Leila Seth, J.
(1) This Income-tax Reference is at theinstance of the Commissioner of Income-tax. The questionreferred by the Income-tax Appellate Tribunal for ouropinion is as follows :
'WHETHERthe Tribunal was justified on, the factsof the case in holding that the amount ofRs. 58,175 credited to the profit and loss account could not be included in the assessmentyear 1967-68?'
(2) These are the facts. M/s. Bharat Nidhi Ltd. the assessed, is a company which was incorporated on 21/09/1942. It is carrying on the business of financing.Sometime after its incorporation, Bharat Bank Limited (theoriginal name of the assessed till 26/02/1952)save loans amounting to Rs. 58,175 to five parties inLahore. After the partition of the sub-continent of India intoIndia and Pakistan in 1947 these amounts transferrd to thebooks of the assessed in India. These amounts were writtenoff and allowed in the assessment years 1918-19 and1949-50 (wrongly noticed on 1945 in'the Tribunal's order)Later in 1950 these amounts were transferred to the Lahorebranch of the Bank as they were considered to be realisable there. A corresponding credit entry was made in theSundry Creditors' account. The Bharat Bank Ltd. sold someof its assets to Punjab National Bank on. 10/03/1951. The present assessed was formed out of a part ofthe assets of Bharat Bank Limited. Its name was changedas abovementioned. In the year of account, i.e. year ending 31/12/1966 (assessment year 1967-68), theassessed transferred the credit amount of Rs. 58.175 from the Sundry Creditors' account to the profit and loss account. It appears that the reason lor the transfer was thatthe assets of the Lahore Branch, had vested in the liquidator.and as such credit could be taken for this amount. Thoughthe assessment contended that this amount was not taxable.the Income-tax Officer taxed it under section 11(1) ofthe Income-tax Act. 1961 (in short, 'the Act').
(3) Being aggrieved the assessed appealed to the Appellate Assistant Commissioner who confirmed the orderr ofthe Income-tax Officer.
(4) On further appeal to the Tribunal, it was contended by the assessed that section 41(1) of the Act did notapply 'to the facts of the case. The Tribunal, however heldthat section 41(1) of the Act applied as the assessce hadobtained an adjustment with the Lahore branch in respectof the loss suffered by the assessed in the earlier year. Butit. accepted the contention of the assessed that this adjustment was made in 1950 when the Lahore branch 'as debited and the Sundry Creditors' account was credited. It was'at that stage that the income could be said to have ariseninterms of section 10(2A) of the Act of 1922. Subsequenttransfer by the assessed from the Sundry Creditors' accountto profit and loss account did not imply receipt by the assessed from the parties. The receipt by adjustment hadtaken place when the adjustment was made by crediting theSundry Creditors' account and debiting the Lahore branchaccount of the Bharat Bank Ltd.' It accordingly held thatthe amount of Rs. 58,175 could not be included as theassessed's income turn the assessment year in question.
(5) Being aggrieved the Commissioner of Income-taxsought for a reference of three questions : These were asfollows :
'1. Whether the Tribunal was justified on the factsof the case in holding that the amount ofRs. 58,175 credited to the profit and loss account could not be included in the assessmentyear 1967-68?
2.Whether there was any material or evidence onrecord on the basis of which the Tribunal couldhave come to the conclusion that adjustmentsin the accounts was made in 1950 debiting theLahore Branch and crediting sundry creditors'account?
3.Whether there was any material on record on thebasis of which the Tribunal could have come tothe conclusion that profits under Section 10-(2-A) had arisen in :1950?'
(6) The Tribunal refused to refer questions 2 and 3 asit held that there was sufficienmaterial on the basis of whichthe Tribunal had come to the conclusion that the amount ofRs. 58,175 credited to the profit and loss account of theassessed could not be included in the assessment year1967-68. It, thereforee, referred only question No. 1. Inthe circumstances, the scope of the reference is extremelylimited.
(7) Mr. K. K. Wadhera appearing for the Commissioner of Income-tax contended that the conduct of the assessed in transferring the amounts from the Sundry- Creditors'Account to the Profit and Loss Account after debiting theSundry Creditors' Account in the year under considerationindicated that the assessed treated this amount as its income. This was at a time when the Lahore Branch wentinto liquidation. He, thereforee, submitted that the amount of Rs. 58,175 was taxable as the assessed's income under section 41(1) of the Act.
