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income-tax Officer Vs. R.B. Seth Moolch and Nemichand - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Jaipur
Decided On
Judge
Reported in(1985)14ITD473(JP.)
Appellantincome-tax Officer
RespondentR.B. Seth Moolch and Nemichand
Excerpt:
1. the department has preferred these appeals against the even dated orders dated 21-6-1983 of shri s.c. agarwal, commissioner (appeals) who allowed the appeal for the assessment year 1972-73; while he partly allowed the appeals for the assessment years 1973-74, 1978-79 and 1979-80 against the orders dated 19-8-1981, 17-9-1981 and 29-7-1982 of shri a.m. lunia, the ito, for the assessment years 1972-73, 1978-79 and 1979-80 and for the assessment year 1973-74 against the order giving effect to the tribunal's order by the commissioner (appeals).2. we are disposing of these appeals on consolidating these together and thereby passing a consolidated order for the sake of convenience since the issues involved in these appeals are common so much so that the contentions and submissions of the.....
Judgment:
1. The department has preferred these appeals against the even dated orders dated 21-6-1983 of Shri S.C. Agarwal, Commissioner (Appeals) who allowed the appeal for the assessment year 1972-73; while he partly allowed the appeals for the assessment years 1973-74, 1978-79 and 1979-80 against the orders dated 19-8-1981, 17-9-1981 and 29-7-1982 of Shri A.M. Lunia, the ITO, for the assessment years 1972-73, 1978-79 and 1979-80 and for the assessment year 1973-74 against the order giving effect to the Tribunal's order by the Commissioner (Appeals).

2. We are disposing of these appeals on consolidating these together and thereby passing a consolidated order for the sake of convenience since the issues involved in these appeals are common so much so that the contentions and submissions of the parties are also common.

3. First of all, we decide the appeal for the assessment year 1972-73.

The first issue in this appeal is regarding the deletion of addition made on account of accrued interest to the assessee on interest free loans to its directors. This issue is determined by the Commissioner (Appeals) in favour of the assessee and against the revenue in his order in paragraph No. 2 on the grounds that the ITO had not established any nexus in the borrowings and the advances made.

Moreover, the submissions made by the assessee were having force.

Therefore, accordingly, he deleted the addition made by the ITO amounting to Rs. 85,017 observing as under : Against the disallowance made it was submitted that the Tribunal for the assessment years 1969-70 and 1970-71 had approved the non-charging of interest from various debtors as the recovery was doubtful, the inference drawn by the ITO was not correct. Moreover it was submitted that interest of Rs. 1,200 was paid to Shri Ugamlal Parekh from whom loan of Rs. 40,000 was taken during the accounting year relevant to this assessment year for business purposes and was directly deposited in the Government treasury. Similarly interest was paid to the tune of Rs. 5,524 to Pioneer Minerals, from whom also money was taken for business during the accounting year.

Another submission made in this connection was that the capital of the company was Rs. 2,87,000 with development rebate reserve of Rs. 80,000 besides interest free creditors of Rs. 12,50,000. If these facts were taken into consideration, no disallowance was called for.

Yet another submission made in this connection was that the ITO has not established any nexus between the borrowings and the advances made. The advances were made in earlier years while the borrowings are relating to the accounting year of the assessment year. Hence, it was submitted that the addition was uncalled for and has been made on guess work. I find that there is force in the submissions made by the assessee on this point. The ITO has not established any nexus in the borrowings and advances made and, accordingly, the addition made by him cannot be sustained. Accordingly, the addition of Rs. 8,517 is deleted.

3.1 The department being aggrieved for the deletion of the addition made by the ITO referred to above has preferred this appeal.

4. Shri Ruhela, the learned departmental representative, contends that the learned Commissioner (Appeals) has erred in holding that the onus is on the department. He further contends that in the case of the assessee on the issue, the provisions of Section 36(2)(iv) of the Income-tax Act, 1961 ('the Act') are applicable. Reliance is placed on the decisions in the case of Bombay Steam Navigation Co. (1953) (P.) Ltd. v. CIT [1965] 56 ITR 52 (SC) and Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC).

5. On the other hand, Shri Gargieya, the learned counsel for the assesee, contends that the issue of interest on the loans to the directors of the assessee-company is very old as the loans were given to them in the year 1950. No doubt earlier the notional interest was charged but in the year 1961, a resolution was passed by the shareholders that no interest is to be charged from the directors on the loans advanced to them in the year 1950 and, accordingly, it was not charged in the assessment year 1965-66 and the department accepted it. Therefore, the department is to be consistent in its approach and as such in the assessment year 1972-73 there is no basis for inconsistency. Moreover, the loan is old one and, therefore, it cannot be held that the amount of loan is diverted by the assessee for non-business purpose in the previous year, relevant to the assessment years under consideration. He further contends that the cases relied upon by the department are not relevant to decide the issue as these cases are distinguishable. He relies on the paper book from pages 1 to 4 and 62 to 82 which is the order of the Tribunal in the assessee's own case for assessment year 1973-74.

