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PETITIONER: DONALD MIRANDA

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY-II(and,connected

DATE OF JUDGMENT: 01/03/1961

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

CITATION:  1961 AIR 1233            1962 SCR  (1) 133  CITATOR INFO :  RF         1969 SC 572  (4,5)

ACT: Income Tax-Refund of excess profits tax-Liability to income- tax-Discontinuance of business Profits for accounting   year exempt from tax-Excess Profits Tax Act 1940 (15 of 1940), S. 12(1)-Indian Finance Act, 1946 (7 of 1946), S.  11(11)-India Income-tax Act, 1922 (11 of.1922), SS. 10, 12.

HEADNOTE: The appellants were partners in a registered firm which  was dissolved  on  March 24, 1945.  A  private  limited  company succeeded  to the business of the firm from March 25,  1945. For the accounting period April 1, 1944, to March 24,  1945, the firm was assessed to excess profits tax under the Excess Profits  Tax  Act, 1940.  It had deposited certain  sums  of money  as required under s. 10 of the Indian  Finance-  Act, 1942,  read with S. 2 Of the Excess Profits  Tax  Ordinance, 1943,  and  in  accordance  with  those  provisions   became entitled  to  repayment of a portion of the  excess  profits tax.   The appellant’s claim before the Income. tax  Officer under s. 25(4) of the ’Indian Income-tax Act, 1922, that  no tax  was payable on the profits of the firm for  the  period between  April 1, 1944, to March 24, 1945, was allowed,  but their  plea that the amount of refund of the excess  profits tax was business profit and therefore similarly exempt  from tax, was rejected.  The High Court, on a reference, took the view that the amount refunded was income from other  sources taxable under s. 12 Of the Indian Income-tax Act, 1922,  and that,  therefore,  the appellants were not entitled  to  the benefit of S. 25(4) Of that Act. Held,  that  in view of s. 12(1) of the Excess  Profits  Tax Act,  1940, and s. II(II) of the Indian Finance  Act,  1946, the  amount  refunded  was  income  from  business  for  the purposes  of  the Indian Income-tax Act, 1922, and  did  not lose its character which it had before the deposit.  It fell under s. 10 of the Indian Income-tax Act and was, therefore, exempt under S. 25(4) of that Act. Mc  Gregor and Baljbur Ltd. v. Commissioner  of  Income-tax, Bengal,  [1959]  36 I.T R. 65 and A. & W.  Nesbitt  Ltd.  v. Mitchell, [1926] II T.C. 2II, relied on.

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JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 173 to  175 of 1960. 134 Appeals  from the judgment and orders dated March 11,  1958, of the Bombay High Court in I. T. R. No. 36 of 1957. of...A.   V.  ViSwanatha  Sastri,  S.  M.  Dubash   and   G. Gopalakrishnan, for the appellants. K. N. Rajagopal Sastri and D. Gupta, for respondents. 1961.  March 1. The Judgment of the Court was delivered by KAPUR, J.-These are three appeals pursuant to a  certificate under   a.  66A(2)  of  the  Indian  Income-tax  Act,   1922 (hereinafter  called  the ’Act), against  the  judgment  and orders  of the High Court of Bombay in Income-tax  Reference No. 36 of 1957. 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 and 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 tinder 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 135 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 con 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               Section 10 of the Indian Finance Act, 1942, or               Section 2 of the Excess Profits Tax Ordinance,               1943,   is  profits  from  business  for   the

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             purposes  of  Section  25(4)  of  the   Indian               Income-tax Act?" 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:-  .lm15 "Clearly  the view of the Legislature was that  this  income should   be   treated  as  a  statutory  income   with   the consequences  that must necessarily follow by reason of  its being a statutory income." 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:- 136 .lm15 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  section 11 or section  11-A  shall,  in computing  for the purposes of income-tax or super  tax  the profits  and  gains  of  that business,  be  allowed  to  be deducted as an expense incurred in that period.", The  relevant part of s. 11(11) of the Indian  Finance  Act, 1946, provided:--               "Any  sum being excess profits tax  repaid  in               respect  of any chargeable  accounting  period               under  the  provision; of section  10  of  the               Indian  Finance Act, 1942, or of section 2  of               the Excess Profits Tax Ordinance, 1943,  shall               be deemed to be income for the purposes of the               Indian  Income-tax  Act  192  2,  and   shall,               notwithstanding  the provisions of section  34               of  that  Act,  be treated as  income  of  the               previous  year which constitutes  or  includes               the chargeable accounting period in respect of               which the said sum is repayable:               Provided  that any such sum repaid in  respect               of  any profits which are. also assessable  to               excess  profits tax under the law in force  in               the  United Kingdom shall be treated, for  the               purpose of assessment to income-tax and  super               tax,  as income of the previous  year  during.               which the repayment is made." It  is not necessary to quote s. 10(1) of the  Finance  Act, 1942,  or the relevant provisions of the Excess Profits  Tax Ordinance,  1943.  Section 12(1) of the Excess  Profits  Tax Act shows that the amount of excess profits tax payable  ,in respect  of a business for any chargeable accounting  period was an allowable expenditure.  Under s. ll(ll) of the Indian Finance  Act,  1946, any excess profits refunded  under  the provisions  of Indian Finance Act, 1942, or of s. 2  of  the Excess Profits Tax Ordinance, 1943, were deemed to be income and were to be treated as income of the previous year  which constituted  or  which included  the  chargeable  accounting period  in  respect of ’which the said  sum  was  repayable. Thus the sum repaid was 137 to be treated as income for the purposes of the Act for  the previous year, notwithstanding s. 34 of the Act.

