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Commissioner of Income-tax, Delhi (Central) Vs. Bharat Nidhi Ltd. - Court Judgment

LegalCrystal Citation
Subject Direct Taxation
CourtDelhi High Court
Decided On
Case NumberIncome-tax Reference No. 188 of 1974
Judge
Reported in(1982)27CTR(Del)29; ILR1982Delhi913
ActsIncome Tax Act, 1961 - Sections 41 and 41(1)
AppellantCommissioner of Income-tax, Delhi (Central)
RespondentBharat Nidhi Ltd.
Excerpt:
.....act, 1961 - section 41(1)--interpretation of--effect of crediting an amount in the profit and loss account even though no amount has actually been received.; the assessed, originally known as bharat bank limited, and formed out of part of its assets, gave loans to 5 parties in lahore. after partition, the amounts were transferred to the books of the assessed in india. the amounts were written off and allowed in the assessment years 1948-49 and 1949-50. in 1950, the amounts were transferred to the lahore branch of the bank and a corresponding credit entry was made in the sundry creditors' account, during the relevant accounting period, the assessed transferred the amounts form the sundry creditors' account to the profit and loss account. though the assessed contended that the amounts..........on the facts of the case, in holding that the amount of rs. 58,175 credited to the profit and loss account could not be included in the assessment year 1967-68 ?' 2. these are the facts : m/s. bharat nidhi ltd., the assessed, is a company which was incorporated on september 27, 1942. it is carrying on the business of financing. some time after its incorporation, bharat bank ltd., (the original name of the assessed till february 26, 1952), gave loans amounting to rs. 58,175 to five parties in lahore. after the partition of the sub-continent of india into india and pakistan in 1947, these amounts were transferred to the books of the assessed in india. these amounts were written off and allowed in the assessment years 1948-49 and 1949-50 (wrongly noticed as 1945 in the tribunal's.....
Judgment:

Leila Seth, J.

1. This income-tax reference is at the instance of the Commissioner of Income-tax. The question referred by the Income-tax Appellate Tribunal for our opinion is as follows :

'Whether the Tribunal was justified, on the facts of the case, in holding that the amount of Rs. 58,175 credited to the profit and loss account could not be included in the assessment year 1967-68 ?'

2. These are the facts : M/s. Bharat Nidhi Ltd., the assessed, is a company which was incorporated on September 27, 1942. It is carrying on the business of financing. Some time after its incorporation, Bharat Bank Ltd., (the original name of the assessed till February 26, 1952), gave loans amounting to Rs. 58,175 to five parties in Lahore. After the partition of the sub-continent of India into India and Pakistan in 1947, these amounts were transferred to the books of the assessed in India. These amounts were written off and allowed in the assessment years 1948-49 and 1949-50 (wrongly noticed as 1945 in the Tribunal's order). Later, in 1950, these amounts were transferred to the Lahore branch of the bank as they were considered to be realisable there. A corresponding credit entry was made in the sundry creditors' account. The Bharat Bank Ltd., sold some of its assets to the Punjab National Bank on March 10, 1951. The present assessed was formed out of a part of the assets of Bharat Bank Ltd. Its name was changed as above mentioned. In the year of account, i.e., year ending December 31, 1966 (assessment year 1967-68), the assessed transferred the credit amount of Rs. 58,175 from the sundry creditors' account to the profit and loss account. It appears that the reason for the transfer was that the assets of the Lahore branch had vested in the liquidator and, as such, credit could be taken for this amount. Though the assessed contended that this amount was not taxable, the ITO taxed it under s. 41(1) of the I.T. Act, 1961 (in short, 'the Act').

3. Being aggrieved the assessed appealed to the AAC, who confirmed the order of the ITO.

4. On further appeal to the Tribunal, it was contended by the assessed that s. 41(1) of the Act did not apply to the facts of the case. The Tribunal, however, held that s. 41(1) of the Act applied as the assessed had obtained an adjustment with the Labour branch in respect of the loss suffered by the assessed in the earlier year. But it accepted the contention of the assessed that this adjustment was made in 1950 when the Lahore branch was debited and the sundry creditors' account was credited. It was at that stage that the income could be said to have arisen in terms of s. 10(2A) of the Act of 1922. Subsequent transfer by the assessed from the sundry creditors' account to profit and loss account did not imply any receipt by the assessed from the parties. The receipt by adjustment had taken place when the adjustment was made by crediting the sundry creditors' account and debiting the Lahore branch account of the Bharat Bank Ltd. It accordingly held that the amount of Rs. 58,175 could not be included as the assessed's income for the assessment year in question.