6. In rebuttal, the learned departmental representative merely stated that the copy of the resolution referred to above was not filed before the ITO.7. We have heard the rival submissions and have gone through the record before us. From the record it is clear to us that the ITO made the addition which has been deleted by the Commissioner (Appeals) for the amount of interest payable by the directors on the loans advanced to them. The loans were advanced to the directors in the year 1950 and the assessee charged the notional interest thereafter. However, in the year 1961 the shareholders of the assessee-company passed a resolution for non-charging of interest on the loans advanced to the directors of the company. On the basis of it, the assessee did not charge the interest and the ITO accepted it. Thereafter it is admitted that in the assessment year 1965-66 no interest was charged by the company on the loans to the directors and the ITO did not make any addition and, therefore, accepted the claim of the assessee. Further, this is not the case whether the amount of loan taken by the company for business purposes has advanced to the directors as these are old loans since 1950. Apart from it there is no material brought on record by the department to rebut the findings of the Commissioner (Appeals) who accepted the contentions of the representative of the assessee before him which we have seen and are well founded. Therefore, we hold that there is no nexus between the amount of loans advanced to the directors and the loans taken by the assessee on which the assessee is paying interest. Moreover, the loans are old one and the assessee is within its powers to write off the loans what to say of non-charging of interest if the assessee has decided so in the interest of business and sufficient cause and reason is there for the same. In this case there is a resolution of the shareholders of the company vide which they decided that no interest is to be charged from the directors on the loans advanced to them as the directors are financially poor. This resolution was acted upon by the company and the ITO did not make any addition for non-charging of interest up to 1965-66. Further the provisions of Section 36(2)(iv) are not applicable in this case at all.

Moreover, the past record of the case is in favour of the assessee and against the revenue and, therefore, the principle of consistency demands from the department that it should not make inconsistency without basis. In view of our above discussion and reasons, we hold that the Commissioner (Appeals) is justified in deleting the addition made by the ITO for non-charging of interest on the loans advanced to the directors by the company. Hence, we confirm the impugned order on this issue. The cases relied upon by the department mentioned above are not applicable to the facts of the case and, therefore, we do not deem it proper to discuss them as these are distinguishable.

8. The next issue in this appeal is regarding the cash credit of Rs. 40,000 and the same is in ground No. 2 which is as under : The Commissioner (Appeals) erred on facts in holding the cash credit of Rs. 40,000 genuine in the name of Ugamlal Parekh, an employee of the company who denied the credit in the statement recorded.

8.1 The ITO asked the assessee to explain the cash credit and the assessee filed the confirmative letter of the creditor Shri Ugamlal Parekh. Further the ITO asked the assessee to produce the creditor before him to verify the genuineness of the cash credit. The assessee requested the ITO to summon him under Section 181 of the Act at its cost. In the situation of the matter, the ITO deputed the inspector to investigate and to report. According to the report of the inspector he was an employee of the company. Before the inspector, he denied the fact that he gave any loan to the assessee. The inspector confronted him with his confirmation and his signatures but he stated before the inspector that he had not given any loan to the assessee. The ITO sent the copy of the statement recorded by the inspector to the assessee for giving his comments. The assessee replied to the ITO and requested that Shri Ugamlal Parekh, creditor, should be called for cross-examination failing which no adverse inference should be drawn against it. The ITO took the view that it was for the assessee to prove that the credits were genuine by producing Shri Ugamlal Parekh and, thus, onus has not been discharged by the assessee and, therefore, genuineness of the credit remained unexplained and burden remained undischarged.

Accordingly, be made the addition of Rs. 40,000 plus the amount of interest Rs. 1,757, totalling Rs. 41,757.

8.2 The assessee went in appeal before the Commissioner (Appeals) who deleted it on the grounds that the question of addition could have been properly determined if Shri Ugamlal Parekh was examined by the ITO and subjected to cross-examination by the assessee, which had not been done ; that in the absence of the same, the question comes down to the fact whether his verbal statement before the inspector is to be accepted or the documentary evidence placed in support of the claim by the assessee should be accepted with reference to the books of account in which entries have been passed, and the position turns to be in favour of the assessee as the evidence produced had not been controverted by cross-examination ; that between the two positions, the position as per the documentary evidence had to be accepted and if that is accepted the addition cannot be sustained. Thus, on these reasons he deleted the addition made by the ITO mentioned above.

10. In this case the creditor is in the service of the assessee. No doubt the creditor is given confirmative letter regarding the cash credit of Rs. 40,000 to the assessee which was filed before the ITO to prove the genuineness of the cash credit. The ITO asked the assessee to produce the creditor so that the genuineness of the confirmatory letter and the cash credit be verified. The assessee did not do so rather asked the creditor to be summoned on his expenses. The ITO ordered the inspector to verify and to report to him. The inspector went on the spot and recorded the statement of the creditor who denied the advancement of loan to the assessee amounting to Rs. 40,000. Regarding confirmatory letter he stated that the confirmatory letter is not genuine as his signature has been taken in deception. The copy of this report was sent to the assessee who asked the creditor to be summoned as he wanted to cross-examine the creditor. The ITO took the view that the onus is upon the assessee to prove the genuineness of the cash credit as well as the credit-worthiness of the creditor. Therefore, he relied upon the report of the inspector and held that the cash credit amounting to Rs. 40,000 is not proved and, therefore, he made additions of Rs. 41,757 which is the total of cash credit amount and the interest thereon. On appeal the Commissioner (Appeals) has held that the confirmatory letter is documentary evidence and, therefore, a statement made before the inspector cannot be relied upon as the same is verbal.

