The Commissioner Of Excess Profits Tax, Hyderabad vs M/S. S. R. V. G. Press Company, Kurnool

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 270 of 1960

Decision Date: 10 March 1961

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

In this case, the Court observed that the Commissioner of Excess Profits Tax, Hyderabad, filed a petition against M/S S R V G Press Company of Kurnool on 10 March 1961, and that the matter was heard by a bench consisting of Justice J.C. Shah and Justice J.L. Kapur of the Supreme Court of India, the judgment being reported in 1961 AIR 1274 and 1962 SCR (1) 232. The case involved the application of the Excess Profits Tax Act, 1940 (XV of 1940), particularly rule 12 of Schedule 1, and also related to provisions of the Sales Tax Act. The headnote recorded that the respondents were entitled to a rebate of sales tax on goods that they purchased and used in their manufacturing process, and that they had adopted a system authorized by law whereby sales tax was paid provisionally on the basis of the turnover of the preceding year, with the liability to be adjusted at the close of the accounting year in accordance with the actual turnover of that year. As a consequence, in some years the respondents were assessed to pay tax in excess of the amount provisionally assessed, while in other years they obtained a refund of the excess tax paid under the provisional assessment. The Income Tax Officer recognised this system and permitted deduction of the sales tax actually paid under the provisional assessment. However, the Excess Profits Tax Officer, while using the same method of computation for assessing liability for previous periods, declined to allow deduction of the full amount of tax that had been provisionally debited to the sales tax for the chargeable accounting period, on the ground that, in his view, it did not constitute reasonable and necessary expenditure and therefore was not a permissible deduction. The principal question presented was whether the payments of sales tax were unreasonable and unnecessary having regard to the requirements of the business, and consequently could not be deducted under rule 12 of Schedule 1 of the Excess Profits Tax Act. The Court held that the determination of whether a claimed deduction is reasonable and necessary must be made by the Excess Profits Tax Officer, but that such determination must be undertaken in the light of commercial expediency rather than through a strictly legalistic analysis. The Court further explained that payments made to satisfy a liability that arises from an assessment by the Sales Tax Officer cannot be characterised as unreasonable, because the payment of sales tax as assessed is obligatory and essential for the conduct of the business, and therefore must be regarded as satisfying the requirements of rule 12 of Schedule 1 of the Excess Profits Tax Act. The Court referred to the precedent set in In re M P Kumaraswami Raja (1955) 6 Sales Tax Cases 113 in support of this reasoning.

On February 21 1956 the Andhra Pradesh High Court issued a judgment and order in the matter recorded as Case Reference No 4 of 1955. Counsel K N Rajagopal Sastri and D Gupta appeared on behalf of the appellant, while counsel H J Umrigar, Thiyagaraja and G Gopalakrishnan represented the respondents. The final decision of the Supreme Court was delivered on March 10 1961 by Justice Shah.

The Court observed that the assessee parties were a manufacturing firm located at Kurnool that produced ground‑nut oil and cake. Under the Madras General Sales Tax Act IX of 1939 the firm was entitled to a rebate of sales tax that it paid on goods purchased for use in its manufacturing operations. The assessee maintained its books of account on the Samvat calendar, with the fiscal year ending at Diwali. The accounting method employed was a hybrid of mercantile and cash principles; purchases and sales on credit were entered in the books, and the sales tax actually collected by the tax authorities was debited at the time of payment, with any refunds credited when received.

The firm followed the procedure authorized by the Act of paying tax based on the turnover of the preceding year. Accordingly, the Sales Tax Officer made a provisional assessment of tax using the prior‑year turnover, and later adjusted the liability at the close of the accounting year to reflect the actual turnover for that year together with any rebate applicable to ground‑nuts pressed into oil. Because of these final adjustments, in certain years the assessee were required to pay tax in excess of the provisional amount, while in other years they received refunds of any surplus tax that had been provisionally collected.

