Donald Miranda vs The Commissioner Of Income-Tax, Bombay

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 173 to 175 of 1960

Decision Date: 1 March 1961

Coram: J.L. Kapur, M. Hidayatullah, J.C. Shah

In the matter titled Donald Miranda versus The Commissioner of Income‑Tax, Bombay, the Supreme Court of India delivered its judgment on the first day of March, 1961. The bench that heard the case was composed of Justice J.L. Kapur, Justice M. Hidayatullah and Justice J.C. Shah. The petitioner, Donald Miranda, challenged the order of the Commissioner of Income‑Tax for Bombay City‑II. The case is reported in the 1961 All India Reporter at page 1233 and also in the 1962 Supreme Court Reports (First Series) at page 133. The judgment cites several statutes including the Income‑Tax‑Refund of Excess Profits Tax provisions, the Excess Profits Tax Act of 1940 (section 12(1)), the Indian Finance Act of 1946 (section 11(11)), and the Indian Income‑Tax Act of 1922 (sections 10 and 12). It also references the Income‑Tax Act of 1918 where relevant. The headnote summarises the essential issue: the appellants, who were partners in a registered firm dissolved on 24 March 1945, sought a refund of excess profits tax for the accounting year 1 April 1944 to 24 March 1945 and claimed that the refunded amount should be treated as business profit exempt from tax under section 25(4) of the 1922 Act.

The factual background indicates that after the dissolution of the partnership, a private limited company named S. S. Miranda and Co. Ltd. took over the business from 25 March 1945. During the relevant accounting period the firm had been assessed to excess profits tax under the 1940 Act and had deposited sums as required by 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 a partial repayment of the excess profits tax it had previously paid. When the claim was presented to the Income‑Tax Officer under section 25(4) of the 1922 Act, the officer allowed the contention that no tax was payable on the firm’s profits for the period in question, but rejected the submission that the refunded amount constituted business profit and was therefore exempt in the same manner. The Bombay High Court, on reference, held that the refunded amount was “income from other sources” subject to tax under section 12 of the 1922 Act, and consequently denied the appellants the benefit of section 25(4). Upon appeal, the Supreme Court examined sections 12(1) of the Excess Profits Tax Act, 1940 and section II(II) of the Indian Finance Act, 1946, and concluded that the amount refunded retained its character as income from business for the purposes of the 1922 Income‑Tax Act and did not lose the nature it possessed prior to the deposit. Accordingly, the Court held that the refund fell within the ambit of section 10 of the Income‑Tax Act and was exempt under section 25(4). The judgment relied upon the authorities 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. 221. The appeals, numbered 173 to 175 of 1960, were filed against the Bombay High Court’s order dated 11 March 1958 in Income‑Tax Reference No. 36 of 1957. Counsel for the appellants included A.V. Viswanatha Sastri, S.M. Dubash and G. Gopalakrishnan, while the respondents were represented by K.N. Rajagopal Sastri and others.

Gupta appeared for the respondents. The judgment was delivered on 1 March 1961 by Kapur, J. The matter before the Court involved three separate appeals filed under certificate provision 66A(2) of the Indian Income‑tax Act, 1922 (referred to as “the Act”). All three appeals challenged the same judgment and orders of the Bombay High Court in Income‑tax Reference No. 36 of 1957, but each appeal was made by a different partner of the same firm, and therefore the appeals were distinct. The firm in question operated as wine merchants in Bombay and had been established before 1 April 1939. Initially the firm was taxed under the Income‑tax Act of 1918. After the firm registered under the provisions of the Income‑tax Act of 1922, it continued its business until it was dissolved on 24 March 1945. The very next day, 25 March 1945, a private limited company named S. S. Miranda and Co. Ltd. took over the firm’s business. The partners claimed, under section 25(4) of the Act, that the profits of the registered firm for the period 1 April 1944 to 24 March 1945 were exempt from tax, and that claim was allowed. During that accounting period the firm was subject to excess‑profits tax pursuant to the Excess Profits Tax Act, 1940, and it also made required deposits under section 10 of the Finance Act, 1942, read with section 2 of the Excess Profits Tax Ordinance, 1943. Those provisions entitled the firm to a refund of part of the excess‑profits tax, amounting to Rs 2,35,704. The three partners who filed the appeals held the following shares of the refunded amount: James Miranda received Rs 58,926, Donald Miranda received Rs 58,926, and Mrs N. Q. Miranda received Rs 1,17,854. Their argument was that the refunded sum constituted business profit and thus was exempt from tax under section 25(4) of the Act. The Income‑tax Officer rejected this argument, assessed each partner’s share to income‑tax and super‑tax, and then refunded the balance after those deductions, however he calculated the tax rate by including the partners’ total business income that was exempt under section 25(4). That assessment was upheld on appeal, but the Income‑tax Appellate Tribunal subsequently held that the refunded amount was income from business and therefore exempt under section 25(4). The Commissioner of Income‑tax then asked the Tribunal to refer the legal question to the High Court: whether the repayment of excess‑profits tax made by the Central Government under section 10 of the Indian Finance Act, 1942, or section 2 of the Excess Profits Tax Ordinance, 1943, should be treated as profits from business for the purposes of section 25(4) of the Act.