He further held that it was for the ITO to summon the cash creditor for cross-examination of the assessee. Moreover there is an entry of the cash credit in the books of account and, therefore, whatever has been stated by the cash creditor before the inspector cannot be relied upon in view of the documentary evidence in the name of confirmatory letter and the entries in the books of account. These reasons ascertained by the Commissioner (Appeals) for accepting the cash credit are erroneous in law and on facts. The entries in the books of account are not conclusive piece of evidence, rather these are made by the assessee in its books of account and, therefore, these are exhibiting the stand of the assessee or the claim of the assessee. The confirmatory letter has been issued by the creditor to prove that the amount of credit is belonging to him and he has advanced it to the assessee. But the ITO is within his powers to verify it and, therefore, competent to ask the assessee to produce the cash creditor for testing the veracity of transaction and genuineness of the confirmatory letter. It is for the assessee to prove that the genuineness of the transaction vis-a-vis the cash credit between the assessee and the creditor and also to prove the identity of the creditor and the creditworthiness of the creditor. No doubt in this case the assessee has prima facie proved the identity of the creditor by making the entry in the books of account as well as filing the confirmatory letter, but it has failed to prove the creditworthiness of the creditor and the genuineness of the transaction between the assessee and the creditor. The reason is that the creditor has stated that he did not advance any loan to the assessee at all. He further stated that he is not in a position to advance the loan to the assessee and the facts stated in the statement and recorded make it clear. It is also clear to us that the creditor denied the issuance of confirmatory letter to the assessee as he has stated in the statement that the assessee has taken his signature in deception. Moreover the creditor is in the service of the assessee and the assessee has nowhere alleged that his relations with him are strained or enemical and, therefore, the ITO has collected the material to disprove the claim of the assessee regarding the cash credit. Furthermore, the ITO has confronted the report of the inspector to the assessee and the assessee has not at all made any comment except asking the ITO to summon the creditor for cross-examination. This request has no basis in view of the fact that firstly, the assessee failed to produce the creditor and secondly, he failed to make any comment in respect of the report showing therein that the creditor is enemical to him. Moreover, it is proved beyond doubt that the creditor is in the service of the assessee while the assessee has stated that he is not in the service of the assessee. The learned departmental representative from the record proved it and when this fact is brought to the knowledge of the learned counsel for the assessee, then he has not answered except to feel sorry. Therefore, the confirmatory letter and the entries in the books of account have been disproved by the creditor himself. When the creditor is denying the advance of loan and making a statement that the signature on the confirmatory letter has been taken by the assessee in deception then there is no duty on the ITO to summon the creditor again and again as the ITO has proved that the claim of the assessee for cash credit amounting to Rs. 40,000 is not genuine.

11. The Commissioner (Appeals) has committed an error in law and on facts in holding that the confirmatory letter is a documentary evidence but this documentary evidence is made by the creditor who has denied the making of the document stating that the signature on the confirmatory letter has been taken by the assessee in deception. The ITO has confronted this statement to the assessee who has not contradicted it even by filing an affidavit or alleging any enemity against the creditor who is still in the service of the assessee.

Therefore, the confirmatory letter has no value and as such it cannot be relied upon. Similarly the entries in the books of account cannot be relied upon. Furthermore, the statement recorded by the inspector is there and the inspector has made the report to the ITO holding therein that the cash credits are not genuine. There is no allegation against the inspector that he is having any grudge against the assessee, except stating that he is subordinate to the ITO. This plea has no force at all as the inspector has made the report in the performance of his duty under the statute and rules. As we have observed above that the entries in the books of account are not conclusive and it is for the assessee to prove these and in this case these have been disproved by the statement of the cash creditor and the report of the inspector.

Moreovee, the Commissioner (Appeals) was in error in saying that the statement of the creditor is verbal and, therefore, it cannot be taken over as the documentary evidence-the confirmatory letter. Firstly, the statement is conclusive piece of evidence if it goes unrebutted and free from the discrepancies and contradictions. Moreover, there is report of the inspector which says that the cash cradit is not genuine which is a documentary evidence more valuable than that of confirmatory letter and entries in the books of account as the inspector has made the report in the performance of his duties and the law and rules assign such duty on him. Therefore, in this view of the matter, we hold that the Commissioner (Appeals) has committed an error in law and on facts in deleting the additions. Hence, we set aside his order.

12. Now the question arises that whether the matter should go back or not. As the assessment year is 1973-74, the Tribunal has sent back the matter on the issue. The issue in the assessment year 1973-74 is distinguishable than the issue over here in view of the fact that the plea therein is for adjustment entry, while over here it is the genuinenss of cash credit of Rs. 40,000. Therefore, the year under consideration is distinguishable with the year 1973-74 on the issue of cash credit on account of this factual position. In view of our above discussion and reason thereto, we hold that the cash credit amounting to Rs. 40,000 is not explained as the entries regarding it are there in the books of account of the assessee and the explanation offered by the assessee for it is unsatisfactory. Therefore, the provisions of Section 68 of the Act are applicable to the facts and circumstances of the case. Accordingly, we hold that the amount of Rs. 40,000 is to be added in the income of the assessee for the assessment year under consideration under Section 68, and as such the ITO was justified.

Regarding the question of interest on this amount as taken by the ITO amounting to Rs. 1,757, we feel the same is to be answered in the negative in view of the fact that to add interest on the cash credit is too much. Further more, if the assessee has failed to explain the cash credit then Section 68 says that the same is to be taken as the income of the assessee for the assessment year under consideration in which year the entries in the books of account are made regarding it.

