Income Tax Appellate Tribunal - Delhi
Vraj Lal Mani Lal And Co. vs Deputy Commissioner Of Income-Tax on 6 November, 1992
Equivalent citations: [1993]44ITD413(DELHI)
ORDER
A. Kalyanasundharam, Accountant Member
1. The assessee, a registered firm had filed this appeal against the order of the CIT(A), aggrieved by his confirmation of including Rs. 2,92,12,829 as income under Section 41(1) of the Income-tax Act. The plea of the appellant is that, the Provident Fund Commissioner, had raised demands towards the PF liability, over the years from 1962. The PF Commissioner, in the relevant previous year, had revised the persons who could be categorised as its employees, and consequently the demand regarding the contributions on account of PF of its employees, was revised, and to the extent of Rs. 2,92,12,829, the liability got reduced. The claim of the appellant firm was that, the reduction in demand by the Provident Fund Commissioner, had two elements. The first element represented Rs. 2,26,41,195, a liability, that was taken over from Delhi Tambakoo Udyog Pvt. Ltd. (DTU) and the second element represented, the liability that was provided by the appellant firm, in its books over the years. The appellant firm, had claimed that, the liability that was provided by DTU in its books, was never claimed as a deduction by the assessee, in computing its income in any of the earlier years and therefore, it could not be treated as its income under Section 41(1) of the Act. The appellant had raised the issue that, Rs. 65,71,630, representing PF contributions provided and deduction allowed to it in the earlier years, did not cease to be its liability, and therefore, could not be treated as income under Section 41(1) of the Act.
2. Shri Agarwal, the learned counsel for the appellant, however, fairly conceded that, the claim of the appellant, to the extent of Rs. 65,71,630, has no merit. He submitted that, assessee was allowed deduction to that extent, and consequent to the determination of the actual liability of Provident Fund, the said provision no longer represented any actual liability, because, it stood remitted and there is cessation of liability. He contended that, he would press the claim of the appellant regarding the amount of Rs. 2,26,41,195 only. We therefore, approve the inclusion of Rs. 65,71,930 as income under Section 41(1) of the Act. The facts regarding the issue are that, the appellant firm was carrying on the manufacture of bidis. The entire manufacturing activity was centered around the small villages around Sagar, in Madhya Pradesh. The bidi manufacturing was given over to DTU, in 1971, vide an agreement between the assessee and DTU on September 23, 1971. DTU continued manufacturing of bidis till December 11, 1981, on which date, the appellant reacquired the bidi manufacturing. The bidi manufacturing was carried out with the help of contractors, who provided labourers, who would work in their homes. These labourers were called 'Home Workers' and they would be paid for their labour through the contractors called 'Sattedars', who had hired them.
3. The Central Govt. issued a Notification No. 4(9)/66-PF-II dated May 17, 1977 & CSR No. 660, extended to applicability of the Employees PF Act & Scheme, 1972 to the bidi manufacturing industry. The notification did not indicate that, the Act & Scheme, covered even 'Home Workers" and therefore, these 'home workers' were reluctant to join the scheme. DTU sought clarification from the PF Commissioner, vide its letter of June 30, 1977. The PF Commissioner replied vide his letter dated July 11, 1977, stating that, the Act & the scheme extended to all employees, regular or otherwise, irrespective of their place of work. The PF Commissioner issued a general circular reiterating the above dated November 29, 1977 and directed to enroll all eligible employees as members, deposits the moneys, file the returns on monthly basis. This circular also clarified that, the term 'employees' covered any person employed or through a contractor in or in connection with the work of the establishment. DTU and the MP Bidi Udyog Sang, filed writ petition to the High Court, against the notification of May 1977, which was dismissed on August 5, 1977. Special leave petition was moved to the Supreme Court against the dismissal order of the High Court. M/s Mohan Lal Hargovindas Products (P.) Ltd., a member of the M.P. Bidi Udyog Sang, applied under Section 26B of the Provident Fund Act & Scheme to the Regional PF Commissioner, for the determination of applicability of the scheme to 'home workers', but there was no response.
