Bombay High Court
Commissioner Of Income-Tax vs Bennett Coleman And Co. Ltd. on 19 January, 1993
Equivalent citations: [1993]201ITR1021(BOM)
JUDGMENT Dr. B.P. Saraf, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961 (for short "the Act"), the Income-tax Appellate Tribunal has referred the following question of law to this court for opinion :
"Whether, on the facts and in the circumstances of the case and in law, the Appellate Tribunal was justified in holding that the unclaimed credit balance of Rs. 6,093 in the account of casual contributors and part-time correspondents written back to the profit and loss account did not form part of the trading receipts and was thus not includible in the total incom ?"
2. The facts giving rise to this reference, briefly stated are as follows : The assessee is a limited company. It publishes a daily paper The Times of India and some other publications. The relevant assessment year is 1965-66, the corresponding previous year being calendar year 1964. In earlier years, there appeared a credit balance of Rs. 6.093 in the accounts of casual contributors and part-time correspondents. It represented the remuneration awarded by the assessee to casual contributors and part-time correspondents who did not collect the amounts awarded to them for one reason or the other. During the previous year under consideration, the assessee transferred this amount to its profit and loss account. The Income-tax Officer treated this amount as the income of the assessee. Aggrieved by the action of the Income-tax Officer, the assessee went in appeal before the Appellate Assistant Commissioner. The contention of the assessee before the Appellate Assistant Commissioner was that transfer of this amount to the profit and loss account did not mean that it represented its income of the year under consideration. The Appellate Assistant Commissioner accepted this contention of the assessee and excluded the amount of Rs. 6,093 from its income. Against the order of the Appellate Assistant Commissioner, the Revenue went in appeal to the Income-tax Appellate Tribunal (for short "the Tribunal"). The Tribunal upheld the finding of the Appellate Assistant Commissioner and held that the aforesaid amount did not form part of the trading receipt of the assessee. The reasoning of the Tribunal was that these amounts belonged to outsiders and the mere fact that they had not turned up to collect the same or the fact that the period of limitation had elapsed did not mean that the assessee had become the owner of these amounts nor did it mean that it had become the income of the assessee. Aggrieved by the order of the Tribunal, the Revenue applied for reference and the Tribunal, on being satisfied that the question of law did arise out of its order, referred the same to this court.
3. Learned counsel for the Revenue submits that section 41(1) of the Act squarely applies to the facts of the present case and in that view of the matter the amount in question has to be deemed to be profits and gains of business chargeable to income-tax. Section 41(1) of the Act is in the following terms :
"S. 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, and subsequently during any previous year the assessee 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 him 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."
Thus, two conditions must be fulfilled in order to attract section 41(1). Firstly, the allowance or deduction should have been made in the computation of profits and gains of a business or profession in the assessment for any year in respect of such loss, expenditure or trading liability and, secondly, subsequently during any previous year the assessee should have obtained whether, in cash or in any other manner, any amount in respect of such loss or expenditure or benefit in respect of such trading liability by way of remission or cessation thereof. If both these conditions are fulfilled, the amount obtained by him or the value of benefit accruing to him shall be deemed to be the profits and gains of business and charged to income-tax as income of that previous year.
4. In the instant case, there is no dispute about the fulfilment of the first conditions, i.e., deduction had been made in the assessment for earlier years in respect of the amount under consideration by way of expenditure. The controversy raised is in regard to cessation of liability in respect thereof. According to the Revenue, once the claim is barred by limitation and the amount is transferred by the assessee himself to the profit and loss account, "cessation of liability" is complete. According to the assessee, that by itself is not enough. The transfer of the amount standing in the balance-sheet as trading liability - it must be a bilateral act, which means that there must be consent, implied or express, of the creditor in order to hold that there is cessation of liability.