Secondly, we hold that there is no basis to make addition for interest on such amount. Accordingly we hold that the amount of Rs. 40,000 has to be added in the hands of the assessee in the assessment year and to this extent we restore the order of the ITO and set aside that of the AAC as he has committed an error in law and on facts in deleting the amount of cash credit.

13. Now we come to the assessment year 1973-74. In this appeal the only ground is as under : On the facts and in the circumstances of the case the Commissioner (Appeals) erred in deleting the addition made on account of unexplained credit in the account of Shri Choggalal Akodia.

This issue was there before the Tribunal in the assessee's appeal for the assessment year 1973-74 wherein the Tribunal set aside the impugned order and sent back the matters to be decided afresh. Accordingly, we hold that the appeal of the revenue for this year is to be decided along with that of the assessee as per the directions of the Tribunal for the assessment year 1973-74 in the assessee's own appeal.

Accordingly, we set aside the order of the Commissioner (Appeals) on this issue and direct him to do as the Tribunal has asked to do in the assessment year 1973-74 in the assessee's own appeal.

15. The common ground in these years is regarding the expenditure incurred for prospecting of mines is whether revenue expenditure or capital expenditure.

15.1 The ITO took the expenditure as capital in both the years for the reasons recorded in his order in paragraph Nos. 5, 5.1 and 5.2.

15.2 On appeal the Commissioner (Appeals) held as revenue expenditure for the reasons recorded in the assessment year 1979-80. That faces and as the ITO mentioned above (sic).

15.3 In the assessment year 1979-80 in paragraph No. 3 the Commissioner (Appeals) observed as under : Against this disallowance it has been submitted that the lease held by the assessee is one. The operations are carried in these lease areas from time to time. At some places operations are on a wider scale while on some areas the operations are started afresh.

However, the fact remains that the whole mining area given on lease is actually under operation and any expenses incurred are of revenue nature. It was admitted by the ARs that the nomenclature given to these expenses in the books of account was incorrect but that was not determinative of their true nature. It was further submitted that for prospecting of mines, the Government grants separate lease.

This is not the case here. The lease is one and is covered for taking out mica from the mines in the whole area given under the lease. Hence, it was submitted that the ITO's conclusion was not correct. He was influenced by the wrong name given to the expenses.

I find that the submissions made have force. The addition made by the ITO cannot be sustained. The lease is one with the company which is for working out the mines. It is not a lease for prospecting operations. Hence, the assessee is entitled to work out the mining operations in the leased area and any expenditure incurred in that connection will be necessarily revenue expenditure. It is not the case of the ITO that this expenditure was not incurred. Accordingly, the addition made by the ITO by treating the expenses as of capital nature cannot be sustained and is, therefore, deleted.

16. The departmental representative has not brought any material to rebut the aforesaid findings of the Commissioner (Appeals) though he reiterated the stand of the ITO before us. Further it is an admitted position that the assessee was engaged in the business for the last 40 years and is mining on one lease since then. Therefore, the Commissioner (Appeals) is justified in holding that the expenditure in question is revenue expenditure and is extended in carrying out the business for the assessment years under consideration. Accordingly, we hold that the reasons assigned by the Commissioner (Appeals) for taking the expenditure as the revenue are cogent as these go unrebutted and, therefore, we agree with these reasons and even adopt for holding that the expenditure in dispute is revenue expenditure and not at all capital expenditure in view of the facts mentioned above. Hence, we confirm the impugned order on the issue.

18. The second issue in this year is regarding car expenses for the personal use of the directors. The Commissioner (Appeals) sustained the disallowance of the car expenses for the use of the directors at Rs. 9,700, i.e., one-sixth. This disallowance is in accordance with the past record of the case but is excessive as it is admitted by both the parties that in the past it was made and sustained at one-fifth of the total expenses. Accordingly, we sustain the disallowance at one-fifth instead of one-sixth in respect of car expenses for the use of directors.

19. The third issue in this appeal is regarding deletion of addition of Rs. 20,495 which was shown by the assessee-company in its profits and loss account.

19.1 The Commissioner (Appeals) determined this issue in his order in paragraph No. 8 observing as under : Ground No. 7 : This relates to addition of Rs. 20,495 which was also part of the total amount written back to the profit and loss appropriation account of Rs. 1,08,436 mentioned above. This was constituted of three figures of Rs. 10,687 for creditors' credit balances, Rs. 8,667 for directors' credit balances and Rs. 1,150 for employees' credit balances. It is submitted against this addition that these items were not originally passed through that profit and loss account and, therefore, provisions of Section 41(1) were not applicable. Moreover it was submitted that this point is covered by the orders of the Tribunal, Jaipur Bench, for the assessment year 1973-74 in the case of the assessee. I find that the submission is correct in view of the Tribunal's order for the assessment year 1973-74 in the case of the assessee, the addition made by the ITO cannot be sustained and is, therefore, deleted.

It is clear from the aforesaid findings of the Commissioner (Appeals) that he arrived at his conclusion on following the decision of the Tribunal in the assessment year 1973-74 and, therefore, we hold that he is justified in his conclusion and as such we confirm it.

20. The fourth ground in this appeal is regarding the deletion of Rs. 86,169. This ground is in respect of unpaid wages. The ITO in making the addition held that the name and address to whom the wages are to be paid are not given and the details were also not furnished. Therefore, he held that the amount is taxable under Section 41(1) of the Act, as the same was not payable.

