Bombay High Court
Commissioner Of Income-Tax vs Chase Bright Steel Ltd. (No. 2) on 1 December, 1988
Equivalent citations: (1988)90BOMLR692, [1989]177ITR128(BOM)
Author: S.P. Bharucha
Bench: S.P. Bharucha
JUDGMENT Sugla, J.
1. The following questions have been referred to this court at the instance of the Department under section 256 of the Income-tax Act, 1961:
"For the assessment year 1968-69:
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the deduction for expenditure of Rs. 8,400 being the rent of the guest house, under section 30 of the Income-tax Act, 1961, for the assessment year 1968-69 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to deduct the expenditure of Rs. 6,060 for the maintenance of the guest house under section 37(3) of the Income-tax Act, 1961, for the assessment year 1968-69 ?
For the assessment year 1969-70:
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the deduction for expenditure of Rs. 4,200 being the rent of the guest house, under section 30 of the Income-tax Act, 1961, for the assessment year 1969-70 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to deduct the expenditure of Rs. 2,770 for the maintenance of the guest house under section v of the Income-tax Act, 1961, for the assessment year 1969-70 ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the sum of Rs. 22,275 was not assessable under section 41(1) for the previous year relevant to the assessment year 1969-70 ?"
2. The first two questions raised for the assessment year 1969-70 are identical to those raised for the assessment year 1968-69 except for the amounts mentioned therein. Counsel are agreed that the two common questions are covered by this court's judgment in the assessee's own case for the assessment year 1967-68 in Income-tax Reference No. 99 of 1976, dated November 18, 1988 (see [1989] 177 ITR 124) and that following the said judgment both the common questions have to be answered in the affirmative and in favour of the assessee.
3. Accordingly, the common questions are so answered.
4. Facts pertaining to the third question relating to the assessment year 1968-70 are: The assessee-company credited a sum of Rs. 79,492 to its profit and loss appropriation account. Out of this amount, the assessee conceded that it was liability to pay tax on Rs. 49,959. As regards the balance amount of Rs. 22,275 the assessee-company admitted that this amount represented commission payable to BE Shri G. D. Modi in an earlier year, the amount was allowed as deduction. The commission was not claimed by Shri Modi for the past many years. During the previous year, the assessee-company debited Shri Modi's account and credited its profit and loss appropriation account. Yet, the assessee-company claimed that the amount was not taxable despite the fact that it was written off in the aforesaid manner. The assessee's contention that the act of writing off on its part did not amount to remission or cessation of its liability which was the requirement of section 41(1) of the Income-tax Act, 1961, was rejected by the Income-tax Officer who brought the aforesaid amount of Rs. 22,275 to tax under section 41(1). The Appellate Assistant Commissioner confirmed the inclusion of the amount under section 41(1). On further appeal, however following its earlier order in the assessee's won case for assessment year 1967-68, the Tribunal accepted the assessee's case that the amount of Rs. 22,275 was not taxable as its income under section 41(1) of the Income-tax Act, 1961. According to the Tribunal, its conclusion was fortified by this court's decisions in Kohinoor Mills Co. Ltd. v. CIT [1963] 49 ITR 578, Ambika Mills Ltd. v. CIT [1964] 54 ITR 167 and J.K. Chemicals Ltd. v. CIT [1966] 62 ITR 34.
5. Shri Jetley, learned counsel for the Department, submitted that the Tribunal had not appreciated the decision of this court properly. When certain expenses were allowed as deduction in the past, such amount of expenses is deemed to be the assessee's income under section 41(1) of the Income-tax Act as soon as and to the extent there is remission or cessation of liability in respect thereof. The only question requiring consideration was whether the assessee's liability still continued. In this context, he stated that the assessee's conduct in written off the liability by debiting the account of Shri Modi and crediting correspondingly the profit and loss appropriation account clearly indicated that it had no intention of making payment to Shri Modi even if it was demanded.
6. According to Shri Jetley, the legislative intention as regards this provisions was clear. It was to tax such amounts which were allowed as deductions and which were ultimately not paid and were not to be paid by the assessee. Assuming there was some lacuna in the provisions of section 41(1), he submitted, this court should fill up the lacuna by supplying necessary words in the provisons. In support of his contention, Shri Jetley relied on number of decisions of this court and other High Courts to which we propose to refer in the course of our judgment.
7. Shri Khatri, learned counsel for the assessee, on the other hand, reiterated the reasons given in support of the conclusion. In particular, he urged that the question was squarely covered by the decision of this court referred to by the Tribunal in its order in the assessee's favour. He brought to our notice other decisions of this court and other decisions of this court and other High Courts which, accordingly to him, supported the Tribunal's order. We shall make reference to those judgments also to the extent necessary in the course of the judgment.
8. Section 41(1) of the Income-tax Act, 1961, reads thus:
"41(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 the 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."
