The excise department refunded duty I had paid and claimed as expenditure, but its appeal against the refund is still pending. Is the refund taxable now under section 41(1)?
Yes. The Supreme Court held that section 41(1) has two limbs and only the second one asks about remission or cessation of a trading liability. Where duty was actually paid, allowed as expenditure, and later refunded, the case falls under the first limb, obtaining any amount in respect of such expenditure. The refund is chargeable in the year it is received, and the possibility that a higher court may later restore the levy is irrelevant. If the levy is upheld later, the assessee has his remedy then. The appeal was dismissed.
Decided by the Supreme Court (Supreme Court of India; S. Rajendra Babu, K.G. Balakrishnan and P. Venkatarama Reddi JJ. Judgment by Venkatarama Reddi J) on 2002-09-06, reported as (2002) 257 ITR 343; 2002 (7) SCC 188; AIR 2002 SC 3145; (2002) 124 Taxman 373; (2002) 6 JT 528 (SC); 2002 (6) SCALE 231. It bears on section 41(1) of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the case that split section 41(1) into two independent limbs and stopped the cessation test from being applied to everything. Before it, several High Courts had held that no refund could be taxed while the legality of the levy was still under challenge; the Court disapproved the Gujarat decisions in Bharat Iron and Steel Industries and V.T. Audyogik Sahakari Mandi and explained away J.K. Synthetics and Rameshwar Prasad as second-limb cases where nothing had actually been refunded. The practical line it draws is money out and money back. If you paid the levy, took the deduction and have the cash back, the first limb applies and finality is beside the point. If you only made a provision and never paid, you are in the second limb and cessation is everything, which is where Kesaria Tea sits.
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The assessee had paid excise duty in 1986 and been allowed it as expenditure. The first appellate authority and CEGAT held the goods were not liable to duty, and on 20 September 1988 the duty of Rs 9,64,206 was refunded. The excise department's appeal to the High Court was dismissed and it then filed a special leave petition in the Supreme Court, whose outcome was not known. For assessment year 1989-90 the assessing officer brought the refund to tax under section 41(1). The assessee said there had been no remission or cessation of a trading liability while the matter was still before the Supreme Court. The first appellate authority accepted that and the Tribunal upheld it. On a reference, the Karnataka High Court held the Tribunal was wrong and the refund was assessable under section 41(1), relying on this Court's decision in Thirumalaiswamy Naidu and Sons, while leaving it to the Tribunal to consider whether the duty had in fact been refunded to the assessee. The assessee appealed.
The appeal was dismissed. Section 41(1) is attracted. Payment of a statutory levy such as excise duty or sales tax in the course of business is expenditure, and where that expenditure has been allowed and the amount is later got back, the case falls under the first limb of section 41(1), obtaining any amount in respect of such loss or expenditure. The words 'by way of remission or cessation thereof' govern only the later clause about a trading liability and cannot be transposed into the earlier one. Whether the refund might be set at naught later is not a relevant consideration; the Revenue need not await the verdict of a higher court, and if the levy is upheld later the assessee is not without remedy. The Gujarat High Court's decisions in Bharat Iron and Steel Industries and V.T. Audyogik Sahakari Mandi were held to be wrong. The Karnataka High Court's decision in K.G. Subramanyam was approved. The Court added that the order under appeal was cryptic and its reasoning inaccurate.
The Court took the section apart. The first step is that an allowance or deduction was made in an earlier assessment for a loss, expenditure or trading liability. The second step is in two alternatives: the assessee has obtained an amount in respect of the loss or expenditure, or he has obtained a benefit in respect of the trading liability by way of remission or cessation. Either alternative brings the deeming provision into play. Expenditure and trading liability may overlap, but the draftsman dealt with the two allied concepts separately and specifically to make the provision comprehensive, and the anatomy and collocation of the words show that the test of remission or cessation belongs to the trading liability clause alone. Reading it into the first clause would do violence to the language and structure, and would constrict a provision designed to have the widest amplitude. Applying that, payment of duty is expenditure, as Kedar Nath Jute Manufacturing establishes, and the refund is the obtaining of an amount in respect of it. The Court then reconciled the earlier authorities on that footing. In Rameshwar Prasad the amount had been deposited in court as security rather than paid in discharge, and was refunded by the court, so only the second limb could apply. In J.K. Synthetics the assessee had made a provision and neither paid nor obtained a refund, so again only the second limb was in play; the High Court's transposition of remission and cessation into the first limb was disapproved even though its conclusion was right. Kesaria Tea, decided by the same bench, was the typical second-limb case, a provision written back with no payment and no refund.