20.1 On appeal the Commissioner (Appeals) deleted it on the ground that the details of the amount had been filed before him to show that the closing balance at the close of the year was Rs. 1,05,319 and the amount of Rs. 86.169 was an opening balance in the account ; that certain payments were not made in this connection during the accounting year, while certain credit entries were passed ; that there was no writing back of this amount in the profit and loss account, hence, it was admitted that the provisions of Section 41(1) were not applicable ; that the payments are still being made from the balance outstanding.

Therefore, he, on these facts, held that the ITO was not entitled to apply the provisions of Section 41(1) observing further that the ITO could not make an addition unless the account is transferred to the profit and loss account.

21. On appeal before us, it is pleaded that the amount in dispute, no doubt, is representing the liability but the liability has ceased and, therefore, the provisions of Section 41(1) are applicable. Further the onus is upon the assessee to prove the liability and in this case it is not proved and the reasons assigned by the Commissioner (Appeals) are contrary to the facts on the record, viz., that the assessee has not furnished the addresses and names of the labourers to whom the amount is paid. Moreover the amount has not been paid, that too to the labourers. Therefore, the liability to pay is ceased as payments are old one and, therefore, this cannot be recovered under the process of law. Furthermore, the ITO has disputed that the amount is not representing the liability and, therefore it has become the income of the assessee for its non-payment and if the assessee has not brought it to the profit and loss account, then it cannot be held that the liability is there and the provisions of Section 41(1) are not applicable.

21.1 On the other hand, the learned counsel for the assessee contends that the liability has been accepted by the department as is evident from page 35 of the paper book and from the assessment orders for the assessment years 1974-75 and 1976-77. He, therefore, contends that the books of account have not been rejected and, therefore, the ITO has no right to add this as income of the assessee. Reliance is placed on pages 18 and 20. He further contends that there is an affidavit dated 6-2-1980 at page 19 of the paper book which has not been rebutted by the department and, therefore, in view of these facts the amount represents liability and as such it is not subject-matter of Section 4!(1).

22. We have heard the rival submissions and have gone through the record before us. At the time of hearing, we asked the learned counsel for the assessee that whether the amount has been paid to-date and the answer is in the negative. We further asked the learned counsel for the assessee that whether the assessee is in a position to furnish the details and also addresses of the payee, he answered in the positive stating that the matter be sent back for this purpose. However, he has admitted that the amounts represents payments of labour wages to the labourers and they are there but have so far not come to collect. He has also admitted that these are old amounts to be paid to the labourers for their wages and have not been paid for the last 10 to 15 years. It is also clear from the record that the assessee has filed the affidavit dated 6-2-1980 and contends that the contents have not been rebutted and, therefore, the affidavit should be accepted. The contents of the affidavit need not to be rebutted in view of the fact that the assessee has admitted that the amounts to the labourers have not been paid even up-to-date. Moreover, the assessee was asked by the ITO to give the names and addresses of the labourers but he failed to do so.

No doubt, these amounts are to be paid since long and they were there in the assessment years 1974-75 and 1975-76 and the revenue accepted these as payments to the labourers and, therefore, the liability of the assessee to pay has become obsolete. If the liability is not discharged even up-to-date and the amount is lying with the assessee, who is using it in the business and, therefore, it is the amount of the assessee for the purpose of business. It is admitted by the assessee that the amount has not been deposited in the bank in the names of the labourers rather the assessee is using it for the business purposes in each year.

Moreover India is a welfare State and one of the poorest country in the world. Therefore, if the wages are not paid to the daily wagers in time, then it cannot be held that the assessee is keen to discharge its liability and running the business on principle and humanitarian basis.

Further, the assessee did not give the names and addresses of the labourers and the books of account show that they do not contain the names and addresses of the labourers. When this is so then it cannot be ascertained whether those labourers are alive or not. Furthermore, the amount of wages cannot be recovered under the process of law and the limitation as prescribed for it. The provisions of Section 41(1) makes it clear that if the liability is not discharged then the liability ceases. In this case, the totality of the facts and circumstances of the case shows that the assessee is not keen to discharge the liability as up-to-date the assessee has not paid the amount to the labourers.

Moreover, the names and addresses of the labourers are not furnished to the ITO. Accordingly, we hold that the ITO is justified in taking this amount for the purpose of tax in the assessment year under consideration. Moreover, the assessee has already obtained the deduction for these expenses and if the assessee pays the same, he has remedy before the income-tax authorities to show and prove that the payment is made to the labourers. Therefore, justice demands that claim of the assessee should not be accepted and as such we reject the claim of the assessee and hold that the Commissioner (Appeals) has committed an error in deleting the addition made by the ITO. Hence, we restore the order of the ITO and set aside that of the Commissioner (Appeals) for the reasons which we have mentioned above. Hence, we decide this issue in favour of the revenue and against the assessee.

23. The fifth issue in this appeal is regarding the deletion of addition of Rs. 79,555. This amount is also in respect of unpaid wages.

The ITO and Commissioner (Appeals) added and deleted the above amount on the grounds which they have adopted and assigned for the sum of Rs. 86,169 mentioned above. (The fourth issue as discussed above in this appeal.) For the same reasons, we set aside the order of the Commissioner (Appeals) on this issue also and restore that of the ITO, as we have mentioned for deciding the issue of Rs. 86,169. Hence, we set aside the impugned order on this issue and thereby hold that the contentions of the learned departmental representative mentioned above are well founded and hence tenable.

