Income Tax Appellate Tribunal - Mumbai
Income-Tax Officer vs Foremost Dairies Ltd. on 27 March, 1986
Equivalent citations: [1986]18ITD157(MUM)
ORDER
K.S. Viswanathan, Accountant Member
1. This is a departmental appeal. The assessee-company carries on business of manufacturing dairy products. The ITO noticed that the assessee had credited the profit and loss account with a sum of Rs.2,24,379, which was in respect of the credit balance written back. In the statement of income filed by the assessee, this amount had been excluded. The ITO required the details of such write back and the reasons for its exclusion. These were not given. He then pointed out that the very fact that the assessee had credited the balances showed that there was a cessation of liability. He pointed out that the accounts were audited and the very fact that the auditors allowed such amount to be shown to the profit and loss account is a clear case of evidence for cessation of liability. He then made the addition under Section 41(1) of the Income-tax Act, 1961 ('the Act').
2. The assessee appealed. The Commissioner (Appeals) held that in view of the Bombay High Court decisions in the cases of J.K. Chemicals Ltd. v. CIT [1966] 62 ITR 34 and Gannon Dunkerley & Co. Ltd. v. CIT [1976] 102 ITR 428 it is well settled that mere writing back the credit balances would not amount to non-payment of the same and did not extinguish or diminish the liability. He further pointed out that even in the case of CIT v. Sadabhakti Prakashan Printing Press (P.) Ltd. [1980] 125 ITR 326, the Bombay High Court has followed their earlier principles. He, therefore, deleted the addition.
3. The department is in appeal before us. Shri Mahadeshwar for the department pointed out that the assessee had not given any details whatsoever in connection with this disputed addition. In the absence of any such details, the only thing which looms large is the conduct of the assessee in writing back this amount to the profit and loss account. It was further pointed out that admittedly the assessee in some of the cases was not even aware of the existence of these creditors. In these circumstances, he submitted that the condition regarding cessation of liability is satisfied. He then pointed out that the decisions relied on by the Commissioner (Appeals) are not applicable to the facts of the case. The case of Sadabhakti Prakashan Printing Press (P.) Ltd. (supra) dealt with a write back of a provision for gratuity. The liability to pay gratuity, he pointed out, does not cease merely because the assessee writes back the provision. With regard to the decision in the case of Gannon Dunkerley & Co. Ltd. (supra), he pointed out that this has been explained and distinguished by the Allahabad High Court in the case of Indian Motor Transport Co. v. CIT [1978] 114 ITR 677. In that case, the amount was transferred to the provision for taxation account and further the assessee had made payments from such account as and when the creditors made their claim. It was on these facts that the High Court in that case came to a finding that the amount never became the property of the assessee. The Bombay High Court decision in the case of J.K. Chemicals Ltd. (supra) has been considered by the Punjab and Haryana High Court in the case of CIT v. Haryana Co-operative Sugar Mills Ltd. [1985] 154 ITR 751 and it held that the ratio would not apply to such cases. He then submitted that the facts are similar to the decision of the Bombay High Court in the case of CIT v. Batliboi & Co. (P.) Ltd. [1984] 149 ITR 604.
4. For the assessee, Smt. Vissanji submitted that this case has to be seen only as unilateral action and it is now well settled that such unilateral action of the assessee will not amount to cessation of liability. She submitted that the Bombay High Court decision in the case of Gannon Dunkerley & Co. Ltd. (supra) and the Calcutta High Court decision in the case of CIT v. Sugauli Sugar Works (P.) Ltd. [1983] 140 ITR 286 would apply to the facts of the case.
5. We have considered the submissions. The only issue we have to consider is whether the ITO is justified in bringing to tax the amount written back to the profit and loss account. As we see it, it is open for the department to approach this question by two methods. The first is to show that the amount written back is merely a trading receipt. That is what Shri Mahadeshwar has attempted to do in his submissions before us by relying on the decision of the Bombay High Court in the case of Batliboi & Co. (P.) Ltd. (supra). The second method, which is actually followed by the ITO, is treating these receipts as liabilities which have ceased to exist during the accounting year.