5. We have carefully considered the rival submission. On a careful perusal of section 41(1) of the Act, we find it difficult to accept the contention of the assessee that cessation of liability can take place only as a result of a bilateral act. In our opinion, it will depend on the facts of each case. There may be cases where the liability is not barred by operation of law. In such cases for cessation of liability, bilateral act of the parties will be necessary. However, in cases where the recovery has become barred by limitation by operation of law, unilateral expression of intention of the debtor not to treat the amount any more as liability might be sufficient to bring about a "cessation of the liability".
6. In the present case, the admitted position is that the liabilities had become unenforceable under the law by lapse of time and the assessee had transferred the amount thereof to its profit and loss account. The position of the carried forward liability, in such a situation, stands thus : So far as the creditor is concerned, he cannot enforce his claim by bringing legal action. So far as the assessee is concerned, by transferring the amount to the profit and loss account, he has made his intention clear thereafter not to pay these amounts in future. Situated thus, it is difficult still to hold that there is no "cessation of liability" in this case without a bilateral act of the parties. In fact, the question of bilateral act in such a case cannot even arise.
7. It may, however, be appropriate at this stage to refer to some of the decisions on which reliance was placed by learned counsel for the assessee. Reference may be made first to the decision of this court in Kohinoor Mills Co. Ltd. v. CIT [1963] 499 ITR 578, where dealing with the provisions of section 10(2A) of the Indian Income-tax Act, 1922 (for short, "the 1922 Act"), which was in pari materia with section 41(1) of the present Act, the court observed (at page 580) :
"It is not in dispute before us that in view of the provisions of section 10(2A), it is open to the income-tax authorities to include in the income of the assessee the amount of the trading liability of the assessee, which had ceased to be its trading liability in the relevant accounting year. The question, however, is whether the trading liability to the extent of Rs. 30,190 representing the unclaimed wages, which was the trading liability of the assessee incurred in the year 1952 had ceased to be its trading liability in the year 1955 by reason of the expiry of three years, and thus barring the remedy of the labourers and workmen to recover that amount by way of suits."
8. In the light of these observations, it was held that the trading liability incurred by the assessee in respect of the said amount did not cease to be a trading liability in the year in question by reason of the expiry of period of three years. It may be noted here that the amount involved in the above case represented the amount of wages which had become due to the labourers and workmen but which were not claimed by them. The court found that though the period of three years which was the period for filing a suit had expired, the liability under the concerned labour legislation had not ceased. It was in that view of the matter that it was held that there was no cessation of liability. Besides, in the above case, on facts also, there was no transfer of the amount in question by the assessee to its profit and loss account as has been done in the instant case.
9. Next in order is the decision of this court in J. K. Chemicals Ltd. v. CIT [1966] 62 ITR 34. In this case, certain amounts were allowed as deduction in the past in respect of wages, salary and bonus payable to the employees. A certain portion of the wages, salary and bonus so debited was in fact not drawn by the employees. A sum of Rs. 5,929 remained undrawn. The remedy was apparently barred by limitation. The liability in respect thereof was written off during the previous year. This amount was credited by the assessee to his profit and loss account during the relevant previous year. The Income-tax Officer included this amount in the total income of the accounting year on the ground that the trading liability in respect of which deduction had been allowed had ceased to exist under section 10(2A) of the 1922 Act (corresponding to section 41(1) of the 1961 Act) and, as such, the amount in question should be deemed to be income. This court held (at page 41) :
"The question to be considered is whether the transfer of these entries brings about a remission or cessation of its liability. The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees. We fail to see how a debtor, by his own unilateral act, can bring about the cessation or remission of his liability. Remission has to be granted by the creditor. It is not in dispute, and it indeed cannot be disputed, that it is not a case of remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur either by reason of the operation of law, i.e., on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor, or a contract between the parties, or by discharge of the debt-the debtor making payment thereof to his creditor. Transfer of an entry is neither an agreement between the parties nor payment of the liability. We have already held in Kohinoor Mills' case [1963] 49 ITR 578 (Bom) that the mere fact of the expiry of the period of limitation to enforce it, does not by itself constitute cessation of the liability. In the instant case, the liability being one relating to wages, salaries and bonus due by an employer to his employees in an industry, the provisions of the Industrial Disputes Act also are attracted and for the recovery of the dues from the employer, under section 33C(2) of the Industrial Disputes Act, no bar of limitation comes in the way of the employees."