In this case the High Court ruled that the amount which had been refunded to the appellants was to be classified as income from other sources and therefore taxable under section 12 of the Indian Income‑tax Act. Consequently the appellants could not claim the exemption that section 25(4) of the Act provides. While delivering the judgment the learned Chief Justice observed that the Legislature intended such receipts to be treated as statutory income, and that the legal consequences attached to statutory income must consequently follow. The appellants contended that the refunded sum represented income, profits and gains arising from the conduct of their business and that, under section 10 of the Act, it should fall within the exemption of section 25(4). To resolve this dispute the Court considered the relevant statutory provisions contained in the Excess Profits Tax Act, 1940 and the Finance Act, 1946. Section 12(1) of the Excess Profits Tax Act reads:

“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.”

Section 11(11) of the Indian Finance Act, 1946 provides that any sum repaid as excess profits tax under section 10 of the Indian Finance Act, 1942, or under section 2 of the Excess Profits Tax Ordinance, 1943, shall be deemed to be income for the purposes of the Indian Income‑tax Act 1922, and, notwithstanding section 34 of that Act, shall be treated as income of the preceding year which includes the chargeable accounting period to which the repayment relates. The provision further stipulates that if the sum repaid relates to profits also assessable to excess profits tax under the law then in force in the United Kingdom, such sum shall be treated, for income‑tax and super tax assessment, as income of the earlier year in which the repayment is made.

The Court noted that it was unnecessary to reproduce the language of section 10(1) of the Finance Act, 1942, or the corresponding provisions of the Excess Profits Tax Ordinance, 1943. It observed that section 12(1) of the Excess Profits Tax Act indicates that the amount of excess profits tax payable for a business in any chargeable accounting period is an allowable expense. Under section 11(11) of the Finance Act, 1946, any excess profits tax that is refunded pursuant to the Finance Act, 1942, or the Excess Profits Tax Ordinance, 1943, is deemed income and must be treated as income of the preceding year that contains the chargeable accounting period to which the sum relates. This statutory treatment, the Court concluded, confirmed that the refunded amount could not be characterized as profit from business for the purposes of section 25(4) and therefore did not qualify for the exemption.

In this case the Court observed that the sum which was repayable in respect of the accounting period had to be treated as income for the purpose of the Act in the preceding year, despite the provision of section 34 of the Act. The preamble of the Excess Profits Tax Act makes clear that the purpose of that Act was to levy a tax on profits generated by certain businesses. Consequently, whenever any part of the tax that had been collected under the Excess Profits Tax was refunded under the Finance Act of 1942 or under the Excess Profits Tax Ordinance of 1943, that refunded amount retained the same character it possessed before the taxation, that is, it remained a portion of the profits of the business. The Court referred to its earlier decision in McGregor and Balfour Ltd. v. Commissioner of Income Tax, West Bengal (1), where it held that the amount received back by the assessee as a refund constituted income for the purposes of the Act and was to be assessed as income of the previous year. In that decision the Court also examined Rule 4(1) of the Rules applicable to cases I and II of Schedule D of the English Income Tax Act, 1918 (8 and 9 Geo. V, c. 40) and remarked that “the object and purpose of the legislation in each case is the same, and although the two provisions are not identical in wording, they are substantially similar in language and in material.” From this observation the Court concluded that the intention of the legislature in section 11(14) of the Indian Finance Act, 1946, which was the provision applicable in the earlier case, was the same as the intention behind Rule 4(1) of the English Income Tax Act. The operative wording of section 11(11) and section 11(14) of the Finance Act, 1946, is almost identical. Accordingly, the amount of excess profits tax was an allowable deduction for computing the business profits of an assessee under section 12(1) of the Excess Profits Tax Act, and when that tax or any portion of it was refunded, the refund had to be treated as income of the assessee. When the amount was initially deposited with the Central Government, it represented a share of the assessee’s business profits; when it was later returned to the assessee, it had to be restored to its original character as part of business profit. The Court emphasized that the nature of the amount does not change merely because it is refunded pursuant to provisions of the Finance Act or the Excess Profits Tax Ordinance; its nature remains unchanged. The effect of the deposit under the cited statutes was therefore equivalent to taking a slice of the business profit, depositing it with the Central Government Treasury, and later, when it was discovered that a larger amount had been deposited than was required, returning the excess portion.