5. Being aggrieved, the Commissioner of Income-tax sought for a reference of three questions. These were as follows :

'1. Whether the Tribunal was justified on the facts of the case in holding that the amount of Rs. 58,175 credited to the profit and loss account could not be included in the assessment year 1967-68

2. Whether there was any material on record on the basis of which the Tribunal could have come to the conclusion that adjustments in the accounts was made in 1950 debiting the Lahore branch and crediting the sundry creditors' account

3. Whether there was any material on record on the basis of which the Tribunal could have come to the conclusion that profits under section 10(2A) had arisen in 1950 ?'

6. The Tribunal refused to refer questions Nos. 2 and 3 as it held that there was sufficient material on the basis of which the Tribunal had come to the conclusion that the amount of Rs. 58,175 credited to the profit and loss account of the assessed could not be included in the assessment year 1967-68. It, thereforee referred only question No. 1. In the circumstances, the scope of the reference is extremely limited.

7. Mr. K. K. Wadhera, appearing for the Commissioner, contended that the conduct of the assessed in transferring the amounts from the sundry creditors' account to the profit and loss account after debiting the sundry creditors' account in the year under consideration indicated that the assessed treated this amount as its income. This was at a time when the Lahore branch went into liquidation. He, thereforee, submitted that the amount of Rs. 58,175 was taxable as the assessed's income under s. 41(1) of the Act.

8. Mr. Bishamber Lal, appearing for the assessed, first urged that the finding of the Tribunal, that the income cannot be the income of the year under consideration and at best can be the income of the year 1950-51, when the amount was credited to the sundry creditors' account, is final. thereforee, no question really arose for consideration. However, in the alternative, he submitted that the conditions of s. 41(1) of the Act were not attracted. He urged that s. 41 is not a charging fictional income. In the circumstances, he contended that a mere book entry did not constitute income; nor did the making of entries of credit in the account by themselves constitute a remission or cessation of liability. Since, admittedly, no amount had been actually received in the year of account under consideration, there was no taxable income.

9. In order to appreciate the point in issue, it is necessary to set out the relevant provision. Section 41(1) reads :

'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 assessed, and subsequently during any previous year the assessed 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.'

10. What is sought to be done under this sub-section by the Revenue is to tax as income what it had earlier allowed as a deduction. In order to attract its provisions two conditions must be satisfied. First, the amount/amounts must have been allowed as a deduction in some earlier year/years; and, secondly, the assessed must receive either the amount or some benefit by way of remission or cessation of liability.

11. In the present case there is no dispute that the bad debts were written off and the loss allowed to the assessed. Though Mr. Bishamber Lal did faintly mention that it was the Bharat Bank Ltd., which got the advantage of the allowance and now it was Bharat Nidhi Ltd., that was sought to be taxed, he did not pursue this matter.

12. There is also no dispute that no cash or actual payment has been received by the assessed in the year under consideration. thereforee, the query is limited to whether the assessed has obtained in any other manner any amount in respect of such loss or has been benefited 'by way of remission or cessation' of the trading liability, for it is only then that the amount can be deemed to be his profits and gains of business and thus taxable. But it is in the year in which the loss is recouped, expenditure refunded or liability remitted that it is to be taxed.

13. In the present case, the Tribunal's finding is that the 'receipt by adjustment' was made in 1950 when the sundry creditors' account was credited and the Lahore branch account debited; it was in that year that income arose in terms of s. 10(2A) of the Indian I.T. Act, 1922 (similar to s. 41(1) of the 1961 Act). The finding of fact is final especially in view of the fact that it was sought to be challenged by the reference to questions Nos. 2 and 3 above noticed. This was refused. It was specifically noted by the Tribunal that these findings were based on sufficient material.

14. thereforee, the only aspect which remains to be examined is, what is the effect of crediting the profit and loss account and debiting the sundry creditors' account in the year under consideration.

15. In Gannon Dunkerley & Co. Ltd. v. CIT : [1976]102ITR428(Bom) , the Bombay High Court has opined that merely because money has been transferred from the 'unclaimed balances account' to the 'reserve for taxation account' it will not become taxable. In arriving the this conclusion, two earlier decisions of the Bombay High Court have been followed. These are : Kohinoor Mills Co. Ltd. v. CIT : [1963]49ITR578(Bom) and J. K. Chemicals Ltd. v. CIT : [1966]62ITR34(Bom) .

16. In J. K. Chemicals Ltd., certain amounts towards wages, salary and/or bonus of employees were debited in the accounts when incurred though not disbursed. The assessed followed the mercantile system of accounting and obtained deductions during the years 1945 to 1953 in computing its total income. In 1957 it credited the undrawn sums to its profit and loss account. The court held that the transfer of the entry is neither an agreement between the parties nor the payment of the liability. thereforee, a remission or cessation liability is not brought about by a unilateral act.