10. From the above passage it is clear that the conclusion that there was no cessation of liability was arrived at in view of the fact that despite the expiry of the period of limitation to enforce it, the assessee could not get rid of his liability when called upon to meet it either by the employees under the Industrial Disputes Act or by the Government under the Bombay Labour Welfare Fund Act on account of the special provisions of those Acts. It was in that view of the matter that this court held that a unilateral act on the part of the debtor cannot bring about a cessation of liability and decided in favour of the assessee. It may be observed that both the above decisions were rendered in cases where in effect the liability did not cease to exist by operation of law. It still remained enforceable against the assessee by virtue of the relevant labour legislations. The decision in J. K. Chemicals Ltd.'s case [1966] 62 ITR 34 (Bom) was followed by this court in CIT v. Sadabhakti Prakashan Printing Press (P.) Ltd. [1980] 125 ITR 326. It was also followed by the Calcutta High Court in CIT v. Sugauli Works P. Ltd. [1983] 140 ITR 286 and again by this court in CIT v. Chase Bright Steel Ltd. (No. 2) [1989] 177 ITR 128.
11. From a careful perusal of the above decisions it is clear that the ratio thereof not applicable to the facts of the present case. Here there is no controversy in regard to the fact that the recovery of the amount was barred by limitation. There is no special feature as in some of the above cases such as provisions of the labour legislation by virtue of which the payment of the amount in question might still be enforced. That being so admittedly the claim was no more enforceable. Once this legal position is coupled with the intention of the debtor not to pay the amount, undoubtedly it would amount to "cessation of liability". Difficulties sometimes arise only in ascertaining the intention of the debtor not to pay. There is evidently no particular form in which the intention not to pay a time-barred debt has to be expressed. Nor, in practice, are such declarations made in so many words. Therefore, it has to be ascertained from the facts of each case and the conduct of the debtor can bring about a cessation of liability also depends on the facts of each case. It is not that in all cases it must be a result of a bilateral become barred by limitation, it is difficult to visualise how such a declaration can be a result of a bilateral act. It has to be a unilateral act of the debtor. Diversion of the amount of liability to the profit and loss account can certainly be one of the most unequivocal modes of such declaration.
12. The controversy may also be considered from one more angle, i.e., whether an assessee who has himself written off his time-barred liability from his accounts and transferred the amount to his profit and loss account thereby treating it as his income can be permitted to turn round, when the question of inclusion of such amount in his income under section 41(1) of the Act arises, and say that despite his own action of writing off the liability and transferring the amount to his profit and loss account, the liability has not ceased. In the absence of extraordinary circumstances the answer to this question has to be in the negative. In extraordinary cases where the assessee wants to contend that despite his own action of the nature indicated above the liability still survives, the onus will be on him to bring sufficient materials on record to satisfy the authorities concerned in that regard. In fact the decision of this court in J. K. Chemicals Ltd. v. CIT [1966] 62 ITR 34, is a case on this point. However, in the present case such is not the stand of the assessee. We are, therefore, of the clear opinion that section 41(1) of the Act is attracted to the facts of the present case and as such, the amount of Rs. 6,093 would be deemed to be profit of the business of the assessee and charged to tax as income of the previous year in question.
13. In view of the foregoing discussion, we are of the clear opinion that the Tribunal was not justified in holding that the said amount was not includible in the total income of the assessee. The question referred to us is, therefore, answered in the negative, i.e., in favour of the Revenue and against the assessee. We make no order as to costs.