Commissioner Of Income Tax v. Thirumalaiswamy Naidu & Sons.

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Liability is barred by limitation, but there are cases where liability is being carried forward for years in the publications of the assessee. In such cases, the Income Tax Authorities have recognised the responsibility as ceased/non-existent because the account has been shown outstanding for many years. The assessee has not implemented sanctions from the mortgagers or has declined to implement essential details like PAN/Address of the creditors, or there is no chance of the mortgagers claiming their mortgages in future and implemented section 41(1) of the Income Tax Act, 1961[1] by adding the accountability to the taxable income of the debt.

Suppose an assessee is showing a Trading Liability in his books for years. In that case, it cannot be viewed as discontinued merely because of the data that it is being shown for years. The assessee is inadequate to confirm the supervisors or other details from the creditors, or the opportunity of creditors demanding their money back is minimal.

Facts Of The Case

In the following case of Commissioner of Income Tax vs Thirumalaiswamy Naidu & Sons[2], the assessee is firm trading in jaggery, having the trading separate from the State, jaggery is free from native sales tax under the Government Order of the State Government. There was a debatable question of whether Jaggery is also a released article for Central sales tax. This was the situation before this court gave its judgement in the set of writ petitions in M. Ishwarlal & Co. v. the State of Madras [3]. Until then, the unformulated State of the law had a lot of inconvenient features for traders in jaggery, like the assessee in the following case. The assessee did not gather any sales tax from the clients because it was not jaggery was not a taxable item. 

Aside from that, if the assessee did not accumulate any money for sales tax and eventually, it came out that jaggery was not a free thing, the assessee would have to pay out the tax from his income. Since there is continuously a time-interval between the dealings of sale deed and the valuation of the concerned revenue, it would nearly be unbearable for the assessee to get compensation of tax from the customers and, in any case, they might probably scribble to pay, unless they are bonded up with an initial contract. Therefore, as a fact of assurance against these hazards, the assessee composed sales tax from the clients on every trade on the footing that jaggery may be assessable, but took attention to assemble the money not as sales tax, but under a dependent obligation reason. 

After collecting the money, however, the assessee did not think it fit to condense himself accountable for the consequences and accordingly forwarded the entire money taken from the clients to the department of sales tax. In this way, the gathering of tax by the assessee from the clients under the dependent accountability became Rs. Seventeen thousand fifteen for the whole year ended March 31, 1968, and Rs. 1, 20, 364 for the accounting year, which ended on March 31, 1969.

The assessee did not transport into the fair dealing and in the money gained and decline statement. The units from the clients, on the securities side, or the enclosures of taxes from those collections to the sales tax department, are on the liability side. This system of accounting was evidently chosen because the assessee did not think that the jaggery was a taxable commodity, particularly when the subject was pending litigation before the taxing officials and this Court. In any fact, it made no deviation to the ideal consequence of the gain and loss record, since under the assessee’s management of accounts, the same money obtained out of the assets side as well as of the debit side of the dealing and profit and loss record. 

Arrangement of accounting selected by the assessee was not determined by the ITO because the assessee’s accounting did not change the Profit situation. He, consequently, evaluated 1968-69 without taking note of Rs. 17015 received by the assessee from the clients under the unpredictable obligation statement towards sales tax. The Commissioner, however, prevented this evaluation in review and added to the taxable salary of the assessee for the appropriate account year the sum of Rs. 17, 015, on the basis that it must be traded with on system, as part of the trading avail of the assessee, whether or not it had been produced into the trading account by the assessee.


Whether the query of law as made by the Department of Sales Tax pressures only one feature of the Tribunal’s choice, the aspect moving the applicability of Section 41(1) of the Income Tax Act. Therefore, is whether the accuracy to the reimbursement of Rs. 1, 37, 379, which got up to the assessee during the appropriate account year, can be viewed as a portion of the assessee’s trading incomes of the year. 

Contentions Of The Petitioner

The assessee filed an appeal against the order of the Commissioner of the Income Tax department. At the concluding stage, the appeal was disposed of by the Tribunal in a very inquisitive manner. The assessee had filed all the taxes from his end and his liability had ended. The Assessee questions the act of the ITO and the Commissioner as a matter of correct commercial accounting.

