D.K. Kapur, J.
1. A number of income-tax references relating to the same assessed have been heard by us together. These are I.T.R. Nos. 57 and 58 of 1976, I.T.R. No. 127 of 1976 and I.T.R. Nos. 27 and 28 of 1977. The assessment years covered by these references are 1965-66 to 1968-69, i.e., four assessment years. Inasmuch as many of the questions are common, these cases can be conveniently dealt with together.
2. For the assessment years 1965-66 and 1966-67, there is a common statement of case which refers the following question for our opinion :
'1. Whether, on the facts and the circumstances of the case the surpluses of Rs. 99,836 and Rs. 13,79,105 resulting from the book adjustments between the assessed and the State Trading Corporation are liable to be assessed in the hands of the assessed for the assessment years 1965-66 and 1966-67, respectively
2. Whether, on the facts and the circumstances of the case, the amounts of provision made by the STC for bad and doubtful debts and sales tax liabilities which were transferred to the assessed are assessable in the hands of the assessed for these assessment years ?'
3. For the assessment year 1967-68, the following two questions have been referred :
'1. Whether, on the facts and in the circumstances of the case, the surplus of Rs. 5,74,848 is liable to be assessed in the hands of the assessed as income under section 41(1) of the Income-tax Act, 1961
2. Whether, on the facts and in the circumstances of the case, the provisions made by the State Trading Corporation for bad and doubtful debts and sales tax liabilities which were transferred to the assessed are assessable in the hands of the assessed for this assessment year ?'
4. In substance, these questions are similar to the ones for the earlier two years. For the assessment year 1968-69, the following question has been referred :
'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the entire surplus of Rs. 5,37,178 representing credits in the 'Bifurcation Suspense Account' was not taxable in the hands of the assessed ?'
5. This is also similar in effect.
6. The facts giving rise to this case can now be summarised. The State Trading Corporation of India was a Government of India undertaking already in existence before the Minerals and Metals Trading Corporation was incorporated on October 1, 1963. Under a scheme framed by the High Court of Delhi, the MMTC (in short) took over the business and trade in mineral ores, concentrated metals and other allied commodities with effect from October 1, 1963, which was formerly being carried on by the STC (in short). The STC was the transferor-company and the MMTC was the transferee-company. The business taken over was described as transferred business. The MMTC paid a sum of rupees two crores as consideration for the transfer. There was a stipulation in the scheme to the effect that the excess of the transferred assets less the total value of the liabilities, less the sum of rupees two crores which was already paid, would be treated as a loan. This led to the creation of a 'Bifurcation Suspense Account' in which liabilities and assets settled after October 1, 1963, were adjusted. There was a surplus of Rs. 99,836 and Rs. 13,79,105 in the accounting years relevant to the assessment years 1965-66 and 1966-67. This surplus was on account of the fact that the assessed had to pay less in the revenue accounts in respect of the liabilities taken over from the STC. This surplus amount was taken by the Income-tax Officer to be a revenue gain and hence taxable as income under section 41(1) of the Income-tax Act, 1961. This was the position for the first two years.
7. The assessed appealed to the appellate Assistant Commissioner who held that a running business had been taken over by the assessed and hence any gain on the realisation of the assets and settlement of liabilities was a revenue gain. Thus, the surplus was to be treated as income according to the Appellate Assistant Commissioner.
8. On appeal to the Tribunal, the Tribunal came to the conclusion that the entire business had been transferred for a sum of rupees two crores and thereafter no business was to be done by the STC. The transferred business was an independent and separate business which was transferred lock, stock and barrel to the assessed-company. The Tribunal was of the view that the successor was a different assessable unit from the predecessor. It was held by the Tribunal that it was not necessary that the entire business should be transferred and this case was a case of succession to an independent and separate business.
9. The Tribunal followed the judgment of the Supreme Court in CIT v. Hukamchand Mohanlal : 82ITR624(SC) , where it was held that a successor in business could not be held chargeable under section 41(1) of the Act.
10. The question of bad and doubtful debts was also considered by the Tribunal and came to the conclusion that no case was made out for inclusion of this amount as the assessed's income. There was a sales tax liability of Rs. 1,52,297.29 and some other bad and doubtful debts which had been transferred towards which some payment has been received.
11. In the assessment year 1967-68, a sum of Rs. 5,74,848 was adjusted in the 'Bifurcation Suspense Account'. As regards the bad and doubtful debts, there is no specification of the amount, but the earlier order of the Tribunal was followed.