It was observed that when a sum had been deposited in excess of the amount that was actually exigible, the surplus part was later returned. The return of that surplus did not alter its fundamental character; even while it was held in the Government Treasury it remained, in substance, a portion of the profits of the business from which it originated. The preamble to the Excess Profits Tax Act makes it clear that the tax in question was imposed upon profits that arose out of certain specified businesses. The Commissioner advanced the contention that the tax was not paid out of the profits of the business but merely in respect of those profits. The Court held that this distinction was immaterial because the tax had been charged, levied and paid on the amount by which the profits earned during any chargeable accounting period exceeded the standard profit level. To describe the tax as anything other than a slice taken out of the business profits would amount to an idle dispute over terminology. The Court referred to the decision in Mc Gregor and Balfour Ltd. v. Commissioner of Income Tax, where it had previously endorsed the observation of the Master of the Rolls in A.& W. Nesbitt Ltd. v. Mitchell. In that passage the Master of the Rolls explained that the repayment was not a legacy nor a gratuitous sum; rather it represented a refund of an amount that had been over‑paid to the revenue authorities over the period during which Excess Profits Duty was payable. The repayment therefore returned “not having lost its character but being still the repayment of a sum too much, a sum taken out of the profits which were made by the company in the course of its trading, profits 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 Court stressed that the amount once deposited returned without any change in its essential nature.

The Court further noted that the English Rule expressly provides that such a sum “shall be treated as profits for the year in which the payment is received.” Similarly, Section 11(11) of the Indian Finance Act, 1946 requires that the same sum be treated as income of the preceding year. The Court pointed out that, as affirmed in the earlier Balfour and Mc Gregor case, the intention underlying the English provision and the Indian provision is identical, and the language employed in both statutes is substantially the same. Counsel for the Commissioner drew the Court’s attention to the authority of Kirke’s Trustees v. Commissioners of Inland Revenue, where it was submitted that the Lord Chancellor, at page 329, held that the assessment of the amount received should be made under Case VI of Schedule D. Lord Shaw of Dunfermline, at page 332, expressed a similar view, reinforcing the position that the repayment should be treated as trading profits for the year of repayment and assessed accordingly under the appropriate schedule.

In the case under consideration, the Court explained that the repayment should be regarded as trading profit for the year in which the repayment occurred, and consequently it must be assessed as such pursuant to Schedule D. The Court further observed that the assessment ought to be made under Case VI of the Schedule. Lord Sumner was cited as having remarked that determining whether the charge falls under Case I or Case VI is a relatively minor question, but that observation offered little assistance to the respondent, namely the Commissioner of Income‑tax, because Case VI also deals with taxation of annual profits and gains that are not covered by the other cases. The Court held that the amount that had been refunded retained the same character it possessed prior to being deposited, and therefore the view that the income should be assessed under section 12 of the Act rather than under paragraph B 10 was erroneous. Since, in the Court’s opinion, the refunded sum fell within the scope of section 10, the appellants were entitled to the benefit provided by section 25(4) of the Act, and the sum was not subject to tax. Accordingly, the appeals were allowed, costs were awarded, and a single hearing fee was ordered. The judgment concluded that the appeals were allowed. (1)..[1959] 36 I.T.R. 65. (2)..(1926) 11 T.C. 323.