High Court Of Punjab & Haryana
CIT vs. Chaudhary Cotton Ginning & Pressing Factory
Section 32(2), 41(1)
Asst. Year 1977-78
N.K. Sud & S.S. Grewal, JJ.
IT Ref. Nos. 120 & 121 of 1982
31st August, 2004
Counsel Appeared
Rajesh Bindal, for the Petitioner
JUDGMENT
N.K. Sud, J. :
This order will dispose of IT Ref. Nos. 120 and 121 of 1982, arising out of the order of the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short “the Tribunal”), dt. 23rd March, 1982, relating to asst. yr. 1977-78.
2. In IT Ref. No. 120 of 1982, the following question of law has been referred for the opinion of this Court at the instance of the Revenue :
“Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in allowing the assessee’s claim that the unabsorbed depreciation of Rs. 20,392 brought forward from the asst. yr.1976-77 should revert back in the case of the firm and it should be set off against the income of the firm in view of the provisions of s. 32(2) of the IT Act, 1961 ?”
3. In IT Ref. No. 121 of 1982, at the instance of the assessee, the following question of law has been formulated : “Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the amount of Rs. 5,29,332 was liable to tax as deemed income under sub-s. (1) of s. 41 of the IT Act, 1961 ?”
4. The assessee is having a factory for cotton ginning and pressing. During the accounting period relevant to asst. yr. 1977-78, it owed Rs. 11,61,768.06 to 52 creditors. These amounts represented the price of goods purchased by the assessee in the accounting period relevant to the asst. yr. 1976-77. The purchase price of the goods had entered into the determination of net commercial results as per P&L a/c and was taken into consideration by the ITO, B- Ward, Sirsa, who had framed the assessment for asst. yr. 1976-77 vide order dt. 23rd Jan., 1979, determining the net loss at Rs. 5,59,332 before allowance of depreciation.
5. During the course of assessment proceedings for the asst. yr. 1977-78, which is the year under consideration, the ITO found that the said 52 creditors were paid off by the assessee only to the extent of 50 per cent due to each of them. The balance 50 per cent amount of Rs. 5,80,884 was remitted by the creditors in favour of the assessee. After giving an opportunity to the assessee of being heard, the ITO treated the amount of Rs. 5,80,884 as income representing remission or cessation of liability within the meaning of s. 41(1) of the IT Act, 1961 (for short “the Act”).
6. For the asst. yr. 1976-77, there was an unabsorbed depreciation of Rs. 20,392 determined by the ITO. During the course of assessment proceedings for the year under consideration, the assessee made a claim before the ITO that the said amount of Rs. 20,392 be allowed in computation of total income for asst. yr. 1977-78. This contention was rejected by the ITO.
7. The assessee took the matter in appeal before the CIT(A), who upheld the findings of the ITO on both the issues. Assessee preferred a second appeal before the Tribunal. The Tribunal allowed the assessee’s claim for set off of unabsorbed depreciation of Rs. 20,392 pertaining to asst. yr. 1976-77. It was held that the assessee being a registered firm, the amount of depreciation for asst. yr. 1976-77 not wholly set off in the respective assessments of the partners, has to be brought back for computation of total income of the firm for the succeeding years under s. 32(2) of the Act. The Tribunal, however, upheld the findings of the authorities below in treating the amount of Rs. 5,29,332 as income under s. 41(1) of the Act.
8. Assessee as well as the Revenue filed reference applications under s. 256(1) of the Act, requiring the Tribunal to refer the questions decided against them for the opinion of this Court. In the above factual background, we now proceed to answer the questions referred for our opinion.
9. As far as question about allowance of unabsorbed depreciation in Ref. Appln. No. 120 of 1982 is concerned, learned counsel for the Revenue fairly points out that the issue stands settled against the Revenue in Garden Silk Weaving Factory vs. CIT (1991) 94 CTR (SC) 136 : (1991) 189 ITR 512 (SC). Accordingly, the question is answered in the negative, i.e., in favour of the assessee and against the Revenue.
10. As far as question in IT Ref. No. 121 of 1982 is concerned, the facts are not in dispute, the assessment for the years 1976-77 had been made vide order dt. 23rd Jan., 1979, at a net loss of Rs. 5,29,332 before allowance of depreciation. This was based upon the P&L a/c in which deduction on account of purchases included the purchases of Rs. 11,61,768.06 made from the 52 creditors. The loss was duly allocated to the partners to be considered in their personal assessments. Since the payments of Rs. 11,61,768.06 had not been made to the 52 creditors during the accounting period relevant to asst. yr. 1976-77, the same was shown as trading liability in the balance-sheet for that year. It is not in dispute that, in the succeeding year, i.e., asst. yr. 1977-78, the said 52 creditors accepted 50 per cent of the amount due to them and remitted the balance amount of Rs. 5,80,884 in favour of the assessee. The assessee does not dispute that the remission of trading liability is deemed to be income under s. 41(1) of the Act. However, the case of the assessee is that the remitted amount can only be treated as income under s. 41(1) of the Act if the allowance or deduction has been made in the assessment for earlier years in respect of such expenditure or trading liability incurred by the assessee. According to the assessee, in the asst. yr. 1976-77, when the benefit of trading liability of Rs. 11,61,768.06 had been claimed, the assessment had resulted in a net loss of Rs. 5,29,332. Thus, it is claimed that out of the total liability of Rs. 11,61,768.06, deduction to the extent of Rs. 5,29,332 could not be said to have been allowed in asst. yr. 197677. In other words, it is claimed that the allowance for deduction with regard to the expenditure, loss or trading liability has to be against a positive income in the process of assessment. It is only then that any remission such as expenditure, loss or trading liability or part thereof in any subsequent year can be treated as income under s. 41(1) of the Act.
11. In order to appreciate the contention of the assessee, reference may be made to the provisions of s. 41(1) of the Act, which read as under : “(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability 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.”
12. A bare perusal of the aforesaid provision shows that the interpretation sought to be placed by the assessee is misconceived. As per this section, a benefit obtained by an assessee in respect of any loss, expenditure or trading liability by way of remission or cessation thereof, is deemed to be profits and gains of business or profession, if it is shown that such loss, expenditure or trading liability was allowed as a deduction in the assessment for any year. Thus, all that this provision requires is that such an expenditure had been allowed as a deduction while making assessment for any earlier year. There is no further requirement that the assessment must result in a positive income. It is not in dispute that the deduction on account of trading liability of Rs. 11,61,768.06 had duly been allowed while framing the assessment for asst. yr. 1976-77. Thus, the requirement of s. 41(1) stands fulfilled and remission of any part of the said trading liability in any subsequent year has to be treated as profits and gains of business or profession as done by the AO. We are, therefore, satisfied that the Tribunal was right in holding that the remission of Rs. 5,80,884 during the asst. yr. 1977-78 out of total amount of Rs. 11,61,768.06 allowed as a deduction in asst. yr. 1976-77 was squarely hit by the provisions of s. 41(1) of the Act and had rightly been brought to tax. Accordingly, we answer the question referred by the Tribunal in the negative, i.e., in favour of the Revenue and against the assessee.
[Citation : 271 ITR 17]
