The Commissioner of Excess Profits Tax, Hyderabad versus M/S. S. R. v. G. Press Company, Kurnool

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	232. SUPREMECOURTREPORTS [1962]
'9⁶'	ordersthathadbecome final before tho Act came into
*Dafeda-;;iranjan* Singh&Another v.	force. Nor do we find any force in the argumentoflearned counsel fortheStatethatunders.27ofthe Act,the
Custodian, EvacueeProperty (Pb.)6- Anoth" Subba RaoJ.	Custodian-General mayatany time revisetheorder of any Custodian and, therefore, the Custodian-Gene' 1 · 'tht l''tft' d racan revisew1ouanyim1o imeanyorer madebyany Custodian under any previous law. Sec- tion27ofthe Act can be given retrospective opera- tion only to theextentpermitted bys.58(3)ofthe Act. We have heldthats.58(3) doesnotaffectthepre- vious operationoftheJawand therefore cannot affect the finalityoftheorders made undertheOrdinance. Sothe words in the section"anytime" or"anyCusto- dian" must necessarilybeconfined only to ordersof anyone of the Custodians defined in the Actandto orders of Custodians deemed to have been made under the Actbuthadnot become final before the Act came into force.
	No other point was raised.Inthe result, the order oftheCustodian-General is set asideandthatofthe Custodian datedJune6,1949,is restored. The res- pondents willpaythe coststotheappellants.

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Appeal allowed.

Marek zo.

THE COMMISSIONER OF EXCESS PROFITS TAX, HYDERABAD

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v.

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M/S. S. R. V. G. PRESS COMPANY, KURNOOL (J. L. KAPUR and J. C. BRAH, JJ.)

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Excess Profits Tax-Sales Tax-Provisional payment in advance, if permissible deduction-Excess Profits Tax Act, r940 (XV of r940), r. I2, Sch. I.

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The respondents were entitled to a rebate of sales tax on goods purchased by them and used,in their manufacturing process. They had adopted the system which was permissible under law,

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1 S.C.R. SUPREME COURT REPORTS 233

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' I96I of paying sales tax provisionally assessed by the Sales Tax Officer on the basis of turnover of the previous year, the liability Tl Connnissioner being adjusted at the end of the year of account in the light of " of Excrss Profits the actual turnover of that year, as a resu t o w I f · h1c^{. h .} , m some Taz, Hyderabad amount provisionally assessed, in others they obtained refund years the respondents were assesse to d pay tax in excess of the of v. the excess tax paid under ·the provisional assessment. The M/s.⁵ · R. v. G. Income Tax 0 cer recognise t e system an perm1tte ffi . d h d . d d d e uc- Press Co1npany, J( urnool tion of sales tax actually paid under the provisional assessment. The Excess Profits Tax Officer had in assessing liability to excess profits tax for previous periods adopted the same method of computation, but for the chargeable accounting period, he did not allow the deduction of the full amount of tax provisionally debited to the sales tax, because in his vie\V it \Vas not reasonable and necessary expenditure and thus not a permissible deduction.

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·The question was whether the sales tax payments were unreasonable and unne<essary having due regard to the requirements of the business and consequently not deductible under r. 12 Sch. 1 of the Excess Profits Tax Act.

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Held, that it.is for the Excess Profits Tax Officer to decide whether the deductions claimed are reasonable and necessary having regard to the requirements of the business. But the reasonableness and necessity of the expenditure sought to be deducted under r. 12 Sch. 1 of the Excess Profits Tax Act in assessing excess profits tax liability must be adfudged in the light of commercial expediency, and not on any legalistic consideration. Payments made in satisfaction of liability which arises by virtue of assessment made by the Sales Tax Officer cannot be called unreasonable. Payment of sales tax as assessed being obligatory and necessary for the purpose of carrying on the business, it must be deemed to satisfy the requirements of r. 12 of Sch. 1 of the Excess Profits Tax Act.

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In re M. P. Kumaraswami Raja, (1955) 6 Sales Tax Cases n3, referred to.

