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Chaudhry Cotton Ginning and Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Chandigarh
Decided On
Judge
Reported in(1984)7ITD337(Chd.)
AppellantChaudhry Cotton Ginning and
Respondentincome-tax Officer
Excerpt:
.....profit and loss account and as such was claimed and was allowed by the ito in computing the total income/loss of the assessee for the assessment year 1976-77 as per order dated 23-1-1979 made by the ito, which determined the figure of loss of rs. 5,29,332 before allowance of depreciation for that year.4. during the course of the assessment proceedings for the assessment year 1977-78, which is 'under appeal before us, the ito found that the said 52 creditors to whom the assessee owed rs. 11,61,768.06 as on 1-8-1975 were paid off by the assessee only to the extent of 50 per cent of the amount due to each one of them. this 50 per cent came to rs. 5,80,884. the balance 50 per cent of the amount was remitted by each creditor in favour of the assessee during the accounting period relevant to.....
Judgment:
1. These cross appeals, by the assessee and the revenue, are directed against the order of the Commissioner (Appeals), dated 9-2-1981, relating to the assessment year 1977-78. In order to have proper appreciation of the issues raised by the parties in their respective appeals, we first record the factual background of the case.

2. The facts which are uncontroverted and on the basis of which we have to determine the issues arising from and projected in the cross-appeals are in the following conspectus.

3. The assessee is having a factory for cotton ginning and pressing.

During the accounting period, relevant to the assessment year 1976-77 under appeal, 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 assessment year 1976-77. The purchase price of the goods had entered into the determination of net commercial results as per profit and loss account and as such was claimed and was allowed by the ITO in computing the total income/loss of the assessee for the assessment year 1976-77 as per order dated 23-1-1979 made by the ITO, which determined the figure of loss of Rs. 5,29,332 before allowance of depreciation for that year.

4. During the course of the assessment proceedings for the assessment year 1977-78, which is 'under appeal before us, the ITO found that the said 52 creditors to whom the assessee owed Rs. 11,61,768.06 as on 1-8-1975 were paid off by the assessee only to the extent of 50 per cent of the amount due to each one of them. This 50 per cent came to Rs. 5,80,884. The balance 50 per cent of the amount was remitted by each creditor in favour of the assessee during the accounting period relevant to this assessment year, i.e., the assessment year 1977-78.

The details of the opening balance, the amount paid in cash by the assessee and the amount remitted by the parties with their respective names appears in Annexure A to the assessment order dated 26-9-1980 for the year under appeal. After giving an opportunity to the assessee of being heard, the ITO treated the balance 50 per cent amounting to Rs. 5,80,884 as the sum representing remission or cessation of liability within the meaning of Section 41(1) of the Income-tax Act, 1961 ('the Act').

5. Now reverting back to the assessment year 1976-77, we find that unabsorbed depreciation to the extent of Rs. 20,392 had been determined by the ITO. During the course of the assessment proceedings, for the year under appeal, therefore, the assessee made a claim before the ITO that the said sum of Rs. 20,392 representing unabsorbed depreciation of the assessment year 1976-77 immediately preceding the assessment year under appeal 1977-78, be allowed in the computation of the total income in this year. This contention of the assessee was rejected by the ITO.6. The assessee had claimed deduction under Section 80G of the Act in respect of an amount of Rs. 14,000 donated to Chajju Ram Memorial Jat College, Hissar. This claim was disallowed by the ITO on the ground that the assessee had not produced a certificate regarding exemption under Section 80G available to that college.

7. There were other disputed additions and claims but we are not encumbering this judgment with the facts relating to those disputes as it would be seen from the discussion below that they have not travelled to us for determination. However, insofar as the above issues are concerned, these were first agitated in appeal before the Commissioner (Appeals) along with other disputes. The learned Commissioner (Appeals) rejected the assessee on the claim for allowance of unabsorbed depreciation amounting to Rs. 20,392. He also held that remission or cessation of liability by the creditors of the assessee amounting to Rs. 5,80,884 was clearly taxable under the provisions of Section 41(1).