Once the assessee gets back the amount which was claimed and allowed as business expenditure during the earlier year, the deeming provision in Section 41(1) of the Act comes into play
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Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court held that section 41(1) has two limbs and only the second one asks about remission or cessation of a trading liability. Where duty was actually paid, allowed as expenditure, and later refunded, the case falls under the first limb, obtaining any amount in respect of such expenditure. The refund is chargeable in the year it is received, and the possibility that a higher court may later restore the levy is irrelevant. If the levy is upheld later, the assessee has his remedy then. The appeal was dismissed. This was decided by the Supreme Court (Supreme Court of India; S. Rajendra Babu, K.G. Balakrishnan and P. Venkatarama Reddi JJ. Judgment by Venkatarama Reddi J) and bears on section 41(1) of the Income Tax Act 1961. It is reported as (2002) 257 ITR 343; 2002 (7) SCC 188; AIR 2002 SC 3145; (2002) 124 Taxman 373; (2002) 6 JT 528 (SC); 2002 (6) SCALE 231. This is the case that split section 41(1) into two independent limbs and stopped the cessation test from being applied to everything. Before it, several High Courts had held that no refund could be taxed while the legality of the levy was still under challenge; the Court disapproved the Gujarat decisions in Bharat Iron and Steel Industries and V.T. Audyogik Sahakari Mandi and explained away J.K. Synthetics and Rameshwar Prasad as second-limb cases where nothing had actually been refunded. The practical line it draws is money out and money back. If you paid the levy, took the deduction and have the cash back, the first limb applies and finality is beside the point. If you only made a provision and never paid, you are in the second limb and cessation is everything, which is where Kesaria Tea sits. If it applies to you, the first step is this: Ask first whether money actually moved. If duty was paid, deducted and then refunded to you, expect the addition in the year of receipt and do not argue that the dispute is still alive.
The assessee had paid excise duty in 1986 and been allowed it as expenditure. The first appellate authority and CEGAT held the goods were not liable to duty, and on 20 September 1988 the duty of Rs 9,64,206 was refunded. The excise department's appeal to the High Court was dismissed and it then filed a special leave petition in the Supreme Court, whose outcome was not known. For assessment year 1989-90 the assessing officer brought the refund to tax under section 41(1). The assessee said there had been no remission or cessation of a trading liability while the matter was still before the Supreme Court. The first appellate authority accepted that and the Tribunal upheld it. On a reference, the Karnataka High Court held the Tribunal was wrong and the refund was assessable under section 41(1), relying on this Court's decision in Thirumalaiswamy Naidu and Sons, while leaving it to the Tribunal to consider whether the duty had in fact been refunded to the assessee. The assessee appealed. The matter was decided on 2002-09-06 by the Supreme Court (Supreme Court of India; S. Rajendra Babu, K.G. Balakrishnan and P. Venkatarama Reddi JJ. Judgment by Venkatarama Reddi J). On those facts the Supreme Court held as follows. The appeal was dismissed. Section 41(1) is attracted. Payment of a statutory levy such as excise duty or sales tax in the course of business is expenditure, and where that expenditure has been allowed and the amount is later got back, the case falls under the first limb of section 41(1), obtaining any amount in respect of such loss or expenditure. The words 'by way of remission or cessation thereof' govern only the later clause about a trading liability and cannot be transposed into the earlier one. Whether the refund might be set at naught later is not a relevant consideration; the Revenue need not await the verdict of a higher court, and if the levy is upheld later the assessee is not without remedy. The Gujarat High Court's decisions in Bharat Iron and Steel Industries and V.T. Audyogik Sahakari Mandi were held to be wrong. The Karnataka High Court's decision in K.G. Subramanyam was approved. The Court added that the order under appeal was cryptic and its reasoning inaccurate.