4. Pending the decision of the Supreme Court, DTU and other bidi manufacturers, the contractors (Sattedars) did not permit any deduction from the payments made to them, for labour charges of 'home workers'. Since, DTU did not deduct the PF contribution from the payments made to these 'home workers' through the Sattedars, as per the provisions of the PF Act & Scheme, the employer became liable to make good the contributions of the employees, as well as that of the employer, though, it had not made any deduction. Further, the Act & Scheme, prevented recovery of the contributions so made, on behalf of the employees, from them. The High Courts stayed the recovery of the dues, pending the decision of the Supreme Court. DTU had made provisions in its towards the share of these 'home workers' and covering the employers equal share, for the assessment years 1978-79 to 1982-83, aggregating to Rs. 2,26,41,195. In the assessment year 1978-79 the provision was not allowed to be deducted by the assessing officer, but, the first appellate authority had allowed the deduction. The Revenue carried the matter in appeal to the Tribunal and the Tribunal, considering the above facts, vide its order dated November 29, 1980, upheld the order of the first appellate authority, and confirmed the allowing of the deduction of the contribution towards the employees share & the employers share for 'home workers'. The reasoning was that, the liability was statutory in nature and applied the ruling of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIF [1971] 82 ITR 363. The similar provisions made in the assessment years 1979-80 to 1982-83, were allowed on the above basis.
5. The business of bidi manufacturing was taken over by the appellant firm, vide agreement dated December 11, 1981, along with all the assets and the liabilities, attached to that business. The firm from that date, had carried on the business of manufacture of bidis, on similar lines as was carried by DTU, i.e., through 'home workers' provided by 'Sattedars'. The assessee had provided in its accounts for the assessment year 1983-84 (accounting year ended Diwali 1982), the liabilities towards contribution towards P.F. both for employees and employers share, of home workers' and was allowed deduction from its assessable income.
6. The Supreme Court vide its order dated September 25, 1985, had held that, 'home workers' would fall within the definition of employees, as defined under the PF Act. The Bidi Manufacturers Sang, had approached the Regional PF Commissioner for determination of the actual liability and it was some time in 1991, that, PF Commissioner, could decide, the exact quantum of the liability and as a consequence, the liability to the tune of Rs. 2,92,82,189 was no longer payable contribution towards provident fund. This amount of Rs. 2,92,82,189 comprises of liability provided by DTU for Rs. 2,26,41,195 and the liability provided by the appellant firm for Rs. 65,31,730.
7. The Revenue had sought to bring to tax under Section 41(1) of the Income-tax Act, 1961 the entire amount of Rs. 2,92,82,189, on the basis that, it was remitted in favour of the appellant and therefore, the liability had ceased. The Assessing Officer (A.O.), in his order, had made reference to the provisions of PF Act, and observed that, the assessee had not paid any dues for the period from 1977 to 1985. He had also observed that, as of January 1, 1988, all the available records had been checked and the dues had been ascertained. A.O. had also observed that, according to appellant's letter dated May 25, 1990, It had no records of the 'home workers.' A.O. had observed that, consequent to the decision of the Supreme Court in 1985, the appellant had no option, but, to maintain the record of the 'home workers', fixing their precise identity and eligibility. A.O. had considered the fact that, DTU was a concern in which, the partners of the appellant firm were directors. He observed that, because of the agreement with DTU In 1971, DTU was to manufacture bidis according to the specification of the assessee-firm, and to bear the trade mark of the firm. He also noted that, according to the agreement, the firm could also supply to DTU, the tendu leaves, labels and the tissue papers.
