Ajit K.Sengupta, J. - (1.) In this reference under Section 256(1) of the Income-tax Act, 1961, made at the instance of the Revenue, the following question of law has been referred by the Tribunal for the opinion of this court for the assessment year 1974-75 : " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the liability cannot be assessed under Section 41(1) of the Income-tax Act, 1961, simply because the assessment of the Commercial Tax Officer has been set aside by the appellate authorities and in that view holding that the assessee is entitled to the deduction of Rs. 17,78,887? " The facts as found by the Tribunal are that in the course of the assessment proceedings for the assessment year 1968-69, the assessee-company had claimed and was allowed a deduction of the sales tax liability amounting to Rs. 17,78,867 in respect of four quarters ending on August 31, 1963. This liability was fastened upon the assessee on the basis of the ex parte order dated August 16, 1967, passed by the Commercial Tax Officer, Central Section, Calcutta. The assessee did not make any provision for this sales tax liability in its books of account, but the claim was made by the assessee-company based upon the said ex parte order passed by the Commercial Tax Officer on August 16, 1967. Subsequently, on appeal filed by the assessee, the Assistant Commissioner of Commercial Taxes, by his appellate order dated April 4, 1973, set aside the ex parte order passed by the Commercial Tax Officer and directed him to make a fresh assessment after giving a proper opportunity to the assessee to produce its books of accounts which were lying seized with the Income-tax Department. Since the sales tax liability of Rs. 17,78,887 which was raised in pursuance of the ex parte assessment made by the Commercial Tax Officer ceased to exist as a result of the appellate order passed on April 4, 1973, the Income-tax Officer sought to assess the said sum of Rs. 17,78,887 as the assessee's income under Section 41(1) of the Income-tax Act, 1961, in the assessment for the previous year ending March 31, 1974, which is now in reference before this court. On appeal by the assessee, the Appellate Assistant Commissioner, agreeing with the Income-tax Officer, observed that the sales tax liability in question arose as a result of the ex parte order passed by the Commercial Tax Officer. This liability related to the assessment year 1964 65 and the assessee-company, even though it followed the mercantile system of accounting, did not provide this liability in its books of account in any of the years and the deduction was claimed by it in the assessment year 1968-69 only on the basis of the ex parte order dated August 16, 1967, which fell within the accounting year relevant to the assessment year 1968-69. Since the said ex parte order was now set aside by the appellate authority, the said liability of Rs. 17,78,887 did not exist any longer and it ceased to exist. In that view of the matter, the Appellate Assistant Commissioner upheld the action of the Income-tax Officer having regard to the clear language of Section 41(1) of the Income-tax Act, 1961.
(2.) On further appeal by the assessee before the Tribunal, it was contended on behalf of the assessee that Section 41(1) had no application in the instant case inasmuch as there was a distinct possibility of revival of the demand on further appeal by the Department against the setting aside order passed by the Assistant Commissioner of Commercial Taxes. Reliance was placed on behalf of the assessee on several decisions of High Courts which have again been cited before us. We shall consider these cases later in our judgment.
(3.) At the outset, we are a little surprised over the approach adopted by the Tribunal in this case. It is an admitted position that the sales tax liability of Rs. 17,78,887 arose as a result of the ex parte assessment order passed by the Commercial Tax Officer, Central Section, Calcutta, on August 16, 1967. The assessee claimed deduction of this liability based upon this ex parte order. The said ex parte order was later set aside by the Assistant Commissioner of Commercial Taxes by his appellate order dated April 4, 1973, with a direction to make a fresh assessment after giving a proper opportunity to the assessee to produce the books of account which were lying seized with the income-tax authorities. No material was placed before the Tribunal on behalf of the assessee to show that the Sales Tax Department had filed any appeal against the appellate order dated August 4, 1973, passed by the Assistant Commissioner of Commercial Taxes. In its order, the Tribunal has also not recorded any such fact. In paragraph 4 of its order, the Tribunal only records the submissions made on behalf of the assessee as under : " . . . .In the instant case also, the Sales Tax Department has challenged the setting aside of the order and there is a distinct possibility of revival of the demand. " This recording was later modified by the Tribunal through its subsequent order dated January 21, 1980, on a miscellaneous application filed on behalf of the assessee. The last sentence appearing in paragraph 4 of the Tribunal's original order dated August 8, 1979, as extracted above was substituted by the following sentence ; " In the instant case, with the Assistant Commissioner of Sales Tax setting aside the order, there is a distinct possibility of revival of the demand. " In paragraph 6 of its original order dated August 8, 1979, the Tribunal had recorded, inter alia, as under : " 6. If the assessee's case is viewed in the light of the judicial principles as enunciated by various High Courts, the liability in question has not ceased to exist meaning thereby that, on further appeal by the Department, there is a distinct possibility of the revival of the demand or the liability. . . . " Later, by the order dated January 21, 1980, passed by the Tribunal on the assessee's miscellaneous application, the words " on further appeal by the Department " as appearing in paragraph 6 of its earlier order were directed to be deleted.;