12. In the assessment year 1968-69, the reference is confined only to the adjustment in the 'Bifurcation Suspense Account' amounting to Rs. 5,37,178. The Tribunal had again recorded the conclusion that this amount was not to be treated as a revenue receipt.
13. We have heard learned counsel for both sides in this matter and have had considerable difficulty in finding out the scope of the questions before us. In order to clarify matters, we have referred to the scheme of arrangement made by the Delhi High Court as per order dated March 31, 1967. This procedure is necessary to understand what is the surplus with which we are dealing. The relevant portion is the scheme of clause 9, which reads as follows :
' (a) The excess of the total value of the assets (including the reserves proposed to be transferred under paragraph 4 of this Scheme) over the total value of the liabilities as on date of transfer less the sum rupees two crores which has already been paid by the transferee-company to the transferor-company shall be treated as a loan. The aforesaid excess shall be paid by the transferee-company to the transferor-company in three half yearly Installments on the following dates :
October 1, 1965, April 1, 1966, and October 1, 1966.
(b) The transferee-company shall not be liable to pay any interest on the amount outstanding or any part thereof so long as the Installments are paid by the company on or before the due dates.'
14. From a reading of the scheme, it appears that part of the business of the State Trading Corporation of India Ltd. was transferred to the Minerals and Metals Corporation of India Ltd. However, the exact value of the transferred business could not be evaluated, so an adjustment account was opened with the idea of determining whether the value was more or less than rupees two crores. If there was an excess, the same had to be paid by the MMTC to STC. It does not seem at first sight that this operation involves any income. It is a question of sale of the assets by the MMTC to STC for an approximate amount calculated at rupees two crores. By subsequent adjustments, the question as to whether this sale consideration was to be increased or decreased had to be determined. The surplus in the 'Bifurcation Suspense Account' is merely a step in the process of adjusting the amount of rupees two crores. It is certainly not obvious to us as to how any revenue gains resulted to the assessed in this process of adjustment. During the hearing of these references, our main attention was directed to the question of whether the amounts of adjustments were in the nature of capital receipts or revenue gains.
15. As the question is somewhat intricate, it will be useful to see why the Income-tax Officer held that these were revenue gains. The Income-tax Officer was faced with two contentions : (a) that the amounts in question were not a result of the assessed's (trading) activities, but only a result of the adjustment of the previous liability and hence a capital receipt Secondly, the amount could not be taxed under section 41, as there was no deduction claimed by the assessed on this account at any stage. According to the Income-tax Officer, the position of the assessed was that of a successor and the assessed had to be treated as if it was in existence since the inception of the activities. According to him, all liabilities which had already been allowed had to be taxed now provided there is a saving. On this footing, the entire amount was held to be taxable. We do not find that the reasoning is at all satisfactory, but reproduce it as that of the Income-tax Officer. In the assessment year 1966-67, it was reasoned that the assessed took over the assets and liabilities as well as trade contracts, and thereforee, there was a continuation of the activities. It was again stated that the liabilities which had been allowed earlier were to be taxed now.
16. The appellate order passed by the Appellate Assistant Commissioner considered the question whether the surplus or deficit on realisation was of a capital nature. It was held that a running business was taken over, thereforee the gain or loss in the running business was a surplus which resulted in a revenue gain.
17. When the matter was considered by the Tribunal, the main reliance of the assessed was on the point that section 41(1) did not apply, and the further point urged was that the surplus or excess was a capital receipt not liable to tax. The Department relied on another judgment of the Supreme Court in CIT v. R. Hanumanthappa and Son : 82ITR880(SC) , wherein there was a change in ownership. In that case, a Hindu undivided family was converted into a partnership. As already stated, the decision of the Tribunal was that section 41(1) did not apply and hence the surplus was not taxable. Although, it was expressly urged on behalf of the assessed that there was no revenue receipt, but a receipt of a capital nature, this question does not seem to h been decided either way by the Tribunal. The same position was maintained in the other assessment years 1967-68 and 1968-69.
18. We may conveniently deal with this case from the point of view whether section 41(1) of the Act applies and this will also help in deciding the other question as to whether there is any revenue receipt in this case. This part of the discussion relates to question No. 1 in the assessment years 1965-66 to 1967-68 and also to the only question referred for 1968-69.
19. Section 41(1) of the Act provides as follows :
'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.'