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CIVIL APPELLATE JURISDICTION: Civil Appeal No. 270 of 1960. Appeal from the judgment and order dated February 21, 1956, of the Andhra Pradesh High Court in Case Reference No. 4 of 1955.

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K. N. Rajagopal Sastri and D. Gupta, for the appellant.

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H.J. Umrigar, Thiyagaraja and G. Gopalakrishnan, for the respondents.

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March 10. The Judgment of the Court was delivered by

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30

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...

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234 SUPREME COURT REPORTS [1962]

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z96z SHAH, J.-The assessees are a firm carrying on Th C^{-. .} business at Kurnool, of manufacturing ground-nut oil e ommission" d k U d h M d G 1 S 1 of Excess p,.ofits an ca e. n er t e a ras enera a es Tax Act ra., Hydcrnbad IX of 1939, the assessees were entitled to a rebate of v. sales tax paid on goods purchased by them and used M /s. s. 11. v. G. in the manufacturing process. The assessees maintain- .Press Company, ed their books of account according to the Samvat Kurnool Year ending with Diwali. The system of accounting was a mixture of mercantile and cash. Purchases and Shah]. sales of goods on credit were duly entered in the books of account. The sales tax actually recovered by the tax authorities was debited when paid and amounts if any refunded were credited when received. The assessees had adopted the system which was premitted by the Act of paying tax calculated on the turnover of the previous year of account. Under this system, tax was provisionally assessed by the Sales Tax Officer on the basis of the turnover of the previous year, and thereafter the liability was adjusted at the end of the year of account in the light of the actual turnover of that year, and of rebate allowed in respect of groundnuts pressed into oil. As a result of the final adjustment made by the sales tax authorities, in some years the assessees were assessed to pay tax in excess of the amount provisionally assessed and in others they obtained refund of the excess tax paid under the provisional assessment. The following tabular statement shows the official years for sales tax, provisional demands made by the sales tax authorities, the final demands and the adjustments made in that behalf:

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Official	Provi-	Final	Adjust	ment
Year	sional		Refund/	Addi-
ended.	demand.	demand.	tio	nal levy.
	Rs.	Rs.	Rs.	Rs.
31-3-1942	2,679	1,872	807
31-3-1943	3,046	2,863	183
31-3-1944	14,509	18,402		3,893
31-3-1945	47,276	20,037	27,239
31-3-1946	45,315	13,379	31,936

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For the assessment year 1946-4 7 (corresponding to the year of account October 18, 1944 to November 4, 1945), the assessees claimed in their assessment to

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235

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1 S.C.R. SUPREME COURT REPORTS

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income-tax to deduct Rs. 49,633 being the amount of sales-tax paid under a provisional assessment. In the The Commission" year ending 31-3-1945, the assessees had paid of Excsss Profits Rs. 47,276 as sales-tax provisionally assessed. They Tax, Hyderabad also had paid in that year Rs. 3,894 in adjustment of v. the liability for the previous year towards sles-tax ;;;;5c:;.;.: due. After giving credit for Rs. 1,537 received as Kurnool rebate, the total sales-tax liability under the provisional assessment was Rs. 49,633. The Income-tax Shah j. Officer accepted this claim, and debited it from the income in the assessment year 1946-4 7 in assessing the taxable income of the assessees. Deduction of salestax actually paid under provisional assessment less rebates was permitted by the Income-tax Officer not only in the assessment year 1946-47 but also in the earlier years. The Excess Profits Tax Officer had also adopted for the chargeable accounting period prior to October 18, 1944 the same method of computation, but for the chargeable accounting period October 18, 1944 to November 4, 1945, the Excess Profits Tax Officer allowed out of the amount of H,s. 47,276 debited to sales tax only Rs. 17,055 as properly attributable to that period in computing the Excess Profits Tax liability. According to the Excess Profits Tax Officer, the excess amount paid under the provisional assessment i.e., Rs. 30,221 could not be taken into account, because under r. 12 of Sch. 1 of the Excess Profits Tax Act, expenditure in excess of the amount reasonable and necessary for the business was not a permissible deduction. In appeal against the order of the Excess Profits Tax Officer, the Tribunal affirmed the order. Against the order passed by the Tribunal confirming the order of the Excess Profits Tax Officer, the assessees applied for and obtained an order referring the following question to the High Court of · Judicature of Andhra Pradesh,

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"Whether there are materials for the Tribunal to hold that the aforesaid sales-tax payments of Rs. 30,221 were unreasonable and unnecessary having due regard to the requirements of the business and not consequently deductible under r. 12 of Sch. 1 of the Excess Profits Tax Act?"