8. A.O. had also noted the fact, that the reading of Clause 4 of the agreement entered into on December 1981, indicated that, the assessee-firm, had not only taken over the firm, but, also agreed to satisfy & discharge, all the debts & liabilities of DTU and shall indemnify DTU against all accounts, proceedings, claims & demands relating to the liabilities & claims, as well as shall be exclusively entitled to benefit, if any, as a result of remission or cessation thereof. A.O. had made reference to the order of the Tribunal in the case of DTU, for the assessment year 1978-79 and placed reliance on the operative part of the decision, which stated, "if any recovery is made from the worker subsequently or any refund is given to the assessee by the authorities as a result of final decision regarding the liability the amount could be assessed in terms of Section 41(1)". The A.O. had observed that, "it is precisely in keeping with these directions of the ITAT the balance amount is now sought to be taxed under Section 41(1)".
9. A.O. also considered the objection of the appellant that, the amount that stood remitted, which was equal to the deduction that was allowed in the hands of DTU, could not be brought to tax under Section 41 (1) in its hands by placing reliance on the Supreme Court in Saraswati Industrial Syndicate Ltd. v. CIT[ 1990] 186ITR 2781. A.O. had observed that, as per Clause 4 of the agreement of take over of the business, the appellant had taken over the assets & liabilities, and had agreed to indemnify DTU against any further liabilities, and to be exclusively entitled to the benefit, arising, consequent upon any remission, etc., and therefore, it was not a case of merger, as was the case in Saraswati Industrial Syndicate Ltd. (supra). He had observed that, the observation of the Supreme Court that, the scheme had to be read with the terms of the agreement, was relevant. He also observed that, the agreement for take over of the bidi manufacturing was collusive in nature, because it was carried on by the assessee up to 1971, after which it was temporarily transferred to DTU, which continued it till 1981, and in 1981, it was procured back in 1981, for a paltry consideration of Rs. 5 lakhs. He had further observed that, two concerns were the same, though, had different names and were different entries in the eye of law. He had further observed that, the appellant had prior knowledge of the remission, and that, the transfer, followed by re-purchase was nothing but a convenient arrangement to evade the tax liability, that would arise, consequent upon the remission of any liability.
10. He was of the opinion that, transferring the liability between two family concerns, cannot become via media to evade tax. He further observed that, the provisions of the law cannot be construed narrowly, so that, huge incomes would escape taxation. A.O. placing reliance on the Gujarat High Court decision in Motilal Ambaidasv. CIT [1977] 108 ITR 136, observed that, Section 41(1) cannot be construed narrowly and tax liability cannot be avoided. He then referred to the Supreme Court ruling in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148, wherein, it was observed that, assessee could not evade tax liability by the use of colourable devices. He had accordingly concluded that, the predecessor and the successor are from the same family group and that, the final amount having been quantified, so intimated to him, and therefore, treated the amount of Rs. 2,92,82,189 as income under Section 41(1) of the Act.
11. On appeal, the assessee sought to file additional evidence, in support of its claim that, the PF Commissioner, was still in the process of determination of the final liability, and that, even in 1991 assessee has been pursuing the same. CIT(A), made reference to the Supreme Court decision in Mr. Ramaniijam, Secretary, Dist. Bidi Workers Unionv. State of Tamil Nadu, for the proposition that, the beneficial legislation in the interest of the workers had not been implemented in its true spirit. CIT(A) was of the opinion that the claim of PF is at best an abstract liability and at worst obscure claim. CIT(A), in para 24 of her order had observed, "On the one hand they do not want to pay the benefits to the workers and on the other hand they want to misrepresent before the department that certain amounts may have to be paid in the future. The dues to be enforceable have to be crystallised. In the facts and circumstances of the case I have no hesitation in holding that the claim of the appellant in only a ploy to deprive the Govt. of its revenue on the one hand and the employees of their dues on the other hand". CIT(A), accordingly confirmed the treatment given by the A.O. and dismissed the appeal.