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The  preamble of the Excess Profits Tax Act shows  that  the object  of that Act was to impose a tax on  profits  arising out  of certain businesses.  Therefore when any  portion  of the  tax collected on excess profits tax was refunded  under the  provisions  of  the Finance Act,  1942  or  the  Excess Profits  Tail, Ordinance,’1943, it necessarily had the  same quality  which  it had before the amount which  was  charged with  the payment of tax had under the provisions  of  those Acts.  In a, judgment of this Court, Mc Gregor. and  Balfour Ltd.  v.  Commissioner of Income Tax, West Bengal  (1),  the amount  received as a refund by the assessee was held to  be income for the purpose of the Act and for assessment it  was treated as income of the previous year.  After reference  in that case to R. 4(1) of the Rules applicable to oases I  and II  of Schedule ’D’. of the English Income Tax Act, 1918  (8 and 9 Geo.  V, c. 40), it was observed                "The object and purpose of the legislation in               each  case  is the same, and  though  the  two               provisions  are not ipsissima verba, they  are               substantially  in the same words and  also  in               pari materia.               There  can  be  no doubt  that  the  intention               underlying the two provisions is the same  and               the language is substantially similar." Thus this Court was of the opinion that the intention of the legislature  ins. 11(14), of the Indian Finance  Act,  1946, which was the section applicable in that case and of R. 4(1) of  the English Income Tax Act was the same.  The  operative words  of  s.  11(11) of the Finance Act, 1946,  and  of  s. 11(14) of that Act are almost identical. It would, thus appear that the amount of excess profits  tax was an allowable deduction for the purpose of computation of the  business profits of an, assessee under s. 12(1) of  the Excess  Profits Tax Act and when it or a portion of  it  wag refunded  it  had to be treated as income of  the  assessee. When it was deposited with 138 the  Central Government it 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  a part  of the profits of a business.  It cannot be said  that its  nature  changes  merely because it is  refunded  as  ’a consequence  of  some provisions in the Finance Act  or  the Excess Profits Tax Ordinance.  Its nature remains the  same. The  effect of the deposit under the  Acts  above-mentioned, was  as  if  a slice of the business profit  was  taken  and deposited with the Central Government Treasury and then when it  was found that a larger amount had been  deposited  than was exigible a portion of it was returned.  By being put  in a  Government Treasury it does not cease to be what  it  was before  i.e. profits of a business.  As we have said  it  is significantly  clear  from the very preamble of  the  Excess Profits  Tax  Act  i.e., it was a  tax  imposed  on  profits arising  out of certain businesses.  An argument was  raised on behalf of the Commissioner that the tax was not paid  out of  the  profits  of the business, but  in  respect  of  the profits.   That  is immaterial; it was charged,  levied  and paid  on  the  amount  by  which  the  profits  during   any chargeable accounting period exceeded the standard  profits. It  would  be mere quibbling with words if one were  to  say that  it  was  not a slice taken out of  the  profits  of  a business. In  the cage Mc Gregor and Balfour Ltd.  v.  Commissioner,of Income   Tax  (1)  this  Court  quoted  with  approval   the observation, of the Master of the Rolls in

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A.   &  W. Nesbitt Ltd. v. Mitchell (1) where it was said:-               "But in respect of what is that payment  made?               It is not a legacy, it is not a sum which  has               fallen  from the skies;-it 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,  means  and  is               intend to represent a repayment of a sum which               was  paid  by  them in  respect  of  the  duty               charged  upon  the  excess  profits  of  their               trading.   It  comes  back,,  therefore,   not               having lost its character but being still  the               repayment of a sum too much, it is true-but  a               sum taken               (1) [1959] 36 I.T.R. 65.               (2) (1926) 11 T.C. 211, 217, 218-               139               out  of  the profits which were  made  by  the               company in the course of its trading, profit,;               which at the time they were made were  subject               to  income-tax and subject to  excess  profits               duty,  and  that  is  the  character  of   the               repayment that has been made." The   amount  deposited  comes  back  without   losing   its character.   No  doubt  the words in the  English  Rule  are "shall  be  treated  as profits for the year  in  which  the payment is received", and in B 11(11) of the Indian  Finance Act,  1946,  such  sum has to be treated as  income  of  the previous  year but as pointed out by this Court  in  Balfour and  Mc  Gregor case (1), the intention underlying  the  two provisions is the same and even the language used in the two provisions is substantially the same. Counsel  for the Commissioner drew our attention to  Kirke’s Trustees v. Commissioners of Inland Revenue (2), and it  was submitted  that the Lord Chancellor held at p. 329 that  for the amount so received the assessment falls to be made under Case VI of Schedule ’D’.  Lord Shaw of Dunfermline at p. 332 said that the repayment was to be treated as trading profits for  the year of repayment and therefore assessable as  such under  Schedule  ’D’.  He was also of the opinion  that  the charge  was to be one under Case VI.  Lord Sumner said  that it became a minor matter to decide whether the charge was to be  made  under  Case  I  or Case  VI  but  this  is  little consolation  to the respondent (the Commissioner of  Income- tax) because Case VI was also dealing with taxes in  respect of annual profits and gains which do not fall in one of  the other cases. In  our  opinion  the  amount  refunded  did  not  lose  its character  which it had before the deposit and therefore  it is an erroneous view to take that the income was  assessable under  s.  12  of the Act and not under B. 10.   If  it  was income  falling under s. 10, as in our opinion it was,  then the appellants were entitled to get the benefit of s.  25(4) of the Act and the amount was not liable to taxation. The  appeals are therefore allowed with costs.  One  hearing fee. Appeals allowed. (1)..[1959] 36 I.T.R. 65. (2)..(1926) 11 T.C. 323. 140