1. These appeals are by the assessee for the assessment years 1979-80 and 1980-81. Since common grounds are involved in these appeals, they are being disposed of by a common order for the sake of convenience.
2. On behalf of the assessee, Shri B.K. Khare, the learned representative of the assessee, submitted that the assessee-company was rendering local consultancy engineering and procurement services for Rajasthan Atomic Power Project for the Department of Atomic Energy (the Government of India). According to Shri Khare, the agreement has been approved under Section 80MM of the Income-tax Act, 1961 ('the Act') by the Department of Atomic Energy. The approval is attached at page 43 of the paper book. The contract got concluded by 30-4-1976. The company has, subsequently, been wound up by its members in terms of special resolution passed on 14-12-1979.
3. Shri Khare submitted that the Department of Energy was to pay for the cost of the time of the assessee-company spent in connection with the contract. According to the agreement, Clause 6.1.1, the Department of Energy was to pay for the normal fringe benefits which required the approval of the Department of Atomic Energy. The fringe benefit included pension, provident fund, group insurance, hospitalisation and medical. The company had staff provident fund scheme along with Mahendra & Mahendra Ltd. The Commissioner, Bombay, recognised this scheme. This particular scheme stands duly approved from the date of dissolution, i.e., 1-4-1969. On the basis of such payment, the supplementary bills were raised on the Department of Atomic Energy and correspondences were exchanged. According to the supplementary bills, the total of such provident fund contributions aggregated to Rs. 1,16,872 from April 1969 to December 1970. The Department of Atomic Energy kept on postponing the same and finally a meeting was held between the Director of the Power Projects Engineering Division of the Department of Atomic Energy regarding the reimbursement of their expenses incurred on the company's contribution on the provident fund.
The last of such letters was date 26-9-1978, which is at page 30.
According to this letter, Shri Khare submitted that the Department had accepted on principle the claim of the assessee-company and the letter is in confirmation of such discussion. The correspondence in this connection, Shri Khare submitted, is from pages 21 to 30. The supplementary bills are on pages 17 to 21. Shri Khare then submitted that the amount of Rs. 1,10,940 was, therefore, received consequent to the final discussion in the year under review. It was under these circumstances, Shri Khare submitted that the receipt is to be treated as income under Section 41(1) of the Act. Shri Khare submitted that the break-up of the amount received is as under : (a) Re covery in respect of contribution to provident Rs. fund for the period from 1969 to 1970 66,070 (b) Recovery of overhead expenses 44,870 4. Shri Khare submitted that the original contract was between Montreal Engg. (Eastern) Ltd. and the Department of Atomic Energy. The Indian Co. (Montreal Engg. India Ltd. was formed and the entire, agreement was transferred in favour of the assessee-company with effect from 1-4-1969). The ITO was explained that originally the amount was paid as contribution and other overhead expenses were charged off to the profit and loss account. The ITO was also explained that the recovery being in the nature of reimbursement of expenses already claimed as a deduction, Section 41(1) should only apply. The ITO, however, applied the provisions of Section 176(3A) of the Act on the ground that the company had discontinued its business. According to the ITO, the provisions of Section 176(3A) would only apply to the assessee's case.
5. Before the Commissioner (Appeals), the entire explanation as has been filed in pages 1 to 43 of the booklet was also placed. It was also explained that Section 176(3A) would not be attracted in the assessee's case. It was explained that Section 176(3A) has been introduced as a corollary to Section 176(3). Reference was also made to Circular No.204 dated 24-7-1976 (see Taxmann's Direct Taxes Circulars, Vol. 2, 1985 edn., p. 653). It was explained that this provision would apply only in the case of the assessee, who is maintaining cash system of accounting.
In that case, any income received by an assessee after he had discontinued its business has to be rightly taxed under Section 176(3A). Shri Khare further submitted that it was also explained that Section 176(4) was introduced subsequent to the case of Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT 61 ITR 428 (SC), where Shri Mody, who received certain professional receipts after he joined the Bombay High Court as a Judge. In that case, it was held that since when he received this amount, he did not carry on the profession of advocacy. The receipt is capital in nature and, therefore, not taxable.
It is under these circumstances that Section 176(4) came into being.
The Commissioner (Appeals), however, mentions in his order that Section 176(3A) does not mention anything about cash basis or otherwise and it talks only of business being discontinued and taxability of sum which have been received after the discontinuation. According to the Commissioner (Appeals), the amount having been received out of business activities, it has to be taxed under Section 176(3A) and it is not a capital receipt or a receipt under Section 41(1).
6. Shri Khare submitted that the assessee's accounts have been maintained on mercantile basis all through. According to Shri Khare, Section 41(1) provides charging to tax of an amount which has been received in a subsequent year which receipt is directly in connection with any allowance or expenditure or loss or deduction allowed to the assessee-company in an earlier year. It also provides that it would be taxed as such whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. He also drew our attention to the Explanation under Section 41(2) wherein an identical provision has been made in respect of discarding the assets of the business and taxability of the profit on such sales on the company as if the company is in existence. He also referred to Section 41(5) wherein it has been provided that in a case where the business is no longer in existence and there are incomes chargeable to tax under Sub-section (1) of Section 41, etc., any loss which arose in that business during the year when it ceased to carry on the business shall be allowed to be set off against the income chargeable to tax under this sub-section. He therefore, referred to Section 176, which talks of discontinuation of business or dissolution.