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Contentions Of The Respondent

The Commissioner interfered the department of Sales Tax and added to the taxable income of the assessee for the relevant account year the sum of Rs. 17,015, on the basis that it must be dealt with on system, as part of the dealing gain of the assessee, whether or not it had been transported into the trading version by the assessee.

Summary Of Judgement

The judgement in the case of Commissioner of Income Tax v. Thirumalaiswamy Naidu & Sons., came across to set a precedent where the Tribunal, after examining the material of the income, held in our belief correctly that Thirumalaiswamy Naidu & Sons was obvious on facts and rightly understood the decision in McDowell & Co Ltd[4]. The assessee in the given case, in the route of the business of its assets, acquired sales-tax from the clients.  The assessee, in its deed, was inflicted under the Central Sales-tax Act and spent the tax. The sales tax collected by the assessee has to be interpreted as to its assets, according to the verdict of this Court in the matter of Chowringhee Sales Bureau Pvt. Ltd. v. CIT[5]. Any amount of sales-tax made by the assessee was legally responsible for being decreased from the gains made by the assessee. 

In this case, the assessee had made the sales tax payment under the Central Sales-tax Act’s provisions. Those rules were under provocation and eventually were struck down by the Madras High Court.  The assessee got back money of Rs. 1,37,379 as compensation. The full money of businesses turnover of the assessee, including the tax collected, was includible in the assessee’s taxable earnings. If any reasoning was given from the income and later the identical were returned to the assessee, the refund would have the character of a revenue receipt. It has to be handled as a release on the revenue statement and assessed as before-mentioned. The form has been overwhelmed beyond suspicion by the express provisions of Section 41(1) of the IT Act.

The next question before the Court of Law is if the assessee gives back any piece of the money to its clients, will it still be accountable to return tax on the entire money. Admittedly, the assessee had not adjusted any part of this money of Rs. 1,37,379 to any person of its clients in the year of bank statement. As and when such payment is made, the assessee will be authorised to claim reduction.

The situation thus was present that in the two evaluations, i.e., for 1968-69 and 1969-70, the assessee’s statements did not give assets for and take into statement either the total amount of Rs. 1, 37, 379 being sales tax accumulations fulfilled by the assessee from its clients or debit alike money for the payments made by the assessee to the sales tax administration towards sales tax responsibility for sales of jaggery during the two years.  

In both these assessment years, the final resolution by the taxing authorities, regarded as a quantity, was at a disagreement with the assessee’s accounting statement or, instead, non-accounting, of the money of Rs. 1, 37, 379 either on the side of profit or on the debit side of the dealing account. The Commissioner in the first year and the ITO in another year took freedom with the assessee’s statements. The dealing receipts were not considered as buying receipts or any receipts, for that matter, since the acquisitions from the clients were made uncertain. Rather than considering whether the activity of the Commissioner or the ITO was right as a matter of Financial statements, what the Tribunal and the AAC did was to take additional freedom with the assessee’s statements way to organise the understanding, as it were, by awarding equal reductions in the same assessments with regards the amounts are given by the assessee of the sales tax acquisitions to the sales tax department.

While so, as already registered, in M. Ishwarlal & Co. v. the State of Madras , this Court held that jaggery was excluded from Central sales tax by the exemption’s sheer power conferred property by the State Government under the Tamil Nadu General Sales-tax Act. The assessee was one of the writ petitioners before this Court.

This Court’s decision meant that the money of Rs. One hundred thirty-seven thousand three hundred seventy-nine given by the assessee to the sales tax department as Central sales tax on inter-State sales of jaggery had to be returned to the assessee and the other sellers similarly situated. Since, though, the Central sales tax on its jaggery sales were not given to the Department by the assessee from out of its own money. Still, only from out of its acquisitions from the clients, the situation was that the money of the sales tax account to be returned by the sales tax department to the assessee had, indeed, to be crossed on by the assessee to its clients.