12. Shri Agarwal, the learned counsel for the appellant firm, submitted that, the authorities at the lower level, had disregarded the provisions of Section 41(1) of the Act totally. He contended that, the lower authorities, had no dispute to the fact that, assessee was not allowed any deduction for Rs. 2,26,41,195. He submitted that, the word 'assessee' appearing in Section 41(1) of the Act, refers to that assessee, in whose hands, the deduction was allowed in the earlier assessments. He contended that, identity of the assessee, to whom deduction was allowed and in whose hands the remitted liability is sought to be treated as deemed income, have to be the same. He pleaded that, it is not possible to tax something, which was remitted, resulting in cessation of liability, unless, the provision of such liability, was allowed to be deducted in the computation of income, in any of the earlier assessment years. He pleaded that, the logic of the law maker is very clear, because, but for the situation that existed, when the claim for deduction was made, it would not have been allowed, and as a consequence, when, the liability had ceased, the earlier deduction needed to be nullified, which was possible only by treating the cessation as deemed income. He pleaded that, the only condition that needs to be met for the application of Section 41(1) of the Act, is that, the person, who was allowed the deduction and the person, in whose hands, the amount remitted was taxable, have to be the same. He contended that, this section, requires the existence and continuance of an assessee.
13. Shri Agarwal, contended that, the Revenue, could not have taxed the appellant firm, the amount that was allowed as deduction in the assessment of DTU. He contended that, the observation of the lower authorities, that, the appellant firm, has carefully planned everything, knowing fully well, as far back as 1981, when it took over the business of bidi manufacturing, that the liability of PF would get substantially get reduced, has no basis. He contended that, in assessment year 1983-84, the consideration of Rs. 5 lakhs, paid to DTU was found to be adequate and the revenue had no quarrel on that account. He submitted that, according to Clause 4 of the agreement of take over, the appellant firm was to indemnify DTU of any further liability and therefore, any reduction in any of the liability, was also to be retained and not to be passed over to DTU. Since, the appellant firm, had taken over the business of manufacturing of bidis enblock, the assets as well as the liabilities, attached to the business had to be taken over, and there was no other alternative. He contended that, the liability towards PF of home workers' had continued and it was merely as a result of recalculation that, the amount of Rs. 2,26,41,195 was determined as not payable any longer. He contended that, the lower authorities, had repeatedly used the words of collusion, preplanned affair of two inter-related concerns, only to evade the tax, knowing too well that, an item of receipt, unless, it bears the character of income, could not have been brought to tax. He submitted that, with the use of certain words, the character of the amounts could not be changed and therefore, could not alter the fact that, the amounts were not allowed to the appellant firm as a deduction in the computation of its income. He submitted that, the Supreme Court in Saraswati Industrial Syndicate Ltd. 's case (supra) had clearly held that, the person in so far as assessment under the Income-tax Act, is concerned, is distinct from another person. He submitted that, Supreme Court (supra) had, clearly held that, for purposes of applicability of Section 41(1) of the Act, the identity of the assessee in whose hands, the deduction of a trading liability, was allowed in the earlier year and in the subsequent year in which the benefit is derived must be the same. They had further observed that if there had been change in the identity, there would be no tax liability under Section 41(1) of the Act. He therefore, contended that, since, DTU and the appellant firm are not having the same identity, in so far as the assessments under the Act, and the deduction of liability not having been allowed to the appellant firm, in an earlier, the benefit of reduction in the liability so received, in the assessment year under appeal, could not be brought to tax under Section 41(1) of the Act.