24. The last issue in this appeal is regarding the deletion of addition of Rs. 39,835. This amount is also representing unpaid wages for various entries in the books of account. The contentions and submissions of the parties are the same as those for the issue of Rs. 86,169 mentioned above (fourth issue). As this amount has not been paid so far and, therefore, for the same reasons, we hold that the liability to pay this amount has ceased and as such these are to be added in the income of the assessee under Section 41(1). Accordingly, we set aside the order of the Commissioner (Appeals) on this issue and restore that of the ITO.25. Now we come to the appeal for the assessment year 1979-80. The first ground in this appeal is as under : The Commissioner (Appeals) erred on facts and in law in holding that the expenditure incurred for prospecting of mines is revenue expenditure and thereby deleting the same.

This issue we have determined in deciding the appeal for the assessment year 1978-79 taking it as common ground in that year. Accordingly, we determine it over here.

The Commissioner (Appeals) erred on facts and in law in deleting the addition made on account of accrued interest to the assessee on interest-free loans to its directors.

27. This issue we have determined for the assessment year 1972-73 and for the same reasons, we determine it over here and that too in favour of the assessee. Hence, we confirm the impugned order on this issue and thereby reject this ground.

28. In the result, the appeals for the assessment years 1972-73 and 1978-79 are partly allowed. The appeal for the assessment year 1973-74 is treated as allowed for statistical purpose only. The appeal for the assessment year 1979-80 is dismissed.

1. I have gone through the order of my learned brother. I am unable to agree with the views expressed by my learned brother regarding unpaid wages which has been considered by him in paragraph Nos. 20 to 24, for the assessment year 1978-79 for Rs. 86,169 was the opening balance in the unpaid account, Rs. 79,555 representing amount unpaid to various creditors and Rs. 39,835 representing unpaid expenses of earlier years.

The ITO in respect of unpaid wages wanted the assessee to file the details in respect of names and addresses of various employees in whose names the amounts were shown as outstanding as also establish their identities. The ITO has not disputed the fact that these were amounts brought forward from earlier years for which provision was made in various respective years. The ITO was of the view that since the assessee could not provide names and addresses establishing the identities of various persons, these are not liabilities. The Commissioner (Appeals) deleted the said sum as the liability has not been distinguished.

2. Regarding the second item of Rs. 79,555, the ITO did not dispute that these were brought forward balances in the names of various creditors, as under the unpaid wages account he made similar demands of addresses as well as the identities of the creditors. According to the ITO no explanation was offered and, therefore, he treated these sums which were outstanding as not liabilities and, hence, treated the same as income under Section 41(1).

3. The last item is in respect of certain expenses provided for in the earlier years which remained unpaid. Similar question was asked and the ITO treated the various sums as income under Section 41(1). The Commissioner (Appeals) deleted the second and third items for the same reasons as he had deleted the unpaid wages.

4. My learned brother has gone on extraneous consideration such as welfare State and that the country is very poor. It is an admitted fact that all the above items have been charged as an expenditure and allowed as such by the department in the earlier years and provided for. It is also an admitted fact that the department has no evidence in its possession that the parties concerned have remitted the liability in favour of the assessee. It is also an admitted fact that as far as the assessee-company is concerned, there is no cessation of liability.

It is also an admitted fact that the details of outstandings have been furnished to the department. It is also an admitted fact that these are shown as liabilities not only in this year but also in the earlier years. The only reasoning given for treating these as income is that these are used by the assessee for its business and, therefore, the assessee is not keen in discharging his liability and, therefore, they have to be treated as income under Section 41(1). This in my opinion is a presumption and not a finding of fact. Section 41(1) reads 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 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.

The reading of the section clearly indicates the following requirements : (a) Expenditure or loss or trading liability must have been incurred by the assessee and allowed as a deduction in the assessment year.

(b) In a subsequent year the assessee must have obtained either in cash or in any other manner, 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.

(c) It would then be treated as income in the year of receipt or accrual of the benefit.

5. Thus, it can be seen in the instant case that only the first requirement of Section 41(1) has been satisfied is that the assessee was allowed the impugned expenditure against' its income in earlier years. The second requirement, i.e., receipt of cash or remission or cessation has not occurred. In such a situation Section 41(1) cannot be applied. In the case of CIT v. Punjab Oil Mills [1976] 102 ITR 332 (Punj. & Har.) it was held 'as regards trading liabilities it is only upon remission or cessation that this sub-section comes into operation'.

5.1 The question of a liability becoming barred by law of limitation was examined in the case of Kohinoor Mills Co. Ltd. v. CIT [1963] 49 ITR 578 (Bom.) and in the case of Bhagwat Prasad & Co. v. CIT [1975] 99 ITR 111 (All.). It was held that 'when a liability becomes barred by the law of limitation, there is neither remission nor cessation of the liability ; the liability is not extinguished, only the creditor's remedy becomes barred'. Therefore, if the amount of a trade-in-debt was allowed as an expense to the assessee, the amount cannot be taxed under this sub-section as the income of the year in which the debt due by the assessee becomes time barred.

5.2 In the cases of J.K. Chemicals Ltd. v. CIT [1966] 62 ITR 34 (Bom.), CIT v. V.T. Kuttappu & Sons [1974] 96 ITR 327 (Ker.) and Gannon Dunkerley & Co. Ltd. v. CIT [1976] 102 ITR 428 (Bom.), they had gone a step further. In the first two cases the amount that was unpaid was credited to partner's capital account and in the last case of the company the amount was transferred to its general reserve account. Even in that situation it was held that the amount could not be taxed under Section 41(1) even if the amount is credited to the profit and loss account or to the reserve account. In the case of J.K. Synthetics Ltd. v. O.S. Bajpai, ITO [1976] 105 ITR 864 (All.) it was held that cessation of liability would arise only when the liability has finally ceased without there being a chance of their being revived.