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236 SUPREME COURT REPORTS [1962]

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196¹ The High Court answered the question in the nega-. . tive and against the order of the High Court, this The of Excess Commission" P•ofits appea 1 · IS pre erre wit £ d · h 1 eave un er d s. 66A(2} an tl (3) Tax, Hyderabad of the Income-Tax Act read with s. 21 of the Excess v. Profits Tax Act. M /s. s. R. v. G. It is manifest that the assessees had not altered P.ess Company, the method according to which their accounts were Kurnool maintained. Year after year, they were paying tax Shah J. provisionally assessed by the Sales-tax Officer 011 the turnover of the previous year subject to adjustment at the close of the year of account. This system of payment of tax under provisional assessments was not adopted with a view to evade tax liability. Nor was recovery of the amounts ordered to be refunded to the assessees delayed because of any deliberate inaction on the part of the assessees. It is not found that excess tax on inflated returns was paid in anticipation of the repeal of the Excess Profits Tax Act. The assessees for reasons of convenience adopted, as they were entitled under the Madras General Sales Tax Act, a system of payment of tax on provisional assessment based on the turnover of the previous year subject to final adjustment to be made at the end of the year. The assessees could opt for the system of paying sales-tax on provisional assessment, but the liability to pay tax imposed was on that account not voluntarily incurred. This system produced no direct benefit to the business and adjudged in retrospect, it undoubtedly reduced the taxable income; but if otherwise the payment was reasonable and necessary having regard to the requirements of the business, it was not liable to be ignored in assessing the Excess Profits Tax liability of the assessecs. By r. 12 of Sch. I of the Excess Profits Tax Act, it is provided that "in computing the profits of any chargeable accounting period, no deduction shall be allowed in respect of expenses in excess of the amount which the Excess Profits Tax Officer considers reasonable and necessary having regard to the requirements of the business; ... ". It is for the Excess Profits Tax Officer to decide whether the deductions claimed are reasonable and necessary having regard to the requirements of the

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1 S.C.R. SUPREME COURT REPORTS 237

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business. But the reasonableness and necessity of r96r the expenditure sought to be deducted in assessing Th .. Excess Profits Tax liability must be adjudged in the 0; £;:,;"'.;:;:;' light of commercial expediency. The payments made Tax. Hyderabad by the assessees were in discharge of obligation imposv. ed lawfully and were necessary for the proper conduct M /s. s. R. v. G. of the business. By s. 10 of the Madras General Sales Pms Company, Kurnool Tax Act, the assessees were obliged within 15 clays from the date of service of the notice of assessment to Shah j. pay tax and in default, the amount was liable to be recovered as if it were an arrear of land revenue. Again, by s. 15, if the assessees failed to submit the return as required by the provisions of the Act or the rules made thereunder or failed to pay the tax within the time prescribed, they were liable to be penalised. Payments made in satisfaction of liability which arises by virtue of the assessment made by the Sales Tax Officer cannot be called unreasonable. Payment of sales-tax as assessed being obligatory and necessary for the purpose of carrying on the business, it must in our opinion be deemed to satisfy the requirements of r. 12 of Sch. 1 of the Excess Profits Tax Act .

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The Excess Profits Tax Officer was, in our opinion, in error in thinking that the tax paid was in excess of the requirements of the business. We are also of the view that the Tribunal was in error in holding that by seeking to deduct only the tax properly attributable to the actual turnover during the chargeable accounting period, the Excess Profits Tax Officer was not seeking to disturb the method of accounting which was followed by the assessees and was accepted by the taxing authorities for many years.