The learned Commissioner allowed the claim of the assessee with regard to the deduction of Rs. 14,000 paid as donations to Chajju Ram Memorial Jat College, Hissar, because it was covered by the provisions of Section 10(22) of the Act.

8. Now in the appeal of the assessee, there are four grounds, but ground Nos. 1 and 3 have been withdrawn with our permission. The remaining grounds are Nos. 2 and 4 only. The No. 2 ground relates to the claim of unabsorbed depreciation of Rs. 20,392 and ground No. 4 reads as under : That in any case, alleged remission of liability to the creditors, amounting to Rs. 5,80,884, cannot be assessed as income under Section 41(1) to the extent of Rs. 5,29,332 not allowed as deduction in the assessment year 1976-77.

The revenue in its appeal is aggrieved with the directions of the learned Commissioner to the ITO to allow Section 80G relief with regard to the donations of Rs. 14,000.

9. We have heard the parties. We first would like to dispose of the appeal of the revenue which contains only a single ground pertaining to the directions by the Commissioner (Appeals) that relief under Section 80G in respect of the donation of Rs. 14,000 given to Chajju Ram Memorial Jat College be allowed. We find that there is a finding of fact given by the learned Commissioner that the said college 'is affiliated to Kurukshetra University and accounts of the college are audited by the chartered accountants of the University and DPI Auditors'. The Commissioner also found that the income of the college was exempt under the provisions of Section 10(22) and as such the assessee was entitled to relief in respect of donations of Rs. 14,000 made to the said college. These facts have not been controverted and in our opinion, on these facts, the learned Commissioner came to the correct conclusion that relief under Section 80G was due to the assessee in respect of the sum of Rs. 14,000. We, therefore, dismiss the appeal of the revenue.

10. Now coming to the appeal of the assessee, we first dispose of ground No. 2 relating to unabsorbed depreciation amounting to Rs.'20,392. As mentioned supra, both the authorities have, gone again st the assessee with regard to its claim on the facts that are set out above. In our opinion, the authorities below erred in rejecting the claim of the assessee. It has been held by the Hon'ble Madras High Court in the case of CIT v. Nagapatinam Import & Export Corporation [1979] 119 ITR 444 that the language of Section 32(2) makes it clear that, in the case of a registered firm, either the whole of the depreciation allowance or any part thereof for which effect had not been given by adjustment in the hands of the partners, will have to be added to the amount of the depreciation in the following year and deemed to be part of the allowance for the later year and can be considered for set off or adjustment in the hands of the firm. In coming to this conclusion, the Hon'ble Court considered the Bombay High Court judgment in the case of Ballarpur Collieries Co. v. CIT [1973] 92 ITR 219, the Supreme Court judgment in the case of CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555 and the Delhi High Court judgment in the case of Raj Narain Agarwala v. CIT [1970] 75 ITR 1. The said Court followed this judgment subsequently, in the case of CIT v.Madras Wire Products [1979] 119 ITR 454 (Mad.).

11. The Gauhati High Court in the case of CIT v. Singh Transport Co.

[1980] 123 ITR 698 upheld the order of the Tribunal in which it has been held that the unabsorbed depreciation of the assessee, a registered firm, for the preceding assessment years allocated to the partners, not wholly set off in their respective assessments, could be and where necessary should be brought back for computation of the total income of the firm in the subsequent years, as if it were the firm's unabsorbed depreciation and incidentally to that judgment of the Tribunal, one of us was a party as the author. In this judgment, the Hon'ble Gauhati High Court has relied upon the Supreme Court judgments in the cases of Jaipuria China Clay Mines (P.) Ltd. (supra) and S.Sankappa v. ITO [1968] 68 ITR 760. The Hon'ble High Court in this judgment has dissented from the judgment of the Allahabad High Court in the case of K.T. Wire Products v. Union of India [1973] 92 ITR 459, the Gujarat High Court judgment in the case of CIT v. Garden Silk Wvg.

