid in that year Rs.

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3,894  in adjustment of the liability for the previous  year towards  sales-tax due.  After giving credit for  Rs.  1,537 received as rebate, the total sales-tax liability under  the provisional  assessment  was  Rs.  49,633.   The  Income-tax Officer accepted this claim, and debited it from the  income in  the  assessment year 1946-47 in  assessing  the  taxable income  of  the assessees.  Deduction of  salestax  actually paid under provisional assessment less rebates was permitted by  the Income-tax Officer not only in the  assessment  year 1946-47  but also in the earlier years.  The Excess  Profits Tax  Officer had also adopted for the chargeable  accounting period  prior  to  October  18,  1944  the  same  method  of computation,  but  for  the  chargeable  accounting   period October 18,1944 to November 4, 1945, the Excess Profits  Tax Officer  allowed out of the amount of Rs. 47,276 debited  to sales  tax only Rs. 17,055 as properly attributable to  that period  in  computing  the  Excess  Profits  Tax  liability. According  to  the Excess Profits Tax  Officer,  the  excess amount paid under he provisional assessment i.e., Rs. 30,221 could not be taken into account, because under r. 12 of Sch. 1  of the Excess Profits Tax Act, expenditure in  excess  of the amount reasonable and necessary for the business was not a permissible deduction.  In appeal against the order of the Excess Profits Tax Officer, the Tribunal affirmed the order. Against  the  order passed by the  Tribunal  confirming  the order  of  the  Excess Profits Tax  Officer,  the  assessees applied  for and obtained an order referring  the  following question to the High Court of Judicature of Andhra Pradesh, "Whether  there are materials for the Tribunal to hold  that the   aforesaid  sales-tax  payments  of  Rs.  30,221   were unreasonable  and  unnecessary  having  due  regard  to  the requirements of the business and not consequently deductible under r. 12 of Sch.  1 of the Excess Profits Tax Act?" 236 The  High  Court answered the question in the  negative  and against  the  order  of  the  High  Court,  this  appeal  is preferred with leave under s. 66A(2) and (3) of the  Income- Tax Act read with s. 21 of the Excess Profits Tax Act. It is manifest that the assessees had not altered the method according  to which their accounts were  maintain-Id.   Year after  year, they were paying tax provisionally assessed  by the  Sales-tax Officer on the turnover of the previous  year subject  to adjustment at the close of the year of  account. This system of payment of tax under provisional  assessments was  not adopted with a view to evade,, tax liability.   Nor was  recovery of the amounts ordered to be refunded  to  the assessees delayed because of any deliberate, inaction on the part  of the assessees.  It is not found that excess tax  on inflated  returns was paid in anticipation of the repeal  of the  Excess Profits Tax Act.  The assessees for  reasons  of convenience adopted, as they were entitled under the  Madras General  Sales  Tax  Act,  a system of  payment  of  tax  on provisional  assessment  based  on  the  turnover  of   the, previous year subject to final adjustment to be made at  the end of the year.  The assessees could opt for the system  of paying   sales-tax  on  provisional  assessment,   but   the liability  to  pay  tax  imposed was  on  that  account  not voluntarily  incurred.   This  system  produced  no   direct benefit  to  the  business and adjudged  in  retrospect,  it undoubtedly reduced the taxable income; but if otherwise the payment  was reasonable and necessary having regard  to  the requirements  of  the  business, it was  not  liable  to  be ignored in assessing the Excess Profits Tax liability of the assessees.   By r. 12 of Sch.  1 of the Excess  Profits  Tax

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Act,  it is provided that "in computing the profits  of  any chargeable accounting period, no deduction shall be  allowed in  respect of expenses in excess of the amount  which,  the Excess   Profits  Tax  Officer  considers   reasonable   and necessary   having  regard  to  the  requirements   of   the business;...". It  is for the Excess Profits Tax Officer to decide  whether the  deductions claimed are reasonable and necessary  having regard to the requirements of the 237 business.   But  the  reasonableness and  necessity  of  the expenditure  sought  to  be  deducted  in  assessing  Excess Profits  Tax  liability  must be adjudged in  the  light  of commercial  expediency.  The payments made by the  assessees were  in discharge of obligation imposed lawfully  and  were necessary for the proper conduct of the business.  By s.  10 of  the  Madras General Sales Tax Act,  the  assessees  were obliged  within  15  days from the date of  service  of  the notice  of assessment to pay tax and in default, the  amount was  liable to be recovered as if it were an arrear of  land revenue.  Again, by s. 15, if the assessees failed to submit the  return as required by the provisions of the Act or  the rules  made thereunder or failed to pay the tax  within  the time prescribed, they were liable to be penalised.  Payments made in satisfaction of liability which arises by virtue  of the  assessment  made  by the Sales Tax  Officer  cannot  be called unreasonable.  Payment of sales-tax as assessed being obligatory and necessary for the purpose of carrying on  the business,  it must in our opinion be deemed to  satisfy  the requirements of r.  12  of Sch. 1 of the Excess Profits  Tax Act. The Excess Profits Tax Officer was, in our opinion, in error in  thinking  that  the  tax  paid  was  in  excess  of  the requirements of the business.  We are also of the view  that the  Tribunal  was in error in holding that  by  seeking  to deduct  only  the tax properly attributable  to  the  actual turnover during the chargeable accounting period, the Excess Profits Tax Officer was not seeking to disturb the method of accounting  which  was  followed by the  assessees  and  was accepted by the taxing authorities for many years. Counsel  for  the  Commissioner  submitted  that  the  rules relating  to advance provisional assessment and levy of  tax framed  under  the Madras General Sales Tax Act,  1939  were inconsistent  with  the  provisions  of  the  Act  and   the assessees  should  have  raised  this  contention  and  have obtained  a  decision from the court before  paying  tax  on provisional assessment and not having done so, payments made cannot  be  regarded  as  either  reasonable  or  necessary. Counsel  says that in In re M. P. Kumraswami Raja  (1),  the Madras High (1)  [1955] 6 Sales Tax Cases 113. 238 Court  has declared this scheme of taxation  on  provisional assessment  ultra  Vires.   But the  reasonableness  or  the necessity  of  payments  under r. 12 Sch. 1  of  the  Excess Profits Tax Act must be ascertained in the light of what may be  regarded  as  commercially  expedient  and  not  on  any legalistic  considerations.  It would not be expected  of  a businessman to start a litigation in respect of a tax  which the  Legislature of the State was competent to levy  on  the ground  that  the  method  devised  for  computing  the  tax liability  was ultra vires.  The tax was duly  assessed  and paid  and the reasonableness and necessity must be  adjudged in the light of the circumstances then prevailing and not in the  light  of  subsequent developments.   It  may  also  be

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noticed that since the Madras High Court’s decision in In re Kumaraswami  Raja’s case (1), the Madras Legislature by  the Madras  General  Sales  Tax  Amendment  Act  VIII  of   1955 retrospectively validated the levy.  By virtue of this  Act, assessments made provisionally and the levy of the tax  were to  be regarded as valid notwithstanding any initial  incon- sistency  between  the provisions of the Act and  the  Rules framed thereunder.  It may also be pointed out that no  such question  was  referred to the High Court and  not  even  an argument  appears to have been raised in the High  Court  on this  question.  We are of the view that the High Court  was right in answering the question in the negative. The appeal therefore fails and is dismissed with costs.                                        Appeal dismissed. (1) [1955] 6 Sales Tax Cases 118. 239