High Court Of Rajasthan : Jaipur Bench
CIT vs. EID Mohd. Nizammudin
Section 41(1)
Asst. Year 1996-97
R.M. Lodha & R.S. Chauhan, JJ.
IT Appeal No. 88 of 2006
30th July, 2007
Counsel Appeared :
Ms. Parinitoo Jain, for the Revenue : Mahendra Gargieya, for the Assessee
JUDGMENT
By the court :
The liability of Rs. 11,80,973 written back by the assessee in P&L a/c was treated as income in the asst. yr. 1996-97 by the AO relying upon Expln. 1 introduced in s. 41(1) w.e.f. 1st April, 1997. The CIT(A), at the instance of the assessee set aside that finding of the AO. The Tribunal in the appeal of the Department upheld the view of the CIT(A). This is how this income-tax appeal has been preferred under s. 260A of the IT Act, 1961.
2. Though the counsel for the Revenue sought to rely upon s. 28(iv) of the IT Act, 1961 in support of her contention that the AO was justified in treating the aforesaid amount written back by the assessee as the income, we are afraid that neither the said section was relied upon by the AO nor was pressed into service by the Revenue in appeal before the Tribunal. That section even otherwise has no application.
3. Sec. 41(1) of the IT Act as was existing in the year of assessment (1996-97) before introduction of Expln. 1 came up for consideration before the Supreme Court in the case of CIT vs. Sugauli Sugar Works (P) Ltd. (1999) 152 CTR (SC) 46 : (1999) 236 ITR 518 (SC). The Supreme Court after referring to s. 41(1) of the IT Act, held thus : “It will be seen that the following words in the section are important : ‘the assessee had 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’. Thus, the section contemplates the obtaining by the assessee of an amount either in cash or in any other manner whatsoever or a benefit by way of remission or cessation and it should be of a particular amount obtained by him. Thus, the obtaining by the assessee of a benefit by virtue of remission or cessation is sine qua non for the application of this section. The mere fact that the assessee has made an entry of transfer in his accounts unilaterally 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 reasoning of the High Court is correct and we are in agreement with the same.”
4. It has been, thus, held in unequivocal terms by the Supreme Court that mere entry of transfer in his account by the assessee unilaterally would 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 Supreme Court concurred with the reasoning of the Calcutta High Court reported in the case of CIT vs. Sugauli Sugar Works (P) Ltd. (1981) 23 CTR (Cal) 226 : (1983) 140 ITR 286 (Cal) where the Division Bench held thus :
“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 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 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.”
5. The legal position laid down in the case of Sugauli Sugar Works (P) Ltd. (supra) has been applied subsequently by the Supreme Court in the case of Chief CIT vs. Kesaria Tea Co. Ltd. (2002) 173 CTR (SC) 394 : (2002) 254 ITR 434 (SC). This is what the Supreme Court said :
“It may be noted that the provision was made in the books of account towards purchase-tax which was under dispute and the benefit of deduction from business income was availed of in the past years in relation thereto. The same was sought to be reversed by the assessee during the year ending on 31st March, 1985, for whatever reason it be. The question is whether the circumstances contemplated by s. 41(1) exist so as to enable the Revenue to take back what has been allowed earlier as business expenditure and to include such amount in the income of the relevant assessment year, i.e., 1985-86. In order to apply s. 41(1) in the context of the facts obtaining in the present case, the following points are to be kept in view : (1) In the course of asessment for an earlier year, allowance or deduction has been made in respect of trading liability incurred by the assessee; (2) Subsequently, a benefit is obtained in respect of such trading liability by way of remission or cessation thereof during the year in which such event occurred; (3) In that situation the value of the benefit accruing to the assessee is deemed to be the profits and gains of business which otherwise would not be his income; and (4) Such value of the benefit is made chargeable to income-tax as the income of the previous year wherein such benefit was obtained. The High Court, agreeing with the Tribunal, rightly held that the resort to s. 41(1) could arise only if the liability of the assessee can be said to have ceased finally without the possibility of reviving it. On the facts found by the Tribunal, the Tribunal as well as the High Court were well justified in coming to the conclusion that the purchase-tax liability of the assessee had not ceased finally during the year in question. Despite the finality attained by the judgment in Neroth Oil Mills’ case (1982) 49 STC 249 (Ker), the other issues having bearing on the exigibility of purchase-tax still remained and the dispute between the assessee and the Sales-tax Department was still going on. There is no material on record to rebut these factual observations made by the Tribunal. Nor can it be said that the reasons given by the Tribunal are irrelevant.
The learned senior counsel appearing for the IT Department has contended that the assessee itself took steps to write off the liability on account of purchase-tax by making necessary adjustments in the books, which itself is indicative of the fact that the liability ceased for all practical purposes and therefore, the addition of the amount of Rs. 3,20,758 deeming the same as income of the asst. yr. 1985-86 under s. 41(1) is well justified of the Act. But, what the assessee has done is not conclusive. As observed by the Tribunal, a unilateral action on the part of the assessee by way of writing off the liability in its accounts does not necessarily mean that the liability ceased in the eye of law. In fact, this is the view taken by this Court in CIT vs. Sugauli Sugar Works (P) Ltd. (1999) 152 CTR (SC) 46 : (1999) 236 ITR 518 (SC). We, therefore, find no substance in the contention advanced on behalf of the appellant. Incidentally, we may mention that the controversy relates to the period anterior to the introduction of Expln. 1 to s. 41(1).” We need not elaborate that the controversy relates to the period anterior to the introduction of Expln. 1 to s. 41(1) has been dealt with and considered on the basis of the position obtained in s. 41(1) without reference to the said Explanation. It is trite saying that if there is doubt about the taxing provision, the benefit of doubt must go to the assessee. The fact that clarification was introduced under s. 41(1) w.e.f. 1st April, 1997 clearly shows that the doubt prevailing in respect of s. 41(1) has been clarified and that benefit must go to the assessee. As a matter of fact, this position is clarified by s. 16 of the Finance (No. 2) Act, 1996 which clarifies that the amendment by way of Expln. 1 will take effect from 1st April, 1997 and will, accordingly, apply in relation to the asst. yr. 1997-98 and not previous years. The consideration of the matter by the Tribunal does not suffer from any error of law. The income-tax appeal is dismissed in limine.
[Citation : 294 ITR 139]
