R. Balia, J. - (1.) THIS appeal is directed against the order passed by the Income-tax Appellate Tribunal, Jodhpur Bench, Jodhpur, relating to the assessment year 1995-96.
(2.) WHILE admitting the appeal, the following two questions have been framed on April 4, 2002 : "1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law allowing interest paid to third parties placing reliance on the judgment of CIT v. Jain Construction Co. [2000] 245 ITR 527 (Raj), whereas in the said judgment, the High Court has not held that interest to third parties are allowable out of income arrived by applying net profit rate ? 2. Whether, on the facts and in the circumstances of the case and position of law, the Income-tax Appellate Tribunal was justified in giving the relief on account of the sales tax refund which was credited by the assessee-firm itself in his profit and loss account and declared it as the part of its income under Section 41(1) of the Act ?" So far as question No. 1 is concerned, we notice that this court has considered the same issue in I. T. Appeal No. 1 of 2002 and I. T. Appeal No. 3 of 2002-CIT v. Bhawan va Path Nirman (Bohra) and Co. (No. 1) [2002] 258 ITR 431 (Raj), which had arisen out of the same order passed by the Tribunal as is under challenge in this case, relating to the assessment years 1994-95 and 1996-97, respectively, and decided today by a separate order. The court found no merit in the contention raised by the Revenue for any interference in the conclusion reached by the Tribunal in estimating taxable income by applying the net profit rate subject to appropriation towards depreciation and interest. Following the decisions in the said two appeals, question No. 1 must be held in favour of the assessee and against the Revenue that in the present facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in allowing deduction on account of interest payable to third parties while determining the income on estimate basis. In making the estimate, the Tribunal has taken into account the past practice of fixing net profit rate without taking into consideration the depreciation and interest and they are to be adjusted towards the net profit worked out at the rate fixed by the Assessing Officer itself in consecutive six years immediately prior to the assessment year 1994-95. We have also noticed from the material emerging from the Tribunal's order that the foundation for fixing the net profit rate for the assessment year in question, i.e. 1995-96, has been the net profit rate which has been taken into account by the Income-tax Officer for the preceding years by making it subject to such deduction on account of depreciation and interest. It may also be noticed that net profit rate is subject to adjustment on account of allowable depreciation is not disputed by the Revenue also now. Thus, it is accepted that the net profit rate is not the final estimate but is subject to further adjustments. What adjustments are to be made has been decided by the Tribunal on the basis of the case history of the assessee. Therefore, this finding of fact does not call for any interference by this court. So far as the second question is concerned, it relates to inclusion of refund received during the previous year relevant to the assessment year 1995-96 from the Sales Tax Department on account of excess payment paid in the earlier years, in the taxable income of the previous year in question, as reimbursement of expenses. The payment of sales tax, which is an indirect tax is considered to be part of business expenditure and which ordinarily is an allowable expense subject to the conditions given in Section 43B, which in substance restricts the allowability of deduction on account of sales tax liability only to the extent of amount actually paid during the previous year or at best up to the date of filing of returns. If such deduction is allowed, in any particular year, while computing the income subjected to tax under the Income-tax Act and is subsequently refunded to the assessee then the assessee is required to include such refund amount in his taxable income as reimbursement of deduction earlier claimed and allowed. The reason is obvious. If an assessee has claimed deduction of any amount as expenses incurred by him and which has been so allowed, it results in reducing his tax liability to that extent. When such amount is received by such assessee by way of refund or otherwise then on receipt of such amount by way of refund from the person or from any other sources to whom such payment has been made, the assessee is not allowed to retain the benefit which he has earlier obtained by reducing his tax liability on earlier occasion. However, where no deduction for any expenses incurred by the assessee on an earlier occasion has been claimed or claimed but has not been allowed by the Assessing Officer in determining the income chargeable to tax under the Income-tax Act, then merely by making entries in books no benefit of reducing tax liability by reducing the taxable income is obtained by the assessee, nor on refund of such amount in a later assessment year, any question of subjecting it to tax can arise under Section 41(1)(a). Section 41(1)(a) provides that refund of any allowance or deduction made in the assessment of any earlier year is liable to be subjected to tax in the year of refund or recovery. For the present purpose, the relevant part of Section 41(1)(a) of the Act may be reproduced hereunder : "41. Profits chargeable to tax.--(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,-- (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not ; or (b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in Clause (a) way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year."
(3.) FROM the very opening part of the provision, it is apparent that it applies to a case where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequent thereto during any previous year, if the assessee obtains any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the same is to be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year. The sine qua non of invoking Section 41 is that in any earlier assessment year, the allowance or deduction ought to have been made in computing the income chargeable under the tax. It obviously concerns the computation of taxable income made in accordance with the provisions of the Income-tax Act in the assessment and not merely on the basis of treatment of such amount in the books of account. In the present case, the question relates to refund of sales tax received from the Sales Tax Department, which was in earlier years found to be paid by him as the same was deducted at source. It is contended by the Revenue before us that since the net profit rate has been applied in the case of assessee by rejecting his books of account, it is inherent in determination of net profit rate that all allowable expenses as are admissible under the provisions of the Act have been taken into consideration and allowed by the Assessing Officer and, therefore, it must be deemed that when the assessee had paid in any earlier year, the amount of sales tax, which has been deducted at source, the same was allowed and as the same has been refunded in the previous year in consideration, it has to be taxable under Section 41(1)(a). ;