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Counsel for the Commissioner submitted that the rules relating to advance provisional assessment and levy of tax framed under the Madras General Sales Tax Act, 1939 were inconsistent with the provisions of the Act and the assessees should have raised this contention and have obtained a decision from the court before paying tax on provisional assessment and not having clone so, payments made cannot be regarded as either reasonable or necessary. Counsel says that in In re M. P. Kumaraswami Raja (¹ ), the Madras High (1) [1955] 6 Sales Tax Cases 113.

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	238 SUPREMECOURTREPORTS [1962]
'9⁶' Th C^--.. *e ,ommissioner* ofExcess Profits Tax,Hyderabad v. M/s.s.R.v.G. Press Company, *Kurnool* ShahJ.	Court has declaredthisschemeoftaxationon provi- sional assessment_ultra vires._ Butthereasonableness , or the necessityofpayments underr.12Sch.1ofthe Excess Profits Tax Act must be ascertained inthe lightofwhatmaybe regarded as commercially expedientandnot onanylegalistic considerations.It wouldnotbe expectedofa businessman tostarta litigation in respectofataxwhichtheLegislatureof theState was competent to levy onthegroundthat themethod devised for computing thetaxliability was_ultra vires.Thetaxwas duly assessedandpaid andthereasonablenessandnecessity must be adjudg- edinthelightofthecircumstancesthenprevailing andnotinthelightofsubsequent developments.It may also be noticedthatsincetheMadrasHighCourt's decision in_InreKumaraswami Raja'scase(¹),the Madras LegislaturebytheMadras General SalesTax Amendment ActVIIIof 1955 retrospectively validat- edthelevy.Byvirtueofthis Act, assessments made provisionally andthelevyofthetaxweretobe regarded as valid notwithstandinganyinitial incon- sistency betweentheprovisionsofthe Actandthe Rules framed thereunder.Itmay also be pointed outthatno such question was referred to theHigh Courtandnoteven an argument appearstohave been raised in the High Court onthisquestion. We areof theviewthattheHighCourt was right in answering thequestion inthenegative. Theappeal therefore failsandis dismissed with costs. Appeal dismissed.

238
SUPREMECOURTREPORTS
[1962]

'9⁶'
Th
C^--..
e ,ommissioner
ofExcess Profits
Tax,Hyderabad
v.
M/s.s.R.v.G.
Press Company,
Kurnool
ShahJ.

Court has declaredthisschemeoftaxationon provi-
sional assessment_ultra vires._
Butthereasonableness

,
or the necessityofpayments under**r.**12Sch.1ofthe
Excess Profits Tax Act must be ascertained inthe
lightofwhatmaybe regarded as commercially
expedientandnot onanylegalistic considerations.It
wouldnotbe expectedofa businessman tostarta
litigation in respectofataxwhichtheLegislatureof
theState was competent to levy onthegroundthat
themethod devised for computing thetaxliability
was_ultra vires.Thetaxwas duly assessedandpaid
andthereasonablenessandnecessity must be adjudg-
edinthelightofthecircumstancesthenprevailing
andnotinthelightofsubsequent developments.It
may also be noticedthatsincetheMadrasHighCourt's
decision in_InreKumaraswami Raja'scase(¹),the
Madras LegislaturebytheMadras General SalesTax
Amendment ActVIIIof 1955 retrospectively validat-
edthelevy.Byvirtueofthis Act, assessments made
provisionally andthelevyofthetaxweretobe
regarded as valid notwithstandinganyinitial incon-
sistency betweentheprovisionsofthe Actandthe
Rules framed thereunder.Itmay also be pointed
outthatno such question was referred to theHigh
Courtandnoteven an argument appearstohave been
raised in the High Court onthisquestion. We areof
theviewthattheHighCourt was right in answering
thequestion inthenegative.
Theappeal therefore failsandis dismissed with
costs.
Appeal dismissed.

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(1) [1955] 6 Sales Tax Cases 118.

The Commissioner of Excess Profits Tax, Hyderabad v. M/S. S. R. v G. Press Company, Kurnool

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The Commissioner of Excess Profits Tax, Hyderabad v. M/S. S. R. v G. Press Company, Kurnool

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