14. Shri A.K. Gupta, the learned departmental representative, vehemently supported the orders of the lower authorities. He contended that, the observation of the A.O. that, the giving over of the bidi manufacturing to DTU in 1971, and it subsequent buy back in 1981, was a well thought of plan, only to defraud the revenue of its rightful dues. He contested that, the Tribunal in the case of DTU, had very categorically observed that, in the year of remission, the amount remitted has to be treated as income under Section 41(1) of the Act. He strongly contended that, the transfer in 1971 and re-transfer in 1981, was nothing more than a substitution of the names for one another, because, the business of manufacturing of bidis, had continued all along right from the time, the appellant firm had commenced manufacturing bidis before 1971. He contended that, the liability and its remission have to be related to the business and not to the person, in whose hands, its income was assessed. He pleaded that, the appellant firm had taken over the business in 1981, along with the assets and liabilities, as also any future liabilities and future reduction in them. He contended that, in view of such take over, the 'home workers' and their liability, also was the subject matter of such an agreement. He contended that, if the take over was limited to business and not of the employees liabilities, then, it would have indicated that, the transaction was not intended to evade the tax. He pleaded that, if only if, DTU had culminated the agreement with 'home workers', which would have brought to close, the employer-employee relationship, it would have been for DTU to ensure compliance of the PF Laws. Since, this was not so done, the firm and DTU, had prior knowledge that, the liabilities that were provided in the books of DTU, were entirely imaginary and not real, and it was a case of clever planning, by getting all of such imaginary liabilities as deduction, thus, reducing the tax liability in those years in the hands of DTU and at the same time, by showing as if the business was retransferred to the firm, and getting the benefit of remission in such imaginary liability, again avoiding the tax liability. He contended that, the so called transfers in 1971 to DTU and its re-transfer to the appellant firm in 1981, were mere book entries, and in reality, there was never any transfer of any business at all. He pleaded that, it was amply clear from the fact that, DTU manufactured bidis only for the appellant firm and under its trade mark. He pleaded that, it would not be proper for any court to hold that, those transactions of transfer were legal and to hold that, the identities of DTU and the appellant firm are not the same. He pleaded that, the facts clearly go to prove the mala fides of the assessee, in colouring the transaction to make it appear to be genuine one.
15. We have given our very careful consideration to the rival submissions and have also perused the materials that are placed on our record and to which our attention was drawn as related to the issues in appeal. The undisputed facts are that, PF Commissioner, had quantified the amount that should be deposited by the appellant firm, covering employees and employers share, on account of'home workers'. As a consequence, the liability that had been carried forward for the assessment years 1978-79 to 1982-83 to the extent of Rs. 2,26,41,195, had become free from being paid or deposited with the PF Authorities. It is also not denied that, the liability that was provided in the various assessment years, was properly made in those years. This is borne out from the order of the Tribunal in the case of DTU, for the assessment year 1978-79, a copy of which is placed at pages 94-106 of the paper book.
16. The question as raised before the Tribunal was, "whether payments of Rs. 8,77,772 & Rs. 7,59,801 representing assessee's liability under the PF Act in respect of the regular workers and home workers respectively could be allowed as a deduction". The revenue, in its appeal, had only question about the allowability and never had raised the issue, on the amount as excessive. We are therefore, too late in the day, for the revenue to claim that, liability was allowed excessively, knowing fully well that, in a later year, it would get reduced.
17. The other undeniable fact is that, when DTU took over the manufacturing of bidis, i.e., in the year 1971, PF Act was not applicable and it was only from 1977, it got extended so as to apply to the bidi manufacturers. In 1981, when, the appellant firm, took over the manufacturing business, the applicability of the PF Act to all the bidi manufacturers, was still in liquid state, because, the Supreme Court was seized of the matter. It was in 1985, that the matter got resolved, which was after about four years from the date of take-over of the business, by the appellant firm. It was only in 1985, that, Supreme Court had held that, employees would cover even 'home workers'. The various bidi manufacturers association, as well as the various bidi workers union, had both carried the issue to the Supreme Court the former denying the applicability to 'home workers' and the latter strongly supporting its claim that, the PF Act extended to and covered all workers, including 'home workers'. The manufacturers, had claimed that, 'home workers' were not their regular employees, but, contract labourers, who keep on either changing or who move from place to place. This was based on the fact, that, they had contacts with contractors of labour, called 'Sattedars', and that, the individual labourers, was the responsibility of the 'Sattedars' and not of the assessee. The workers, on the other hand contested that, it was a manner of functioning and they had not realized that, they are being deprived of their valuable rights to the several benefits.