Factory [1975] 101 ITR 658 and the Delhi High Court judgment in the case of Raj Narain Agarwala (supra). The revenue cited the case of Choudhary Cotton Ginning & Pressing Factory v. CIT [1977] 109 ITR 6 (Punj. & Har.) in its support and to support the order of the Commissioner (Appeals).

12. We are of the opinion that the unabsorbed depreciation of the assessee, which is a registered firm, of the assessment year 1976-77 amounting to Rs. 20,392 allocated to the partners, not wholly set off in their respective assessments, should be brought back for computation of the total income of the firm for the year under appeal, i.e., 1977-78. In any case, from what is stated above, it is also clear that on the issue that is before us about the treatment to be given to the unabsorbed depreciation amounting to Rs. 20,392, there are two reasonable views possible as there is conflict of judicial opinion on the issue. It is now trite law that in such a situation in the interpretation of a taxing statute, the view that favours the subject is to be preferred. Therefore, looking at the issue from this angle, there is no other way except that the claim of the assessee is to be accepted. We accept the claim on each of the above counts by setting aside the orders of the authorities below on this issue and by directing the ITO to take the depreciation of Rs. 20,392 as part of the depreciation for the year under appeal, while computing the total income of the assessee for the assessment year 1977-78.

13. The only other ground in the appeal of the assessee pertains to the issue of taxability of the sum of Rs. 5,80,884 under Section 41(1). The facts relating to it have already been set out by us above in paras 3 and 4. We have noted that for the assessment year 1976-77, the loss of Rs. 5,29,332 before allowance of depreciation was determined. This was based upon the profit and loss account for that year prepared by the assessee after taking into consideration, the debit for purchases of Rs. 11,61,768.06, made from 52 creditors. This loss was allocated to the partners by the ITO vide order dated 23-1-1979. The order dated 23-1-1979, for the assessment year 1976-77, is final and there are no proceedings pending with regard to that at any stage. The short point on which the learned counsel for the assessee laid emphasis was that in the computation of total income for the assessment year 1976-77, the final figure determined was loss of Rs. 5,29,332. Since the final figure was a loss, the assessee did not in fact get an allowance or deduction made in the assessment for the assessment year 1976-77 in respect of the trading liability incurred by the assessee. Since in the computation of the total income such a trading liability had not been deducted, the provisions of Section 41(1) are not applicable. It was contended, since the figure of income determined for the assessment year 1976-77, in which the trading liability was incurred with regard to the 52 creditors, was loss, no benefit was received by the assessee.

For this, reliance was placed upon the following judgments- Sharma & Co. v. ITO [1972] 86 ITR 741, 747 (All.), Naubatram Nandram v. CIT [1972] 86 ITR 805, 811 (MP), Steel & General Mills Co. Ltd. v. CIT [1974] 96 ITR 438 (Delhi), Bhagwat Prasad & Co. v. CIT [1975] 99 ITR 111 (All.) and Motilal Ambaidas v. CIT [1977] 108 ITR 136, 151 (Guj.).

14. On the basis of the above judgments, it was further emphasised that under Section 41, there is a fiction that any benefit accruing to an assessee by remission or cessation of its trading liability is deemed to be the profits and gains of its business but it comes into play only if while computing its income for some assessment year, an allowance or deduction in respect of the trading liability is actually made and subsequently, the assessee received in respect of that trading liability, some benefit whether in cash or in-some other manner which accrues to the assessee because of its ceasing to exist. It was emphasised time and again that the assessee had not received any benefit because of determination of loss in the assessment year 1976-77 and as such during the accounting period relevant to the assessment year under appeal, i.e., 1977-78, when the amounts by the 52 creditors totalling Rs. 5,80,884 were remitted, these were not hit by the provisions of Section 41(1).

