Jammu & Kashmir H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that no part of the aggregate sum of Rs. 41,453 is chargeable to tax under s. 41(1) of the IT Act ?

Counsel Appeared

Anil Bhan, for the Revenue : None, for the Assessee

JUDGMENT

Dr. B.P. SARAF, C.J. :

By this reference under s. 256(1) of the IT Act, 1961 (‘the Act’) made at the instance of the Revenue, the Tribunal, Amritsar Bench, Amritsar, has referred the following question of law to this Court for opinion :

“Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that no part of the aggregate sum of Rs. 41,453 is chargeable to tax under s. 41(1) of the IT Act ?”

This reference pertains to the asst. yr. 1964-65. The controversy is about the inclusion of a sum of Rs. 41,453 in the taxable income of the assessee as ‘profits chargeable to tax’ under s. 41(1)(a) of the Act. The material facts giving rise to this controversy, briefly stated, are as follows. In the course of assessment of the assessee for the asst. yr. 1964-65, the ITO observed that a sum of Rs. 41,453, representing certain balances in respect of which allowance or deduction had been made in the assessments of the assessee in the past, had been written off by the assessee during the relevant previous year and credit given to the partners in their profits-sharing ratio. He was of the opinion that it was a case of remission of liability and, hence, that amount was chargeable to income-tax under s. 41(1)(a) of the Act. He, accordingly, included the sum of Rs. 41,453 in the taxable income of the assessee under the head ‘Profits and gains of business or profession’. The assessee appealed to the AAC. The AAC observed that the ground of appeal challenging the inclusion of the above amount in the taxable income of the assessee was not pressed. He, however, rejected the claim of the assessee in this regard on merits also. The assessee appealed to the Tribunal. The Tribunal found that the AAC had not given any reason for holding that this amount was taxable under s. 41(1) of the Act. The matter was, therefore, remitted to the AAC for re-adjudicating this claim of the assessee after hearing both the parties. The AAC, on hearing both the parties, observed that certain outstanding credit balances, in all amounting to Rs. 41,453, appearing in the accounts of the customers, employees, dealers and sub-contractors had been written off by the assessee in the previous year relevant to the asst. yr. 1964-65 and transferred to its P&L a/c and apportioned amongst its partners in their respective profit-sharing ratio. The AAC also observed that there was no dispute about the fact that the decision had been made in the assessments for earlier assessment years in respect of the amounts represented by the credit balances written off by the assessee during the relevant previous year and transferred to its P&L a/c. The AAC was, therefore, of the opinion that it was a clear case where the assessee had obtained benefit in respect of trading liability to the extent of Rs. 41,453 by way of remission of trading liability. The assessee appealed to the Tribunal. The Tribunal held that despite the fact that trading liability to the tune of Rs. 41,453 had been written off by the assessee and the amount transferred to its P&L a/c and apportioned amongst its partners in their profit-sharing ratio, no material was brought on record by the Revenue to establish that there was remission or cessation of the liability. While doing so, the Tribunal relied on the decision of the Bombay High Court in J.K. Chemicals Ltd. vs. CIT (1966) 62 ITR 34 (Bom) : TC 19R.248.

We have heard Mr. Anil Bhan, the learned counsel for the Revenue, who submitted that the amount of Rs. 41,453 representing the unclaimed balances standing to the credit of various parties having been transferred by the assessee itself to its P&L a/c, it was clearly liable to be included in the taxable income of the assessee under s. 41(1)(a) of the Act. He submitted that the fact the assessee himself has transferred the amounts to its P&L a/c, itself was enough evidence of remission or cessation of liability to bring the case within the purview of s. 41(1)(a). Reliance was placed in support of this contention on the decision of the Supreme Court in CIT vs. T.V. Sundaram Iyengar & Sons Ltd. (1996) 136 CTR (SC) 444 : (1996) 222 ITR 344 (SC) : TC S13.1348. The learned counsel laid great emphasis on the following passage in the above decision. “……..If a commonsense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its P&L a/c. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus” He also relied on the following passage appearing in the said judgment

: “In the present case, the money was received by the assessee in the course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by efflux of time the money has become the assessee’s own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its P&L a/c. There is no explanation from the assessee why the surplus money was taken to its P&L a/c even if it was somebody else’s money. In fact, as Atkinson, J. pointed out that what the assessee did was the commonsense way of dealing with the amounts.”