18. It is also not denied that, the revenue had no material on the record that indicated that the 'home workers' desired to be treated as regular employees and had called for fixation of their rights. The perusal of the order of the Tribunal in the case of DTU, rather indicates that, the company had provided for the liability on account of employees and employers share. This was according to the provisions of PF Act, which makes it compulsory for the employer to deposit that amount, which he had failed to deduct from the employees pay, out of his funds, but, he could not subsequently recover it from the employee, unless, the employee agrees. If the 'home workers', through their 'sattedars', had agreed to the manufacturer, deducting, that portion, representing the contributions to be made towards their share, there would not have been any necessity for the manufacturers to provide for the employees share, that was not allowed to be deducted from their pay.
19. We are therefore of the opinion that, (a) when the provisions to meet the liability as were made in the accounts, to meet the requirements of the PF Act and in compliance thereof, was justified in spirit, and in quantum and (b) it was never the case of the revenue that, PF authorities, had determined the liability in those years at a different figure, it would be a mere allegation without any material in support thereof that, the huge liabilities were provided in the books to hoodwink the revenue authorities, with prior knowledge that, it did not represent the true liability.
20. The other argument of the revenue that, giving over of the manufacturing in 1971, and its subsequent take over in 1981, was a well thought of plan, to evade the tax liability, on the huge income, that flowed from the take over, is based on Clause 4 of the agreement of take over in 1981. In this connection, it would be worthwhile to note that, way back in 1971, when DTU took over the manufacturing business, the revenue had knowledge of the fact that, the Directors of DTU are partners of the assessee firm. The revenue also was aware of the fact that, DTU was to manufacture bidis according to the specifications of the appellant firm, and that, the bidis would be marketed under the trade name of the appellant firm only. The assessments had been framed on DTU on the manufacturing activity and on the appellant firm for the period during which, the manufacturing was carried on by DTU. It has never been the case of the revenue that, for the period 1971 to 1981, it was held that, the agreement for handing over of the business of manufacture of bidis, by DTU, was a sham transaction and appeared only on paper.
21. It was also in the knowledge of the revenue, that in 1981, when the appellant firm, had taken over the business of manufacture of bidis, along with all assets and liabilities, the two concerns were related concerns. It is not denied that, the appellant firm and DTU had been carrying on with the manufacture of bidis, under the same circumstances, as existed before 1971 and between 1971 to 1981. The assessments, as have been framed on the appellant firm, for the assessment years from 1983-84 to 1988-89, contained no remark that, the agreement of take-over was a sham transaction, because the manufacturing unit, had all along remained with the assessee-firm.
22. We are therefore, of the opinion that, when the initial handing over in 1971, was a genuine transaction and similarly, the take-over in 1981, was a genuine transaction, then, after some lapse of time, the character of the transaction from being genuine, could not become non-genuine. The genuineness or otherwise of transaction of giving over and take over, would be relevant only at the point of giving over and the take over and thereafter, it would lose all its relevance, because, the subsequent events or developments, could be related to the circumstances that existed at the relevant point of time of the transaction.
23. The allegation of the transactions of giving over and take over as a sham or non-genuine one, has been raised, because, in the assessment year under appeal, the PF Commissioner, had determined the actual liability, which resulted in substantial reduction of the amounts that have been carried forward over the years, on that account. This allegation is supported with the emphasis on Clause 4 of the agreement of take over in 1981, which is reproduced for the sake of facility :
That V.M. & Co., shall pay, satisfy and discharge all the debts and liabilities of the Vendor in respect of the said bidi manufacturing business subsisting on the date aforesaid and V.M. & Co., shall indemnify the Vendor against all accounts, proceedings, claims and demands in respect of and relating to the said liabilities and claims as well as be exclusively entitled to benefit, if any, on account of remission or cessation thereof.