The record includes a table showing, for each official sales‑tax year, the provisional demand made by the sales‑tax authorities, the final demand, and the resulting adjustment, whether a refund or an additional levy. For the fiscal year ending 31‑March‑1942 the provisional demand was Rs 2,679 and the final demand Rs 1,872, yielding a refund of Rs 807. The subsequent years show similar calculations, with the 1945 year recording a provisional demand of Rs 47,276, a final demand of Rs 20,037 and an additional levy of Rs 27,239.

For the assessment year 1946‑47, which corresponded to the accounting period from 18 October 1944 to 4 November 1945, the assessee claimed a deduction of Rs 49,633 in their income‑tax return. This amount represented the sales‑tax paid under the provisional assessment for that year. In the year ending 31‑March‑1945 the firm had paid Rs 47,276 as a provisional sales‑tax, and an additional Rs 3,894 in adjustment for the previous year’s liability. After allowing a rebate of Rs 1,537 that had been received, the total sales‑tax liability attributable to the provisional assessment amounted to Rs 49,633. The Income‑Tax Officer accepted this claim and allowed the deduction, debiting the amount from the assessable income of the assessee for the 1946‑47 assessment year. The Income‑Tax Officer’s permission to deduct the sales‑tax actually paid, less any rebate, was not limited to the 1946‑47 year but was also extended to the earlier assessment years.

In this case, the Income‑Tax Officer allowed the deduction of sales‑tax amounts not only for the assessment year 1946‑47 but also for the earlier years in which the same method of computation had been applied.

For the chargeable accounting period preceding 18 October 1944, the Excess Profits Tax Officer adopted the same method of computation; however, for the period from 18 October 1944 to 4 November 1945, the Officer permitted only Rs 17,055 of the Rs 47,276 debited to sales‑tax to be treated as properly attributable to that period when computing the Excess Profits Tax liability.

The Officer explained that the remaining amount of Rs 30,221, which had been paid under the provisional assessment, could not be taken into account because rule 12 of Schedule 1 of the Excess Profits Tax Act disallows any expenditure that exceeds what is reasonable and necessary for the business.

The assessees appealed the Officer’s order, but the Tribunal affirmed the order, confirming the Officer’s view that the excess payment was not deductible.

Subsequently, the assessees obtained an order directing the High Court of Judicature of Andhra Pradesh to consider whether there were material facts that would permit the Tribunal to hold that the sales‑tax payments of Rs 30,221 were unreasonable and unnecessary in view of the requirements of the business and therefore not deductible under rule 12 of Schedule 1 of the Excess Profits Tax Act.

The High Court answered this question in the negative, finding no material to support a conclusion that the payments were unreasonable or unnecessary.

Against the High Court’s decision, the assessees filed this appeal, obtaining leave under sections 66A(2) and (3) of the Income‑Tax Act read with section 21 of the Excess Profits Tax Act.

It is evident from the record that the assessees never altered the method by which their accounts were maintained; year after year they paid tax that had been provisionally assessed by the Sales‑Tax Officer on the basis of the previous year’s turnover, subject to adjustment at the close of the year of account.

This system of provisional payment was not adopted with any intention to evade tax liability, nor was the recovery of amounts ordered to be refunded delayed because of any deliberate inaction on the part of the assessees.

No evidence was found that excess tax on inflated returns had been paid in anticipation of the repeal of the Excess Profits Tax Act.

For reasons of convenience, the assessees elected, as permitted under the Madras General Sales Tax Act, to follow a system of paying sales‑tax on provisional assessment based on the turnover of the preceding year, with a final adjustment to be made at the end of the year.

Although the assessees could have opted out of this system, the liability to pay tax imposed by the provisional assessment was not voluntarily incurred; the system produced no direct benefit to the business and, in retrospect, evidently reduced taxable income, but if the payment was reasonable and necessary having regard to the requirements of the business, it was not