17. In CIT v. Sadabhakti Prakashan Printing Press (P.) Ltd. : [1980]125ITR326(Bom) , the Bombay High Court has followed its earlier decision in J. K. Chemicals Ltd. : [1966]62ITR34(Bom) . The Kerala High Court has also relied on this decision in CIT v. V. T. Kuttappu & Sons : [1974]96ITR327(Ker) and held that there was no cessation of liability because the debt had become time-barred.

18. In Liquidator, Mysore Agencies Pvt. Ltd. v. CIT : [1978]114ITR853(KAR) , the Karnataka High Court has followed the Bombay High Court's decision in Kohinoor Mills Co. Ltd. v. CIT : [1963]49ITR578(Bom) and also held that there is no cessation of liability by reason of the law of limitation.

19. In CIT v. Rashmi Trading : [1976]103ITR312(Guj) , the Gujarat High Court has held that 'the only meaning that can be attached to the words obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss expenditure' incurred in any previous year clearly refer to the actual receiving of the cash of that amount. The cash may be actually received or it may be adjusted by way of an adjustment entry or a credit note or in any other form when the cash or equivalent of the cash can be said to have been received by the assessed. But it must be the obtaining of the actual cash which is contemplated by the Legislature when it used the words 'has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure in the past'. In the context in which these words occur, no other meaning is possible so far as we are concerned. As such, they held that the amount of sales tax refunded was assessable in the year in which the refund order was obtained from the STO and not the earlier year in which the Supreme Court judgment was passed which made such an order possible.

20. However, the Allahabad High Court has taken a different stand-distinguished the case of Gannon Dunkerley & Co. Ltd. : [1976]102ITR428(Bom) . Relying on its own earlier decisions in Pioneer Consolidated Co. Of India Ltd. v. CIT : [1972]85ITR410(All) and in Bhagwat Prasad & Co. v. CIT : [1975]99ITR111(All) , it has held (in [1978] 114 ITR 677 that the conduct of the assessed in transferring the amounts from the creditors' account to the profit and loss account after debiting the creditors' account is material. It shows that the assessed treated these amounts as income. The inference of fact to be drawn from this conduct is that the assessed treated its liability with regard to the unclaimed wages and amounts due to persons with whom it had business dealings had ceased to exist on the date of transfer. Further, it was observed that an entry in the account is a prima facie evidence of income. Distinguishing the case of Gannon Dunkerley & Co. Ltd., : [1976]102ITR428(Bom) in Indian Motor Transport Co. v. CIT [1978] 114 ITR 677 it observed (p. 679) :

'There the amounts in question were transferred from the unclaimed balances account to the assessed's reserve for taxation account. It was found that the assessed made payments from the reserve for taxation account as and when the creditors made claims. It is clear that the assessed never claimed that the amounts became its own property or its income. It was not transferred to the profit and loss account. The observation that a unilateral act on the part of the debtor in making transfer entry would not bring about remission or cessation of liability has to be understood in the context of the facts.'

21. But the Allahabad High Court was dealing with a case where the monies were actually with the assessed. The unclaimed wages, etc., which were lying in deposit with the assessed, were got back and put into circulation in the profit and loss account. In the present case no monies were obtained. What was due to the assessed had been written off in 1948-49 and 1949-50. This had again been credited to the sundry creditors' account in 1950 and to the profit and loss account in 1967. But on neither occasion had any amount been received.

22. As already noticed, investigation had revealed that this amount represented the adjustment of debts already written off and allowed as bad in the assessment years 1948-49 and 1949-50. But in the year 1950 this amount had been credited to the sundry creditors' account and debited to the Lahore branch. The reversal of the adjustment resulted in the fact of the expenses and/or allowance already allowed being written back, as it were, as the income of the accounting year 1950-51. This reversal and adjustment resulted in an income of Rs. 58,175 to the assessed. The fact that this amount has been credited to the profit and loss account in the year under consideration and may be available for distribution of dividend is not really relevant. No monies have been received. No amount has been obtained. If any benefit has accrued in terms of s. 41(1) of the Act, this accrued in 1950-51.

23. The account entries are, no doubt, somewhat confusing; and it is difficult to fathom why the assessed put through the entries during the previous year which have created the controversy under consideration. But the substance of the matter is clear. The assessed had earlier got a deduction, as bad debts, of the amounts advanced to the Lahore parties. Section 41(1) can be attracted only if there is any material either to show that the assessed was able to recover the amounts themselves in the previous year or that it got during the year, some benefit in respect of those amounts which had earlier been treated as lost. There is absolutely no material on record to suggest this. Indeed, it is a moot question whether the provisions of s. 41(1) were attracted even in 1950 but that we are not required to decide as the Tribunal's conclusion on that aspect has become final.

24. For the reasons outlined above, it would appear to us that the question must be answered in the affirmative and in favor of the assessed. The assessed will be entitled to costs. Counsel's fee Rs. 350.


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