24. The contention of the revenue is that, the words, 'be exclusively entitled to benefit, if any, on account of any remission or cessation thereof, has been so introduced in the agreement of take over, with total awareness of the fact that, the liability provided in the accounts of DTU and carried over by the appellant, was provided much more than the actual amount payable, and as and when, the actual amount payable is determined, there would be substantial benefit, in the shape of remission and cessation. The revenue claims that, this benefit was foreseen in 1981, and the two concerns, realized, that, if the status quo was maintained, then, DTU would have ended up paying tax on the determination of the actual liability. It was this realization, by the assessee firm and DTU, that the plot was hatched in 1981, and the picture of take over was painted, so as to implant the existence of two distinct assessees, and put forth the claim as was advanced by the appellant firm presently. It is claimed that, the transaction of giving over in 1971 and take over in 1981, was so depicted, solely with the view to evade the tax on accrual of benefit, consequent upon the reduction in the actual amount payable to P.F. Authorities.
25. We may observe that the claim as put forth, by the revenue, does bring out some interesting argument, but, it remains merely an argument, without any substance in it. The Clause 4 of the agreement, which has used the words of entitlement of any benefit that might accrue from the liabilities, upon its remission and cessation, are a normal precaution taken by the buyer, who takes over all of his predecessors' assets and liabilities, agreeing to indemnify him from all the liabilities, demands, claims etc. We are therefore, of the opinion that, nothing comes out from these words, to suggest that, the agreement was a sham.
26. As had been observed in the earlier paragraphs, it is too much to claim that, the two parties, had effected a perfect plan of claiming deduction of huge amounts as liability, give over the business enblock to another, with clear foresight of the benefit of reduction in liability flowing to the purchaser, a few years after the take over. If the provisions as were made by DTU in the asst. years 1978-79 to 1982-83, were properly made, as per the requirement that existed at that time, and subsequently, if the P.F. authorities, after a lapse of over eight years, recalculate and inform of a different amount as liability, then, no blame would lie upon the assessee, for providing in excess and claiming it as a deduction, more especially, when, the revenue had never challenged on the quantum aspect at all, in those years. We have no doubt in our minds that, when there are transactions involving two related concerns, similar to those in the instant case, microscopic examination is necessary, but, to claim that, the transaction was a sham, after a lapse of few years, in the course of proceedings of another asst. year, which circumstances never existed, when the transaction took place, would be altogether improper.
27. The revenue had advanced the various arguments, for the sole purpose of bringing to tax the reduction in the liability that was carried forward from DTU and the amount as was provided by the appellant firm in its books for the asst. year 1983-84. Insofar as, the liability provided by the appellant firm, which got reduced, the assessee had conceded that, it could not support its claim, that the amounts could not be brought to tax under Section 41 (1), because, the assessee, in whose hands, the deduction was allowed and who has received the benefit, happens to be the same person.
28. As regards the amount carried forward from DTU, the revenue, has no dispute that the person, in whose hands deduction was allowed was the limited company' and the person, who had reaped the benefit from the reduction of liability, is the appellant firm, and they are distinct persons, insofar as the Income-tax Act is concerned. Revenue, realizing that, benefit had not been received by the limited company, which is the basis for invoking the provisions of Section 41(1) of the Act, had evolved the concept of transaction being sham and non-genuine.
29. Section 41(1) of the Act provides that, "where an allowance or deduction has been made in the asst. year 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 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, 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 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".
30. The reading of the above clearly indicates that, the assessee, who had been allowed deduction in any asst. year, of any loss, expenditure or trading liability, and in any subsequent previous year, the assessee has obtained any benefit in cash or otherwise, some benefit in respect of any trading liability by way of remission or cessation, then such benefit so accruing to the assessee, would be chargeable as profits and gains from business. This section is based on the principle of accrual, i.e., mercantile system of accounting. This enactment had considered the possibility of disputes arising in business, regarding the quantum, due to quality etc., and the purchaser demanding compensation or reduction in the value, and such similar circumstances. Since the initial liability to pay is according to agreement between the two parties, it had to be allowed in that year. However, when the claim was accepted in a subsequent year, which being in relation to the original contract, has the effect of reducing the contract value, then such benefit so received in a subsequent year, was to be treated as income from business. The law maker, also had realized that the settlement of disputes do take a long time, by which the business of the assessee may or may not be in existence, which was why, it has been provided in Section 41(5} of the Act, that, business to which the loss, expenditure or trading liability was related to, it is not necessary that, such business should exist, in the year, when the benefit was obtained. The law maker had clear conception of the situation that the assessee, who had been allowed deduction in a year, if obtains any benefit, in relation to the deduction allowed, it would be treated as income from profits and gains, irrespective of the fact, as to whether, that business of the assessee, to which the deduction was related to, existed at the time of obtaining of the benefit.