He then, drew our attention to page 37 of the paper book where an extract from the report of the Direct Taxes Administration Enquiry Committee has been filed. In this report, the direction was, to bring to tax the income received after the cessation of business or profession by the advocates, engineers, etc. According to Shri Khare, the intention is very clear to take only such persons who receive income after the cessation of the business. In the assessee's case, the amount received by it is in the nature of reimbursement of expenses, which expenses have been allowed to the company as deduction in the earlier years. The company though had ceased to carry on the business, is in the process of winding up and the correspondence was carried on by the company and the amounts have been received by the company. The wordings of Section 41(1) are abundantly clear and Section 41(5) also aptly provides set off of the loss of the earlier years against the income under Section 41(1).
7. The next ground, Shri Khare submitted, is in respect of fees of Rs 5,930 received by the assessee in the year. According to Shri Khare, the amount of fees which was received is not taxable under Section 176(3A).
8. The next ground is in respect of set off of the unabsorbed depreciation He submitted that the ITO was of the view that since the business has discontinued, the Act does not provide for setting off of carry forward depreciation. In this connection, reliance was placed on the Ahmedabad Special Bench decision in ITO v. Rajaratna Naranbhai Mills Ltd.  2 SOT 144. According to Shri Khare, in case there is income under Section 41(1) or if there is any income from business, the unabsorbed depreciation shall be allowed to be set off. According to him the assessee is also entiled to claim under that Section 80MM of the Act in respect of receipts.
9. The last ground, Shri Khare, submitted is in respect of interest levied under Section 217(1A) of the Act. He submitted that the interest has been levied consequent to the department treating the receipt of Rs. 1,10,940. The assessee had filed an estimate at nil income since there was no income at all. According to him, as per the Bombay High Court decision in the case of CIT v. Diamler Benz, A.G.  108 ITR 961 (FB), the assessee who is aggrieved by the order of the ITO can prefer an appeal to the AAC or the Commissioner (Appeals) in respect of even interest which is taken along with the other grounds of appeal.
The learned Commissioner (Appeals) had negatived the claim of the assessee that there is no provision under Section 246 of the Act for filing any appeal against the imposition of penal interest under Section 217(1A).
10. On behalf of the department, the learned departmental representative, Shri S.S. Ruhela submitted that the provisions of Section 28 to 43 of the Act can be applied to a business if and only if the business is in existence or continued. Section 176 would be applied in all cases where the business had been discontinued. According to him, the Special Bench of the Tribunal in Sundaram Finance Ltd. v. IAC has held that while applying the provisions of Section the plain language of the Section as it is must be read. The meaning of the Section as is generally given should be given under all circumstances.
11. According to Shri Ruhela when the amounts were received there was no business connection between the assessee-company and the Department of Atomic Energy. It is a payment made by the Department of Atomic Energy for the contract which was executed by the assessee-company earlier to the discontinuance of business. Shri Ruhela, therefore, submitted that the treatment given by the ITO as well as the Commissioner (Appeals) is justified.
12. Regarding the unabsorbed depreciation being set off, Shri Ruhela pointed out that Section 41(5) provides for setting off of loss simpliciter. Shri Ruhela pointed out that in the earlier years, the Tribunal in the assessee's own case, in IT Appeal No. 704 (Bom.) of 1982 for the assessment year 1978-79 vide order dated 30-6-1983 had held that the unabsorbed depreciation could be set off against the income from other sources. Regarding other grounds, he relied on the orders of the authorities below.
13. We have heard the rival submissions. The various correspondences that have been filed by the assessee clearly indicated that the claim that was made by the assessee was in respect of provident fund contributions and certain overhead expenditure. These expenditures were partly incurred and charged to the profit and loss account in 1969 and 1970. Section 176 starts with the words 'Notwithstanding anything contained in Section 4'. Section 4 of the Act talks of assessment of every person. Section 176 (3A) reads as under : Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance.
The reading of this Section indicates that any sum that is received in the nature of income would be taxable under this Section. It would become taxable only when such receipt is related to the period when the business was in existence though received subsequent to the cessation or discontinuance of such business. An identical provision exists in Section 176(4), which provides for receipt received by for profession after he ceases to carry on the profession. The background of insertion of these provisions, is as per the advice of the report contained in Direct Taxes Administrative Committee (1958-59), copy of which is at page 184 of the paper book. The relevant portion reads as under : There is no provision in the law at present to assess the income received after the cessation of practice or death of the assessee carrying on a profession, like solicitors, advocates, doctors, consulting surgeons, engineers, etc. The law should be amended in such a way that even on the assessee's cessation of his vocation or retirement from the profession or death, income received after such cessation, retirement or death would be taxed. However, in cases where the contractual obligations of partnerships provide for the payment of commuted amounts to the heirs of the deceased partners, and if the taxes are payable by the surviving partners there should be no tax on the commuted payments received by the deceased partners' estate or heirs commuted payments will not be allowed as a deduction from the income of the firm or surviving partners.