20. It is not easy to see how this question has been put into operation on the facts of the present case by the Income-tax Officer. The section provides that if an allowance or deduction has been made in respect of loss, expenditure or trading liability, then, if a remission or cessation of the liability is received as a benefit by the assessed in some other year, it shall be deemed to be profits and gains of business or profession and hence chargeable to income-tax. It has first to be determined what is the deduction that was permitted earlier which is written back for the purpose of this case. The scheme of the section is a simple one. If certain expenditure is allowed as a deduction in any assessment, that deduction can be written back and treated as income in some other year when it is written back in the accounts. For instance, when accounts are written on the mercantile system of accounting, the assessed is likely to treat some anticipated liabilities as a deduction in the accounts. When the quantum of such expenditure is decreased due to subsequent events, the difference between the amount previously allowed and the amount actually incurred is to be treated as a revenue gain. This would happen if there is a surplus. The Income-tax Officer appears to have treated the surplus in the 'Bifurcation Suspense Account' as being a gain in respect of certain liabilities previously incurred by the assessed. In order to find out what was the nature of the surpluses of which nothing has been said in the orders, we had tried to find out from some of the material attached to these statements, whether there were any allowances which were being written back. This was in order to determine what was the nature of the surplus. In the statement of case relating to the assessment year 1967-68, there is a copy of the 'Bifurcation Suspense Account' as annexure 'A'. There are as many as 20 entries in this account, showing a credit of Rs. 5,74,849 in all. Conveniently, some of these entries can be looked at. The first liability is the net excess in respect of liabilities for various items transferred by the STC, the second entry is excess railway freight in respect of goods sold prior to bifurcation which was paid during the year. The third entry is in respect of recovery of excess railway freight from suppliers, etc. The fourth entry is interest claimed by a party which accrued prior to bifurcation. It appears, thereforee, that the assessed received various amounts from various parties and had to pay some amount to other parties. The amount received was more than the amount expended, but all this was in respect of previous liabilities. The total net amount thus received was Rs. 5,74,849 in the assessment year in question.
21. It is now necessary to refer to another term in the scheme of arrangement approved by the High Court. This term is clause 8, which states :
'8 (a) The value of all assets, properties and liabilities whatsoever pertaining to the transferred business as on the date of transfer, except the stock-in-trade shall be the value as given respectively to them in the Schedule attached to this Scheme being their value as shown in the books of the he transferor-company as on that date.
(b) The valuation of the assets and the determination of the liabilities in accordance with the foregoing provisions shall be final and binding on both the companies and the members and creditors of both the companies.'
22. This clause shows that the value of the properties, assets and liabilities pertaining to the transferred business shall be the value as given in the schedule attached to the scheme, being the value as shown in the books of the transferor-company. This value is taken as binding on both the companies. In short, the arrangement between the two companies was that all the entries shown in the business of the transferor-company (STC) shall be shown as entries in the books of MMTC and then the'Bifurcation Suspense Account' would operate to see the actual valuation for the purpose of adjusting the sum of rupees two crores paid to the STC. It is this revenue amount, i.e., the gain over and above the book entries, which is the subject-matter of the first question which we are to decide. If this amount had been received by the STC, that would be taxable under the provisions of section 41(1). The problem we are faced with is : are they chargeable in the hands of the assessed-company
23. On this aspect, the judgment of the Supreme Court CIT v. Hukamchand Mohanlal : 82ITR624(SC) , seems to be conclusive. The court specifically held that there was no provision in the Act which made a successor in business or the legal representatives of an assessed to whom an allowance has already been granted liable to tax under section 41(1). The judgment of the Supreme Court clearly supports the assessed in this case and the Tribunal is right in its conclusion.
24. This question can also be answered by applying the provisions of section 41(1) directly to the assessed. What is stated is that an assessed is liable to tax if he has previously received a benefit by way of deduction or allowance in respect of an amount which he later gets back in some form, i.e., some anticipated expenditure is allowed by way of deduction which eventually the assessed does not have to incur. Such an amount is to be deemed to be the profit of the assessed. In this case, the allowance or deduction was granted to the STC, but the receipt is in the hands of MMTC. Unless MMTC is treated the same as STC, the section does not obviously apply. A simple query has to be put : Did the present assessed get the benefit of allowance or deduction in respect of the surplus The answer has to be in the negative; thereforee, the section does not apply. Consequently, the amount cannot be taxed in the hands of the assessed.