4. Reliance was also placed on the decision of the Court of Appeal in England in Morley (Inspector of Taxes) vs. Tattersall (1939) 7 ITR 316 (CA) : TC 13R.264, which has also been referred to by the Supreme Court in T.V. Sundaram Iyengar & Sons Ltd’s case (supra). Great stress was laid down on the following passage from the said judgment which is quoted in the above decision of the Supreme Court : “The true accountancy view would, I think, demand that these sums should be treated as paid into a suspense account, and should so appear in the balance-sheet. The surpluses should not be brought into the annual trading account as a receipt at the time they were received. Only time will show what their ultimate fate and character will be. After three years that fate is such, as to one class of surplus, that insofar as the suspense account has not been reduced by payments to clients, that part of it which is remaining becomes, by operation of law, a receipt of the company, and ought to be transferred from the suspense account and appear in the P&L a/c for that year as a receipt and profit. That is what it in fact is. In that year Jays become the richer by the amount which automatically becomes theirs, and that asset arises out of an ordinary trade transactions. It seems to me to be the commonsense way of dealing with these matters….”

Our attention was also drawn to the following observations of the Supreme Court based on the ratio of the above decision : “……..If a commonsense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its P&L a/c. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time- barred and the amount attained a totally different quality. It became a definite trade surplus….” The learned counsel submitted that the ratio of the above decision squarely applied to the present case.

5. When the attention of the learned counsel was drawn by the Court to the later decision of the Supreme Court in CIT vs. Sugauli Sugar Works (P) Ltd. (1999) 152 CTR (SC) 46 : (1999) 236 ITR 518 (SC) wherein the Supreme Court has categorically held that the mere fact that the assessee has made an entry of transfer in his account unilaterally will not entitle the Department to say that s. 41(1) of the Act would apply, he fairly stated that he was not aware of the above decision and took time to peruse the same and make further submissions in this regard. The matter was adjourned accordingly.

The matter is on board today for further hearing. Mr. Anil Bhan, the learned counsel for the Revenue, fairly conceded that in Sugauli Sugar Works (P) Ltd.’s case (supra), the Supreme Court has held that the mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not entitle the Department to say that s. 41(1) would apply and the amount would be taxable income of the assessee. He however, contended that the earlier decision of the Supreme Court in T.V. Sundaram Iyengar & Sons Ltd.’s case (supra) should be followed in view of the fact that it was a decision of a larger Bench comprising three Judges whereas the later decision is a decision of the Bombay comprising two Judges. He submitted that, in any view of the matter, the later decision of the Supreme Court is per incuriam, inasmuch as the earlier decision of the larger Bench of the Supreme Court was not placed before the Court and this decision has been rendered without taking note of the law laid down in that case.

We have carefully considered the submissions of the learned counsel and perused both the decisions of the Supreme Court. On a careful reading of the same, we do not find that there is any inconsistency between two decisions of the Supreme Court. We also do not find any merit in the submission of the learned counsel that the decision in Sugauli Sugar Works (P) Ltd.’s case (supra) is per incuriam. The facts of the two cases are completely different.

The facts of the present case are identical to those of Sugauli Sugar Works (P) Ltd.’s case (supra). In that case also in the previous year relevant to the asst. yr. 1965-66, the assessee transferred a sum of Rs. 3,45,000 out of the suspense account running from 1946-47 to 1948-49 to the capital reserve account. The ITO found that an amount of Rs. 1,20,000 was with reference to the deposits and advances which had been paid back and he included a sum of Rs. 2,56,529 under s. 41 of the Act in the total income of the assessee. The appeal of the assessee was dismissed by the AAC. However, the Tribunal accepted the contention of the assessee and held that its unilateral entry in the accounts transferring the amount to the capital reserve account could not have been the matter within the scope of s. 41(1) of the IT Act and, consequently, held in favour of the assessee. The decision of the Tribunal was challenged by the Revenue before the High Court. The High Court approved the decision of the Tribunal and said that a unilateral act on the part of the debtor would not bring about the cessation of his liability. Against the decision of the High Court, the Revenue went in appeal to the Supreme Court. The Supreme Court approved the decision of the High Court and held that a mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end.