6. From the various judgments mentioned above it is clear, unless and until all the conditions as has been brought out in Section 41 are satisfied, the assessing of an income under Section 41(1) would be illegal and unlawful. Therefore, I am of the view that the amount of unpaid wages of Rs. 86,169, Rs. 79,555 of sundry creditors and Rs. 39,835 of unpaid expenses cannot be assessed as income under Section 41(1) and the additions made are, therefore, deleted.

1. My learned brothers constituting Jaipur Bench could not agree on the following point and as such the difference of opinion was referred by them to the President who nominated me as a Third Member for my opinion. The point of difference is succinctly put by my learned brothers as follows : Whether, on the facts and in the circumstances of the case, the amounts of Rs. 86,169, Rs. 79,555 and Rs. 39,835 are the subject-matter of Section 41(1) of the Income-tax Act, 1961 2. The assessee in this appeal is a private limited company engaged in mining of mica. The dispute, inter alia, before the ITO was whether outstanding liabilities towards wages could be treated as income of the assessee under the provisions of Section 41(1). The assessee's balance sheet showed an outstanding amount for expenses (viz., payable to labourers) of Rs. 1,05,619 as at the end of the previous year relevant for the assessment year 1978-79 (as is understood from the order of the ITO). Of this it was noticed that a sum of Rs. 86,169 related to the amounts payable in the earlier years. The assessee was asked to give the names and addresses of the parties to whom these amounts were payable with a view to establish their identities. The assessee's reply was that as it did not have the old accounts, it was unable to supply the information. Then the ITO made certain observations which I thought are very pertinent to quote : It appears that the assessee is following the practice of writing off of these expenses amounts as and when it suits its best. It has credited them in the profit and loss account without submitting them for taxation. These liabilities are old and the assessee is not having any details about these liabilities. It is clear from the discussion, that the assessee has claimed excessive expenses in earlier years and has not paid correct taxes on its real income of these years.

He then held that since the assessee failed to give details, there did not exist any liability for these expenses and that the claim for allowance of these amounts was made wrongly in the earlier years. The assessee relied upon certain case law before the ITO but he did not consider it advisable to refer to them on the ground that case law did not help the assessee when no liability existed. Thus, invoking the provisions of Section 41(1), the sum of Rs. 86,169 which related to the earlier years was added back as income of the assessee. Then the ITO noticed another item of expenditure under the head 'Unpaid mandal' creditors for Rs. 79,555. Here also the ITO required the assessee to furnish the details of the names of the parties to whom the amounts were owing but the assessee could not furnish the details. Again for the same reasons as were adduced in support of the addition for the earlier sum of Rs. 86,169, the ITO added this sum of Rs. 79,555 also as income of the assessee under Section 41(1). Again there is another liability under the head 'Current liabilities' which included another item of Rs. 39,835 as again relating to the earlier years and again for exactly similar reasons given for the above two additions, this amount also was added back as income of the assessee under Section 41(1).

Thus, a total sum of Rs. 2,05,579 was added as income of the assessee under Section 41(1). Aggrieved assessee filed an appeal before the Commissioner (Appeals). The Commissioner (Appeals) found that out of the opening balance of Rs. 1,05,319 certain payments were being made and it was not correct to say that no payments were being made out of these opening balances and further the sums in question were never treated by the assessee as its income by transferring the sums to the profit and loss account and, therefore, the provisions of Section 41(1) were not at all attracted. He also recorded a statement as a fact that the ITO did not dispute the fact that payments were being made out of these outstanding amounts. For these reasons he deleted the addition.

For more or less similar reasons the other two additions also were deleted. The most important finding recorded by the Commissioner (Appeals) was that the genuineness of the payment made out of these outstanding balances was not doubted by the ITO at any stage even though the credit balance related to the earlier years, in other words being carried forward from earlier years. In other words, the finding of the Commissioner (Appeals) was that the unpaid balances were being carried forward from year to year and being cleared in subsequent years and the stage that they remained unpaid and treated as the income of the assessee never arose. It was by this finding of the Commissioner (Appeals) that the department felt aggrieved and filed an appeal before the Tribunal. The matter was argued at length.

3. The learned Judicial Member was of the opinion that for the reasons given by the ITO the amount was rightly added back as income of the assessee and the Commissioner (Appeals) was wrong in deleting it. In particular he pointed out in paragraph No. 22 of his order that in reply to a question put by the Bench, the learned counsel for the assessee answered that the matter could be sent back to the ITO so that the details of the amounts could be furnished to the ITO and that it was asserted that the labourers were existing and the payments were outstanding and did not cease to be liabilities except that they became old balances. He expressed the opinion that since these amounts were to be paid for long and they were not paid and since the revenue accepted them as payments in the earlier years, the liability of the assessee to pay has ended not having been discharged even till the date of the appeal. The assessee was using this sum in the business and it, therefore, became the amount of the assessee for the purpose of the business. He was of the opinion that the assessee should have deposited these sums in the bank in the names of the labourers instead of utilising the same for business purpose. On the ground that the names of the labourers were not furnished, he expressed a doubt whether the labourers were alive or not. He also held that law of limitation applied to the payment of these wages. He, therefore, held that the Commissioner (Appeals) was not justified in deleting these additions and that the ITO was justified in treating these sums as the income of the assessee. So the sum and substance of the view expressed by the learned Judicial Member as I gathered is that since the assessee had delayed the discharge of these liabilities to the labourers, he was not keen to pay the money to the labourers and that fact proved that the liability ceased to exist and, consequently, the provisions of Section 41(1) were attracted.