(8) Mr. Bishamber Lal appearing for the assessed, firsturged that the finding of the Tribunal, that the income cannot be the income of the year under consideration and atbest can be the income of the year 1950-51 when the amount was credited to the 'Sundry Creditors' Account, is final.Therefore, no question really arose for consideration. However, in the alternative, he submitted that the conditionsof section 41(1) of the Act were not attracted. He urgedthat section 41 is not a charging section but a deemingprovision and should not be read as charging fictional income. In the circumstancs, he contended that a mere bookentry 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 accountunder consideration there was no taxable income.
(10) In order to appreciate the point in. issue it isnecessary to set out the relevant provision. Section 4(1) reads :
WHEREan allowance or deduction has been madein the assessment for any year in respect otloss, expenditure or trading liability incurredby the assessed, and subsequently during anyprevious year the assessed has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss orexpenditure or some benefit in respect of suchtrading liability by way of remission or cessation thereof, the amount obtained by him orthe value of benefit accruing to him shall bedeemed to be profits and gains of business orprofession and accordingly chargeable to income-tax as the income of that previous year,whether the business or profession in respectof. which the allowance or deduction has beenmade is in existence in that year or not.'
(11) What is sought to be done under this .sub-sectionby the revenue is to tax as income what it had earlier allowed as a deduction. In order to attract its provisions twoconditions must be satisfied. First, the amount/amountsmust have been allowed as a deduction in some earlier year/years;and second that the assessed must receive eitheramount or some benefit by way of remission or cessation ofliability.
INthe present case there is no dispute that the bad debtswere written off and the loss allowed to the assessed.Though, Mr. Bishamber Lal did fairly mention that itwas the Bharat Bank Ltd. which got the advantage of theallowance and now it was Bharat Nidhi Ltd. that wassought to be taxed, did not pursue this matter.
(13) There is also no dispute that no cash or actualpayment 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 anyamount in respect of such loss or has been benefited ''byway of remission or cessation' of the trading liability, forit is only then that the amount can be deemed to be hisprofits and gains of business and thus taxable. But it is inthe year in which the loss is recouped expenditure refunded or liability remitted that it is to be taxed.
(14) In the present case, the Tribunal's finding is thatthe 'receipt by adjustment' was made in 1950 when theSundry Creditors' Account was credited and the LahoreBranch account debited; it was in that year that incomearose in terms of section 10(2-A) of the Indian Income-tax Act, 1922 [similar to section 41(1) of the 1961 Act].The finding of fact is final especially in view of the factthat it was sought to be challenged by the reference toquestion Nos. 2 and 3 above noticed. This was refused. Itwas specifically noted by the Tribunal that these findingswere based on sufficient material.
(15) thereforee, the only aspect which remains to beexamined is, what is the effect of crediting the Profit andLoss Account and debiting the Sundry Creditor's Accountin the year under consideration.
(16) In Cannon Dunkerley & Co. Ltd. v. Commissionerof Income-tax. Bombay. : 102ITR428(Bom) , theBombay High Court has opined that merely because moneyhas been transferred from the 'unclaimed balances account' to the 'reserve for taxation account' it will notbecome taxable. In arriving at this conclusion, two earlierdecisions of the Bombay High Court have been followed.These are : Kohinoor Mills Co. Ltd. v. Commissioner ofIncome-tax, Bombay : 49ITR578(Bom) and J.K.Chemicals Ltd. v. Commissioner of Income-tax, Bombay. : 62ITR34(Bom) .
(17) In J. K. Chemicals Ltd. (supra) certain amountstowards wages, salary and/or bonus of employees weredebited in the accounts when incurred though not disbursed. The assessed followed the mercantile system of accounting and obtained deductions during the years 1945 to1953 in computing its total income. In 1957 it creditedthe undrawn sums to its profits and loss account. TheCourt held that the transfer of the entry is neither an agreement between the parties nor the payment of the liabilityTherefore, a remission or cessation of liability is not brought about by a unilateral act.
(18) In Commissioner of Income-tax, Bombay City-IIv. Sadabhakti Prakashan Printing Press (P) Ltd., (1980) 325 I.T.R. 326, the Bombay High Court has followed its earlier decision in J. K. Chemicals Ltd., The KeralaHigh Court has also relied on this decision in Commissionerof Income-tax, Kerala, v. V.T. Kuttappu & Sons : 96ITR327(Ker) and held that there was no cessation oflability because the debt had become time barred.
(19) In Liquidator Mysore Agencies Pvt. Ltd. v. Commissioner of Income-tax, Mysore : 114ITR853(KAR) , the Kamataka High Court has followed the Bombay High Court decision in Kohinoor Mills Co. Ltd. v.Commissioner of Income-tax, Bombay (supra) and alsoheld that there is no cessation of liability by reason of theLaw of Limitation.