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The assessee could not very thoroughly estimate the sum of Rs. 1, 37, 379 as its money, for the amount associated to the clients, who have legally authorised to a statement of the money the point it became refundable to the assessee, following the Court’s determination that the custom and development of the tax were not having any reasonable manner. We consider that the Tribunal was incorrect in dismissing the assailable buying taking from the asst. yr. 1974-75.

The problem is, therefore, claimed in the removal and favour of the Income. The appeal is allowed. There will be no order as to costs.


This case is a reference of an income-tax reference where we have to trade a short with sales-tax. In our country, sales tax is the commercial tax on the turnover of traders. There is, however, no prohibition on the transfer of the extent of the transactions tax by the traders to their clients. In many jurisdictions, the acquisition of sales tax is considered a portion of the sale cost, and it needed a piece of particular information in Section 2(r) of the Tamil Nadu General Sales Tax Act, 1959 [6], to keep the acquisition of sales tax outside the notion of value or turnover. Whatever the situation under the sales tax statutes, accountants and salespeople regularly consider sales tax-managed as the portion of the dealer’s buying receipts in his dealing account. But since it is once paid over by the trader to the sales tax department or expected to be so given over, it becomes a statement against interests, either in his dealing description or in the profit and loss statement. Thus, the exclusive outcome from the division of the statements is precisely the same as in a situation where sales tax acquisitions and the sales tax debts do not go to the assets side of the debit side, as the case may be, of the assessee’s dealing and profit and loss statement.

One of the grounds on which the Tribunal deleted this amount of Rs. 1, 37, 379 from the assessee’s taxable revenue was that if the settlement were included in the assessee’s hands as income for this year, the Income-tax Department would have to give a corresponding allowance if and when the assessee hands over portions of these amounts to its customers in the coming years. As the Tribunal picturesquely put it, by the same “stroke of the pen” by which the Department would be adding the amount of Rs. 1, 37, 379 for this year, it will have to transpire on making deductions and subtractions as and when the assessee returns to the parties the amounts originally negotiated from them as contingency amounts towards transactions tax collections.

The Court held that the entire expense of trades turnover of the assessee, including the money of tax collected, was certainly includible in the assessee’s assessable income. If any reasoning was given from that interest and later the same was returned back to the assessee, the refund would have the quality of income receipt. It has to be managed as a receipt on the revenue statement and had to be assessed as such. The position has been placed beyond doubt by the express provisions of Section 41(1). Admitted, the assessee had not returned any part of this amount to any one of its clients in the year of the account. As and when such a refund is made, the assessee will be allowed to claim the deduction.


This case came out to introduce Section 41(1) is a fabrication. For instance, where an assessee acquires a debt, and the creditor releases the responsibility either in total or in section, the assessee might get an advantage, but the discharge does not involve anything coming into him as assets. Section 41(1) and its precursor, Section 10(2A) of the Indian I.T. 1992, changed this fundamental principle by the enlightenment of the law under which what was not interest was deemed to be revenue. It is needless to go into a detailed analysis of the grammar of Section 41(1). It is adequate for our immediate goal to recognise that they are two essential prerequisites for invoking this preparation. One is that the assessee must have acquired a trading liability in some year with regard to which he should have received a deduction or allowance in an assessment of his income in a former year. The second requirement is that subsequently, in the assessment year under consideration, a decrease, abatement or end of that possibility occurs, resulting in some interest to the assessee. If both these conditions are fulfilled, then the value of the advantage will be deemed to be the taxable income of the year of reduction or cessation of liability.

[1] The Income Tax Act, 1961, s. 41(1).

[2] Commissioner of Income Tax vs Thirumalaiswamy Naidu & Sons, (1998) 146 CTR SC 529.

[3] M. Ishwarlal & Co. v. The State of Madras, AIR 1968 Mad 241.

[4] McDowell & Co Ltd, 1986 AIR 649.

[5] Chowringhee Sales Bureau Pvt. Ltd. v. CIT, 1973 AIR 376.

[6] The Tamil Nadu General Sales Tax Act, 1959, s. 2(r).