9. Broadly speaking, the sub-section applies only if, (i) an allowance or deduction had been made in the assessment for any year in respect of the loss. Expenditure or trading liability incurred by the assessee and (ii) in subsequent years, the assessee had obtained any benefit in respect of the amount so allowed as deduction by way of remission or cessation. As regards the first condition, admittedly, the amount of Rs. 22,275 represented commission claimed as payable by the assessee to Shri Modi in one of the past assessment years and the assessee's claim for deduction was allowed went a credit entry was made in favour of Shri Modi. As regards the second condition, there is, of course, a dispute between the parties. According to the Department, the liability being barred by limitation and the assessee having written it off by correspondingly crediting its profit and loss appropriation account, ceased or got remitted within the meaning of section 41(1) of the Act. The assessee contends that it is not so. When a liability is barred by limitation, what happens is that the remedy of the creditor is barred. The liability of the debtor (in this case the assessee) is never barred so long as he had the intention of honoring the liability.
10. For appreciation of the rival contentions in this regard, it is desirable to first refer to the judgments of this court railed upon before us. The first judgment cited is in the case of Kohinoor Mills Co. Ltd. v. CIT [1963] 49 ITR 578. In that case, the income-tax authorities had concluded the amount of Rs. 30,190 in the income of the assessee on the ground that the liability pay had ceased by reasons of the expiry of the period of three years. The assessee had not written off the liability in its accounts. It was on these facts that this court held that merely because the remedy of the creditors to recover the amount is barred, the assessee's liability did not cease and that, therefore, the amount was not taxable under the provision of section 10(2A) of the Income-tax Act, 1922, corresponding to section 41(1) of the Income-tax Act, 1961. The second decision is J.K. Chemicals Ltd. v. CIT [1966] 62 ITR 34. In this case, certain amounts were add owed as deduction in the past in respect wages, salary an bonus payable to the employees. The liabilities in respect thereof were written off during the previous year, the remedy was apparently barred by limitation. The Department's contention that the liabilities had ceased and section 10(2A) of the 1922 Act (corresponding to section 41(1) of the new Act) was applicable was rejected by this court observing at page 41 as under:
"....... The question to be considered is whether the transfer of these entries about a remission 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 honor 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 his creditor. Transfer of an entry is neither an agreement between the parties not payment of the liability."
11. Thus, this court, in its above judgment, held that the cessation of the liability may occur either (i) by reason of operation of law, i.e., on the liability being unenforceably at law by the are creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor, or (ii) by contract between the parties, or (iii) by discharge of the debt - the debtor making payment thereof his creditor. There are, thus, three alternative situations contemplated in this decision which would result in the cessation of the liability. However, in that case, the liability pertained to wages, salaries and bonus due by an employer to his employees in an industry so much so that the provisions of the Industrial Disputes Act were attracted and consequently the bar of limitation did not come in the way of the employees. In these circumstances, this court held that there was no cessation of the liabilities and, therefore the amounts could not be treated as income of the assessee under section 10(2A) of the Indian Income-tax Act, 1922.
12. In Gannon Dunkerley and Co. Ltd. v. CIT [1976] 102 ITR 428, this court held that neither remission not cessation of liability could take place by unilateral act on the part of the debtor and, therefore, merely because the amount was transferred from "unclaimed balances account" to "reserve for taxation account" it will not become taxable under section 10(2A) of the Act of 1922. That the decision was given on the facts of that case is evident from the emphasis laid on the fact that some payments were made out of these accounts as and when demanded by the parties and for this reasons the transfer of amounts from "unclaimed balances account" to "reserve for taxation account" did not mean cessation of liability. The question involved in the case of CIT v. Batliboi and Co. Pvt. Ltd. [1984] 149 ITR 604, was not regarding the remission or cessation of liability at all. It was whether the surplus deposits made by the customers were trading receipts in the hands of the assessee. It was held that the excess deposit were to held by the assessee for the benefit of the depositors. The deposits were in respect of specific transactions of sales and were adjusted towards the purchase price of the machinery sold. It had close connection with the transactions of sales. Since the assessee transferred the excess deposits remaining in its hands to the profit and loss account during the previous year, such excess amounts were assessable to tax as trading receipts in the hands of the assessee. The provisions of section 10(2A) of the old Act of 1922 and section 41(1) of the new Act of 1961 were not even referred to and/or examined in this decision.
13. To sum up, so far as these court is concerned, the settled legal position appears to be what was stated by this court in its judgment in J.K. Chemicals Ltd.'s case [1966] 62 ITR 34. The liability of an assessee does not cease merely because the liability has become barred by limitation and the assessee has unequivocally expressed it intention not to honour the liability even when demanded. Essentially, therefore, it will always be a question of fact whether or not the assessee has expressed unequivocally his intention not to honour the liability after it has become barred by limitation. In a given set of facts, a finding either way may be possible. In the instant case, the departmental authorities have assumed that the assessee has not intention of honoring the liability on demand from the mere fact of the assessee's writing off the liability and crediting the amount to the profit and loss appropriation account. The Tribunal has held that the liability did not cease. We have to answer the question on the basis of the facts found. In the circumstances, so far as this case is concerned, it will not be possible for this court of interfere.
14. The decisions of other High Courts cited before us do not carry the matter further, because they followed the earlier decisions of this court.
15. Accordingly, the third question relating to the assessment year 1969-70 also is, on the facts, found answered in the affirmative and in favour of the assessee.
16. No order as to costs.