(20) In Commissioner of Income-tax. Gujarat v. RashmiTrading : 103ITR312(Guj) , the Gujarat HighCourt has held 'that 'the only meaning that can be attached to the words 'obtained, whether in cash or in any othermanner whatsoever, any amount in respect of such loss orexpenditure' incurred in any previous year clearly refer tothe actual receiving of the cash of that amount. The cashmay be actually received or it may be adjusted by wayof an adjustment entry or a credit note in any other formwhen the cash or equivalent of the cash can be said tohave been received by the assessed. But it must be theobtaining of the actual cash which is contemplated by thelegislature when it used the words 'has obtained', whetherin cash or in any other manner whatsoever, any amountin respect of such loss or expenditure in the past'. In thecontext in which these words occur, no other meaning ispossible so far as we are concerned. As such they held thatthe amount of sales tax refunded was assessable fur theyear in which the refund order was obtained from the SalesTax Officer and not the earlier year in which the SupremeCourt judgment was passed which made such an orderpossible.
(21) However, the Allahabad High Court has taken adifferent standdistinguished the case of Cannon Dunkerley & Co. Ltd. (supra). Relying on its own earlier decision in Pioneer Consolidated Co. of India Ltd. v. Commissioner of Income-tax, U. P. : 85ITR410(All) andin Bhagwat Prasad & Co. v. Commissioner of Income-tax, Lucknow : 99ITR111(All) , it has held thatthe conduct of the assessce in transferring the amounts from the creditors' account to the profit and loss account afterdebiting the creditors' account is material, it shows thatthe assessed treated these amounts as income. The inferenceof fact to be drawn from this conduct is that the assessedtreated its liability with regard to the unclaimed wages andamounts due to persons with whom it had business dealingshad ceased to exist on the date of transfer. Further it wasobserved that an entry in the account is prima-facie evidence of income. Distinguishing the case of Cannon Dunkerley & Co. Ltd. (supra) in India Motor Transport Co.v. Commissioner of Income-tax (1978) 114 I.T.R. 677,it observed :
THEREthe amounts in question were transferredfrom the unclaimed balances account to theassessed's reserve for taxation account. It wasfound that the assessed made payments from the reserve for taxation account as and whenthe creditors made claims. It is clear that theassessed never claimed that the amounts becameits own property or its income. It was nottransferred to the profit and loss account. Theobservation that a unilateral act on the partof the debtor in making transfer entry wouldnot bring about remission or cessation of liability has to be understood in the context ofthe facts.'
(22) But the Allahabad High Court was dealing with acase where the monies were actually with the assessed. Theunclaimed wages etc. which were lying in deposit with theassessed, were got back and put into circulation in theprofit and loss account. In the present case no monies wereobtained. What was due to the assessed had been writtenoff in 1948-49 and 1949-50. This had again been creditedto the Sundry Creditors' Account in 1950 and to the Profit and Loss Account in 1967. But on neither occasion hadany amount been received.
(23) As already noticed, investigation had revealed thatthis amount represented the adjustment of debts alreadywritten off and allowed as bad in the assessment years1948-49 and 1949-50. But in the year 1950 this amounthad been credited to the Sundry Creditors' Account anddebited to the Lahore Branch. The reversal of the adjustment resulted in the fact of the expenses and/or allowancealready allowed being written back, as it were, as the income of the accounting year 1950-51. This reversal andadjustment resulted in an income of Rs. 58,175 to the assessed. The fact that this amount has been credited to theprofit and loss account in the year under consideration andmay be available for distribution of dividend is not reallyrelevant. No monies have been received. No amount hasbeen obtained. If any benefit has accrued in terms of section 41(1) of the Act, this accured in 1905-51.
(24) The account entries are, no doubt, somewhat confusing; and it is difficult to fathom why the assessed putthrough the entries during the previous years which havecreated the controversy under consideration. But the substance of the matter is clear. The assessed had earlier goa deduction, as bad debts, of the amounts advanced to theLahore parties. Section 41(1) can be attracted only if thereis any material either to show that the assessed was able torecover the amounts themselves in the previous year orthat it got during the year, some benefit in respect of theseamounts which had earlier been treated as lost. There isabsolutely no material on record to suggest this. Indeed, IT is a moot question whether the provisions of Section 41(1) were attracted even in 1950 but that we are not requiredto decide as the Tribunal's conclusion on that aspect hasbecome final.
(25) For the reasons outlined above, it would appear tous that the question must be answered in the affirmativeand in favor of the assessed. The assessed will be entitledto costs : Counsel's fee Rs. 350.