The learned Accountant Member, on the other hand, took a different view. He pointed out that in respect of the sum of Rs. 86,169 was the amount brought forward from the earlier years and except for the reason given by the ITO that names were not available in the books, the fact of the matter was that details were available and the payments were being made in the discharge of these liabilities. In regard to second item of Rs. 79,555, though these were brought forward balances, the names of the creditors were available in the books under the head 'Unpaid wages'. Since these labourers were not produced, the ITO treated them as unexplained and, therefore, income under Section 41(1).

In regard to third item he pointed out that they represented expenses provided for in the earlier years which remained unpaid and the ITO treated them as income because those liabilities for expenses remained undischarged. He then pointed out that the department has absolutely no proof even of a semblance even to suggest that the parties concerned remitted the liability in favour of the assessee so as to be called as income within the meaning of Section 41(1). He held that as far as the assessee was concerned, there was no cessation of liability. Another important fact recorded by him in his order was that it was an admitted fact that the details of outstandings were furnished to the department and that these amounts were shown as liabilities in the past also and except for the reason that the assessee was using these sums in its business, there was nothing else in the possession of the department to show that these sums ceased to be liability so as to be treated as income under Section 41(1), He pointed out that this was only a presumption but not a finding of fact. He held that the requirement of Section 41(1), namely, that the assessee obtained either any cash or in any other manner any amount in respect of such loss or expenditure or some benefit in respect of such liability by way of remission or cessation thereof was not satisfied and therefore, these amounts were miles away from the application of Section 41(1). Then he made a reference to some cases-Punjab Oil Mills (supra), Kohinoor Mills Co.

Ltd. (supra) and Bhagawat Prasad & Co. (supra)-to show that when a liability became barred by the law of limitation, there was neither remission nor cessation of the liability and that the liability was not extinguished except that the creditor's remedy became barred. 4. I have considered the matter very carefully, perused the orders of the authorities below and of my learned brothers, considered the arguments addressed to me and I am of the opinion that these sums could not be treated as income under Section 41(1) at all. As rightly pointed out on behalf of the assessee, these sums were not transferred to the profit and loss account at all by the assessee, which is an admitted fact.

Even the ITO does not say that these amounts were transferred to profit and loss account. Transfer to profit and loss account becomes significant only to show that there is a cessation of liability at least from the point of view of the assessee if not under the law. When the assessee treated these liabilities as payable and outstanding, I wonder whether it is open to the department to say that the liability ceased to exist all because there was delay in the payment. Moreover the fact mentioned by the learned Accountant Member in his order that the details of the outstanding amounts were furnished before the authorities below was not disputed. Another important fact that requires a mention in this context is that the assessee has been making payments out of these outstanding amounts and that also was not disputed. The learned Judicial Member also pointed out in his order as I have observed a short while ago that the assessee offered to give the details if the case was sent back to the ITO but yet that request was not granted. On these admitted facts I find it difficult to agree with the view that the liability ceased to exist so as to bring these sums in question within the meaning of Section 41(1) as income. The law on the subject is now fairly settled and I do not have to refer to the entire case law but all I would say that the cases referred to by the learned Accountant Member in his order are opposite and lay down the correct principle of law, namely, that the liability though became barred under the law of limitation, there could neither be remission nor cessation of the liability and that the liability did not exist except that the creditor's remedy became barred. So mere time barring of a debt or a liability did not automatically mean that it became the income of the assessee within the meaning of Section 41(1). The words used in Section 41(1) are very clear and unambiguous that the cesser of trading must be by way of remission or cessation thereof. Without there being a remission or cessation of a trading liability the amount in question could not be treated as income under Section 41(1). The remission or cessation of the liability was not proved in this case neither as a fact nor as a law. The object behind Section 41(1) is clear. The revenue seeks to take back a benefit which had been granted earlier when subsequent events show that the benefit need not have been granted or the assessee got a benefit out of the grant of the benefit earlier. In other words, this is a recognition of the principle of bringing as income the recoupment of loss. It is pertinent to mention here that even transfer of the entries, i.e., outstanding balance to the profit and loss account was not considered by the Courts as resulting any income within the meaning of section 41(1) because that was a unilateral act, i.e., to say for the section to apply there must be a bilateral act which means that the liability must be given up by the receipient. The Courts have held that there was a distinction between remission and cessation. While remission means a positive conduct on the part of the creditor, cessation may result even from outside agency, e.g., when the assessee is absolved of a liability by a judicial pronouncement or by statute. Since there is neither remission by a positive conduct on the part of the assessee or the creditors nor a cessation and as it was found as a fact that the payments were being made out of these liabilities, though belatedly, I am unable to agree that there was a cessation of the liability or remission thereof so as to bring these sums within the ambit of Section 41(1). I, therefore, express my agreement with the view expressed by the learned Accountant Member. Before I close the matter, I would like to add that from the order of the learned Accountant Member which was not particularly refuted, it would appear that this was no more a case where details of the outstanding liabilities were not available.

5. The matter will now go back to the original Bench for disposal according to majority view.


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