The Court took the section apart. The first step is that an allowance or deduction was made in an earlier assessment for a loss, expenditure or trading liability. The second step is in two alternatives: the assessee has obtained an amount in respect of the loss or expenditure, or he has obtained a benefit in respect of the trading liability by way of remission or cessation. Either alternative brings the deeming provision into play. Expenditure and trading liability may overlap, but the draftsman dealt with the two allied concepts separately and specifically to make the provision comprehensive, and the anatomy and collocation of the words show that the test of remission or cessation belongs to the trading liability clause alone. Reading it into the first clause would do violence to the language and structure, and would constrict a provision designed to have the widest amplitude. Applying that, payment of duty is expenditure, as Kedar Nath Jute Manufacturing establishes, and the refund is the obtaining of an amount in respect of it. The Court then reconciled the earlier authorities on that footing. In Rameshwar Prasad the amount had been deposited in court as security rather than paid in discharge, and was refunded by the court, so only the second limb could apply. In J.K. Synthetics the assessee had made a provision and neither paid nor obtained a refund, so again only the second limb was in play; the High Court's transposition of remission and cessation into the first limb was disapproved even though its conclusion was right. Kesaria Tea, decided by the same bench, was the typical second-limb case, a provision written back with no payment and no refund. In the words reproduced by the source cited on this page: "Once the assessee gets back the amount which was claimed and allowed as business expenditure during the earlier year, the deeming provision in Section 41(1) of the Act comes into play"
It was decided by the Supreme Court on 2002-09-06 and is reported as (2002) 257 ITR 343; 2002 (7) SCC 188; AIR 2002 SC 3145; (2002) 124 Taxman 373; (2002) 6 JT 528 (SC); 2002 (6) SCALE 231. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 41(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed. Section 41(1) is attracted. Payment of a statutory levy such as excise duty or sales tax in the course of business is expenditure, and where that expenditure has been allowed and the amount is later got back, the case falls under the first limb of section 41(1), obtaining any amount in respect of such loss or expenditure. The words 'by way of remission or cessation thereof' govern only the later clause about a trading liability and cannot be transposed into the earlier one. Whether the refund might be set at naught later is not a relevant consideration; the Revenue need not await the verdict of a higher court, and if the levy is upheld later the assessee is not without remedy. The Gujarat High Court's decisions in Bharat Iron and Steel Industries and V.T. Audyogik Sahakari Mandi were held to be wrong. The Karnataka High Court's decision in K.G. Subramanyam was approved. The Court added that the order under appeal was cryptic and its reasoning inaccurate. It arises in Deductions & Disallowances matters, on section 41(1) of the Income Tax Act 1961, and was decided by Supreme Court of India; S. Rajendra Babu, K.G. Balakrishnan and P. Venkatarama Reddi JJ. Judgment by Venkatarama Reddi J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Keep the second-limb cases for what they are. A provision written back, or a deposit made in court as security rather than in discharge, is a cessation question, not a refund question. Record the year of actual receipt carefully; the High Court here left open for the Tribunal whether the refund had in fact reached the assessee, and that question decides the year. If the levy is later restored on appeal, claim the deduction again for that year rather than resisting the section 41(1) addition now.
Still good law. A three-judge bench decision that settles the two-limb reading of section 41(1) and expressly disapproves the contrary High Court view; the source page records it as widely followed. Its later history was not separately traced in this session. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The Court set out section 41(1) as it stood at the relevant time; the present text, with its Explanations and the sub-sections added later, is wider, so read the current provision for a later year. The Court did not decide whether the refund had actually reached this assessee, which the High Court had left to the Tribunal, so the year of chargeability on these facts was not finally settled. The fate of the excise department's special leave petition was unknown even to the Court. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed. Section 41(1) is attracted. Payment of a statutory levy such as excise duty or sales tax in the course of business is expenditure, and where that expenditure has been allowed and the amount is later got back, the case falls under the first limb of section 41(1), obtaining any amount in respect of such loss or expenditure. The words 'by way of remission or cessation thereof' govern only the later clause about a trading liability and cannot be transposed into the earlier one. Whether the refund might be set at naught later is not a relevant consideration; the Revenue need not await the verdict of a higher court, and if the levy is upheld later the assessee is not without remedy. The Gujarat High Court's decisions in Bharat Iron and Steel Industries and V.T. Audyogik Sahakari Mandi were held to be wrong. The Karnataka High Court's decision in K.G. Subramanyam was approved. The Court added that the order under appeal was cryptic and its reasoning inaccurate.
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