15. The revenue, through Shri R.S. Khichi, the junior authorised representative, strongly opposed these submissions. It was contended by Shri Khichi that the learned counsel for the assessee has been making out a case as if the assessee did not get any benefit in the assessment year 1976-77 with regard to its trading liability of Rs 11,61,768.06, allowed in the trading and profit and loss account for that year. It was contended that for the debit of Rs. 11,61,768.06 in the trading and profit and loss account and the assessee thus, getting a benefit of that amount by way of deduction, the final figure which was determined at a loss of Rs. 5,29,332 for 1976-77 would have been a positive figure of income of over Rs. 5 lakhs. Therefore, the argument of the learned counsel for the assessee that the assessee did not get any benefit on account of this trading liability in the assessment year 1976-77 and its remission and cessation in the accounting period relevant to the assessment year 1977-78 did not result in any benefit to the assessee, is wholly erroneous and untenable. The learned departmental representative further clarified that it is an accepted position that the goods worth Rs. 11,61,768.06 had been purchased by the assessee during the accounting period relevant to the assessment year 1976-77, the cost thereof had been debited to the profit and loss account after entering into the purchases account and that the assessee had actually to pay only half of the cost by way of settlement with these parties in the accounting period relevant to the assessment year 1977-78. If the argument of the learned counsel for the assessee as projected, it was contended, is accepted, it would tantamount to importing and introducing into the smooth working of the Act an element of uncertainty, which is not permissible as held by the Hon'ble Punjab and Haryana High Court in the case of CIT v. Khem Chand Bahadur Chand [1981] 131 ITR 336 (FB) wherein, the Hon'ble High Court observed that- ...such considerations which introduce an element of uncertainty in the meaning of a phrase used in a statute have to be avoided at all costs. (p. 353) Finally, it was stressed that the cases cited by the learned counsel for the assessee are either irrelevant because they do not deal with the issue or are otherwise not applicable because factually trading liability had been allowed to the assessee in the assessment year 1976-77 and with regard to that trading liability, there was remission or cessation of liability in the accounting period relevant to the assessment year under appeal. That gave the ITO valid jurisdiction and powers to assess the amount in question under Section 41(1).

16 We have given careful considerations to the rival submissions and we are of the opinion that this ground of the assessee has to be rejected.

The reasons for this are not too far to seek. It is admitted that the trading liability of Rs. 11,61,768.06 by way of purchases made by the assessee in the accounting period relevant to the assessment year 1976-77 had gone into the determination of the final commercial results for that year in the form of trading and profit and loss account. The purchases are admittedly a trading Siability of the assessee. This liability was of the sum of Rs. 11,61,768.06 as purchases made from 52 creditors, whose names and addresses appear in Annexure A to the impugned assessment order made by the ITO. It is also admitted by the assessee and there is no dispute before us 'on this question that those parties have remitted 50 per cent of the amount and each of them having received 50 per cent of the amount has absolved the assessee from all legal liability regarding the payment of the balance 50 per cent of their respective amounts. In other words, the liability which was a trading liability and was availed of by the assessee in determining the final figure for the purpose of income assessment in the year 1976-77, ceased to exist in the assessment year 1977-78. Thus, the two limbs of Section 41(1) that the trading liability should have been claimed and allowed as a deduction in computing the total income of any assessment year and that such a trading liability should cease to exist in the subsequent assessment year, when the provisions of Section 41(1) are invoked, are fully satisfied. The only issue is whether, when the final figure determined in computing the total income of an assessee ends into a negative figure, i.e., loss, it can be said whether, the assessee availed himself of any benefit with regard to that trading liability.

