Delhi H.C : Whether, on the facts and in the circumstances of the case, provisions of s. 41(1) of the IT Act, 1961, are attracted in respect of the amount of Rs. 18,255 representing refund of additional licence-fee received from the excise department ?

Counsel Appeared

Sanjeev Khanna with Ajay Jha, for the Petitioner : None, for the Respondent

JUDGMENT

ARIJIT PASAYAT, C.J.:

Pursuant to directions given by this Court under s. 256(2) of the IT Act, 1961 (for short the ‘Act’), following question has been referred at the instance of the Revenue, by the Appellate Tribunal, Delhi Bench ‘C’ (in short the ‘Tribunal’), for opinion of this Court :

“Whether, on the facts and in the circumstances of the case, provisions of s. 41(1) of the IT Act, 1961, are attracted in respect of the amount of Rs. 18,255 representing refund of additional licence-fee received from the excise department ?”

2. Factual position in nutshell is as follows. Assessee is an individual who was carrying on business under the name and style of M/s Baldev Raj & Sons. Previously M/s Baldev Raj & sons was the name and style of a partnership firm of which M/s Lal Chand, Kidar Nath, Madho Ram, Bishamber Prashad and B.S. Chawla were the partners. Assessee was the successor to the business which was being carried on by the said firm. Said firm was required to pay certain additional licence-fees imposed by the excise department during the asst. yr.1968-69. Subsequently a part of the duty was refunded by the excise department out of which Rs. 18,255 were received by the assessee being the successor of the partnership-firm. Assessee took the stand that assessment of the firm which had paid the additional fees was still pending consideration and the expenditure may not be allowed as a deduction in its assessment. ITO found that since firm’s assessment was complete and the expenditure had been allowed in appeal, provisions of s. 41(1) of the Act were clearly applicable. Accordingly, he treated the said amount as liable to be taxed under s. 41(1) of the Act. Assessee carried the matter in appeal before the Appellate Assistant Commissioner (in short the ‘AAC’). Said authority directed exclusion of the amount from assessment. He was of the opinion that the refund could only be assessed in the hands of the firm in whose case it was allowed as an expenditure. Matter was carried in appeal by the Revenue before the Tribunal. Revenue’s stand was that assessee being the successor was liable to be treated at par with the firm and the aforesaid s. 41 (1) was clearly applicable. Reference was made by the assessee to a decision of the apex Court in CIT vs. Hukumchand Mohanlal 1972 CTR (SC) 273 : (1971) 82 ITR 624 (SC) : TC 44R.253 to contend that AAC’s conclusions were in order. Tribunal affirmed the views of AAC. Prayer for reference under s. 256(1) of the Act was turned down, but on being moved under s. 256(2) of the Act, the question as set out above, was directed to be referred.

We have heard learned counsel for the Revenue. There is no appearance on behalf of the assessee in spite of notice. Learned counsel for the Revenue submitted that in view of s. 47 of the Indian Partnership Act, 1932 (for short the ‘Partnership Act’), and s. 189 of the Act, mere discontinuance or dissolution would be of no consequence and s. 41 of the Act was clearly applicable to the facts of the case. Sec. 41(1) at the relevant point of time read as follows : “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.” A bare reading of the provision makes it clear that when a deduction has been made in the assessment for any year in respect of expenditure incurred by the assessee and subsequently during any previous year assessee has obtained any amount in respect of such expenditure, the amount obtained by the assessee shall be deemed to be profits and gains of business and accordingly chargeable to income-tax as the income of that previous year, whether the business in respect of which the deduction has been made is in existence in that year or not. In order to bring in application of s. 41(1) it has to be shown that : (a) an expenditure has been incurred by the assessee, (b) the said expenditure has been allowed as a deduction in assessee’s case, (c) in subsequent previous year assessee has obtained any benefit in respect of such expenditure. On existence of aforesaid conditions, the amount has to be brought to tax, irrespective of the question whether the business in respect of which the deduction was allowed is in existence or not. In our view in order to make s. 41(1) applicable, it has to be shown by the Revenue that the expenditure was allowed as a deduction in case of the assessee. The amount in respect of which remission or cessation takes place has to be assessed in the hands of the assessee who was earlier granted an allowance or deduction; and none else. Essence of the provision is that Revenue takes back what has been already allowed, under certain circumstances indicated in s. 41, and s. 41(1) deals with one of such circumstances. Sub-s. (1) consists of two parts. The first part deals with loss, expenditure of trading liability in some earlier year for which allowance has been made. Second part deals with recoupment of such loss or expenditure or benefit in respect of such trading liability by way of remission or cessation.

5. In the case at hand, the deduction was allowed in the case of a partnership firm whereas the assessee concerned is an ‘individual’. Merely because he was carrying on business in succession to the earlier partnership firm’s business, that does not per se make him the “assessee” covered under s. 41(1). Sec. 2(31) of the Act defines “person” to include an “individual” and a “firm” separately. Sec. 2(7) of the Act defines an “assessee”. By no stretch of imagination the firm in respect of whom the expenditure was allowed can be treated to be the assessee with whom we are concerned, that is an ‘individual’. That being the position, Tribunal was justified in its view. Our answer to the question, therefore, is in the negative, in favour of assessee and against the Revenue. The reference stands disposed of.

[Citation : 248 ITR 205]