25. The other point of view in answering the self-same question is whether this amount is a capital receipt in the hands of the assessed. The assessed has paid a sum of rupees two crores to get the assets and liabilities of the STC. Assuming that the excess in the 'Bifurcation Suspense Account' is not to go to STC, but is to be retained by the MMTC, it is an appreciation of the assets purchased by the assessed on payment of rupees two crores. The receipt would be revenue in nature only in the hands of STC. It is not revenue in the hands of MMTC. It is like purchasing the right to sue. If a debt is owed by 'A' to 'B' and 'C' purchases the right to recover that debt, the excess or loss resulting in the recovery proceedings is a capital loss or a capital gain, as the case may be. It seems, that in the hands of MMTC, the gains resulting from the realisation of the assets or liabilities are gains resulting from the realisation of capital assets purchased by the assessed-company for a sum of rupees two crores. Viewed from this angle, we are of the view that the amount in question can also be treated as a capital receipt and not as a revenue receipt. It fact, the receipts are not the result of any business activity carried on by the assessed, but the result of business activity carried on prior to the purchase by the STC and, thereforee, the receipts are capital appreciations. Similarly, if there is a shortfall, it would be a capital loss and not a revenue loss. To revert to the example previously set out, if
26. 'A' has to recover a sum of Rs. 20,000 from 'B' and he sells this right to recover to 'C' who files a suit and recovers only Rs. 10,000, it cannot be said that he has suffered a revenue loss of Rs. 10,000. He will suffer a capital loss of Rs. 10,000 because the thing he bought for Rs. 20,000 has turned out to be worth only Rs. 10,000.
27. We would accordingly answer the first question for the assessment years 1965-66 and 1966-67, in the negative, in favor of the assessed and against the Department. We would answer the first question for the assessment year 1967-68, in the negative, though this question is restricted only to section 41(1). In the assessment year 1968-69, the question is differently worded, because it requires us to determine whether the Tribunal was right in holding that the amount was not taxable. We would answer this question in the affirmative, in favor of the assessed and against the Department
28. Turning now to the second question which arises only in the assessment years 1965-66, 1966-67 and 1967-68, and not in the 4th year, it is necessary first to examine the nature of the question. The statement of case shows that in the first of these two years, the assessed-company had made a provision for bad and doubtful debts amounting to Rs. 41,565.95 for 1965-66 and Rs. 16,891.70 for 1966-67. It is stated in the reference that this view has been accepted by the Department for 1968-69, but, in any case, the reference has been made. The Income-tax Officer had disallowed these provisions on the ground that they were only provisions. According to him these amounts could only be written off when they had actually become bad debts. The Tribunal, on the other hand, held that the amount of doubtful or bad debts and sales tax would not be taxable as the Department had accepted the Appellate Assistant Commissioner's order for 1968-69. In the year 1967-68, a similar point regarding the provision for bad and doubtful debts and sales tax was raised. In order to examine what happened in 1968-69, we have the advantage of that order in the reference made for 1968-69. In that order, it was stated as follows :
'The scrutiny of the suspense account indicates that the amount of 37,178 includes the amount of Rs. 5,13,897 pertaining to 'provisions'. He has also drawn my attention to the assessment record of STC, right from 1958-59 to the year 1963-64, to indicate that the amount apportioned under the head 'Provisions' has not been allowed as deductions to STC, though such credit was being made in the books of account from year to year A reference to the record had confirmed the facts and I find that this amount has already been taxed in the earlier assessment years in the hands of STC, the parent company. During the period under consideration, the appellant has only reversed those entries by crediting the profit and loss account and debiting the 'provisions' account. To my mind, it appears that it is only an adjustment by method of accountancy and this amount should not have been brought to tax in the hands of the appellant, though in principle the amounts under the head' Bifurcation Suspense Account' be treated as revenue gain.'
29. This shows that the amount had already been taxed in the hands of STC, the parent company, and this was the reason why the provision was allowed. As it is a question of accountancy and we do not have the advantage of knowing what the provisions actually are, we would merely follow the order of the Appellate Assistant Commissioner on the footing that these provisions were in respect of the amounts which had already been taxed in the hands of STC and were thus not taxable in the hands of the assessed. We may also note for convenience that if these amounts were not taxed in the hands of STC, these amounts could be allowed in the hands of the assessed as amounts anticipated to be payable and, thereforee, they had to be allowed on the mercantile system of accountancy as anticipated liabilities and in the event of the sales tax being remitted or the bad debts being realised, the provisions of section 41(1) would apply against the assessed. The section would only apply if the amounts had not already been taxed in the hands of STC. This point of view has been added in case there is a factual difference between the amount involved in the assessment years 1965-66 to 1967-68. Otherwise, if there was no factual difference, then the position would be the same as decided by the Appellate Assistant Commissioner for 1968-69. The answer to this question would be in the negative for these three assessment years, in favor of the assessed and against the Department.
30. Although we have answered all the questions in favor of the assessed, we do not think that this is a case in which we should award costs. So, we leave the parties to bear their own costs.