The Supreme Court also said that such an entry by itself would not confer any benefit on the debtor as contemplated by s. 41(1) of the Act. The Supreme Court categorically held : “…..Just because an assessee makes an entry in his books of account unilaterally, he cannot get rid of his liability. The question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee’s case alone but it is a matter which has to be decided only if the creditor is before the concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and had become unenforceable. There was be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after the expiry of the normal period of limitation as provided in the Limitation Act.”

The Supreme Court also quoted with approval the following passage from the decision of the Bombay High Court in J.K. Chemicals Ltd.’s case (supra) : “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 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.”

The above decision of the Supreme Court is a clear authority for the proposition that mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. The Supreme Court has held that even the expiry of the period of limitation prescribed by the Limitation Act would not extinguish the debt; but it would only prevent the creditor from enforcing the debt. The Supreme Court has held in categorical terms that the mere fact that the assessee has made an entry of transfer in his accounts will not enable the Department to say that s. 41(1) would apply and the amount should be included in the total income of the assessee. The above decision applies proprio vigore to the present case and the learned counsel for the Revenue also does not dispute this fact.

We have also considered the submission of the learned counsel for the Revenue that the above decision is per incuriam, the same being in conflict with the earlier decision of larger Bench of three Judges of the Supreme Court in T.V. Sundaram Iyengar & Sons Ltd.’s case (supra). We find that the controversy in that case was totally different. In that case though the money was received by the assessee in the course of carrying on his business, it was treated as deposit and was of capital nature at the point of time it was received. It is by efflux of time that the money became the assessee’s own money. It is in these circumstances that the Supreme Court observed : “……Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time-barred and the amount attained a totally different quality. It became a definite trade surplus…..” It is in the peculiar fact and circumstances of the above case that the Supreme Court held : “……Although it was treated as deposit and was of capital nature at the point of time it was received, by efflux of time the money has become the assessee’s own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its P&L a/c. There is no explanation from the assessee why the surplus money was taken to its P&L a/c even if it was somebody else’s money. In fact, as Atkinson, J. pointed out that what the assessee did was the commonsense way of dealing with the amounts.”

We do not find any conflict between the decisions of the Supreme Court in T.V. Sundaram Iyengar & Sons case (supra) and Sugauli Sugar Works (P) Ltd.’s case (supra). The contention of the learned counsel for the Revenue that the decision in Sugauli Sugar Works (P) Ltd.’s case (supra) is per incuriam is, thus, wholly devoid of any merit and the same is, therefore, rejected.

It may, however, be pertinent at this stage to mention that the legal position in regard to remission or cessation of liability emerging from the decision of the Supreme Court set out above has undergone a change by the insertion of the following Expln. 1 to s. 41(1) by the Finance (No. 2) Act, 1996 w.e.f. 1st April, 1997 :

“Explanation 1.— For the purposes of this sub-section, the expression ‘loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof’ shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under cl. (a) or the successor in business under cl. (b) of that sub- section by way of writing off such liability in his accounts.” [Emphasis, italicised in prints, supplied]

The effect of the insertion of the above Explanation is that for the asst. yr. 1997-98 and subsequent years, the expression ‘loss or expenditure or some benefit in respect of any trading liability by way of remission or cessation of any liability by any unilateral act of the assessee. In view of the above amendment, the decision of the Supreme Court in Sugauli Sugar Works (P) Ltd.’s case (supra) would not be applicable to assessment for the asst. yr. 1997- 98 and subsequent years.

In view of the foregoing discussion, we are of the clear opinion that, on the facts and in the circumstances of the case, the Tribunal was right in holding that no part of the sum of Rs. 41,453 was chargeable to tax under s. 41(1)(a).

The question referred to us is, therefore, answered in the affirmative, i.e., in favour of the assessee and against the Revenue.

The reference is disposed of accordingly, with no order as to costs.

[Citation : 247 ITR 710]