6. We take up the first method suggested by Shri Mahadeshwar. In the case of Batliboi & Co. (P.) Ltd. (supra), the assessee was a dealer in machineries. They used to take deposits from intending purchasers of machinery which were later adjusted towards the purchase price of the machinery sold. The surplus deposit, if any, was not returned to the customers. Occasionally, the assessee was unable to refund some of the excess deposits. In the accounting year under consideration before the High Court, some of the deposits not returned were transferred to the profit and loss account. As in this case before us, the assessee claimed that the sums so transferred did not represent taxable receipts. The Tribunal had accepted the assessee's submission. The Bombay High Court pointed out that the excess deposits were not held by the assessee for the benefit of depositors. The deposit was in respect of a specific transaction of sale and was adjusted towards the purchase price of the machinery sold and had a close connection with the transaction of sale. Since the assessee transferred the excess deposit remaining with them to the profit and loss account, it was assessable as a trading receipt. In our opinion, the principle laid down here that where a deposit was made in respect of a specific transaction of trading nature will continue to have trading characteristic and if there was any excess then that excess is a trading receipt will be applicable. The only difference here is that instead of a deposit against the sale to be made by the assessee, here we have the advance given by the assessee against purchases to be made. In this connection, we may point out that neither before the ITO nor before the Commissioner (Appeals) has the assessee given the details of how these excesses arose. However, at the time of hearing Smt. Vissanji, the learned counsel for the assessee, submitted that these amounts were advances given for purchase of milk and dairy products from the villagers and the excess over the price has been written back in the accounting year. For the purpose of disposal of this part of the argument, we will accept that the facts are as submitted by the assessee. Then as against deposits receivable for sale in the reported case before the Bombay High Court, we have advances made for purchases to be effected by the assessee. In both the cases there are excesses. In the case before the Bombay High Court there is an excess over the sale price. In the case before us, there is a deficit of advance given. In either case it is a transaction intimately connected with the trade of the asscssee. If in the case before the Bombay High Court the excess has got the character of a trading receipt, in the case before us the deficit has also the character of a trading receipt. That is because the purchase price payable by the assessee to the villagers is reduced by that extent. Therefore, it goes to reduce the debits in the trading account and increases the profit.
7. The above finding has been given on the basis of the facts submitted before us at the time of hearing. But it is an admitted position that this fact was not before the ITO nor the Commissioner (Appeals). If that is so then the position is that the nature of this write back has at no time been made clear by the assessee. Therefore, it is not open for the assessee, when no facts are given, to urge that at the time of giving the advances it was impressed with the character of a trust money or a loan and it never took the character of a trading receipt. Such an argument is not available to the assessee since no facts are furnished. On this simple factual position, the decision of the Bombay High Court given in the case of Gannon Dunkerley & Co. Ltd. (supra) can be distinguished. Over and above that, we will also accept the further explanation given by Shri Mahadeshwar to distinguish these cases. He has pointed out that in all those cases a mere write back is not tantamount to cessation of liability, because the liability is preserved by other statutes. This is one very distinguishable feature which supports the department's case from other cases relied on by the assessee's counsel.
8. We will now consider the reasons given by the ITO. In other words, we will consider whether there is a cessation of liability. On the background of the facts of the case, i.e., where meagre details are given that the assessee consciously wrote back the amounts and that there are no other statutory provisions which preserve this liability, the fair conclusion would be that there is a cessation of liability. So even on this basis that the provisions of Section 41(1) would be applicable, we will have to uphold the order of the ITO.
9. More or less a similar view has been expressed by the Punjab and Haryana High Court in the case of Haryana Co-operative Sugar Mills Ltd. (supra). There also the assessee was purchasing goods from the suppliers and it had written back an amount of Rs.37,994. As in the case before us, the assessing authority asked for an explanation regarding the income and such write back and the assessee instead of explaining claimed exemption. At page 754 it was observed 'as the assessing authority mentioned that instead of bringing any material on record, the assessee proceeded to claim exemption regarding the said amount and desired to amend the return. So far as the facts which led to him to forfeit the amount are concerned they are within the personal knowledge of the assessee which he had not disclosed. If he had disclosed them, then it could be seen whether in law he was right in forfeiting the said amount and treating the same as his own income'. The assessee's case before us is more or less similar. No details had been furnished before the ITO and it is within his peculiar knowledge as to why he wrote back this amount. Since he had not given the details, it will be open for the department to draw an adverse inference and hold that it is his income.
10. As Shri Mahadeshwar pointed out, the decisions wherein the authorities have held that such write backs could not be brought to tax are easily distinguishable. Two of the earlier decisions on this point are Kohinoor Mills Co. Ltd. v. CIT [1963] 49 ITR 578 (Bom.) and J.K. Chemicals Ltd.'s case (supra). Both these cases dealt with unclaimed balances of the waves (sic). Such balances are protected from being forfeited by other legislations. So the act of the assessee writing back is of no consequences in such cases. The case of Gannon Dunkerley & Co. Ltd. (supra) was not really a case of write back at all. Instead of giving the amounts due to the various suppliers remaining in the ledger in the name of those suppliers they were transferred to an account called 'unclaimed balance account'. The assessee never forfeited it. Nor did he get an advantage by writing it back to the profit and loss account. The case of Sadabhakti Prakashan Printing Press (P.) Ltd. (supra) is also a case of amount due to the workers, i.e., gratuity. The assessee writing it back in the case also makes no difference to the legal position. In these circumstances, we are of the opinion that the order of the ITO must be restored and the departmental appeal allowed.