17. This question is not very difficult to answer. The learned counsel for the assessee appears to labour under the misundertanding that an allowance or deduction in respect of loss, expenditure or trading liability incurred by the assessee must be in the computation of total income. This, however, is apparently an erroneous view because the words used in the Section are an allowance or deduction made in the assessment for any year. Now the assessment in respect of any year crystallises for purposes of the Act, the net result of the commercial transactions of a particular accounting period carried on by the assessee with regard to various business activities. The allowance or deduction is with regard to the loss, expenditure or trading liability incurred by the assessee. The words 'loss', 'expenditure' or 'trading liability' indicate the wide field in which the benefit can be obtained by the assessee. In this regard, particularly the benefit on account of trading liability, is of such an expense that the contention of the learned counsel for the assessee, to confine it to the process of determination of total income by the ITO in an assessment order is untenable. Apparently, trading liability can come in multifarious forms and one of such forms can be purchases, made by the assessee. When the assessee makes purchases, the amount for such purchases as cost becomes a trading liability. The assessee while drawing up the trading and profit and loss account, took into consideration this trading liability. Thereby, the assessee availed of the benefit of deduction by debiting the sum of Rs 11,61,768.06 on purchases account and reducing what could otherwise constitute profit. Now, if while arriving at a particular figure, after availing of this benefit, there results a negative figure, that by itself cannot take away the benefit that the assessee had actually received. Therefore, when the assessee's learned counsel says that the assessee actually did not receive any benefit, it is a spacious but fallacious argument which has to be rejected.

18. His contention that allowance or deduction with regard to the expenditure, loss or trading liability has to be against a positive income in the process of assessment, is certainly importing into Section 41(1) something which does not exist. The Section has to be interpreted as it is. There is no scope for intendment and in this regard, the contention of the revenue that there was an attempt to introduce into the interpretation of Section 41(1), an exterior element cannot be called unwarranted.

19. The learned counsel for the assessee cited various authorities, noted supra and after perusal of each one of them carefully, we do not find that he can draw any support for the proposition that he has propounded and which we have discussed above. If this issue is considered on facts purely, there cannot be any denial of the factum of the assessee having availed of benefit of trading liability of Rs. 11,61,768.06 in the assessment year 1976-77 and of the fact that out of the said sum, the sum of Rs. 5,80,884 had been remitted during the accounting period relevant to the assessment year 1977-78 by its creditors and on that amount, there are no other encumbrances on this sum and the assessee is the owner of it and is entitled to dispose it of as he likes. Therefore, the amount in question was squarely hit by the provisions of Section 41(1). The authorities below rightly brought it to tax. This ground of appeal of the assessee is rejected.

20. The learned counsel for the assessee, appears to have drawn inspiration for his contentions made before us on the analogy of depreciation allowance but we would like to point out that there is a major difference between the allowance of depreciation and the allowance of a trading liability, insofar as the process of assessment is concerned. Section 41(1) deals with 'loss', 'expenditure' or 'trading liability' allowed to the assessee.

The allowance of a trading liability of the type before us is generally taken into consideration while determining the final accounts of a particular accounting period and ordinarily, it is done by the assessee himself. Therefore, a trading liability of this type ordinarily may not enter into the actual process of computation of the total income by the ITO but may be embedded in final accounts. Whereas, on the other hand, 'depreciation allowance' is an allowance made after computing the total income of the assessee by the ITO on specified rates, whether actually, the assets have depreciated or not, in the assessment order itself after certain prescribed conditions are fulfilled bytthe assessee.

Thus, the two fields, one where trading liability is availed of by the assessee and the other where depreciation is allowed by the ITO, are quite different and the two cannot be compared as attempted by the learned counsel for the assessee.

21. We have already held that factually trading liability had been availed of by the assessee in the accounting period relevant to the assessment year 1976-77 and there is no argument, whatsoever, that can be applied to these facts to hold that trading liability was not availed of by the assessee and such a trading liability had not entered into the computation of what was finally determined to the loss of the assessment year 1976-77. Hence, these contentions stand rejected and on each of the above counts, this ground of the assessee is rejected.

22. In the result, the appeal of the revenue is dismissed and that of the assessee partly allowed.


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