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.
Where the business or profession referred to in this Section is no longer in existence and there is income chargeable to tax under Sub-section (1), Sub-section (2), Sub-section (3) and Sub-section (4) in respect of that business or profession, any loss, not being a loss sustained in speculation business or under the head "Capital gains", which arose in that business or profession during the previous year in which it ceased to exist and which could not be set off against any other income of that previous year shall, so far as may be, be set off against the income chargeable to tax under the sub-section aforesaid.
Now reading of these three Sections together, we are of the view that Section 41(1) would apply to a situation where there has been receipts in respect of any allowance, deduction, loss, expenditure made and allowed in computing the total income of the assessee-company in any previous year when the business was in continuance or in existence. In the year of receipt of money, when the business is either discontinued or ceased to exist, then the amount of such receipt shall become income of the assessee under Section 41(1) as if the company is in existence.
14. Section 41(5) is an Explanation to Section 41(1), which only provides that the income that is chargeable to tax under Section 41(1) should be set off against any loss of the company. We are, therefore, satisfied that the claim of the assessee-company is fully justified.
That the amount of Rs. 1,10,940 received in the year which represents reimbursement of expenses like provident fund contribution and overhead expenses, which have been charged to the profit and loss account in 1969-70 is to be taxed under Section 41(1). While coming to this conclusion, we have placed reliance on the Supreme Court decisions in CIT v. Ajay Products Ltd.  55 ITR 741, C.A. Abraham v. ITO  41 ITR 425 as well as CIT v. Vegetable Products Ltd.  88 ITR 192.
15. As regards the receipt of Rs. 5,930 representing service fees the same is rightly taxable under Section 176(3A), as it represents income of the assessee-company in respect of services rendered by it earlier.
Here again, the Section provides that for the purpose of taxation, it is to be treated as if the company is in existence.
16. The depreciation which is unabsorbed has to be allowed to be set off against the income of Rs. 5,930 as for the purpose of taxation, the company is deemed to be in existence. We also follow the Tribunal's order in the assessee's own case for 1978-79 dated 30-6-1983.
17. As regards the levy of interest under Section 217(1A), the assessee has right of appeal along with other grounds. The assessee has taken this ground as he is aggrieved against the entire order of the ITO. The Commissioner (Appeals) was not justified in rejecting the assessee's ground of appeal as the same has been taken along with the other grounds. The assessee, no doubt, could not have appealed against the levy of interest if that was the only point of his grievance as Section 246 does not provide for filing any appeal against the levy of interest under Section 217. For this purpose, we have relied on the Bombay High Court decision in the case of Diamler Benz A.G. (supra). Their Lordships held : It was a clear case of the assessee denying its liability to be assessed under this Act and as such the appeal to the AAC was competent. The Tribunal's view which upheld this particular view was, therefore, correct. Even on merits, the assessee would not be liable for payment of any interest on the ground that there is no income liable to tax.
Shri Khare for the assessee had submitted that the assessee-company had carry forward losses which are sufficient to absorb this income under Section 41(1) as well as under Section 176(3A). Since the figures of the losses brought forward have not been placed before us, we have to remit this matter to the ITO for the limited purpose of verification and examination that the income under Section 41(1) and Section 176(3A) would be entirely absorbed by carry forward of loss. In that event, the interest levied would have to be deleted in entirety. If the carry forward loss cannot absorb the entire income and there is some income, then the provisions of Section 217(1A) would be attracted as the assessee-company must have worked out all this while filing the advance tax estimate. The result is that the appeal for the assessment year 1979-80 is partly allowed.
18. In 1980-81 appeal, the assessee has raised three grounds. The first and second are common with the earlier year, the first being the taxability of income of Rs. 5,000 and the second being the setting off of unabsorbed depreciation.
19. We have held already that the service income received would be taxable under Section 176(3A), and the unabsorbed depreciation should be allowed to be set off against such income. We hold accordingly.
20. Regarding relief under Section 80MM for both the assessment years, it is provided that the relief under Chapter VIA of the Act shall be limited to the gross total income before deduction of claim under Chapter VIA. In case for these two years, there is any income after set off of earlier years' losses, the relief that is to 0be worked out would be limited to the income on account of service fees received of Rs. 5,930 and Rs. 5,000 for 1979-80 and 1980-81, respectively.
21. The last of the grounds is in respect of levy of interest under Section 216 of the Act. Following the earlier paragraph, where we have dealt with the interest under Section 217, we are of the view that interest under Section 216 is not justified and the same is deleted.
The appeal is partly allowed.