31. The concept of deduction and treatment of benefit in relation to that deduction, is concerning one and the same assessee. If this was not so intended, as advanced by the revenue, then, Section 41(1) of the Act, was totally unnecessary, instead, they could have provided it under Section 28 of the Act, where the definition of profits and gains from business or profession has been provided.
32. The concept of identity of the assessee, at the time of deduction and at the time of reaping of the benefit, was examined by the Supreme Court in Saraswati Industrial Syndicate Ltd. 's case (supra) and it was held that Section 41(1) would be attracted, only if, the identity of the assessee remains the same and not otherwise. In this decision, the earlier ruling of the Supreme Court in CIT v. Hukumchand Mohanlal [1971] 82 ITR 624, was touched upon, where, subsequent to the death of the husband, the wife had carried on the business, and the nature of refund of sales tax, in the hands of the wife, when the sales tax was paid by the husband, and allowed as deduction, in his assessment. In that case too, it was held that, the assessee, in whose hands, deduction was allowed and the assessee, who had received the benefit, not being the same, the wife could not be made liable for the refund of sales tax, as deemed income from profits and gains from the business.
33. The revenue had considered the ruling of Supreme Court in Saraswati Industrial Syndicate's case (supra), but, insisted that, the terms of the agreement between the parties are relevant. Since, Clause 4 of the agreement to take over indicated that, it is the assessee-firm, who would be entitled to any benefit, as a result of remission or cessation of trading liability, the revenue, contended, this clause, gave it, the right to treat the income as deemed profits under Section 41(1) of the Act. The reading of the order of Supreme Court in Saraswati Industrial Syndicate Ltd.'s case (supra), does not even suggest that, Section 41(1) could be invoked, at the instance of the successor assessee, if he agrees to be assessed in respect of the benefit received by him, though, deduction was not allowed to him. A representative acts for and on behalf of the person, whom he represents, indicating the assessee, remains the same. A sviccessor in business follows his predecessor, and therefore, they can never have identical identity. As regards the terms of the agreement, we may observe that, if DTU had merely transferred the business of manufacturing of bidis, but, had terminated all of its contracts with 'home workers', then, the benefit of reduction in the amount payable on account of P.F. would not have flowed to the assessee-firm, but, to DTU. In case the agreement to take over provides that, the vendor would meet all of his liabilities of his business till the point of sale and also entitled to all the benefit of any remission or cessation to any liability, though, may arise subsequent to the point of sale, then, the successor would not have obtained the benefit of any remission. The reference to the reading of the agreement, is from the point of view of appreciating the rights & liabilities of the parties to the agreement. Invariably, in contracts of purchase or take over of the business enblock, with all assets and liabilities, with all possible actions and demands continuing, arising, do provide such similar clauses of the buyer, would be entitled to retain any benefit arising as a result of reduction in any liability. Financial Institutions, many a time, to ensure its principal amounts, propose for a take over by another group and suggest foregoing of the outstanding interest, rescheduling of the repayment of principal, etc., and it becomes quite attractive terms in many cases. We are, therefore, of the opinion that, since in the instant case, the agreement indicated that, the appellant firm would be entitled to the benefit of any remission or cessation of any liability, and further, since, it was not allowed the deduction of the liability to the extent of Rs. 2,26,45,195, the remission in the liability, in the asst. year under appeal, could not be treated as deemed profits and gains from business and profession.
34. In the result, the appeal is allowed in part.