Case Note & Summary
The Supreme Court of India adjudicated three civil appeals arising from a certificate under Section 66A(2) of the Indian Income-tax Act, 1922, against a common judgment of the Bombay High Court in Income-tax Reference No. 36 of 1957. The dispute concerned the taxability of a refund of excess profits tax received by the partners of a dissolved registered firm, and whether such refund qualified for exemption under Section 25(4) of the Indian Income-tax Act, 1922. The firm of wine merchants at Bombay came into existence prior to April 1, 1939, and was registered under the Income-tax Act, 1922. It was dissolved on March 24, 1945, and from March 25, 1945, a private limited company, S. S. Miranda and Co. Ltd., succeeded to its business. 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, and had deposited certain sums as required under Section 10 of the Indian Finance Act, 1942, read with Section 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 Rs. 2,35,704, with the shares of the three appellants being Rs. 58,926 each for James Miranda and Donald Miranda and Rs. 1,17,854 for Mrs. N. Q. Miranda. The Income-tax Officer allowed the firm’s claim under Section 25(4) that no tax was payable on the profits for the period April 1, 1944 to March 24, 1945, but rejected the plea that the refund of excess profits tax was business profit similarly exempt. He assessed each partner’s share of the refund to income tax and super tax and, while repaying the balance, computed the applicable rate by including the exempt business income. The Appellate Assistant Commissioner confirmed this view, but the Income-tax Appellate Tribunal held that the refund was income from business and exempt under Section 25(4). At the instance of the Commissioner, the Tribunal referred the following question to the High Court: whether the repayment of excess profits tax made under Section 10 of the Indian Finance Act, 1942, or Section 2 of the Excess Profits Tax Ordinance, 1943, was profits from business for the purposes of Section 25(4) of the Income-tax Act. The High Court held that the refund was income from other sources taxable under Section 12, and thus the appellants were not entitled to the benefit of Section 25(4). The Supreme Court reversed the High Court. It examined Section 12(1) of the Excess Profits Tax Act, 1940, which allowed the excess profits tax payable as a deduction in computing business profits, and Section 11(11) of the Indian Finance Act, 1946, which deemed any refunded excess profits tax to be income and treated it as income of the previous year that included the relevant chargeable accounting period. The Court reasoned that the deposit was a portion of business profits taken and kept with the government treasury; when refunded, it regained its original character as business profit. It did not cease to be business profit merely because it was refunded under statutory provisions, and hence it fell under Section 10 of the Indian Income-tax Act, 1922, not Section 12. Relying on Mc Gregor and Balfour Ltd. v. Commissioner of Income-tax, Bengal and A. & W. Nesbitt Ltd. v. Mitchell, the Court held that the amount came back without losing its character. Consequently, the refund was exempt from tax under Section 25(4) of the Indian Income-tax Act, 1922. The appeals were allowed.
Headnote
A) Income Tax - Business Income vs Other Sources - Refund of excess profits tax retains character as business profit - Income-tax Act, 1922 Sections 10, 12, 25(4) - The firm discontinued business and claimed exemption under Section 25(4) for profits from April 1, 1944 to March 24, 1945; refund of excess profits tax was disputed. Held that refund was income from business under Section 10, not income from other sources under Section 12, and exempt under Section 25(4). (Paras Not mentioned) B) Statutory Interpretation - Deeming Fiction and Nature of Refund - Section 11(11) Indian Finance Act, 1946; Section 12(1) Excess Profits Tax Act, 1940 - The excess profits tax deposited was an allowable deduction under Section 12(1); when refunded it was deemed income under Section 11(11) and treated as income of the chargeable accounting period. Held that the refund came back without losing its character as a slice of business profits, and cannot be assessed as statutory income from other sources merely because it was refunded under statutory provisions. (Paras Not mentioned)
Issue of Consideration
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 purposes of Section 25(4) of the Indian Income-tax Act, 1922.
Final Decision
Appeals allowed; High Court judgment reversed; amount refunded of excess profits tax held to be income from business under Section 10 of Income-tax Act, 1922, and exempt under Section 25(4) of that Act.
Law Points
- Refund of excess profits tax deemed income under Section 11(11) of Indian Finance Act
- 1946
- retains character as business profits
- falls under Section 10 of Income-tax Act
- 1922
- exempt under Section 25(4) on discontinuance of business
- deposit under Finance Act 1942 and Excess Profits Tax Ordinance 1943 is slice of business profit
- Section 12(1) of Excess Profits Tax Act 1940 allows deduction