In this case, the Court observed that any expense ignored for the purpose of calculating the Excess Profits Tax liability of the assessees must be examined under rule twelve of Schedule one of the Excess Profits Tax Act, which expressly provides that, when computing profits for any chargeable accounting period, no deduction may be allowed for expenses that exceed the amount the Excess Profits Tax Officer deems reasonable and necessary in view of the business requirements. The Court explained that it is the duty of the Excess Profits Tax Officer to determine whether the deductions claimed by the assessees satisfy the test of reasonableness and necessity, taking into account the needs of the business. However, the Court emphasized that the assessment of reasonableness and necessity must be made in the light of commercial expediency rather than by a strict legalistic approach. The payments that the assessees made were undertaken to discharge obligations imposed lawfully and were essential for the proper conduct of their business operations. Under section ten of the Madras General Sales Tax Act, the assessees were required to pay the tax within fifteen days of receiving the notice of assessment, and failure to do so rendered the amount recoverable as if it were arrears of land revenue. Moreover, section fifteen of the same Act stipulated that any assessees who failed to file the return as prescribed or failed to pay the tax within the stipulated time were liable to be penalised. Accordingly, the Court held that payments made in satisfaction of a liability that arose by virtue of an assessment issued by the Sales Tax Officer could not be characterised as unreasonable. Since the assessed sales‑tax was obligatory and necessary for the continuance of the business, the Court concluded that such payments necessarily satisfied the requirements of rule twelve of Schedule one of the Excess Profits Tax Act. The Court further observed that the Excess Profits Tax Officer was wrong in contending that the tax paid exceeded the business requirements. The Court also found that the Tribunal erred in holding that the Excess Profits Tax Officer, by seeking to deduct only the tax proportionate to the actual turnover for the chargeable accounting period, was not disturbing the accounting method that the assessees had followed for many years and that had been accepted by the taxing authorities. Counsel for the Commissioner argued that the rules relating to advance provisional assessment and the levy of tax framed under the Madras General Sales Tax Act, 1939 were inconsistent with the provisions of that Act, and that the assessees should have raised this contention and obtained a court decision before paying tax on provisional assessment; otherwise, such payments could not be regarded as reasonable or necessary. Counsel further cited the decision in In re M. P. Kumraswami Raja, reported in the Madras High Court decision of 1955, wherein the Court declared the scheme of provisional assessment to be ultra vires, but the Court noted that the reasonableness or the necessity

The Court explained that the assessment of payments required under rule twelve of Schedule 1 of the Excess Profits Tax Act must be determined according to what is commercially reasonable, not on strict legal formalities. It observed that a businessman could not be expected to start litigation against a tax that the State Legislature was empowered to impose merely because the calculation method might be ultra vires. The Court noted that the tax in the present case had been properly assessed and subsequently paid. Consequently, the question of whether the assessment was reasonable and necessary had to be judged in the context of the circumstances that existed at the time of payment, not in light of later developments. The judgment also pointed out that, following the Madras High Court decision in In re Kumaraswami Raja’s case (1), the Madras Legislature enacted the Madras General Sales Tax Amendment Act VIII of 1955, which retrospectively validated the levy. By that amendment, any provisional assessments and the related tax levies were to be treated as valid, even if an initial inconsistency existed between the statutory provisions and the rules. The Court further observed that the issue of retrospective validation had not been raised before the High Court, nor had any argument on that point been presented during the earlier proceedings.

The Court therefore concluded that the judgment of the High Court was proper, because the High Court had rightly answered the question posed by the petitioners in the negative. In view of this conclusion, the appellate relief sought by the petitioners was denied and the appeal was ordered to be dismissed, with the costs of the proceedings awarded against the petitioners. The order of dismissal therefore became final and binding on the parties, confirming that the assessment and payment of taxes under rule twelve of Schedule 1 of the Excess Profits Tax Act remained lawful. The record of the earlier authority, In re Kumaraswami Raja’s case, was noted in the order and cited as (1) [1955] 6 Sales Tax Cases 118, thereby preserving the reference for future matters. Accordingly, the petitioners were left with no further remedy, and the decree of dismissal with costs stood as the final determination of the appeal. By affirming the High Court’s decision, the Court emphasized that once a tax assessment is made and the tax is paid, it cannot be retrospectively challenged on procedural grounds unless a competent authority provides relief. The dismissal with costs also signified that the petitioners bore the expense of pursuing the appeal, reflecting the Court’s view that their contention lacked merit.